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Tax > Tax Module > Flashcards

Tax Module Flashcards

1
Q

Corporation balance deadlines

A

2 months after YE or 3 months after YE if meet criteria:
- CCPC claimed SBD in CY or PY
- taxable income of the PY didn’t exceed $500k for the CCPC or the associated group of CCPCs

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2
Q

Instalments (individual)

A
  • Must pay if balance due estimated to be >3k in CY and was >3k in 1 of the 2 PYs
  • Instalments due Mar 15, June 15, Sep 15, Dec 15
  • Amount of instalments using 1 of 3 methods:
    i) 1/4 x estimated net tax owing for the CY
    ii) 1/4 x net tax owing for the PY
    iii) first 2 instalments: 1/4 x net tax owing for the 2nd PY; last 2 instalments = 1/2 x net tax owing for the PY - 2 instalments paid
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3
Q

Instalments (corporation)

A
  • Must pay if balance due estimated to be >3k in CY and was >3k in PY
  • 3 methods to calculate:
    i) 1/12 x estimated net tax owing for the CY
    ii) 1/12 x net tax owing for the PY
    iii) first 2 instalments: 1/12 x net tax owing for the 2nd PY; last 10 instalments = 1/10 x net tax owing for the PY - 2 instalments paid
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4
Q

Instalments (corporation) qualifications for quarterly

A
  • Did not have taxable income >500k in CY or PY
  • Had taxable capital employed in Canada <$10m
  • Claimed the SBD in the CY or PY
  • Has a perfect compliance history

instalment calculation:
i) 1/4 x estimated net tax owing for the CY
ii) 1/4 x net tax owing for the PY
iii) first instalments: 1/4 x net tax owing for the 2nd PY; last 3 instalments = 1/3 x net tax owing for the PY - 2 instalments paid

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5
Q

CCA immediate expensing rule

A

if additions <$1.5m, can expense 100% of additions after April 19, 2021

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6
Q

CCA immediate expensing rule class exemptions

A

Class 1-6, 14.1, 17, 47, 49, 51

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7
Q

Class 10.1 special rules

A

50% CCA on disposal
No recapture or terminal loss

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8
Q

Types of property income

A

interest, dividends, rental income, property income, royalties

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9
Q

Rental income expenses

A

Utilities, R&M, interest, insurance, property taxes, advertising, management fees, CCA

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10
Q

Capital gains reserve - lesser of:

A
  1. CG x (proceeds not yet due/total proceeds)
  2. 20% of CG x (4 - # of preceding years ending after the disposition)
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11
Q

Superficial loss

A

where taxpayer sells property to trigger loss & repurchases almost immediately

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12
Q

Conditions for superficial loss & to not deduct

A
  1. taxpayer, spouse or corporation controlled by taxpayer/spouse sells a property
  2. any of the above parties acquire the same property or similar in 30 days before or after the sale
  3. any of the parties still own the property at the end of the 30 day period after the sale
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13
Q

Personal-use property (PUP)

A

ACB and POD deemed greater of $1,000

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14
Q

Listed personal property (LPP)

A

art, jewelry, rare books, stamps, coins

loss can offset CG from disposal of LPP

excess loss can be carried back 3 years & forward 7

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15
Q

Corporation balance due

A

2 months after YE or 3 months after YE for certain CCPCs:

criteria:
1. CCPC claimed SBD in CY or PY
2. taxable income of the PY didn’t exceed $500k for the CCPC or associated group of CCPCs

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16
Q

Interest on income tax

A

prescribed rate + 4%

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17
Q

Late/deficient payment penalty (instalments)

A

50% of the amount by which the interest on the late or deficient instalments exceeds the greater of:
1. $1,000
2. 25% of the interest that would be payable if no instalments had been made

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18
Q

Failure to file penalty

A

5% x unpaid tax for first occurrence + 1% x unpaid tax x # months o/s

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19
Q

Subsequent late/demand to file

A

10% x unpaid tax + 2% x unpaid tax x # months o/s

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20
Q

Repeated failure to report income >= $500

A

10% x amount of unreported income + 50% of difference between understatement of tax & amount paid

