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CFE > Tax > Flashcards

Tax Flashcards

1
Q

\ ];lnOther Deductions

Moving Expense - Costs

A
  • Travelling costs:
    • can use simplified method per km
  • Storage Costs
  • Lease cancellation costs
  • Cost of meals and accommodation not exceeding 15 days: can use simplified method $51 per day
  • Selling costs of the old residence the cost of legal fees and title transfer taxes on the new residence
  • Title transfer taxes
    *
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2
Q

Other Deductions

Moving Expense

A

Deducted under two scenarios:

  • Moving to new business or work location
    • To extent income earned in new location
  • Moving to attend a qualifying post-secondary educational institution on a full-time basis
    • To extent of schorlarships and grants include in income or part-time job while in school

Can be deducted if following:

  • The move brings you at least 40km closer to work or school
  • The moving expenses must be paid
  • The expenses can be carried forward
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3
Q

Other Deductions

CPP for Self-Employed

A

Employer Share of CPP is deducted

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4
Q

Other Deductions

Over Payments

A

Overpayments which were included in other income but have to be returned can be deducted

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5
Q

Other Deductions

Legal and Accounting Fees - Objections

A

Legal and accounting fees related to objections or appeals against the ITA can be deducted whether or not the appeal is successful

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6
Q

Other Deductions

OAS Clawback

A

Lessor of:

  • OAS Benefits in year
  • (Net income before clawback - 75910) * 0.15

Deducted from net income but added to taxes payable

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7
Q

Other Deductions

EI Benefit Repayment

A

The required repayment is 30% of the least of:

  • EI benefits included in income
  • Net income for tax purposes in excess of $64,625

Deducted from net income but added to taxes payable

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8
Q

Other Deductions

Disability Supports

A

May claim to enable individual to:

  • Work as an employee or an independent contractor
  • Attend a designated educational institution or a secondary school
  • Carry on research work for which grant received

Amount that can be deducted lesser of:

-The amount of disability supports payments made

  • Total of employment income, business income and the
  • least of:
    • 15,000
    • 375 times number of weeks of school attendance
    • amount by which net income greater than employment income

Preferable over medical tax credit for any bracket that isn’t the lowest

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9
Q

Other Deductions

Childcare Expenses

A

Must have been incurred for taxpayer to do following:

  • Be employed
  • Carry on a business
  • Carry on research for which a grant was received

Maximum deduction for lower income earner:

  • Actual amount spent on childcare
  • Annual limits
  • 2/3 of earned income

Higher income spouse can claim for weeks that spouse is:

  • Full-time attendance at a designated institution
  • Infirm
  • In prison
  • Living apart from the taxpayer as a result of a marital breakdown
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10
Q

DIP

RRSP Contributions

A
  • Can deduct from net income up to contribution limit
  • Deadline is 60 days after the year end
  • Can contribute until and up to 71 years of age
  • Income earned in the plan is deferred until withdrawn
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11
Q

DIP

RRSP Spouse Contributions

A
  • If room in contribution limit, can contribute to spouse’s RRSP
  • This will not affect spouses’s contribution limit
  • Contributor will deduct from his net income
  • If withdrawn in year of contribution or 2 years following, income included in contributor’s income
  • Exception to this is if withdrawal made during marriage breakdown
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12
Q

DIP

RRSP Calculation

A

A + B + R – C

A is the unused RRSP deduction room from prior year

B is the amount by which

  • The lesser of:
    • The RRSP dollar limit for the year, and
    • 18% of the taxpayer’s earned income for the preceding taxation year exceeds the total of all amounts, each of which is
  • The tax payer’s pension adjustment for the preceding taxation year in respect of an employer, or
  • A prescribed amount in respect of the taxpayer for the taxation year.

R is the taxpayer’s total pension adjustment reversal for the year.

C is the taxpayer’s net past service pension adjustment for the prior year.

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13
Q

DIP

RRSP Withdrawals

A

Must be included in net income unless withdrawn for

  • Home Buyer’s Plan
  • Lifelong Learning Plan Exception for withdrawal in time of marriage breakdown
  • Not included in income or deducted
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14
Q

DIP RRSP

Home Buyer’s Plan

A

Can borrow from RRSP to purchase home if following:

  • The home will be residence to taxpayer
  • The taxpayer has not owned a home in prior 4 full calendar years
  • Maximum amount is $25,000

Must repay annual installments over 15 years starting 2nd year after the year of withdrawal

  • To extent payments not made, amount included in net income for tax purposes
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15
Q

DIP

RRSP

Lifelong Learning Plan

A

Can withdraw without including in income if for learning

Withdrawal period is limited to 4 calendar years

  • Maximum withdrawal of $10,000 per year
  • Overall total limit of $20,000

Must be enrolled at a designated education institution in full-time training or higher education requiring not less than 10 hours per week for at least 3 consecutive months in a year

