Chapter 9: Advanced Tax Concepts Flashcards
What must you first calculate to calculate the capital gain on the disposition of capital property?
The adjusted cost base (ACB)
What factors go into the calculation of the ACB for a piece of property?
- Purchase price
- Contribution of capital
- Sales charges
- Costs of acquisition
- Distributions of investment returns
- Other non-deductible costs
What does a “contribution of capital” refer to when discussing the ACB of a capital property?
When a taxpayer injects capital into a corporation and receives shares in exchange. The amount of money injected would add to the ACB of the shares received.
Is land transfer tax and fees paid to a lawyer deductible?
No, neither are deductible. They increase the ACB of the property.
How are repairs to a rental property treated for tax purposes?
Any costs that are not deductible would increase the ACB. Repair or replacement with a similar item (such as replacing carpeted floors with a similar surface) would be deductible, but replacing carpet with hardwood floors would not be.
What is the general formula for calculating ACB?
ACB = purchase price + sales charges + acquisition costs
When did capital gains become a taxable event in Canada and what is that day known as?
January 1, 1972. Known as valuation day.
What are the de minimus rules?
If the value of Personal Use Property (PUP) or Listed Personal Property (LPP) is below $1000, the ACB is assumed to be $1000.
What is Listed Personal Property?
Property that might have been purchased for personal use but could also have a collectible application (such as stamp, coin collections, antique furniture, etc.)
What are “identical properties” and how are these treated with respect to the calculation of ACB?
Primarily mutual fund units or shares of a company. ACB is averaged across all property owned. This is done to prevent investors from manipulating capital gains/losses by cherry picking which investments to sell.
Calculate the ACB:
In 2005, Paula bought 100 shares of RBC for $40 each + $30 commission. She bought a further 100 shares in 2006 for $50 each + $30 commission. In 2009, she bought her final shares for $30 each + $30 commission.
(100 x 40 + 30) + (100 x 50 + 30) + (100 x 30 + 30) / 100 + 100 + 100 = $40.30
What is the superficial loss rule?
Prevents investors from manipulating capital gains by selling shares with at a loss and then subsequently buying them back within 30 days to create a capital loss to offset capital gains on another investment.
If selling Stock A would create a $20 loss that could offset a $20 gain on Stock B, you cannot sell Stock A and then buy it back shortly after to take advantage of the loss.
What is the Alternative Minimum Tax (AMT)?
Prevents high income earners and trusts from paying little to no tax as a result of tax incentives. Certain deductions will trigger the AMT calculation.
What are AMT triggers?
Alternative minimum tax calculation triggers include:
- Certain CCA deductions
- Losses arising from investments in tax shelters or limited partnerships
- Resource expenditures and losses
- Flow-through shares
- Resource royalty income
- Capital gains
- Employee stock options
- Dividend income
- Labour sponsored funds tax credit
- Foreign investment income
- Foreign employment income
- Allowable business investment loss
What is the Lifetime Capital Gains Exemption?
Allows a taxpayer to incur up to $800K (indexing starting in 2014) of qualifying capital gains on a tax-free basis.
How much income is exempted from the AMT calculation to ensure only high income earners have to deal with it?
The first $40K of income.
What is the AMT inclusion rate for capital gains?
80%
At which tax rate is the AMT calculation based on?
The lowest marginal rate (ie. 15%), no matter how much income the taxpayer has.
What is the AMT credit?
Individuals who pay AMT tax have the ability to claim a tax credit over the next 7 years to recover AMT paid. Must have income to claim the credit or else it is lost.
Is AMT triggered in the year of death?
No.
What qualifies as a non-arm’s length relationship?
- Spouse or common-law
- Child
- Sibling
- Corporations
- Partnerships
- Trusts
- Other relationships can fit in this category if a manipulation of the tax system is occurring (example: your neighbour could qualify as non-arm’s length if you are manipulating the system with that neighbour)
Are nieces and nephews considered arm’s length or non-arm’s length parties?
Arm’s length.
What is attribution of income and when does it occur?
Income will be attributed back to a taxpayer when the taxpayer shifts income to another with the sole or primary purpose of reducing taxes.
Which factors should be considered to determine whether there will be an attribution of income?
- Relationship between the parties
- Tax savings generated
- Active or passive income
- Source of funds
When would transfer of a property to someone non-arm’s length not trigger attribution of income?
If there are no tax savings generated or the recipient uses the property to generate active business income.
Example: If a spouse transfers $100K to another spouse and the recipient invests the money and earns dividend income, all income will be attributed back to the transferor. However, if the recipient uses the money to start a business, there would be no attribution.
If an individual borrows funds for the purposes of investing and has their spouse co-sign the loan, what would happen?
Any income would be attributed back to the co-signor.
When would investment income in a joint account be attributed to one investor?
If one investor earns income and puts it into a joint account and the joint owner contributes nothing to the account.
List ways to create income in a lower income earner’s hands without triggering attribution rules…
- Transfer or sale for fair value of property
- Spousal loan
- Second generation investment income through reinvesting
- Business income
- Spending appropriately (have higher income earner pay bills so lower income earner can do all investing)
- Ownership of shares in a business
- Employing family members
- Legislated income splitting opportunities (CPP retirement benefits, RRSP, etc.)
If a spousal loan is employed as an income splitting strategy, which interest rate must be used?
At least the CRA’s current prescribed rate at the time of the loan.
What are the tax consequences of a spousal loan?