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21
Q

False statement or negligence

A

greater of $100 & 50% of understated tax

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22
Q

Reassessment for individuals

A

Can reassess up to 3 years after original NOA or 10 years if taxpayer requests to apply deductions or credits

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23
Q

Reassessment for corporations

A

Can reassess up to 4 years or 3 years for CCPCs

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24
Q

Appeals process

A

File notice of objection within 90 days or individuals have later of 1 year after tax filing deadline or 90 days after NOA

If CRA denies, must go to tax court of Canada within deadline

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25
Q

Business investment loss

A

Deductible against any source of income

can be carried forward 10 years and back 3

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26
Q

SBC criteria

A
  1. CCPC
  2. substantially all (90%) of the FMV of assets used in an active business carried out primarily in Canada
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27
Q

Reinvestment in SBC criteria to defer CG

A
  1. individual must have owned the common shares of the eligible SBC throughout the 185 day period immediately preceding the sale
  2. replacement shares in 1 or more other eligible SBCs must have been acquired within 120 days of the end of the year in which the replaced shares were sold
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28
Q

Reinvestment in SBC deferral

A

Max deferral = CG x (LOCP of replacement shares/POD)

ACB of replacement shares is reduced by the deferred gain

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29
Q

Voluntary replacement property criteria

A
  1. real property (land or land/building)
  2. used in business
  3. same or similar use as property disposed
  4. replaced within 12 months following the end of the tax year the former property was sold
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30
Q

Involuntary replacement property criteria

A
  1. capital property except vacant land
  2. same or similar use as property disposed
  3. replaced within 24 months following end of the tax year the former property was sold (if sold in separate years, must include CG in the year sold then file amended return in year replacement acquired)
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31
Q

Replacement property deferral of CG

A

max deferral is lesser of:
1. POD - original cost
2. cost of replacement property - original cost of disposed property

Cost of replacement property reduced by deferred CG
Non deferred CG must be recognized in CY

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32
Q

Replacement property deferral of recapture

A

deferred recapture is lesser of:
1. LOCP - UCC
2. cost of replacement property

Cost of replacement property reduced by deferred recapture

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33
Q

Test for ABI vs CG

A
  1. intention (primary vs secondary)
  2. relationship to the taxpayer’s business
  3. length of period of ownership
  4. nature of the asset
  5. # and frequency of similar transactions within a given time period
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34
Q

Non-Arm’s Length Transactions (section 69)

A

If FMV =/= actual proceeds, then the higher goes to the seller and the lower goes to the purchaser (double tax)

If FMV = actual proceeds or gift, then POD = FMV and cost = FMV (no double tax)

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35
Q

NAL Transaction - recapture on sale

A

If selling price>cost, addition to UCC = taxable CG

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36
Q

Time limit to use donations (corporation)

A

can be carried forward 5 years

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37
Q

Non-capital loss rules

A

applied against any income

carryback = 3 years; carryforward = 20 years

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38
Q

Net capital loss rules

A

applied against taxable capital gains

carryback = 3 years; carryforward = indefinite

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39
Q

ABIL rules

A

applied against any income

carryback = 3 years; carryforward = 10 years, then converted to net capital loss

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40
Q

Farm losses rules

A

applied against any income

carryback = 3 years; carryforward = 20 years

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41
Q

Restricted farm losses rules (PT farmer)

A

applied against farm income

carryback = 3 years; carryforward = 20 years

deduction can’t exceed 17,500

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42
Q

NCL calculation

A

NCL = losses from business + losses from property + ABIL + NCL deducted in the year + dividends received from a corporation resident in Canada - income from business - income from property - income from other sources - net taxable capital gains - farm losses

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43
Q

SBD base calculation

A

9% of the lesser of:
1. ABI = NI - net AII
2. taxable income
3. business limit

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44
Q

GRR calculation

A

15% of taxable income - SBD - tax AII

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45
Q

ART calculation

A

38 2/3% of the lesser of:
1. taxable AII
2. taxable income - SBD

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46
Q

AII calculation

A

interest + net rental income + royalties + dividends + net taxable CG = investment income (NET AII)