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16
Q

DIP

RRSP

Termination

A
  • Terminated in the year that an individual turns 71
    • Can still deduct contributions made to spouse’s RRSP after turning age (assuming spouse younger than 71)
  • Transferred on a tax-free basis to RRIF
    • Deductible contributions cannot be made to an RRIF
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17
Q

DIP

TFSA

Contributions

A
  • Over 17 years old can establish a TFSA Contributions are not deductible
  • Withdrawals not taxable
  • Income earned in the plan is not taxable
  • Portion of contribution limit not used in year will carry forward to the next
  • If a taxpayer borrows money to invest in the plan, the interest will not be deductible
  • Can be used for income splitting
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18
Q

DIP

TFSA

Withdrawal

A
  • No income inclusion when funds are removed from the plan.
  • Funds removed from the plan can be added back to the plan starting in the following calendar year.
  • On divorce, may be transferred without any tax consequences
  • On death, if the plan is transferred to the spouse, it will remain a TFSA and income will continue to accumulate tax-free.
  • If, on death, the plan is transferred to someone other than a spouse, the income earned in the plan after death will be taxable
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19
Q

DIP

RESP

Contributions

A

Contribution not tax deductible:

  • No annual maximum
  • Lifetime maximum of $50,000
  • Contributions can be made up to and including the 31st year of the plan’s existence

Withdrawal of capital portion is not taxable

Benefits:

  • Taxed in beneficiary’s hands lower income
  • Deferred until future year
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20
Q

DIP

RESP

CESG

A

Each beneficiary of an RESP under 18 years accumulates CESG contribution room of $2,500 per year for a maximum annual grant of 20% × $2,500 = $500.

The maximum aggregate lifetime CESG is $7,200.

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21
Q

DIP

RESP

CLB

A
  • Children must be born after 2003 and have an RESP established in their name in order to qualify
  • Their family must also qualify for the National Child Benefit supplement each year in order to receive CLB contributions.
  • CLBs are $500 in the first year of eligibility and $100 each subsequent year that the child is eligible until the year the child turns 15.
  • In the first year, there is also a one-time additional amount of $25 for the cost of setting up the RESP.
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22
Q

DIP

RESP

Withdrawals

A
  • A specified portion is deemed to be from the CESG and CLB is taxable income
  • Portion of the payment that represents accumulated income earned in the plan is taxable income
  • Capital portion not taxed because capital funds were paid out of after-tax income
  • An RESP can exist for 35 years before it must be closed.
  • If the beneficiary does not pursue post-secondary education, the income and capital can be paid
    • CESG and CLB contributions must be repaid
    • Accumulated income earned taxable to the subscriber, but this can be transferred into RRSP.
    • The capital portion is not taxed
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23
Q

Personal Tax Payable

Medical Expenses Tax Credit

A

Qualifying medical expenses less the lesser of 3% of net income and $2,302

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24
Q

Personal Tax Payable

Student Loan Interest Tax Credit

A

Basis for credit is interest paid in year or any of the 5 preceding years

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25
Q

Personal Tax Payable

Tuition Tax Credit

A
  • Individuals who are enrolled in the qualifying post-secondary educational program
  • May be transferred to spouse, common-law partner, parent, or grandparent to maximum of $5000 per year
  • Excess can be carried forward
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26
Q

Personal Tax Payable

Donation Tax Credit

A

Basis lesser of:

  • Amount of donation
  • 75% of net income

Can be carried forward for a period of up to 5 years

  • 15% of first $200
  • 33% of $200-$205,842
  • 29% of $205,842

Can be combined with spouse

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27
Q

Personal Tax Payable

Dividend Tax Credit

A

-Deduct the grossed-up amount

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28
Q

Personal Tax Payable

Political Contribution Tax Credit

A
  • -75% on the first $400 ($300 credit)
  • -50% on the next $350 ($175 credit)
  • -33% on next $525 ($175 credit)
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29
Q

Liability for Tax

Residential Ties

A

Primary Ties

  • Dwelling owned or leased and vacant or not vacant and is leased to third party at non-arm’s length
    • Dwelling place in Canada maintained for taxpayer’s use
  • Spouse remains in Canada
  • The dependants remain in Canada

Secondary Ties

  • Personal property kept in Canada
  • Social ties: Club memberships
  • Economic ties: Employment, business, RRSP
  • Other ties: Passport, seasonal dwelling
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30
Q

Liability for Tax

Temporary Absence

A
  • The taxpayer’s intention to permanently sever ties with Canada
  • Visits by the taxpayer to Canada while living abroad
  • Whether the taxpayer has established residential ties outside of Canada
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31
Q

Liability for Tax

Deemed Resident

A
  • Individual who sojourns in Canada total of 183 days or more in year
  • Member of the Canadian armed forces
  • An ambassador, minister, high commissioner, officer or servant of Canada or a province
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32
Q

Liability for Tax

Sojourners vs Part-year Resident

A
  • Sojourner is a deemed resident who sojourners in Canada for 183 days or more
  • Part-year resident becomes or ceases to be resident part-way through the year
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33
Q

Liability for Tax

Date of Becoming Non-Resident

A

The later of:

  • Date the individual leaves Canada
  • Date the individual’s spouse and/or dependants leave Canada
  • Date the individual becomes a resident of the new country he or she has emigrated to
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34
Q

Liability for Tax Becoming

Non-Resident Tax Consequences

A

Deemed to have disposed of all assets at FV

Exceptions:

  • Canadian real or immovable property and resource property
  • Business property, including inventory of a business carried on through a permanent establishment
  • Registered pension plans, deferred profit-sharing plans and tax-free savings plans

First 2 categories are taxable Canadian property.

