Tax

Question 1

Deductibility of expenses

Taxation

Core – Level B

Answer 1

Deductibility of expenses (Tax)
• General limitation – To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and be expected to generate income related to the taxpayer’s business or property

Case: Dogani, Roxanne Kalpert, Solar Panel Solutions
Reference: ITA 18(1)(a)

Question 2

Common business expenses DISALLOWED

Taxation

Core – Level B

Answer 2

Common business expenses DISALLOWED (Tax)
• Amortization / Impairment / Accounting Gains & Losses (deduct via CCA)
• Personal expenses and membership / club dues
• Charitable donations – deduction to determine Taxable Income for a Corp.
• Political contributions – limited tax credit available for an individual; Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit.
• Taxes, interest and penalties related to tax
• Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
• Expenses re: issue or sale of shares and refinancing costs (deduct over 5 years)
• Life insurance premiums (except where the policy has been assigned as collateral)
• Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
• Carrying charges on vacant land (non-deductible portion added to ACB)
• Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)
Case: Culinary Crawl, Atlantic Shellfish, TankCo, Elder Care Centre and Spa, Roxanne Kalpert, Solar Panel Solutions; Reference: ITA 20(1), 18(1)

Question 3

Common business expenses ALLOWED

Taxation

Core – Level B

Answer 3

Common business expenses ALLOWED (Tax)
• Automobile expenses
• Home office expenses
• Convention expenses (limited to 2 per year)
• Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
• Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
• Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year

Case: Culinary Crawl, Atlantic Shellfish, TankCo, Elder Care Centre and Spa, Roxanne Kalpert, Solar Panel Solutions
Reference: ITA 20(1)

Question 4

Capital Cost Allowance (CCA)

Taxation

Core – Level B

Answer 4

Capital Cost Allowance (CCA) (Tax)
• CCA may be claimed on all tangible capital property other than land, must be available for use
• Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
• Most classes subject to ½ year rule (except class 12 [some cases], 14, and 52)
• Dispositions are credited to UCC at lesser of cost and proceeds (excess of proceeds over original cost result in a capital gain)
• Terminal loss – when there is a balance of UCC in the class but there are no assets remaining, the UCC can be claimed as a terminal loss (capital loss cannot arise on the disposition of depreciable property)
• Recapture – arises when the balance in the class is negative (i.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
• Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture. If negative, then terminal loss.
Case: Culinary Crawl, Atlantic Shellfish, TankCo, Elder Care Centre and Spa, Roxanne Kalpert, Ferguson Real Estate, Solar Panel Solutions
Reference: ITA 20(1)(a)

Question 5

Retiring allowance rollover to RRSP

Taxation

Core – Level B

Answer 5

Retiring allowance rollover to RRSP (Tax)
A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment. A retiring allowance includes:
• payments for unused sick-leave credits on termination; and
• amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work).
Individuals with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). The amount that is eligible for transfer is limited to:
• $2,000 for each year prior to 1996
• Additional $1,500 for each year prior to 1989 (if no vested contributions to RPP or DPSP by employer)

Reference: ITA 60(j.1)

Question 6

Shareholder loan

Taxation

Core – Level B

Answer 6

Shareholder loan (Tax)
• Principal amount must be added to shareholder’s income ITA 15(2)
• No imputed interest under ITA 80.4(3)
• Can be deducted under ITA 20(1)(j) when it is repaid
• Exception: If loan repaid prior to second balance sheet date of corporation, then principal amount need not be added to shareholder’s income, but imputed interest under ITA 80.4(2) would apply. However, it cannot be a series of loans and payments (as per ITA 15(2.6))
• Exception: Loan advanced as an employee, rather than shareholder, to acquire residence, auto for work or shares of the company, under ITA 15(2.4), as long as at the time the loan was made, bona-fide arrangements were made for repayment of the loan within a reasonable amount of time