Net AII - division C deductions (NCL and dividends) = taxable AII

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47
Q

Business limit

A

$500k limit reduced by A x (B/11,250)
A = amount of annual limit
B = 0.0281225% of corporation’s taxable capital in Canada in the PY in excess of $10m

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48
Q

Part IV tax on dividends

A

connected = dividend refund x % dividend received
(connected = hold more than 50% of voting shares of NAL OR corporation owns shares in other than represent more than 10% of voting shares)

not connected = dividend received x 38 1/3%

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49
Q

NERDTOH formula

A

NERDTOH = opening balance - dividend refund used in PY + Part I tax (least of 1. AII x 30 2/3% 2. (TI-SBD) x 30 2/3% 3. Part I tax) + part IV tax of noneligible (connected div)

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50
Q

ERDTOH formula

A

ERDTOH = opening balance - dividend refund out of PY + part IV tax of eligible (unconnected dividends)

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51
Q

GRIP formula

A

GRIP = opening balance + [TI - SBD - AII ] x 72% + eligible dividends received (not grossed up)

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52
Q

Eligible dividends

A

can only be designated up to extent of balance in GRIP

Shareholders prefer eligible because marginal tax rate is lower

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53
Q

Capital dividend account formula

A

CDA = opening - net capital loss carryover claimed in the year + TCG

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54
Q

Dividend refund (corporation)

A
  1. lesser of:
    i) 38 1/3% x eligible dividends paid
    ii) ERDTOH balance
  2. lesser of:
    i) 38 1/3% x non-eligible dividends paid
    ii) NERDTOH balance
  3. lesser of:
    i) excess of 38 1/3% non-eligible dividends - NERDTOH balance
    ii) ERDTOH balance - 38 1/3% eligible dividends paid
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55
Q

Personal services business exceptions

A

Not eligible for SBD or GRR
can’t deduct expenses except salary paid to employee
subject to additional 5% federal tax rate

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56
Q

Personal services business criteria

A
  1. income from services provided by employee on behalf of corporation
  2. employee is specified shareholder (own 10%+ of shares)
  3. doesn’t employ >5 employees
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57
Q

Accounting, legal and other fees to borrow money

A

deductible on straight-line basis of 20% per year

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58
Q

Group insurance plans

A

benefit portion paid by employer is taxable

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59
Q

non-group insurance plans

A

premium paid by employer is taxable

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60
Q

standby charge (when vehicle used for personal use)

A

Employer-owned vehicle: 2% of the cost (less sales tax) of the vehicle for each month available

Employer-leased vehicle: 2/3 of lease payments (including sales tax), net of insurance costs

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61
Q

Reduced standby (overrides standby charge) if

A
  1. Employee is required to use the automobile for employment duties
  2. Personal KM per year are <20,0004 (or 1,667 per month)
  3. Automobile is used >50% for employment purpose

Formula: (personal use KM/1,667 x months) x standby charge

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62
Q

Operating cost benefit (when employer pays for automobile costs & vehicle used personally)

A

Employer owned vehicle:
1. if used >50% for employment - lesser of:
i) personal KM x $0.29/km
ii) 1/2 of standby charge
2. if used <50% for employment:
i) personal KM x $0.29/km

Employee owned or leased:
(personal km/total km) x actual operating costs paid by employer

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63
Q

Stock option benefit (inclusion in income)

A

Date of inclusion:
CCPC: when shares acquired under option plan are sold
Non-CCPC: when option is exercised

extent that the FMV of the shares on the exercise date > exercise price

CG/CL = # shares sold x (POD - FMV on exercise date)

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64
Q

stock option benefit (division C deduction)

A

1/2 of employment income inclusion if eligible

Conditions for division C deduction:
CCPC:
i) FMV of share on grant =< exercise price
ii) FMV of share on grant date > exercise price but the shares acquired under the plan are held for at least 2 years after option exercised
(claimed in year shares sold)

Non-CCPC: FMV of share on grant date =< exercise price (claimed in year option exercised)