The spouse who loans funds or shares will “collect” interest income that is fully taxable. The spouse who receives the loan will be able to deduct the interest “paid” as an expense. The lower income spouse will claim all investment income from the property, which should (if done properly) result in a higher overall net benefit. Then, any capital gain that accrues from the date of the loan onward is attributable to the lower income spouse. Any capital gain that had already accrued is still attributable to the higher income spouse.
If a spousal loan is being employed as an income splitting strategy and the CRA’s prescribed rate falls, what may the spouses be inclined to do? What would the consequences be?
The lower income spouse may consider “repaying” the loan to the higher income spouse, then re-borrow at the new, lower rate. This repayment will trigger any capital gains from the lower income spouse.
What happens if property (such as shares) is transferred from a higher income spouse to a lower income spouse?
Income would be attributed back to the higher income spouse. However, if the lower income spouse reinvests the income, all “second generation income” would be taxable in his hands.
If one spouse has a high income and the other spouse has a low income, how can they easily invest (non-registered) and pay tax at the lower income spouse’s rate without risk of attribution back to higher income spouse? (Not complex)
Spend appropriately. Have the higher income spouse take care of all family expenses which frees up the lower income spouse to use all their income for investing. There will be no risk of attribution back to the higher income spouse.
What happens (in terms of attribution of income) if a couple has separated or divorced?
If there is a formal separation agreement in place, there will be no attribution of income. (Although the validity of a separation agreement could be challenged). There is no attribution after a divorce.
What would happen if a low income spouse sets up a corporation to avoid attribution?
If a low income spouse sets up a corp so the high income spouse can lend money to it and the low income spouse can take dividends, this will trigger very complex tax rules known as corporate attribution rules.
Is driving to and from work in an automobile considered personal or business use?
Personal use, and is therefore a taxable benefit.
What are the two separate taxable benefits that can apply when an employee has a car available for personal use?
- Standby charge - assessed based on the ability of the employee to use the car for personal use
- Operating expense benefit - assessed based on an employer paying the expenses associated with maintaining the automobile
How do you calculate standby charges for owned company cars and what can reduce these charges?
Varies depending on whether the employer owns or leases the vehicle. For owned cars, the amount of taxable benefit is based on the purchase price of the car (including taxes) times 2%, times the number of months the car is used. Can be reduced by any amounts that the employee pays the employer for the vehicle.
How do you calculate standby charges for leased company cars?
Based on 2/3rds (66.67%) of the monthly lease payment, including taxes.
How is the operating cost benefit for a company car calculated and does it change depending on whether the car is leased or owned? Can this benefit be reduced?
Based on the kms driven. Usually $0.27 per personal km driven. Reduced by any amounts that the employee pays for maintenance. This calculation is the same for cars that are leased and owned.
What happens if an employee primarily uses an company-provided car for work use? What defines “primarily for work use”?
If personal use is 50% of the kms driven or less than 20,004 km per year, the car is being used primarily for work use. Reduced standby charge benefit is calculated on a pro-rata basis using the kms driven for personal use against the maximum of 1667 per month.
Calculate the pro-rated standby charge for a company car that’s leased at $300/month where the employee only drives 1000km per month for personal use?
$300 x 66.67% (taxable benefit for leasing) x 1000/1667 (max personal km) = $119.98/month
If that employee drove more than 1667km per month for personal use, the taxable benefit would be $200/month.
How will an employer depreciate expenses associated with purchasing a vehicle? How are leasing costs treated?
Using the capital cost allowance.
Leasing costs are fully deductible within limits.
What is the primary advantage of an employer paying an employee for use of their own car rather than using an employer-owned car?
The allowance paid by the employer is tax-free to the employee if properly structured.
How would an employee receive tax-free treatment on a personally-owned automobile for business use?
If a personal-use automobile is required for business-use by an employer, the employee would submit for reimbursement on a per-km basis by the employer.
Would be fully taxable if the employer simply pays a flat-rate allowance.
What is the maximum annual per km reimbursement amount (for 2021) for business-use of personally-owned automobiles?
$0.59 per km for the first 5000 then $0.53 thereafter.
What are the maximum CCA claims for vehicles?
$30,000 for any passenger vehicle, but $55,000 for zero-emission vehicles. Maximum monthly lease that can be used for business expenses is $800/month.
How can shareholders of a corporation use vehicles as a tax planning opportunity?
If the shareholder has a controlling interest in the business and requires a car for business use, the shareholder can take an interest-free loan from the corporation with a written loan agreement in place and repayment over a reasonable period of time. This loan does not result in a taxable benefit to the shareholder.
When is farming income deductible?
Only when the farmer earns income primarily from a farming business. For example, hobby farmers who earn primary income from other sources can only deduct a limited amount ($17,500 in 2019).
What qualifies a business loss?
Loss of invested capital in a Canadian Controlled Private Corporation (CCPC) which also must be a Small Business Corporation (SBC). Must be a deemed disposition or a sale to an arm’s length party.
How are capital business losses treated for tax purposes? What is the formal name?
Formally called ABIL (Allowable Business Investment Loss). 50% capital gains inclusion rate applied to the loss, loss can be applied against any sort of income. Can be carried back 3 years or forward 20 years if there is no income in the year of loss. An ABIL that is unused after 10 years becomes an ordinary capital loss which can only be used against capital gains.
Explain what would happen to an individual who invests $100,000 in a business and the business fails.
If the business is a CCPC (Canadian Controlled Private Corp) and meets the SBC (Small Business Corp) test, that individual will realize a $100K loss. The 50% inclusion rate is applied, leaving the individual with a $50K ABIL (Allowable Business Investment Loss). If the individual makes $80K of income the following year, they would only have to pay tax on $30K (assuming they apply the full ABIL). The ABIL can be carried back 3 years or forward 20. After 10 years, the ABIL can only be applied to capital gains, not all income.