Case: Ferguson Real Estate
Reference: ITA 15(2), ITA 80.4
 

Question 7

Residency

Taxation

Core – Level B

Answer 7

Residency (Taxation)
• CRA considers both significant and secondary residential ties in assessing whether a taxpayer is a resident of Canada
• Significant residential ties – factors that make a strong case, in and of themselves, that residential ties exist:
o a home in Canada
o a spouse or common-law partner in Canada
o dependents in Canada
• Secondary residential ties – factors that may contribute to whether residential ties exist (including, but not limited to):
o personal property in Canada (car, furniture, etc.)
o social ties in Canada (memberships in Canadian recreational groups, etc.)
o economic ties in Canada (Canadian bank account or credit cards, etc.)
o Canadian driver’s licence, Canadian passport, or Canadian health insurance
• If a taxpayer is determined to be a resident of Canada, they are taxed on all of their worldwide income; non-residents of Canada are taxed only on income tied to Canadian sources
Case: Roxanne Kalpert

Question 8

Employee vs. Contractor

Taxation

Core – Level B

Answer 8

Employee vs. Contractor (Tax)
• No single test is decisive. Must consider:
o Intention of the parties
o Control of work (hours, location, how job is completed)
o Ownership of tools (who supplies)
o Chance of profit and risk of loss
o Ability to subcontract work or hire assistants
o Integration
• Issues:
o Contractors can deduct all reasonable expenses whereas employment deductions are limited
o Employees can receive EI benefits, contractors can opt in with restrictions
o Employers are required to withhold source deductions for employees
o Employer may be responsible for both employee and employer contributions of EI and CPP if an individual is incorrectly classified as a contractor
Case: CHHP, Solar Panel Solutions

Question 9

Employer provided automobile –
Standby charge

Taxation

Core – Level B

Answer 9

Employer provided automobile – Standby charge (Tax)
• Standby charge is a taxable employment benefit that only applies if an employer-provided automobile is available to the employee for personal use
• Calculated as:
o 2% of the original cost per month available; or
o 2/3 of the monthly lease payment per month available
• reduced by payments made by the individual to the employer
• reduced standby charge applicable where personal use less than 1,667 km per month and automobile primarily used for business purposes (consider greater than 50%)

Case: Ferguson Real Estate
Reference: IT-63R5

Question 10

Employer provided automobile –
Operating cost benefit

Taxation

Answer 10

Employer provided automobile – Operating cost benefit (Tax)
• Taxable employment benefit, calculated as:
o $0.26 (for 2018) or $0.28 (for 2019) per km of personal use; or
o 50% of the standby charge (only when vehicle used at least 50% for business)
• Operating costs include gas, insurance and maintenance, but not parking

Case: Ferguson Real Estate
Reference: IT-63R5

 

Question 11

Employer provided automobile –
Tax planning

Taxation

Core – Level B

Answer 11

Employer provided automobile – Tax planning (Tax)
• Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
• Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance
• Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
• Maintain log to justify business vs. personal km
• Lower standby charge by reducing number of days vehicle available for personal use
• Increase business use by visiting clients on the way to and from work

Case: Ferguson Real Estate
Reference: IT-63R5

Question 12

Employment –
Taxable benefits

Taxation

Answer 12

Employment – Taxable benefits (Tax)
• Board and lodging (unless at remote location)
• Most rent-free and low-rent housing
• Trips of a non-business nature
• Gifts greater than $500 (that are not cash or near-cash)
• Cash and near-cash gifts
• Cost of tools where employee is not required to have tools to work
• Forgiveness of debt
• Employer-paid education costs when primarily for the benefit of employee

Case: Perkins Packing
Reference: ITA 6(1)

Question 13

Employment – Non taxable benefits

Taxation

Core – Level B

Answer 13

Employment – Non-taxable benefits (Tax)
• Uniforms and special clothing required to be worn
• Transportation to job site
• Moving expenses reimbursed, excluding housing loss reimbursement
• Recreational facilities at place of work
• Premiums paid under private health services plans
• Professional membership fees when primarily for benefit of the employer

Case: Perkins Packing
Reference: ITA 6(1)
 