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65
Q

Imputed interest benefit

A

Debt outstanding x (CRA prescribed rate for quarter - rate paid by employee) x days outstanding in quarter/365

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66
Q

Home reallocation loan

A

Loan used to acquire home at least 40km closer to new work location

Benefit rate - lesser of:
i) CRA prescribed rate when loan made
ii) CRA prescribed rate for the quarter

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67
Q

Employee deductions: lease cost for motor vehicle

A

Max deduction is lesser of:
1. [900 + GST/HST x days vehicle leased/30] - C - D - E
(C = aggregate lease costs in PYs, D = imputed interest at the CRA prescribed rate on refundable deposits over $1k, E = total reimbursement by employer to employee)
2. [(F x G)/0.85H] - D - E = (annual lease x CCA cost limit (34k) (+ GST/HST))/0.85 x vehicle list price (before tax))
(D = imputed interest at CRA prescribed rate on refundable deposits over $1k, E = total reimbursements)

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68
Q

Workspace in the home conditions

A
  1. place where individual principally (>50%) performs employment duties
  2. used exclusively for purpose of earning employment income
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69
Q

Workspace in the home deductions (employee)

A

Utilities, home internet access fees, R&M, rent

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70
Q

Workspace in the home deductions (commission)

A

Utilities, home internet access fees, R&M, rent, insurance on home, property taxes on home

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71
Q

CPP facts

A

Included income but can be elected to split with spouse via application to Service Canada

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72
Q

OAS clawback

A

OAS received - 81,761 = excess x 15%

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73
Q

EI clawback

A

30% of the least of:
1. EI benefits included in income
2. NI for tax - 75,375

74
Q

Pension income splitting

A

can transfer up to 50% to spouse
$2,000 federal pension credit

things to consider when deciding to transfer:
- marginal tax rate of both individuals
- availability of pension credit to transferee (they may already have pension)
- impact on OAS clawback (could reduce for higher-income spouse)
- effect on other tax credits (any credits that consider NI)

75
Q

Scholarships

A

Exempt from tax if student was FT student

If PT, can deduct cost of tuition plus program costs

76
Q

Death benefits (deduction)

A

if payment made to spouse or beneficiary from deceased’s employer - amount is exempt from tax up to $10k

must be used by spouse first then remainder allocated to other beneficiaries

77
Q

Child support

A

not deductible to payer or taxable to recipient (taxable if more than required payment)

78
Q

Spousal support deductibility test

A

Deductible/taxable if all 5 tests met:
1. payments are periodic (not lump sum)
2. payments are considered an allowance for the maintenance of recipient
3. payments are made while former spouses were living apart
4. payments are required in written agreement
5. recipient has discretionary use of the amount

79
Q

Spousal support other rules

A
  • spousal support only deductible/taxable if full amount of child support paid first
  • payments must be defined in agreement (otherwise all assumed to be child support)
  • 3rd party payments can be deducted if (ex. mortgage, tuition payments):
    i) the payments are made in the CY or PY as a result of an agreement
    ii) the expense was incurred for the maintenance of a former spouse
    iii) court order specifically refers to ITA 56.1 (income inclusion) and ITA 60.1 (deduction)
80
Q

Enhanced CPP contribution

A

= 4.95% x (earnings - 3,500) - 3,039.30

if max contribution, get $461 CR

81
Q

Moving expenses conditions for deduction

A
  1. moving to a new business or employment location in Canada (limited to employment or business income earned in new location) OR
  2. moving to attend a qualifying post-secondary education on a FT basis (limited to scholarships or PT job)
  3. moving at least 40km closer to new location
  4. taxpayer ordinarily resided at new and old residences
82
Q

Moving expenses - eligible costs

A
  • traveling costs (meals & lodging) from former residence to new
  • transportation and storage costs incurred in moving
  • M&E near old or new residence (less than 15 days) - can use simplified method of $23/meal or $69/day)
  • lease cancellation costs on old residence
  • selling costs of old residence
  • cost of maintaining a vacant former residence to the extent of the least of:
    i) the actual maintenance expenses
    ii) $5,000
  • cost of changing legal documents
83
Q