How do capital losses differ from business losses?
Business losses create an Allowable Business Investment Loss (ABIL) which can be applied against any type of income (up to 10 years following the loss). Capital losses can generally only be applied against capital gains.
The key word here is ALLOWABLE.
Which type of capital losses can generally be applied against all types of income?
Allowable capital losses.
What is the difference between a capital gain and a taxable capital gain?
Capital gain is the difference between the FMV and ACB. Taxable capital gain is the amount that is taxable after the 50% inclusion rate has been applied.
How long can capital losses be carried forward and backward?
Indefinitely forward, three years backward.
Why might someone not want to apply a capital loss against a previous capital gain?
Applying capital losses retroactively will require an adjustment of those previous years’ taxes.
Are capital losses deductions from taxable income or net income and why is that important?
They are deductions from net income. As such, they don’t reduce net income for the purposes of OAS or Canada Child Benefit calculations.
What is the one exception to the rule that a capital loss can only be applied against a capital gain?
In the year of death, capital losses can be applied against any sort of income. If this wipes out all income, any remaining losses can be carried back to the year prior to death.
What happens if a deceased taxpayer’s estate realizes capital losses in the year following death?
Those capital losses can be carried back and applied against the deceased taxpayer’s terminal tax return. This only works for capital losses occurring in the year after death, not allowable for the following year.
What are the (5) categories of depreciable property?
- Personal Use Property (PUP)
- Listed Personal Property (LPP)
- Other Capital Property - depreciable or non-depreciable
- Registered Property
- Life Insurance
How is Personal Use Property treated for capital gain/loss and depreciation purposes?
Can have capital gains applied, but not losses (such as a cottage). PUP is also not depreciable.
How is Listed Personal Property treated for capital gains/losses and depreciation purposes?
LPP skirts the line between business and personal use, including collectables. The de minimus rules apply to LPP. Subject to normal capital gain rules. Capital losses are possible if used against other LPP gains within 7 years of the loss.
What are the 2 types of Other Capital Property?
- Depreciable property such as assets required for business use.
- Non-depreciable property such as most investments (mf’s, stocks, sf’s, bonds, etc.)
What would be considered other capital property that is depreciable?
Assets required for business use that lose value over time. Building or leasehold improvements to an office. Intangible assets such as an FP’s book of business, or trademarks/patents etc when purchased from another entity. Assets can also be partially depreciable such as a car used for both business and personal use.
What is considered non-depreciable property? How is it treated for capital losses/gains?
Most investments such as stocks, bonds, mutual funds, seg funds, ETFs. Land is also non-depreciable. Subject to normal treatment of capital gains and losses.
What is considered Registered Property?
Registered assets such as RRSPs, RRIFs, TFSAs, DPSPs, RESPs, RDSPs, etc.
What is the Climate Action Incentive (CAI)?
How does it work in Ontario?
Form of carbon tax put into effect in 2019. This is the federal version that applies to taxpayers in Alberta, Manitoba, Ontario and Saskatchewan. It is a refundable tax credit, which means that anyone can collect it even if they don’t have income tax payable.
In Ontario, each adult received $300. The second adult in a couple or first child of a single parent receives $150. Each child under 18 thereafter receives $75. There is a 10% supplement for residents of small and rural communities, this is 10% of the $300 and $150 amounts, does not apply to the $75 amounts for children.
What are carrying charges?
Any cost associated with carrying an investment with the most common being interest on a loan for investment purposes.
What does the term “expectation of profit” imply when it comes to carrying charges?
Carrying charges are deductible if proceeds of a loan are used to purchase/fund an investment that has the potential to provide regular income. For example, common shares, rental property, and mutual funds all have an expectation of profit. Vacant land purchased for speculative reasons would not meet the test, but common shares that have the potential to provide dividend income would meet the profit test.
What happens if a taxpayer borrows money for mixed investment and personal uses and then repays a portion of their loan?
They are assumed to have repaid their personal borrowings before their investment borrowings.
What is the child care deduction?
A deduction available for parents (unless one parent earns little or no income).
Child 6 or younger: $8,000 maximum
Child aged 7 to 16: $5,000 maximum
Child, any age, and eligible for disability amount: $11,000 maximum
Child age 16+ with a mental/physical impairment not eligible for disability amount: $5,000 maximum.
Claimable amount (claimed by lower income spouse) is limited to the least of 2/3rds of the taxpayer’s income or the amount spent.
Can cover costs of…
- Care by an eligible child care provider
- Day care
- Day camp
- Day sports school
- Boarding school or camp (subject to certain limits)
- Educational institution providing childcare
How does the child care deduction work in the case of a separation or divorce?
Only a custodial parent can claim child care expenses. If shared custody, each parent can claim child care expenses.
In which situation(s) could a higher income spouse deduct child care expenses?
If the lower income earner is disabled (long-term), attending post-secondary, or incarcerated.
Is it possible to pay a family member to provide child care expenses and use the childcare deduction?
Yes, if the family member providing care is 18+ and not a dependent for tax purposes. The taxpayer cannot claim the caregiver amount for that family member and also deduct child care expenses paid to that person. The recipient of the payment must claim it as income.
When must an executor or administrator of an estate file and pay taxes?
180 days to file. For payment, it is the later of the tax filing deadline and 180 days.
For example, if a person dies on August 10th, they have until April 30th to pay taxes since it’s more than 180 days. If they die on February 15th, they would have until August 15th to file taxes (180 days).
What is the spousal rollover provision?