  • Taxpayer may elect to have a deemed disposition
  • Would normally only wish to make this election if capital or other losses would not be able to use

If the election results in an allowable capital loss

  • May only be deducted against taxable capital gains that arise from deemed disposition.
  • May not be deducted against taxable capital gains arising from actual dispositions.
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35
Q

Liability for Tax

Corporations

A

Deemed resident if either of following:

  • Was incorporated after April 26, 1965.
  • Was incorporated before April 27, 1965, and it either carried on business or was resident under common law at any time after April 26, 1965

Common Law

  • If central management and control is located in Canada.
  • Central management and control is located where the Board of Directors of the company meets to make decisions on how the corporation is to be run.
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36
Q

Corporation - Div C

Charitable Donations

A
  • Able to deduct charitable donations from net income for tax purposes
  • Annual deduction is limited to 75% of net income for tax purposes
  • may be carried forward and used in any of the following five years
  • Limit of 75% of net income for tax purposes
37
Q

Corporation - Div C

Loss Carryovers

A

Non-capital Loss

  • Carryback: 3 years
  • Carryforward: 20 years

Net-capital Loss

  • Carryback: 3 years
  • Carryforward: Indefinite

ABIL

  • Carryback: 3 years
  • Carryforward: 10 years then converted to net capital loss

Farm Losses

  • Carryback: 3 years
  • Carryforward: 20 years

Restricted Farm Losses

  • Carryback: 3 years
  • Carryforward: 20 years
38
Q

Corporation - Div C

Dividends Received by Corporation

A

Full amount deducted in Division C

39
Q

Death of Taxpayer

Deemed Disposition

A
  • Deemed to have disposed of all property owned at time of death at FMV immediately before death
  • Property transfers to the spouse at tax base
    • Automatically applies; however may elect out of this provision.
  • If the rollover provision is elected out of, the property is deemed to have been disposed of at FMV
    • Election made on an asset-by-asset basis and it may be beneficial in situations where the deceased taxpayer has non-capital or net capital loss carryovers or other credits that would otherwise not be used.
40
Q

Death of Taxpayer

Deadline

A

Taxpayer did not carry on business

  • Death: Jan 1 to Oct 31
    • Apr 30 of the year following the date of death
  • Death: Nov 1 to Dec 31
    • Six months after the date of death

Taxpayer carried on business

  • Death: Jan 1 to Dec 15
    • Apr 30 of the year following the date of death
  • Death: Nov 1 to Dec 31
    • Six months after the date of death
41
Q

Death of a Taxpayer

Transfers

A

For Spouse

  • RRIF taxed in spouse’s hands if successor
  • RRSP taxed in spouse’s hands unless transferred to their RRSP
  • TFSA keeps tax exempt status

For non-spouse

  • FMV of RRIF at time of death is taxed in deceased taxpayer final return
  • FMV of RRSP at time of death is taxed in deceased taxpayer final return
42
Q

LCGE Limit

A

Least of the following amounts:

  1. Unused lifetime deduction: $424,126 ($848,252 × ½) less all previous capital gains deductions claimed
  2. Annual gains limit: A – B, where A is the lesser of:
  • The net taxable capital gains for the year of assets disposed
  • The net taxable capital gains from the year on the disposal of QSBC shares B is the total of:
    • the amount, if any, by which net capital losses deducted in the year exceed the difference, if any, between (a) and (b) above
    • The ABIL realized in the year whether claimed or not
  1. Cumulative gains limit: The sum of all components of the annual gains limits for the current and prior years reduced by:
  • The sum of all amounts of capital gains deductions claimed in prior years
  • The (CNIL) balance at the end of the current year
43
Q

LGCE

SBC

A
  • Used primarily (at least 50%) in an active business carried on in Canada by either the corporation or a related corporation; or
  • Invested in shares or debt of an SBC corporation that was connected with the particular corporation.
44
Q

LGCE

QSBCS

A

The following four conditions must all be met for the shares to be considered QSBCS:

  • The corporation must be an SBC
  • The shares must be owned by the taxpayer, the taxpayer’s spouse or common-law partner, or a partnership related to the taxpayer.
  • The shares must not have been owned by anyone other than the taxpayer or a related person during the 24 months before the shares are disposed of.
  • Throughout the 24-month holding period, more than 50% of the fair value of the assets must have been used primarily in an active business carried on in Canada.