Disability supports deduction criteria

A

Can claim amounts paid to enable the individual to:
- work as an employee or independent contractor
- attend a designated educational institution or school
- carry on research work for which the individual received a grant

84
Q

Disability supports deduction - eligible expenses

A
  • speech, hearing, sight, learning, or mental disability - cost of devices or other assistance that enables individual to engage in activities
  • qualified for disability tax credit individual - amounts paid to an attendant (must be unrelated)
85
Q

disability supports deduction - calculation

A

deduction is lesser of:
- amount of disability support payments made
- employment income, business income, taxable portion of scholarships
- if attending for education, the least of:
i) $15,000
ii) $375 x # weeks of school attendance

86
Q

Childcare expenses - criteria

A

Must have been incurred to allow a taxpayer to:
- be employed
- carry on a business
- carry on research for a grant received
- attend a designated educational institution or secondary school

87
Q

childcare expenses - deduction

A

least of:
1. 2/3 of earned income
2. amount per child based on annual limits
3. amount paid

88
Q

childcare expense limit

A
  • under 7 = $8k/child, overnight camps = $200k/wk
  • 7-16 = $5k/child, overnight camps = $125/wk
  • 16+ (disability but doesn’t qualify for disability credit) = $5k/child, overnight camps = $125/wk
  • any age (disability and qualifies for disability credit) = $11k/child, overnight camp = $275/wk
89
Q

childcare expense - higher income spouse

A

can deduct if lower-income spouse is:
- in FT or PT educational institution
- confined to prison for at least 2 weeks
- infirm and incapable of caring for the children for at least 2 weeks
- living apart from the higher-income earner for at least 90 days and child resides with higher-income spouse

90
Q

Test for employee vs contractor

A
  1. intent
  2. control
  3. ownership of tools
  4. subcontract the work or hire assistants
  5. financial risk
  6. responsibility for investment and management
  7. opportunity for profit (if can control proceeds)
91
Q

CPP credit

A

= (eligible earnings - 3,500) x 5.7%

max earnings = 64,900

for self employed, half is deducted to determine NI under “other” deductions

92
Q

EI credit

A

= insurable earnings x 1.58%

max insurable earnings = 60,300

93
Q

disability credit

A

mental or physical impairment must be certified by a medical doctor

can’t claim if claiming medical expense credit for a FT attendant or care in nursing come

94
Q

Home accessibility

A

if >65 years old and eligible for disability credit

annual amount = up to $10k before 2022 and $20k for 2022+

95
Q

Home buyers amounts

A

if first time buyer acquiring qualifying home (didn’t own for 4 years)

amount = $5,000 before 2022, $10,000 for 2022+

96
Q

home buyers amount - criteria

A
  1. must be home in Canada
  2. home must be registered in the name of the individual or individual’s spouse
  3. individual or spouse must intend to inhabit the home as their principal residence within 1 year of the date of purchase
97
Q

Tuition

A

can transfer up to $5,000 per year to parent (but can’t transfer in subsequent year)

98
Q

Charitable donation

A

(15% x A) + (33% x B) + (29% x C)
A = first $200 donation
B = donations above $200 but less than $221,708
C = amount above sum of A + B

spouses are eligible to combine donations on 1 return to avoid $200 lower tax credit

99
Q

Political contribution tax credit

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

max credit = $650 when $1,275 or more contribution is made

100
Q

Credits that carry forward

A

donations, tuition, student loan interest

101
Q

ABIL - how to get

A

ABIL balance = 50% of BIL on disposal of shares or debt of SBC

if company didn’t file for bankruptcy, can claim if 1 of following met:
1. company is insolvent in fact
2. neither the company nor company controlled carries on a business
3. the FV of shares is nil
4. reasonable to expect the company will be dissolved

102
Q

Conditions for classification for QSBC

A
  1. must be a SBC:
    i) SBC = CCPC where >90% of the FV of total assets is used in an active business carried primarily in Canada
  2. must be CCPC
  3. shares must be owned by the taxpayer or spouse
  4. shares must not have been owned by anyone other than the taxpayer or spouse during 24 months before disposal
  5. throughout the 24 month period, more than 50% of the FV of total assets must have been used in an active business carried on primarily in Canada
103
Q