All property can be transferred from one spouse to the other on a spouse’s death without a deemed disposition arising.
Transferor faces no tax consequences, recipient receives property at the transferor’s ACB.
What are the 4 tax returns that can be filed upon a taxpayer’s death?
- Terminal return (required)
- Rights and things return (optional)
- Partnership income (optional)
- Testamentary trust (optional)
Which tax credits can be applied on all four tax returns upon the death of a taxpayer?
Basic personal amount, age amount, spouse/CL partner amount, amount for an eligible dependent, amount for an infirm dependent, caregiver amount.
What is the Rights and Things Return?
An optional return for deceased taxpayers who received certain things as income in the year of death simply due to unfortunate timing.
If filed, it must include all rights and things…
- Salary/commissions earned but not paid prior to death (vacation pay)
- Matured bond coupons not yet paid
- Dividends declared prior to death but not paid
- Harvested crops, inventory, A/R for farmers and fishermen using the cash accounting method
- WIP for professionals who defer WIP until completion
Example: if a person passes away with $10,000 vacation pay owing, their death will trigger payment of the amount. Can include this on a Rights and Things return and it will likely not lead to any tax payable as it’s less than the Basic Personal Amount.
What is the Partnership Income Tax Return?
Rare, optional return for deceased taxpayers in a partnership with a year-end other than Dec 31. Estate has the option of filing an extra return dealing with partnership income earned between the partnership’s year-end and date of death. If a partnership is wound up on the death of one partner, any income would have to be included on the terminal return instead.
What is a Testamentary Trust?
If the taxpayer is the beneficiary of a Testamentary Trust, this provides the opportunity for the trust to provide income to the beneficiary in a way that’s taxed efficiently. (Will learn more in Ch 15 and Advanced Curriculum)
How can a widow reduce the future taxation of their estate if their deceased spouse owned some form of property?
Elect out of the spousal rollover provision.
A cost-benefit analysis using TVM calculations should be performed to determine the benefit or loss to doing so.
Are purchases of capital property tax deductible in the year of purchase?
Generally, no. They represent capital expenditures which will be amortized over several years.
Which forms of businesses can claim capital cost allowance on capital property?
Incorporated or unincorporated. Sole proprietors, corps, and partnerships all can claim CCA.
What is the declining balance method of depreciation?
Each year’s depreciation is calculated based on the prior year’s depreciated value. The CCA (Capital Cost Allowance) is calculated at the specific depreciation rate for that property. The UCC (Undepreciated Capital Cost) is the name applied to the amount of purchase that has not yet been depreciated.
Generally, the 50% rule applies in the year of purchase.
What is the 50% first-year rule for CCA calculations?
The rate of depreciation is reduced by 50% in the year of purchase of capital property.
This rule does not apply for capital property purchased between 2017-2025. For these properties, you take the 50% amount and multiply it by 3. Example: 20% depreciation rate / 2 = 10% x 3 = 30% in the first year.
If a business owner sells capital property, what are the 3 possible situations that could arise (depending on the sale price)?
- Property sells for less than UCC
- Property sells for more than UCC, but less than ACB
- Property sells for more than ACB
What happens if capital property sells for less than UCC? (Undepreciated Capital Cost)
If it was the disposition of the last piece of property in a class, a terminal loss would be declared for the amount between sale price and UCC, this is fully deductible from income in year of sale.
If property in the same class is still owned, the amount would be added to the UCC of the remaining property. There would be no terminal loss.
What happens if capital property is sold for more than UCC, but less than ACB?
There would be a recapture of depreciation, which means that the difference between sale price and UCC will be added to her income and taxed as ordinary income.
If property still remained in that asset class, it would reduce the UCC for that class and no income would need to be declared.
What happens if capital property is sold for more than ACB?
There would be a recapture of depreciation on the amount between the UCC and ACB (fully taxed as income or used to reduce UCC for other property in the same asset class). On top of that, there would be a capital gain on the amount between the sale price and ACB.
Is land subject to depreciation? What if a building is purchased with land?
Not normally. The building is depreciable but not the land, must keep good records and keep these two assets distinct for tax purposes.
When might someone elect to not claim CCA in a given year?
Corporations are able to carry forward losses, so they are likely to claim CCA each year. Individuals may elect to not claim CCA in lower income years.
What must an individual submit to claim the disability tax credit?
T2201 completed by a medical doctor or other medical professional.
What generally qualifies someone for the DTC?
Someone whose ability to perform certain ADLs is restricted even with assistance, blindness, or the requirement for life-sustaining therapy at least 3 times per week for 14 hours per week.
When must a T2201 be reviewed?
Depending on the nature of the disability, it may be every 3 to 5 years. If a disability is obviously permanent, the CRA will sometimes allow 10 years. If terminal, the CRA will normally not require renewal of the DTC.
What is the DTC amount?
(2021) $8662 for taxpayers 18+
Supplement of $5053 available for taxpayers under 18 if a parent is not claiming a child care expense or attendant care expense on behalf of the person with the disability. If so, the supplement will be reduced.
Each province also has a DTC in the range of the federal DTC.
What type of credit is the DTC?
NRTxCr.
Can be split with the person’s spouse, CL partner, or parent (whichever person claims the person with the disability as a dependent).
Which deduction is available for taxpayers with a disability with expenses associated with earning an income or receiving an education?
Disability supports deduction.
Can be used to deduct the costs of expenses that allow a person with a disability to perform the duties of their job or receive an education.
Which tax credit is available for a taxpayer who maintains a space in their residence for a person (dependant or eligible dependant) who needs care?
What are the amounts?
The caregiver amount.