The first condition requires that the corporation meet the 90% test at the time that the shares are sold, while the fourth condition only requires more than 50% of the assets to have been used in an active business for the 24-month period preceding the sale.

A sole proprietor can incorporate his or her business shortly before a sale and then sell shares of the new corporation and claim the exemption because no one other than the taxpayer or a related person owned the shares in the 24 months prior to the sale.

45
Q

Shareholder benefits

A

Where corporation has conferred a benefit on shareholder, or someone non-arm’s length with the shareholder, the FV of the benefit must be included in the shareholder’s income as property income.

The value of the benefit is not deductible to the corporation, regardless of whether the amount is later repaid.

This rule does not apply to salaries, wages, bonuses, employment benefits or dividends that are already included in the shareholder’s income.

46
Q

Shareholder loan

A

Where a loan has been made to a on shareholder, or someone non-arm’s length with the shareholder, the amount of the loan is required to be included in the taxpayer’s income in the year that the loan was made.

Loans must be included in income unless any of the following conditions are met:

  • iShareholder is an employee of corporation and meets the exemptions for employees
  • Loan is repaid within one taxation year after the year it was made (cannot be on two consecutive fiscal balance sheets).
  • Loan was made in the ordinary course of money-lending business.
  • Loan is inter-company loan or made to non-resident.

Shareholder/employee may be exempt if:

  • Not a specified employee (owns less than 10% of the shares). OR
  • Loan to specified employee for one of three reasons:
    • to acquire a dwelling for their own occupation
    • to acquire newly issued treasury shares
    • to acquire a motor vehicle for employment use
    • AND
    • The following two conditions are met:
      • Bona-fide repayment terms
      • Loan by virtue of employment (all other employees are eligible for similar loans

Other considerations

  • If loan is not included in income, imputed interest must be included in shareholder’s income.
  • If loan is included in income, no imputed income is included in shareholder’s income.
  • Repayment of loan that has been included in income is eligible for deduction in the year it is repaid.
47
Q

Shareholder Manager Remuneration

A

Advantages to incorporating a business:

  • Tax reduction
  • Tax deferral -Pay dividends when convenient
  • Income splitting
    • Can issue non-voting shares to family members
    • Can also split without incorporating but need to provide justification for the salary

Factors to consider in determining remuneration:

  • Corporate tax rate
  • Shareholder manager’s: Combined marginal personal tax rate
  • Availability of tax credits and deduction
  • Shareholder’s objective regarding CPP, RRSP, and RPP -
  • Shareholder manager’s objective regarding growth of the business
  • Risk tolerance

Process to determine ideal mix of salary and dividends

  • Determine the personal marginal tax rate on after-tax dividends
  • Compare the result in step 1 to the personal marginal tax rate on salary to determine the increase in the personal tax rate as a result of substituting salary
  • -Divide the dollar amount of the unused dividend tax credits from the dividend only option by the result from Step 2 = Amount of salary to substitute for dividends
48
Q

NAL Transactions

Related Transactions

A

Nice guy gets FMV

49
Q

NAL Transactions

Spouse Transactions

A

The tax cost of the property to the transferor.

ITA 73(1) automatically applies regardless of whether consideration is paid or not.

The transfer is tax-free because:

  • the deemed proceeds of disposition to the transferor are equal to the tax cost of the property
  • the deemed cost to the transferee is equal to the tax cost of the property

The transferor may make an election for ITA 73(1) to not apply, the rules discussed above for NAL transactions will apply to the exchange.

Attribution applies:

  • If the transferor does not elect out of ITA 73(1) OR
  • fair value consideration is not paid

Attribution does not apply:

  • If the transferor elects out of ITA 73(1) AND
  • fair value consideration is paid
50
Q

NAL Transactions

Transfers to a NAL minor

A
  • Any capital gain or loss on the property will be taxed in the hands of the transferor at the time of the transfer and the rules for NAL sales of property will apply
  • If attribution applies, income earned on the property (such as interest, dividends and rental income) is attributed back to the transferor and taxed in his or her hands until the year in which the NAL minor turns 18.
  • Capital gains are not attributed back.
51
Q

Legal Structures

Partnerships and proprietorships

A

Advantages

  • Losses realized in the startup period of the business may be deducted against other sources of income of the individual partner or proprietor
  • A full set of financial statements is not required • Salaries may be paid to the partner or proprietor’s spouse and children to the extent that they work in the business and the salaries are reasonable.