Question 14

Business use of home expenses

Taxation

Core – Level B

Answer 14

Business use of home expenses (Tax)
A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions:
• The home is the principal place of business.
• They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients.
Eligible costs include: heat, home insurance, electricity, property taxes, repairs and maintenance, mortgage interest or rent (if tenant).
• Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home.
• Home office expenses are also pro-rated for a short business year.
• Losses cannot be created by home office expenses. Unused expenses are carried forward for use in a later year.
• Do not claim CCA on a principal residence, as it may negatively impact the ability to use the principle residence exemption.
Case: Culinary Crawl, Roxanne Kalpert, Solar Panel Solutions
Reference: ITA 18(12), IT-514

Question 15

Business income vs. property income

Taxation

Core – Level B

Answer 15

Business income vs. property income (Tax)
• It is a question of fact whether income is from business or property.
• Capital property is property that provides a long term or enduring benefit
• Disposition of capital property gives rise to capital gains or losses
• Business income will arise from an “adventure or concern in the nature of trade”, determined as follows:
o Conduct
 How long was the asset held? Have there been similar transactions?
o Nature of the asset
 Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business?
o Intent
 Did the taxpayer originally acquire the asset with the intention to sell?
• For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable.
• For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains

Case: TankCo
Reference: ITA 9, ITA 248(1), IT-218R

Question 16

Tax Implications of
Going Public

Taxation

Core – Level C

Answer 16

Tax Implications of Going Public
• Company status will change from CCPC to Public company.
• Deemed year end on date of change in status.
• Possible acquisition of control
• Tax balances that are no longer available CDA, RDTOH
• Small business deduction only available to CCPC  public company will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends.
• Any undistributed Small Business earnings in the Low Rate income pool must be paid out first as other than eligible dividends.
• SRED – public company qualifies for lower rate of ITC, and they are not refundable (only refundable for CCPC)
• Public company shares do not qualify for Capital Gains exemption

Question 17

Employer paid
automobile expenses - Taxable benefit

Taxation

Core – Level B

Answer 17

Employer paid automobile expenses – Taxable benefit (Tax)
• A taxable benefit arises when an employee is given something that is personal in nature or if something that is personal in nature is paid for by the company
• A benefit may include an allowance or a reimbursement of an employee’s personal expense (e.g. personal fuel is reimbursed)
• The value of the benefit is generally its FMV
• If an employee is provided with a taxable benefit, the amount must be included in their income

Case: Perfecto Painters Inc., Solar Panel Solutions

Question 18

Owner-Manager Compensation
Salary vs. Dividends

Taxation

Core – Level C

Answer 18

Owner- manager compensation – salary vs. dividends (Tax)
• Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
• The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration
• Salary payments are deductible to the corporation whereas dividends are not
• Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
• Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
• Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments
• Dividend payments will reduce an individual’s cumulative net investment loss (CNIL)

Case: Perfecto Painters Inc., Ferguson Real Estate

Question 19

Reserves for Bad Debts

Taxation

Core – Level B

Answer 19

Reserves for bad debts (Tax)
• A reserve may be deducted for bad debts to the extent that it is reasonable and based on specific uncollectible accounts
• A reserve claimed in one taxation year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income
o Effectively this means that the increase in the reserve amount should be deducted each year

Case: Perfecto Painters Inc.
Reference: ITA 20(1)(l), ITA 12(1)(d)
 

Question 20

Business Investment Loss

Taxation

Core – Level B

Answer 20

Business investment loss (Tax)
• For tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil
o Generally, this will yield a capital loss equal to the ACB of the shares
• A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss
o Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source
o The ABIL can be carried back up to three years or forward up to 10 years
o If the ABIL is not used by the end of the 10 years, it will become a capital loss
Case: Perfecto Painters Inc.
Reference: ITA 50(1), ITA 39(1)(c), ITA 111(1)(a), ITA 111(8)

Question 21

Moving Expenses

Taxation

Core – Level B
 

Answer 21

Moving expenses
In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses.
• Eligible relocation is:
o Occurring as a result of a new work location within Canada, and
o One in which the new residence is at least 40 kilometres closer to the new work location than the old residence
• Deductible moving expenses include:
o Selling costs related to the old residence (i.e. commissions)
o Costs to transport household goods (i.e. moving company costs, etc.)
o Legal fees associated with the purchase of a new residence
o Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses
o Travelling costs
o Meals and lodging (not exceeding 15 days, not including travel days)
o Costs of cancelling a lease on the old residence
o Up to $5,000 of interest, property taxes, insurance, heating and utilities costs on the old resident, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property
• Examples of costs that are not deductible include:
o Home renovations for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property)
o Travel expenses for a house-hunting trip
Case: Play Canada Inc.
Reference: ITA 248(1); 62