$2295 credit for a child or an adult with income below the basic personal amount.
Up to $7348 for an adult with net income in excess of the basic personal amount, reduced by $1 for every dollar of income over $17256
What are the two basic “types” of dispositions?
Deemed or actual.
What is capital gains tax generally based on?
Proceeds of a disposition or fair market value less the ACB of the property and any selling costs (such as commission paid).
If a collectible is purchased for $1600 and later sold for $800, what is the capital loss and why?
The capital loss would be $600. The de minimus rules would apply and the proceeds of disposition would be deemed to be $1000.
The proceeds of disposition for LPP and PUP (Listed Personal Property and Personal Use Property) is always at least $1000.
Which type of property can and cannot generate capital losses?
Personal Use Property (PUP) never generates capital losses as it’s expected that property purchased for personal use will experience wear and tear.
Listed Personal Property (LPP) can generate capital losses, although there are some special rules and it is treated differently than other capital losses.
Are there capital gains if a taxpayer changes personal use property (such as a cottage) to income producing property?
The taxpayer can elect to defer capital gains but cannot then claim CCA on the rental property.
Are there capital gains if a taxpayer changes income producing property to personal use property (such as a cottage)?
The taxpayer can elect to defer the capital gain, but will most likely be subject to recapture of depreciation and capital gains tax on the eventual sale of the home.
What occurs when property is gifted to another person?
Results in a deemed disposition. The property will be assumed to be disposed of at FMV to determine amount of capital gain. The recipient normally has no tax conseuqences.
When would a transfer of ownership of a property result in a deemed disposition? When would it not?
There is normally a deemed disposition if property is transferred to another person unless the transferor transfers the property in title only and retains full control and access with no regard for the transferee. In that case there has not been a transfer of beneficial ownership and as such, no deemed disposition should result.
What occurs if a joint owner is named on property?
Just as with a transfer of ownership or a gift, this will result in a deemed disposition. The amount disposed for capital gain purposes will be proportional to the amount of ownership that is transferred.
If a property has a FMV of $500K and an ACB of $200K and the owner decides to name a joint owner at 50%, what occurs?
There is a deemed disposition at 50%. Therefore, the owner would have a capital gain of $150K, a new ACB of $100K and a new FMV of $250K. The new joint owner’s ACB and FMV would both be $250K.
When does a transfer of property to a trust not result in a deemed disposition?
If there is no change in beneficial ownership. Although uncommon, there are trust situations where the original owner of the property is also the beneficiary of the trust.
How is capital property treated upon immigration to Canada?
All property must be assigned an ACB.
What must be filed when emigrating from Canada and why?
Requirement to file a tax return, informally known as a stub year, as in the year of death. Becoming a non-resident means that the CRA has its last opportunity to collect taxes.
What is a stub year?
A final tax return prepared in the year of emigration.
How do you file a stub year tax return?
File a tax return as of the date that the taxpayer leaves the country, declaring all income earned to that point. All property would be subject to a deemed disposition at this point.
What happens to deductions and credits in the year of emigration?
Non-refundable tax credits and deductions are not pro-rated based on the date the taxpayer leaves the country. Refundable tax credits (CCTB, UCCB, GST/HST etc) are pro-rated.
Which types of capital property would not be subject to a deemed disposition upon emigrating from Canada?
Canadian real estate Canadian business property Registered property Deferred salary arrangements Certain rights to a trust Property owned by short-term residents Employee stock options Canadian life insurance policies
What happens to Canadian real estate upon emigration from Canada?
Not subject to a deemed disposition, but taxpayer can elect out of the deferral and be subject to capital gains tax.
What happens to registered property upon emigration from Canada?
Registered property such as RRSPs, RESPs, etc. are not deemed to be disposed, but the country of residence may not recognize the tax-favored status of any of these plans.
What happens to capital property owned by taxpayers who were “short-term residents” of Canada upon emigration?
If the taxpayer was a resident of Canada for less than 60 months over the past 10 years, the taxpayer does not have to declare a deemed disposition.
How can a taxpayer avoid a deemed disposition of capital property (that would normally be subject to a deemed disposition) upon emigration from Canada?
The taxpayer may be able to post some kind of security with the CRA, an arrangement that must be made with the CRA on a one-by-one basis and must be done in advance.
Example: taxpayers owns shares worth $400K with an ACB of $100K. Taxpayer makes an arrangement with CRA and their securities broker to post the shares as security and defer the actual payment of tax owing on an interest-free basis. This does not change the amount of tax payable, only the timing. Upon the ultimate disposition of the shares, the tax bill + any further gains will have to be paid.
What happens with involuntary loss of property? Would there be a deemed disposition?
If property is owned and is (for example) stolen or damaged, the property is deemed to be disposed of and capital gains must be realized. If the property was insured and new property is purchased using insurance proceeds to replace it, the new property will assume the ACB of the original property. This allows the taxpayer to defer a capital gain.
How can spouses opt out of a spousal rollover?
Both spouses file a joint election, triggering any capital gains (or losses) that would normally arise. In the case of a deceased spouse, the spouse’s executor makes the election.
What happens to capital property upon divorce or separation (for capital gain purposes)?
No deemed disposition. The spouse receiving property receives it at the transferor’s ACB.
In which situation can a taxpayer avoid capital gains associated with reinvestment?
If a taxpayer sells a business and uses the proceeds to invest in another business. There will be an opportunity to exercise a capital gains rollover.
Taxpayer must have owned the previous business for at least 185 days and the newly purchased shares must be purchased from treasury, not from another individual. Must purchase shares within the year of disposition or within 120 days of the end of that year. The company must have a value of $50M or less.