Disadvantages

  • There is no opportunity for tax deferral, as all profits earned are included in the personal tax return of the individual partner or proprietor in the year earned.
  • A partnership or proprietorship may not be used for estate planning or estate freezes
  • The lifetime capital gains exemption may not be claimed on the sale of partnership or proprietorship assets.
52
Q

Legal Structures

Corporations

A

Advantages

  • Salaries may be paid to the spouse and/or children of the owner of the shares to the extent that they work in the business and the salaries are reasonable.
  • Further income splitting may be accomplished through dividend payments to the spouse and children.
  • If the shareholder’s personal rates are higher than the corporate rates, personal taxes may be deferred by delaying dividend payments
  • Estate planning and succession are possible • The capital gains exemption can be used when shares are sold

Disadvantages

  • Startup losses cannot be deducted against the shareholder’s other sources of income.
  • A separate corporate tax return must be filed, including either a full set of financial statements prepared in accordance with generally accepted accounting principles or a general index of financial information
53
Q

Employee vs Contractor

A
  • Control
  • Ownership of tools
  • Chance of profit/loss
  • Integration
  • Specific Results
  • Intent

Employee relationship

  • Limited deductions available
  • Income tax withheld at source
  • No requirement to register for GST
  • Eligible for paid vacation, severance pay
  • Job security
  • Tax return due April 30 of the following year

Contractor relationship

  • More expenses are deductible, if incurred to earn business income
  • Must make quarterly instalments if the threshold is met
  • Must be GST registered if the threshold is met
  • No severance or job security
  • Tax return due June 15 of the following year Implication of incorrect classification
  • Could be liable for both the employer’s and the employee’s share of CPP and EI premiums and for withholding taxes.
  • Penalties and interest may be levied on the under-remittance of those payments.
54
Q

Capital vs. Income

A

Did the taxpayer intend to use the asset as an item of inventory or as a capital asset?

If the primary intention to use the asset as a capital asset was frustrated, did the taxpayer have, at the time of purchase, a motivating intention to sell the property at a profit?

  • The relationship of the transaction to the taxpayer’s business If the transaction is similar to other transactions entered into during the normal course of the taxpayer’s business operations, this factor supports a conclusion that the profit from the sale is business income.
  • Nature of the asset If the asset can be used over time to produce income, the asset can be considered a capital asset.
  • Number and frequency of transactions A large number of similar transactions over a period of time imply that the asset is inventory.
  • Length of period of ownership of asset A longer period of time implies that the asset is a capital asset, while a shorter holding period implies that the asset is inventory.
55
Q

Superficial Losses

A

Denied and added to adjusted cost base

Denied if meets following three conditions:

  • The taxpayer, the taxpayer’s spouse, or a corporation controlled by either the taxpayer or his or her spouse sells a property.
  • Any of the above taxpayers acquire or reacquire the same property or an identical property in the 30-day period before or after the sale of the property.
  • Any of the taxpayers referred to above still own the property at the end of the 30-day period after the sale of the property.
56
Q

Capital Gains Reserve

A

On a disposition of a capital property, the vendor may agree to receive payment over a period of time.

To align the taxation of the capital gain with the cash available to the vendor, a capital gains reserve may be claimed to defer the payment of tax.

The reserve is calculated as the lesser of two amounts:

  • Capital gain × (Proceeds not due * / Total proceeds)
  • 20% of the capital gain × (4 – Number of preceding years ending after the disposition);

Due means an enforceable right to immediate payment.

The amount included in income each year is calculated as follows:

In the year of the sale:

  • [(Capital gain – Reserve) × Capital gains inclusion rate].

In each year after the sale:

  • [(Prior-year reserve – Current-year reserve) × Capital gains inclusion rate].

In years after the sale, the previous year’s reserve is added back and a new reserve may be claimed if applicable.

57
Q

Business Investment Loss

A
  • LCGE provides a tax incentive for investing in a successful small Canadian business.
  • BIL rules provide tax relief for investing in shares or debt of a failed small Canadian business.
  • BIL results from the actual or deemed disposition of certain capital properties.
  • This may arise on disposition of shares or debt of a SBC
  • An SBC is a CCPC where all or substantially all of its assets (90%) are used in an active business carried on primarily in Canada.
  • BIL is the full amount of the loss and ABIL is 1/2 of BIL.
  • In the year that an ABIL is realized, it is deductible against any source of income.
  • If it cannot be used in that year, it may be carried back three years and forward 10 years and deducted against any source of income in those years.
    • If the taxpayer is unable to use up the ABIL in the carryover period, it is added to the taxpayer’s net capital loss carryover balance.
  • If a taxpayer has made a claim for a capital gains exemption in a preceding year or in the current year, some amount of the BIL will be restricted.
  • The restricted amount of the BIL becomes an ordinary capital loss. The restricted portion of the BIL is determined as being the lesser of:
    • The BIL for the year (before deducting the restricted portion)
    • The cumulative capital gains deduction claimed in preceding years × a factor for that year
58
Q

Capital Gains

Principal Residence Exemption

A
  • Allows exemption from paying tax on all or a part of a capital gain arising on the disposal of the taxpayer’s principal residence to the extent that the taxpayer has designated the residence as personal residence for one or more years.
  • A principal residence:
    • includes any housing unit
    • must have been ordinarily inhabited at some time during the year by the taxpayer or spouse, common-law partner, former spouse, former common-law partner, or child
  • Exemption is limited to the building and half a hectare of land, unless the taxpayer can prove that the excess land is necessary for the taxpayer’s use and enjoyment of the property.
  • Only one residence may be designated as a principal residence for a family unit for a given year.
  • A family unit includes the taxpayer’s spouse or common-law partner and their single children under 18 years of age at the end of the year.
  • If a taxpayer buys or sells a property partway through a year, each part-year counts as a full year.
  • If a taxpayer sells a home and purchases another home in the same year, will have owned two homes in the same year but can only designate one as a principal residence for that year.
  • Where a family unit owns more than one residence in a year, the family unit may only designate one of the residences as a principal residence for that particular year.
59
Q