Purification of assets

A

no tax implications: using excess cash to pay long-term liabilities; using cash to purchase assets

triggers tax: paying dividends to shareholders, paying salaries or bonuses to owner-managers, moving non-qualifying assets into another company

104
Q

Dividend tax credit (individual)

A

eligible = dividend x 0.38 x 6/11
non-eligible = dividend x 0.15 x 9/13

105
Q

RRSP contribution limit

A

Lesser of:
1. 18% of PY earned income
2. CY deduction limit

106
Q

Options to remove funds from RRSP without triggering taxable income

A
  1. Home buyer’s plan
    i) taxpayer can’t have owned home for prior 4 years
    ii) max withdrawal = $35k
    iii) repayment over 15 years, starting on 2nd calendar year after withdrawal (repayments not made included in income)
  2. lifelong learning plan
    i) must be in school at least 10 hours/wk for 3 months
    ii) withdrawal = $10k/year; max $20k in total
    iii) repayment over 10 years, starting in 5th year after withdrawal
107
Q

RRSP overcontribution

A

penalty of 1% per month if overcontribute by $2k+

108
Q

RRSP contribution age limit

A

once turn 71, can’t contribute to own plan but can contribute to spouse’s

109
Q

RESP

A

Limit on contribution = lifetime of $50k per beneficiary

contributions can be made up to 35th year of plan’s existence (40 for disabled)

can be transferred to RRSP

110
Q

RESP - Canada education savings grant (CESG)

A

CESG = $2,500 x 20% = $500 per year; lifetime amount = $7,200

must be repaid if child doesn’t pursue higher education

111
Q

RESP - Canada learning bonds (CLBs)

A

similar to CESG but for children born after 2003

Amount = $500 in first year and $100 each subsequent year until child turns 15
must be repaid if child doesn’t pursue higher education

112
Q

CCPC criteria

A
  • resident in Canada
  • not controlled directly or indirectly by 1 or more non-resident persons
  • not controlled directly or indirectly by 1 or more public corporations
  • not controlled directly or indirectly by a combination of 1 or more non-resident persons and 1 or more public corps
  • has no class of its shares listed on a designated stock exchange
113
Q

General anti-avoidance rules (GAAR) test

A
  1. benefit = a tax benefit has arisen as a result of a transaction (taxpayer proves)
  2. avoidance transaction = the transaction or series of transactions is a tax avoidance transaction without any bona fide purpose other than tax (taxpayer proves)
  3. avoidance transaction = the transaction of series of an abusive tax transaction that is not consistent with the object, spirit, or purpose of the income (CRA proves)
114
Q

Determining residency

A

Primary factors:
i) dwelling place in Canada maintained for use
ii) spouse in Canada
iii) dependents in Canada

Secondary factors:
i) personal property kept in Canada (furniture, clothing, cars)
ii) social ties (club memberships)
iii) economic ties (bank account, RRSPs, employment)
iv) other ties (seasonal swelling, vehicle license)

115
Q

Residency deeming rules

A

Individuals = not factually resident but sojourning in Canada for more than 182 days
- member of Canadian Armed Forces
- an ambassador, minister, high commissioner, officer, or servant of Canada

Corporations = incorporated in Canada after April 26, 1965 and central management and control is located in Canada

116
Q

Date of non-residency

A

latest of:
1. date individual leaves Canada
2. date the individual’s spouse and/or dependents leave Canada
3. date the individual becomes a resident of the new country

117
Q

Non-resident tax

A

income subject to withholding tax = 25%; periodic withdrawal from RRSP = 15%

if receive rental income can elect ITA 216 to pay Part I tax on rental income which allows to file separate return with gross rental income & deduct relevant rental expenses