The capital gain that would have arisen then reduces the ACB of the newly purchased shares.
What are the federal tax credits for donations?
15% for the first $200, 29% beyond $200.
For taxpayers in the top federal tax rate (>$216,511), the credit is 33% for any amount that keeps their income in that tax bracket. A $10,000 donation with $220,000 of income will only offer a 33% bracket on the first $3,489 (220,000 - 216,511).
What can be considered a donation for tax credit purposes?
Donations of cash or property (gifts-in-kind), but not time or services.
What are the two provisions in the Act that allow taxpayers an easier time to get to the $200 donation threshold?
Donations can be carried forward up to 5 years to allow them to accumulate.
Couples can combine their donations.
What is the limit to the amount of tax benefit that can be generated in one year through donations? What are the exceptions to this rule?
Limit is 75% of net income.
Exceptions:
- Year of death and year prior (no limit in the year of death and can be carried backwards if all income is eliminated from the donation).
- Donation in-kind of certified cultural property to a museum or public art gallery.
- Donations of ecologically sensitive land (based on approval from the office of the Minister of the Environment).
Which types of property (2) would not face a taxable capital gain on donation?
- Publicly traded securities
2. Ecologically sensitive land
How are donations to political parties treated?
Treated differently than charitable donations. 75% credit up to $500, then 33.33% up to $1,275.
Which tax credit(s) are available to those in post-secondary education?
Formerly 3 tax credits but as of 2017, only tuition.
However, a student who moves to attend post-secondary can claim a deduction for moving expenses.
How does the tuition tax credit work?
Tuition receipts generate a tax credit.
Tuition amounts can be transferred to the taxpayer’s spouse, parent, grandparent, or parent or grandparent of the taxpayer’s spouse (only once the taxpayer has reduced their own tax payable to zero) and only up to $5,000 can be transferred.
Unusable tuition credits can be carried forward and used in a later tax year. They must be used in the first year that the taxpayer would have tax to pay. Carried forward credits cannot be transferred to another taxpayer.
What are the tax consequences of an employer paying for employees’ gym memberships?
If fitness facilities are available on-site or the employer pays for fitness memberships for all employees, no taxable benefit will arise. There will be a taxable benefit if only a small group of employees is offered a fitness membership.
What are commonly provided tax-free benefits employers can provide to employees?
- Gifts
- Education
- Health & dental insurance
- Discounts
- Clothing (uniform or required for safety reasons)
What would be considered a tax-free gift that an employer could provide an employee?
Up to $500 in a year of non-cash gifts. The gift cannot be a gift card or a substitute for pay for work performed. This does not include gifts of nominal value (mugs, pens, plaques, or items with the employer’s logo).
What is the spousal amount?
A spouse who earns less than the basic personal amount ($13,808 in 2021) can transfer the difference to their spouse and claim it as a spousal amount.
What is the Amount for an Eligible Dependent?
A single (or separated and living alone) taxpayer taking care of a dependent can claim this credit by having any unused portion of the Basic Personal Amount transferred to them. A dependent could be a minor child, infirm adult child, or dependent parent.
Which indigenous peoples in Canada are tax-exempt?
Metis individuals and non-registered “Indians”. Registered Indians are tax-exempt.
How does home ownership work on Reserve lands?
The Constitution Act of 1867 states that Reserve lands cannot be owned by individuals. Traditional home ownership structures are not available on Reserve lands. It is common to replace mortgages with very long-term leases (such as 99-year leases).
What does the CMHC offer for individuals living on Reserve lands?
An on-Reserve housing program where the CMHC insures loans to build or renovate a house. The Federal government may also step in to guarantee loans. This is because traditional home ownership structures are not available on Reserve lands,
In which situations is a Registered Indian exempt from Income Tax?
A Registered Indian who lives on a Reserve and earns income on it will earn the income tax-free. One who earns income off it will likely have taxable income unless it is directly connected to the Reserve. Registered Indians who fall under Treaty 8 (Northern Alberta) are not income tax exempt.
Do Registered Indians pay into CPP?
It’s optional to participate. An employer with employees receiving tax-free income may complete form CPT-124 to opt into CPP and all Indians who are residents of Canada and work for that employer will participate. If an employer refuses to file a CPT-124, the employee can elect to participate in CPP on their own by paying the employer and employee premiums.
Do Registered Indians pay into EI?
Yes, with the employer remitting EI premiums on behalf of the employee. This does not require a T1, but if the employee has multiple jobs they may want to file a T1 to recover any EI overpayment.
How are different types of investment income for Registered Indians treated?
Interest income is tax-free if the instrument was acquired at a branch located on a Reserve and interest is physically payable at the branch.
Dividend income must come from an investment that is a corporation located on a Reserve earning its income on the Reserve to be considered tax-free.
Capital Gains are tax-free if the property is located on the Reserve, unless the property earned taxable income.
Rental income is tax-free if the property is on the Reserve, unless the property can be moved off the Reserve.
How is pension income taxed for Registered Indians?
If the pension income is related to tax-free employment, it will be tax-free. Otherwise, it will be taxable.
Can a Registered Indian earning tax-free income contribute to an RRSP?
No, because they will not have built any RRSP deduction limit. The only scenario would be if the RRSP or RRIF was related to a pension that was tax-free and was unlocked. The income from the registered plan would then also be tax-free.
Is OAS taxable to Registered Indians?
Yes, it is not deemed to be related to income related to the Reserve.
When is the purchase of goods/services exempt from GST/HST/PST for a Registered Indian?
When the good/service is delivered on a Reserve (even if the purchase did not take place on the Reserve).