Change in use

A

Personal to income producing

  • If a taxpayer ceases to inhabit a home as a principal residence and commences to rent the property, there is a change in use of the property from personal to income producing.
  • The taxpayer is permitted to designate the home as his or her principal residence for up to four years after the year of the change in use as long as no capital cost allowance is claimed against any income earned on the property.
  • A separate election may also be made at the time that the property is rented out to not have changed its use.
  • The consequence is that there is no deemed disposition at fair value at the time of the change in use.

Income producing to personal

  • A taxpayer may acquire a property and initially rent it out for some period of time before occupying the home as a principal residence.
  • If no election is made at the time of the change in use, there is a deemed disposition of the property at fair value at that time.
  • If no capital cost allowance was claimed on the property during the time that it was an income-producing property, the taxpayer may elect to not have a deemed disposition at the time of the change in use.
  • This election also allows the taxpayer to claim the PRE for up to four years prior to the year of the change in use.
  • The combination of this election and the election above, where the change in use is from personal to income producing, may not exceed four years.
60
Q

PUP

A

Capital losses on PUP are denied.

POD is greater of $1,000 or actual POD

ACB is greater of $1,000 or actual ACB

61
Q

LPP

A
  • Painting
  • Coins
  • Stamps
  • Rare Books
  • Jewelry

Capital losses on LPP can only be used against LPP gains.

Capital losses on LPP can only be carried forward for 7 years.

POD is greater of $1,000 or actual POD

ACB is greater of $1,000 or actual ACB

62
Q

Replacement Property Rules

A
  • Capital gains or recapture arising may be deferred.
  • Includes any capital gain and/or recapture in income for tax purposes in the year in which property is disposed of.
  • In the year in which a replacement property is acquired, the taxpayer makes an election to defer the capital gain and/or recapture on the property disposed of.
  • When the replacement property is acquired in a taxation year after the year of disposition of the replaced property, the election is made by filing an amended tax return for the year of disposal of the replaced property.

The two situations in which the replacement property rules apply are:

Voluntary

  • Disposal: Property sold by taxpayer
  • Type of property disposed of: real property (land or land/building)
  • Use of property: Property used in a business
  • Type of property acquired: same or similar use as property disposed of
  • Timing of replacement: within 12 months following the end of the taxation year the former property was sold
  • Date of disposition: date the purchaser of the replaced property takes legal title to the property.

Involuntary

  • Disposal: Property is lost, stolen, expropriated, or destroyed
  • Type of property disposed of: capital property except vacant land.
  • Use of property: Property does not have to be used in a business
  • Type of property acquired: same or similar use as property disposed of
  • Timing of replacement: within 24 months following the end of the taxation year the former property was sold
  • Disposition date:
    • Earliest of
      • The day the taxpayer has agreed to the full amount of compensation.
      • The day the compensation is determined by a court or tribunal.
63
Q

Deferred Capital Gains and Recapture

A

Deferral for voluntary and involuntary disposition:

  • Deferred capital gains maximum deferral is lesser of:
    • POD less OC
    • Cost of replacement property less OC of disposed property
  • Deferred recapture Lesser of:
    • POD and OC less UCC of replaced property
    • Cost of replacement property

Deferral of capital gains on disposition of small business investments

To the extent that the proceeds of disposition of shares are reinvested in other eligible small business corps

  • CCPC that uses 90%+ of the FV of its assets in an active business carried on primarily in Canada
  • CCPC where assets are < $50 million
  • Conditions:
    • Individual owned shares of eligible corporation throughout 185 days prior to sale
    • Replacement shares in an eligible small business corporation must be acquired within 120 days

Maximum deferral:

(Lesser of proceeds and cost of replacement/POD)*Capital Gain

64
Q

Acquisition of Control

Items to Consider

A
  • Tax return to be filed for year ending at the deemed year end.
  • Short taxation year: requires proration of CCA, SBD, etc.
  • Unpaid amounts such as management bonuses must be paid within required time frame.
  • Short taxation year counts as one fiscal year for loss carryforward limits.
  • Charitable donation limit may be affected.
65
Q

Acquisition of Control

Steps

A
  • Identify if an acquisition of control has occurred.
  • Determine the deemed year end — the day before AOC.
  • Identify all individual assets with accrued losses — accrued losses are deemed be triggered.
  • Identify potential tax planning opportunities — electing to trigger capital gains and/or recapture to utilize expiring
  • Determine the balance of non-capital losses that may be carried forward to use in the future.
  • Identify loss utilization strategies to use non-capital losses carried forward
66
Q

Acquisition of Control

Losses

A

Net capital losses, ABILs, and non-capital losses from property expire if not utilized at the deemed year end.