Question 22

Principal Residence Exemption (PRE)

Taxation

Core – Level B

Answer 22

Principal residence exemption (PRE)
The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.
• The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer.
• Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year
• A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year
o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family
• If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence
• To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence
Case: Play Canada Inc.
Reference: ITA 54; 40(2)(b)

Question 23

Replacement property rules

Taxation

Core – Level B

Answer 23

Replacement property rules (Tax)
• In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain
• If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively.
• To be eligible to defer the gain, the replacement property rules must apply:
o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use)
o Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer
Case: Dogani; Reference: ITA 13(4), 44(1), 44(5)

Question 24

Refundable dividend tax on hand (RDTOH)

Taxation

Core – Level C

Answer 24

Refundable dividend tax on hand (RDTOH)
For tax years beginning on or after January 1, 2019, there are two types of RDTOH balances:
• Non-eligible RDTOH: Includes refundable taxes on investment income and Part IV tax on non-eligible portfolio dividends.
o Only the payment of a non-eligible dividend can trigger a refund from this account.
• Eligible RDTOH: This tracks refundable taxes paid on eligible dividends received by the corporation.
o Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account; however, when non-eligible dividends are paid, the refund must come out of non-eligible RDTOH first.
At the date of transition, the eligible RDTOH balance will be calculated as the lesser of:
• The existing RDTOH balance; and
• 38 1/3 % of the General Rate Income Pool (GRIP) balance.

Case: Solar Panel Solutions, Lake Country Camping
Reference: ITA 123.3, 129(3), 186, 187

Question 25

Eligible versus non-eligible dividends

Taxation

Core – Level B

Answer 25

Eligible versus non-eligible dividends
• Individuals must include the actual dividend plus a gross-up in their net income for tax purposes. The grossed-up dividend is referred to as the taxable dividend. Dividends received by individuals will have been designated as either eligible or non-eligible by the corporation paying the dividend.
• Non-eligible dividends are paid by Canadian-controlled private corporations (CCPCs) out of after-tax active business income eligible for the small business deduction or from after-tax aggregate investment income subject to RDTOH.
o Since both of these types of income are taxed at preferential rates inside the corporation, the gross-up and dividend tax credit rates on non-eligible dividends are lower than the gross-up and dividend tax credit rates on eligible dividends.
• Eligible dividends are paid by: Canadian public companies out of after-tax income taxed at the general corporate tax rate, or CCPCs out of the general rate income pool (GRIP).
• A CCPC’s GRIP balance comprises eligible dividends received and 72% of active business income not eligible for the small business deduction.
Case: Solar Panel Solutions
Reference: ITA 82(1)(b)

Question 26

Filing and payment deadlines

Taxation

Core – Level B

Answer 26

Filing and payment deadlines
• Income taxes
o Filing deadline is six months after year end.
o Tax balances owing are due two months after year end (three months for CCPCs eligible for small business deduction).
• GST/HST filing deadline
o Annual taxable supplies of:
 $1.5 million or less = annual reporting
 More than $1.5 million up to $6 million = quarterly reporting
 More than $6 million = monthly reporting
o Annual or quarterly filers have the option to report more frequently.
o Quarterly and monthly filers must file and remit the balance owing within one month after the end of the reporting period.
o Annual filers must file and remit the balance owing within three months after the fiscal year end.
o Annual filers are required to pay quarterly instalments if net GST owing in the previous year was more than $3,000.
Case: King Street Theatre

Question 27

“Luxury” automobile costs

Taxation

Core – Level B; Elective – Level A

Answer 27

“Luxury” automobile costs (Tax)
• There are various limitations on the costs that may be deducted by a business in the determination of net business income:
o CCA is calculated on a maximum vehicle value of $30,000 (before PST, GST, HST).
o Interest on financing the purchase of the vehicle is limited to a maximum of $10 per day.
o Vehicle lease payments are limited to $800 per 30 day period.