How is foreign source income treated to avoid double taxation?
The taxpayer files a tax return in the country from which the income originated, and the taxpayer will also declare the income on the Canadian tax return. A foreign income tax credit is generally available to exactly avoid double taxation.
What is SAAR?
GAAR is used as a last resort, so the CRA will create Specific Anti-Avoidance Rules, which are rules that are very focused and complexed and designed with the intent of stopping one specific type of tax avoidance activity (closing a single loophole).
What are the 4 possible transactions that can occur when gifting or transferring property to a non-arm’s length party?
- Transfer it for less consideration than its FMV
- Transfer it for more consideration than its FMV
- Transfer it for no consideration
- Transfer it for consideration equal to FMV
What is the main problem with transferring property to a non-arm’s length party for less consideration than its FMV?
The transferor will have a deemed disposition. The transferee’s ACB will be at the amount of consideration paid. This will result in double taxation as the transferee will eventually have to pay tax again on the same gain that the transferor had to pay tax.
What is the main problem with transferring property to a non-arm’s length party for more consideration than its FMV?
Even if more consideration than the FMV is paid by the transferee, the transferee’s ACB will still be equal to FMV (not consideration paid). This occurs because they are related.
If the parties were unrelated, the ACB would be whatever the consideration was paid as it would be assumed that the price was fair.
Which government benefit programs have tax-free benefits?
Worker’s compensation, GIS, the Allowance
When is a home office deductible for a self-employed person?
When it is either the only place of work or (if another place of work is available), the home office is used exclusively for the purpose of meeting clients.
When can an employee (not self-employed) deduct home office expenses?
When the home office is used for more than 50% of the employee’s job or when it is the place where the employee generates the income related to their job. Employer must provide a form T2200 demonstrating that it was necessary for the employee to incur expenses in question.
What must an employer do for employees to be able to deduct home office expenses?
Provide a form T2200 deeming it was necessary for employees to incur home office expenses.
Which home office expenses can a self-employed person deduct that an employed person cannot?
Home insurance, property taxes, mortgage interest (rent is allowed), capital cost allowance
Which home office expenses can a self-employed person deduct that a commissioned employee cannot?
Mortgage interest (rent is allowable) and capital cost allowance (CCA).
What must an employer do if the employer loans money to an employee?
Assess interest at least at the prescribed rate of interest (or else there may be a taxable benefit for the employee).
What happens if an employer loans funds to an employee at the prescribed rate and the prescribed rate increases the following quarter?
A taxable benefit might arise for that period.
How did a home relocation loan (from an employer) differ from other employer loans?
**Benefit was eliminated in the 2017 federal budget.
If the loan is to fund moving costs to move 40km closer to their workplace, there will be no taxable benefit on the first $25K of funds loaned.
For example: if a $35K loan is given to an employee interest-free, the first $25K would not cause a taxable benefit. The next $10K would have a taxable benefit in the amount of the prescribed rate of interest.
How does a home purchase loan differ from a home relocation loan?
No requirement that an employee move any particular distance (unlike 40km for home relocation).
No provision for the first $25K of the loan to be treated favourably.
Every 5 years, the amount of taxable benefit will be recalculated based on the new prescribed rate.
If an employer advances an employee funds for travel or the purchase of supplies, is there a taxable benefit?
No.
What happens if a shareholder borrows funds from a company as a home relocation loan (and it appears the only reason the loan was available was because of the shareholder’s relationship with the company)?
If not repaid within the year, the entire amount borrowed would likely be included as income and taxed fully.
What are circumstances in which a shareholder can borrow funds for a period of longer than one year and deal with the prescribed rate benefit rules?
- Advances to reimburse trade debts (expenses incurred personally that will be reimbursed by the company). No taxable benefit if prescribed rate of interest applies.
- Funds borrowed to purchase a dwelling.
- Acquisition of shares from treasury.
- Purchase a vehicle (as long as it’s required for work).
- Commercial lending arrangement (if the company is normally in the business of lending money)
What is the threshold for the medical expense tax credit and how does it work?
Based on 3% of net income to a maximum of $2,421 (3% of net income) (2021). If net income is $40K, the threshold is $1200. This means that the medical expense tax credit will only apply on amounts over $1200.
How much is the medical expense tax credit?
Federal tax credit % + provincial tax credit % on amounts over 3% of net income.
What is the medical expense threshold for $100K of net income?
3% of net income to a max of $2,461 (2021).
Since 3% of net income ($3K) is above the maximum, the threshold for this individual would be $2,461.
Which spouse should claim medical expenses?
The lower income spouse (usually).
How does it work if an individual claims medical expenses for an eligible dependent such as an adult child, parent, sibling, grandparent, aunt, niece, etc.?
Calculation must be done separately on line 331 of the T1. The 3% of net income calculation is done separately for each eligible dependent using that person’s net income.
What is the tax year for the purposes of the medical expense credit?
Any 12-month period that ended in the current tax year.
Is there a taxable benefit when an employer pays premiums for a H&D plan?
Although it’s a deduction for the employer, all benefits are tax-free to the employee.
What is the maximum amount of CPP that spouses can split?
The amount of CPP benefit that each spouse earned while in their relationship.
Which types of pension income can be split by an annuitant age 65 or older that cannot be split if an annuitant is under 65?
Income from a RRIF or annuitized RRSP, DPSP, LIF, LRIF, PRRIF, taxable portion of the income received from an annuity sold by a life insurer.
When were married couples allowed to each own a principal residence?