Non-capital losses from a business source become restricted and may only be carried forward if:

  • The business that generated the loss is carried on throughout the taxation year that the losses are to be utilized; and
  • The business is carried on for a profit or with a reasonable expectation of profit.

Restricted non-capital losses may only be deducted against income from the same business that generated the loss, or against income from a similar business.

67
Q

Acquisition of Control

Elective capital gains and recapture

A

Allows to elect to have deemed disposition of any depreciable or non-depreciable capital property on which capital gains or recapture have been accrued.

Election permits to trigger capital gains and/or recapture (income from business) to reduce amount of net capital losses or non-capital losses that would otherwise expire

The elected amount or deemed proceeds of disposition are equal to the lesser of:

  • the fair market value of the property, and
  • the greater of:
    • The adjusted cost base (ACB) of the property, and
    • An amount designated by the corporation

May elect any amount between the ACB of the property and the fair market value of the property.

  • If losses the company wishes to use up are less than accrued gains, the company may elect an amount just sufficient to use up the losses.

For depreciable capital properties, an elected amount greater than original cost will trigger both a capital gain and recapture to the extent that CCA has previously been claimed on the property.

  • If a taxpayer only wishes to use up net capital losses, the taxpayer may not want to make this election on depreciable capital property.
68
Q

Property Income

Interest Income

A
  • Corporations
    • Interest income is recorded based on accrual method
  • Individuals
    • Interest income recorded on cash basis or accrual on anniversary date if cash not received before anniversary date
69
Q

Property Income

Rental Income

A
  • Rental income

Less Eligible expenses

  • Utilities
  • Repairs
  • Maintenance
  • Interest
  • Insurance
  • Property taxes
  • Advertising
  • Management fees
  • CCA — Generally cannot create or increase a rental loss
70
Q

Property Income

Dividend Income

A

Corporations: Included in net income for tax (Division B), deducted to determine taxable income (Division C)

Private corporations: May need to pay a refundable tax (“Part IV tax”) on dividends received

Individual or trust: depends on the type of dividends

  • Eligible: grossed up by 38%
  • Ineligible: grossed up by 16%
  • Stock dividends: treated in same way as cash dividends
  • Capital dividends: paid out of the CDA tax free
  • Foreign dividends: not grossed up, full amount included in income. Foreign tax credit for withholding tax paid.
71
Q

Property Income

Deductions

A

Carrying charges on vacant land — interest on loans used to acquire land and property tax on land

  • Only deductible to the extent of income earned on the land; otherwise added to the cost of the land

Soft costs: interest, legal, accounting, insurance, property taxes

  • Not deductible during construction, renovation or alteration of a building
  • Added to cost of building

Interest: generally deductible if borrowings are used to produce income, must be able to tie use borrowed funds to acquisition of an income producing assets

  • Section 21 allows certain borrowing costs and interest costs to be added to the cost of the depreciable property
72
Q

Other Income

Deferred Income Plans

A
  • RRSP, RRIF. RPP
  • Included in income when withdrawn
    *
73
Q

Other Income

Pension Income Splitting

A
  • A taxpayer may make a joint election to allocate up to 50% of his or her eligible pension income to his or her spouse.
  • The amount allocated to the transferee spouse is deducted from the transferor spouse’s net income and added to the transferee spouse’s net income
74
Q

Other Income

RESP

A
  • The accumulated income of the plan is taxed when withdrawn either in the hands of the beneficiary or in the hands of the contributor if payments are not made to a qualified beneficiary.
75
Q

Other Income

Annuities

A
  • The full amount of the annuity payment received in the year is included in the taxpayer’s income, and a deduction is allowed for the capital element. The deduction is determined as follows:

(Amount paid to acquire the annuity / Total payments to be received) × (Annuity payment)

76
Q

Other Income

CCP

A
  • Canada Pension Plan (CPP) payments are included in the income of the individual receiving the payment.
  • Spouses and common-law partners may elect to split their CPP income equally.
  • The amount that can be shared is 50% of the combined CPP benefits received but pro-rated by the length of time the individuals have been living together in relation to the period over which they have been contributors.
  • A non-contributing spouse must be at least 60 years of age at the time of this election.
  • The spouses must make an application to Service Canada to split their CPP income.
  • If the application is approved, the split amount is paid separately to each spouse and is included in that spouse’s income.
77
Q