• Note that any taxable benefits that might arise where the business provides a “luxury” automobile to an employee or shareholder are calculated on the full value of the vehicle.

Case: Dogani
Reference: ITA 13(7)(g), 67.2, 67.3

Question 28

Conventions expense

Taxation

Core – Level B; Elective – Level A

Answer 28

Conventions expense (Tax)
•	The costs of attending a maximum of two conventions per year may be deducted when determining net business income if the convention held during the year by a business or professional organization at a location that is consistent with the territorial scope of the organization.

Case: Dogani
Reference: ITA 20(10)
 

Question 29

Bonuses payable –
Limit on deferral

Taxation

Core – Level B; Elective – Level A

Answer 29

Bonuses payable – Limit on deferral (Tax)
• All outstanding remuneration must be paid to the employee within 180 days of the year-end balance sheet date in order to be deductible by the company.
• If amounts remain unpaid for 180 days after the year end,
o the amount shall be deemed not to have been incurred as an expense for that taxation year.
o the company will claim a deduction for the expense when the amount is paid, and the employee will include the amount as income in the taxation year that it is received.

Case: Ferguson Real Estate
Reference: ITA 78(4)

Question 30

Acquisition of control

Taxation

Core – Level C; Elective – Level A
 

Answer 30

Acquisition of control (Tax)
• 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.

Case: Ferguson Real Estate, Solar Panel Solutions
Reference: ITA 111(4)-(5.5)

Question 31

Taxation on the sale of a business – Share sale

Taxation

Core – Level C; Elective – Level B

Answer 31

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.
Case: Ferguson Real Estate, Solar Panel Solutions

Question 32

Taxation on the sale of a business – Asset sale

Taxation

Core – Level C; Elective – Level B

Answer 32

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.

Case: TankCo, Solar Panel Solutions
 

Question 33

Lifetime Capital Gains Exemption

Taxation

Core – Level B; Elective – Level A

Answer 33

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.

Case: TankCo, Ferguson Real Estate
Reference: ITA 110.6

Question 34

Winding up of a subsidiary

Taxation

Elective – Level C

Answer 34

Winding up of a subsidiary
Once the liabilities of a Subsidiary are settled and the assets transferred to the Parent Co, a Subsidiary can be wound up into the Parent Co. under the provisions of Subsection 88(1) if the following conditions have been met:
1. A taxable Canadian corporation (the subsidiary) is being wound up.
2. The shareholder (the parent) owns not less than 90% of the issued and outstanding shares of the subsidiary.
3. All the shares that were not owned by the parent immediately before winding up were owned by persons with whom the parent was dealing at arm’s length.
On wind up, there will be no deemed year-end for either the Parent Co. or the Subsidiary. The Subsidiary will cease to exist on completion of the windup and the Parent Co. will continue operating.
Case; Solar Panel Solutions
Reference: ITA 88(1)

Question 35

Amalgamation

Taxation

Elective – Level C

Answer 35

Amalgamation
Where two independent corporations wish to merge and continue their business affairs on a combined basis, they may wish to amalgamate.
• The conditions necessary for this tax deferred rollover to apply are as follows:
o All of the predecessor corporations must be taxable Canadian corporations.
o All shareholders of the predecessor corporations must receive shares of the amalgamated corporation.
o All of the assets and liabilities of the predecessor corporations, other than intercompany balances, must be transferred to the amalgamated corporation in the amalgamation.
o The transfer cannot simply be a normal purchase of property, or involve the distribution of assets on the winding-up of a corporation. It must be supported by corporate legislation which identifies the transaction as an amalgamation.