Prior to January 1, 1982 (1993 for common-law couples and 2001 for same-sex couples)
How do you calculate the principal residence exemption for someone who owned multiple properties (example: a house and a cottage)?
Exemption = gain x (# of years property designated as PR +1) / # of years property was owned
Do not need to designate a property as PR by years consecutively (can designate house for years 2011-2013, then designate a cottage as PR, then designate house again 2018-2021 for example).
When can a rented home be claimed as a principal residence?
If a taxpayer lives in a home, then rents it out for up to 4 years, then resumes residence, the taxpayer can still use the PR exemption. Up to 4 years of rental will still qualify for the exemption.
What significant change to the principal residence exemption was made in the 2016 Federal Budget?
A taxpayer who is using the exemption must report that it is being used on a Schedule 3.
Does a non-resident taxpayer have access to the principal residence exemption on the disposition of a Canadian PR?
Yes. However, the non-resident cannot use the +1 in the formula to calculate the exemption.
What is the main benefit of making contributions to an RPP as opposed to an RRSP?
Contributions are deducted at source, realize tax advantages of contributions right away.
How much can an employee or self-employed person (or student) deduct for relocation expenses when moving 40kms or more closer to a new workplace and no reimbursement is provided?
Which expenses can be deducted?
Cannot deduct more than the amount of income earned either in the new location in the year of the move or in the following year.
- Travelling costs (meals accommodations, vehicle costs)
- Transportation and storage of household effects
- Costs for up to 15 days of temporary residence
- Cost of cancelling a lease
- Selling costs
- Legal fees and land transfer taxes
- Costs associated with owning the previous residence while it sits empty to a max of $5K
- Costs of moving utility bills, changing addresses etc.
How are capital costs different from business expenses?
Capital costs can be amortized over time. Expenses are deducted in the year they are spent.
If a broken window is replaced on a rental property, is this considered an expense or a capital cost?
Expense. However, if all windows were replaced, this would be considered a capital cost and can be amortized over time.
What happens to any CCA if a rental property is changed from income-producing to personal use?
Any CCA must be recaptured. Capital gains can be deferred until the property is disposed of.
If a Canadian resident earns income in another country, what happens to avoid double taxation?
May still have to report income on Canadian tax return, but there is usually an offsetting tax credit to wipe out the effects of double taxation. The end result is normally that income is taxed in the country of origin, but still reported in Canada
When does Canada consider a taxpayer to be a resident?
After 183 days in Canada (unless the taxpayer has “factually” moved here by moving bank accounts, has employment here, receives health care here, brought family with them, etc.). Prior to that time, the taxpayer may be considered a sojourner, not taxed as a Canadian resident (except on income earned in Canada).
Why might someone want to rollover property (such as a mutual fund investment) to their spouse? Why not?
If they have a non-tax reason to make the transfer. The property will roll over to other spouse at the same ACB (no disposition triggered) but any income will be attributed back to the transferring spouse.
What rollover is available to shareholders and when it is normally used?
A shareholder of a corp can transfer assets into that corp on a rollover basis. Normally used when a business owner first incorporates and is often used as part of reorganizations of an operating business.
Who can receive a rollover of registered assets on death?
Spouse and possibly dependent child/dependent child with disability.
How do life insurance rollovers work?
If a spouse or child (including grandchildren) is the life insured under a policy, the owner can transfer ownership on a rollover basis.
How much is the age amount (2021)?
Maximum credit is $7,713
How do you calculate the reduction in the age amount?
$0.15 reduction per dollar of income over a net income in excess of $38,893
How much income can a taxpayer over age 65 have without paying income tax (2021)?
Basic personal amount $13,808 + age amount $7,713 = $21,521 + $2,000 of pension income
In which situation can double taxation arise?
In the area of shareholder benefits. If it can be demonstrated that a taxpayer received a benefit from their corp by virtue of their position as a shareholder, the cost of the benefit would not be deductible to the corporation and will still be taxable to the shareholder.
How can timing of bonuses benefit shareholders (and why do tax professionals often suggest small corps have a year-end in the last 5 months of the calendar year)?
A corp can declare a bonus (and deduct the related expense) on its year-end financial statements, but then defer the actual payment of the bonus for up to 180 days. If that 180 days takes them into the next calendar year, the effect has been to allow the shareholder to wait an entire year extra to declare the income (generating some tax deferral).
When would a private Canadian company not be a CCPC (Canadian Controlled Private Corp)?
Closely held company where a substantial number of shares are held by non-residents.
If an employee exercises a stock option for $10/share when the stock is worth $15/share, how is the taxable benefit calculated?
The $5/share is treated as employment income as this is a taxable benefit. The employee would be able to claim a deduction equal to 50% of the amount of taxable benefit. The net result is that the tax treatment of the benefit is treated the same as capital gains.
If the share is in a CCPC, the employee may be able to defer the benefit until they actually dispose of the shares (if the CCPC did not deduct the cost of the options issued to the employee as a taxable benefit). This deferral is not available to those who deal with the corporation not at arm’s length.
50% deduction is not available for employees of public corps with annual revenues in excess of $500M
How are spousal support payments taxed?
Tax deductible to the payer, taxable to the recipient
How are child support payments taxed?
Not deductible to the payer, not taxable to the recipient
When must a Canadian taxpayer report foreign property? Why is this required?
If foreign property over $100K is owned.
This does not necessarily mean taxes will be assessed, this is just an information gathering tool.
If a US citizen opens up a TFSA, RESP, or RDSP, what must they do?
Report that income on their US tax return, reporting it as a non-resident trust.
At what amount do estates in the US face an estate tax? How much is the tax?
40% on estates over $11.7M (as of 2021)