Other Income

OAS

A
  • Included in income but there is deduction
    • OAS Clawback
78
Q

Other Income

Retiring Allowance

A
  • Retiring allowances may be transferred on a tax-free basis, within certain dollar and time limits, to an RRSP or an RPP.
  • The amount that may be transferred on a tax-free basis is the lesser of:
    • $2,000 for each year or part year during which the individual was employed by the employer or related employer with respect to service before 1996, plus an additional $1,500 for each year or part year, the taxpayer was employed by the employer prior to 1989 for which the employer’s contributions to an RPP or DPSP had not vested by the time the retiring allowance was paid.
    • The amount of the retiring allowance received in the year.
  • The amount must be transferred to an RPP or an RRSP in the year or within 60 days after the year in which the retiring allowance is received. The full amount of the retiring allowance is included in income, and a deduction is allowed for the amount transferred within the dollar and time limits noted above.
79
Q

Other Income

Death Benefits

A
  • Death benefits are payments made to the spouse or other beneficiary of a deceased employee upon the death of the employee in recognition of the employee’s service of employment. These are included in the income of the surviving recipient(s), with a one-time maximum exemption of $10,000 per deceased employee.
  • Where death benefits are paid to multiple beneficiaries, the following rules apply to the $10,000 exemption:
  • A beneficiary who is the surviving spouse is allocated the exemption up to a maximum of $10,000.
    • If any amount of the $10,000 remains after the allocation to the surviving spouse, the remaining amount is allocated on a pro rata basis to beneficiaries other than the spouse.
80
Q

Other Income

Employment Insurance benefits

A
  • Payments received under an Employment Insurance (EI) plan are included in income. See the e-book chapter on other deductions for the EI clawback for higher-income earners.
81
Q

Other Income

Amounts included in net income and deducted under Division C

A
  • The following amounts are included in net income and deducted under Division C:
    • social assistance benefits (welfare)
    • Workers’ Compensation
    • Guaranteed Income Supplement
  • These amounts are included in net income.
  • Thus, they will impact various amounts that depend on net income, such as the spousal, age and medical expense tax credits.
  • It is not the government’s intention to tax these amounts, so they are deducted under Division C in the determination of taxable income.
82
Q

Other Income

Indirect payments

A
  • Indirect payments are payments or transfers of property that normally would have been taxed in the hands of the taxpayer if he or she had received the payment or property transferred.
  • The decision to pay or transfer property must have been made by or with the concurrence of the taxpayer. The following conditions must hold:
    • The taxpayer must have benefited from the transfer.
    • The payment or value of the transferred property would have been included in the taxpayer’s income if the transfer had not been made.
83
Q

Other Income

Scholarships, bursaries and fellowships

A
  • Any amount received by a student in a year as a scholarship, fellowship or bursary is exempt from tax if the student was in full-time attendance at a post-secondary educational institution or a secondary or elementary school.
84
Q

Other Income

Research grants

A

Research grants provided to an individual to allow that individual to carry out research are included in the taxpayer’s income to the extent the grant exceeds expenses incurred in carrying out the research.

The following expenses are not allowed:

  • personal or living expenses
  • expenses the taxpayer has been reimbursed for
  • expenses deductible in the year under other provisions of the ITA
  • expenses that are unreasonable in the circumstances
  • expenses paid by someone else on behalf of the taxpayer
85
Q

Other Income

Spousal Support

A

Amounts paid for spousal support are deductible to the payer and taxable to the recipient if the following five tests are met:

  • The payments are made on a periodic basis.
  • The payments are considered an allowance for the maintenance of the recipient.
  • The payments are made during a time that the spouses or former spouses were living apart as a result of marital breakdown.
  • The recipient has discretionary use of the amount (he or she can use the amount in any way).
  • The payments are made as a result of a decree, order or judgment of a competent tribunal or a written agreement.
86
Q

Other Income

Spousal Support

Periodic versus lump-sum payments

A

Do not qualify under the rules above — that is, they are neither tax deductible to the payer nor are they an income inclusion to the recipient.

If a lump-sum payment is required to be paid by instalment, it is still considered a lump-sum payment and is not deductible to the payer.

To establish the payments are periodic, the taxpayer should ensure the court order or agreement requires:

  • amounts be payable at regular intervals
  • amounts be fixed and predetermined

A taxpayer may also agree to make payments for medical expenses or education of the former spouse.

These amounts are not normally fixed or predetermined so should be set out separately in the court order or written agreement.

87
Q

Other Income

Third-party payments

A

Instead of making a payment directly to the former spouse, a taxpayer may make payments to third parties.

These are deductible to the person making the payment and taxable in the hands of the former spouse who benefits from the payment if the following criteria are met:

  • The payments are made in the current year or the preceding year as a result of an order of a competent tribunal or a written agreement.
  • The expense was incurred for the maintenance of a former spouse or common-law partner.
  • The court order or written agreement specifically refers to ITA
88
Q

Other Income

Child support

A
  • Amounts paid for the support or maintenance of a child are not deductible to the person making the payment and are not taxable to the recipient.
  • Child support payments are defined as any amount not identified in the agreement or order under which it is made as being solely for the support of the recipient spouse or former spouse or the parent of the taxpayer’s child.
  • If the full amount of the required support payments is not made in the year, only payments in excess of the required child support payments are included in the recipient’s income and deductible to the person making the payment.

CFE (14 decks)

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