Reference: ITA 87
 

Question 36

Estate freezes

Taxation

Core – Level C; Elective – Level B

Answer 36

Estate freezes
The objective of an estate freeze is to “freeze” the value of capital assets at a particular point in time. Future growth on the capital assets can accrue to intended beneficiaries of an estate who are generally younger than an individual, and therefore defer the taxation on the accrued gain.
•	Under an internal freeze, the corporation will reorganize their share capital and create a new class of preferred shares, unless one already exists. The existing shareholder will exchange their common shares for preferred shares, which will occur on a tax-deferred basis under either ITA 51 or 86. The new shareholder will then subscribe for new common shares for a nominal amount.
•	Under an external freeze, the new shareholders will incorporate a holding company, and the previous shareholder will transfer their shares of the operating company to the holding company in exchange for preferred shares on a tax-deferred basis under ITA 85(1). This requires the filing of a T2057 election form with the CRA.

Reference: ITA 51, 85(1), 86

Question 37

Disposal of real estate – Special rules

Taxation

Core – Level C; Elective – Level

Answer 37

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.

Case: Ferguson Real Estate
Reference: ITA 13(21.1)(a)

Question 38

Tax returns of a deceased individual

Taxation

Core – Level C; Elective – Level B

Answer 38

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;
• accrued capital gains and losses on capital property and any recapture or terminal loss on depreciable property
Case: TankCo
Reference: ITA 111(2), 70(1), 70(2), 70(5)

Question 39

Scientific Research and Experimental Development (SR&ED)
Taxation

Elective – Level B
 

Answer 39

Scientific Research and Experimental Development (SR&ED)
• Includes current expenditures for basic and applied research as well as for development of new products or processes.
• Investment tax credits are available for qualified expenditures. Capital expenditures no longer qualify for SR&ED credits.
• Rates for investment tax credits depend upon the type of expenditures and type of taxpayer incurring the expenditures
• Canadian Controlled Private Corporations (CCPC) receive a preferential rate of 35% compared to those incurred by other tax payers
• There is an annual expenditure limit for CCPCs
• 40% of investment tax credits are refundable for most taxpayers and 100% for CCPCs

Case: Solar Panel Solutions
Reference: ITA 127(10)
 

Question 40

Loss of CCPC status

Taxation

Core – Level C; Elective – Level B

Answer 40

Loss of CCPC status
• Can occur if the company goes public, is no longer controlled by a Canadian resident, etc.
• Implications:
o Possible acquisition of control
o Tax balances  RDTOH pool cannot have any further additions (CDA would still be available if the company continued to be private)
o Small business deduction only available to CCPC  non-CCPC will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends
o Shares of the company will no longer be qualified small business corporation (QSBC) shares; not eligible for the lifetime capital gains exemption on the disposal of non-QSBC shares
o Tax return payments due two months after year-end, instead of three months
o Stock option taxation less favourable, as employees will not be able to defer the tax benefit arising from the exercise of stock options until the sale of the underlying shares
Case: Ferguson Real Estate
 

Question 41

Stock options

Taxation

Core – Level C; Elective – Level A

 

Answer 41

Stock options (Taxation)
• No tax implications if the employee leaves the stock options unexercised.
• Employment income inclusion when the stock options are exercised, based on the difference between the FMV at the exercise date and the exercise price.
o If the company is a CCPC, then the inclusion is automatically deferred until the year the employee sells the shares.
• Possible Division C deduction to offset the employment income inclusion in the year it is taxed.
o If the options are NOT in the money when granted (FMV of shares does not exceed the exercise price), then 50% of the income inclusion may be deducted.
o If the company is a CCPC, the options can be in the money and the Division C deduction still available if the employee holds the shares for at least 24 months after exercise.
• A capital gain is also included in the employee’s income when they sell the shares, if the selling price is greater than the ACB, which is the price of the shares when options are exercised. One half of the capital gain is taxable.
• Implications to the employer: any compensation expense related to the stock options is not deductible for tax purposes.

Case: Ferguson Real Estate

Question 42

Related party transaction

Taxation

Core – Level C; Elective – Level B

Answer 42

Related party transaction (Taxation)
• 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.

Case: Ferguson Real Estate
 

Question 43

Class 14.1

Taxation

Core – Level B; Elective – Level A

Answer 43

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 applies in the year of acquisition.
• 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.

Case: TankCo, Solar Panel Solutions
Reference: ITA 20(1)(a)

Question 44

Small business limit reduction

Taxation

Core – Level C; Elective – Level B

Answer 44

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.:

Reference: ITA 125