CPA Canada Flash Cards
Small business limit reduction
- Starting January 1, 2019, there is a reduction in the small business limit (SBL) when adjusted aggregate investment income (AAII) is great than $50,000.
o The SBL is reduced by $5.00 for each dollar of AAII over $50,000 in the preceding year.
- AAII generally includes net taxable capital gains on non-business assets and net income from property, excluding dividends from connected corporations.
Class 14.1
- Starting January 1, 2017, goodwill and other intangible assets (such as patents, trademarks, and licenses) with an unlimited useful life are included in Class 14.1 (previously they were included in cumulative eligible capital (CEC) as eligible capital property).
- Amounts are added to Class 14.1 at a 100% inclusion rate with a declining balance CCA rate of 5%, and the half year rule or accelerated investment incentive applies in the year of acquisition, depending on the acquisition date.
- For amounts included in Class 14.1 that were acquired before January 1, 2017, and were transitioned from CEC to Class 14.1, the CCA rate is 7% for the first 10 years.
o Taxpayers can deduct the greater of $500 per year or the amount otherwise deductible, for the first 10 years.
Related party transaction
- When property is transferred between related parties at below FMV, the proceeds received on the transfer are deemed to be the FMV of the property.
o A capital gain must be reported for the difference between the deemed proceeds and the adjusted cost base of the property.
o The party receiving the property is only permitted to record a cost base equal to what was paid. If this is less than FMV, double taxation results. - Can avoid this double taxation a number of ways, such as by selling the property for the FMV or by electing to use a Section 85(1) rollover.
o For a Section 85(1) rollover, a transfer price is elected between cost and FMV (electing at cost would minimize taxes).
o At least one share must be taken back as consideration.
o The non-share consideration should not exceed the elected transfer price, so the balance of the amount to reach FMV of the property should be shares.
Tax returns of a deceased individual
A representative of the deceased individual will need to file a final (terminal year) tax return for the taxation year starting January 1, and ending at the date of death.
* The terminal return includes all amounts realized up to the date of death on which the deceased would have paid tax had he or she lived.
* When a person dies, they are deemed to have disposed of all of their assets at the time of death.
* Filing deadline for the final tax return is the later of the normal filing date (April 30
of the following year), or six months after the date of death.
An election may be made to file a separate tax return for certain “rights and things”. These amounts include:
* amounts received on a periodic basis that were accruing but were not due at the time of death, such as employment income, interest, rent, royalties, certain annuities, and other amounts;
* certain investment tax credits;
Disposal of real estate – Special rules
Real estate (real property) will generally be comprised of two separate assets – land, and building(s).
* When real estate is disposed, the allocation of the proceeds will have a significant effect on taxable income:
* Maximizing proceeds allocated to land can generate capital gains which are one half taxable, and terminal losses on building which are fully deductible.
* If the amount of the proceeds allocated to the building is LESS THAN cost, special rules will limit the amount of terminal loss that may be claimed by calculating deemed proceeds as being equal to the building UCC
* The amount of the proceeds allocated to the land will be determined to be the actual selling price for the real estate, less the deemed proceeds for the building, effectively reducing the amount of the capital gain.
Lifetime Capital Gains Exemption
In order to claim the Lifetime Capital Gains Exemption (LCGE) on the sale of shares the following criteria must be met:
1. The corporation must be a small business corporation.
a. A small business corporation is a Canadian Controlled Private Company (CCPC), in which all or substantially all (90% test) of the fair value of its assets (including unrecorded assets but excluding liabilities) are used primarily in an active business carried on primarily in Canada.
2. Over a 24 month period preceding the sale of shares, more than 50% of the fair market value of the assets must be used in earning active business income, primarily in Canada.
3. Over a 24 month period preceding the sale, no one other than the shareholder, or someone related to the shareholder, can have held the shares.
Note: Certain farming and fishing property will also qualify for the exemption. This is not an additional exemption, but an additional type of property which can qualify for the tax benefit.
Taxation on the sale of a business – Asset sale
In an asset deal, the vending corporation will sell the assets to the purchaser. The purchaser will carry on the business in a new legal entity of their choice. The parties can select which assets are to be sold, and which liabilities are to be assumed.
* As the assets are changing ownership, the purchaser will have a cost base in the assets equal to the purchase price which is paid to acquire them. This allows the purchaser to increase the tax basis of the assets to their fair market value, and obtain a tax write-off on the full amount of the purchase price, including goodwill.
* From a tax perspective, the vending corporation will have proceeds of disposition equal to the purchase price. The vending corporation will then pay corporate tax on the gains realized and be left with cash inside the corporation, which they will retain.
* The cash will then need to be distributed to the ultimate shareholders by way of dividends and return of capital. This provides a significant opportunity for tax deferral, as the corporation can choose when to distribute the cash to the shareholders.
Taxation on the sale of a business – Share sale
In a share deal, a shareholder sells the shares of the corporation which carries on a business. The business continues operating within the same legal entity, and only the ownership of the shares has changed.
* Unwanted assets can be removed from the corporation prior to an acquisition of control, but you need to consider the tax implications.
* The change in ownership of the shares causes an acquisition of control of the corporation and a deemed year end.
* On the acquisition of the shares of a corporation, the cost of non-depreciable capital property may be “bumped” to its fair market value at the time of the acquisition of control upon a vertical amalgamation or a windup. This only applies to non-depreciable capital property (e.g., land, securities).
* From a tax perspective, the vendor will report a capital gain or loss based on the proceeds of disposition received, less their adjusted cost base of the shares. If an individual (including a trust) is disposing of the shares, there may be an opportunity to claim the lifetime capital gains exemption.
Acquisition of control
- With an acquisition of control of a corporation, there is a mandatory recognition of accrued but unrealized losses. Ultimately, there is a reduction on the tax cost of those assets to the fair market value (FMV) on the deemed year-end date.
- To prevent losses from being used prior to the end of the taxation year in which the acquisition of control took place, ITA 249(4) requires that the corporation have a deemed year end on the day preceding an acquisition of control.
- Non-capital losses that were realized before or on the acquisition date can potentially be used after the acquisition date, but only if certain conditions are met and only against specific income. Only non-capital losses from carrying on a same or similar business will be available after the acquisition date.
- Capital losses that were realized before or on the acquisition date are simply lost, and will not be available after the acquisition date.
In determining whether an expense should be capitalized, the CRA usually applies 3 tests:
- does the expenditure provide a lasting benefit?
- does it improve the property?
- does the expenditure form part of the asset, or is it a separate asset?