118
Q

Pros and cons of reorganization

A

Pros:
- limited liability for shareholders
- tax deferral on earnings
- potential tax reduction on earnings subject to SBD
- greater potential for income splitting amongst family members to extent involved in business and salaries reasonable
- greater flexibility for owner-manager compensation
- flexibility to select fiscal YE
- access to the LCGE on future disposition of shares if QSBC (if spouse also a s/h they can also claim QSBC)

Cons:
- cost of initial corporation and ongoing compliance
- inability to claim corporate losses against other sources of personal income
- losses in startup period retained in corporation
- income splitting - dividends paid to children or spouse without involvement in business subject to TOSI

119
Q

Section 85 (incorporation of proprietorship) criteria

A
  1. assets must be transferred to a taxable Canadian corp
  2. assets transferred must be eligible property
  3. consideration must include shares of the transferee corporation (at least 1 share)
  4. consideration must = FMV & property transferred can include shares & NSC
  5. transferor and transferee must jointly elect (deadline = earliest of filing deadlines for the 2 parties)
120
Q

Section 85 elected amounts

A

Ceiling = FMV
Floor - greater of:
i) FMV of NSC (tax value)
for non-depreciable asset, lesser of:
ii) FMV
iii) ACB of asset

for depreciable asset, lesser of:
ii) FMV
iii) UCC
iv) capital cost

elect more than UCC = recapture (ABI)
elected amounts become transferor’s POD and transferee’s cost

121
Q

Section 85 - terminal loss

A

terminal loss if UCC>FMV; loss denied but can be sold at FMV and the loss becomes a class 10 CCA and can be claimed at 30% as a business loss

122
Q

section 22 election

A

joint election between purchaser & seller which allows seller to deduct any losses realized as business losses

NO section 22 then AR = allowable capital loss, if YES section 22 then AR = business loss (AR can’t be transferred under section 85 unless election is made as always at a loss)

123
Q

paid-up capital (PUC)

A

amounts corporation received for shares on the original subscription

124
Q

section 84.1

A

prevents the creation of PUC or tax-free removal of corporate surplus on a NAL transfer of shares to a corporation by an individual

2 consequences:
- reduction in PUC (to extent there was an increase from the transaction)
- a deemed dividend (to extent NSC received > hard cost)

125
Q

Estate freeze

A

Converting common shares into fixed-value preferred shares thus new growth in the company goes to new common shares

126
Q

Section 86 - exchange of shares

A

shareholder exchanges existing shares for another type (typically preferred) and used to pass business to children

not eligible for LCGE

127
Q

section 86 conditions

A
  1. the original owner’s shares must be capital property to that shareholder
  2. the original owner of the shares must exchange all shares owned of a particular class for shares of the same corporation
  3. the share exchange must be as a consequence of reorganization (articles of incorporation amended)
128
Q

section 86 steps

A
  1. existing stakeholders (parents) exchange their common shares for preferred shares with a fixed redemption value = FV of common shares (preferred shares can be voting or non voting)
  2. children subscribe for newly issued common shares at a nominal value
129
Q

Section 51

A

allows a taxpayer to exchange existing shares of a corporation for convertible securities of the same corporation without triggering CG (don’t have to convert all the shares of the class)

130
Q

Sale of shares - calculation

A

selling price - ACB of shares = CG - LCGE (if qualify) = CG after exemption x inclusion rate (50%) = taxable CG

selling price - taxable CG x marginal rate = after-tax cash kept

131
Q

Sale of shares - facts

A
  • all assets and liabilities included in sale
  • purchaser becomes responsible for all liabilities of the corporation
  • cost and UCC remain unchanged
  • can keep losses depending on acquisition of control
  • amounts paid above FMV = purchased GW but not eligible for CCA
  • LCGE available on qualifying QSBCS
132
Q

Sale of assets - process

A
  1. determine tax impact on the corporation (effect on ABI, AII, CDA, NERDTOH, GRIP)
    - NERDTOH = AII x 30 2/3%
    - inventory = selling price - cost = ABI
    - depreciable property recapture or terminal loss = ABI
  2. determine cash available to redeem shares = selling price of assets - corporate tax on ABI + refund of NERDTOH - liabilities - bonus paid to s/h = cash available to redeem shares
  3. determine deemed dividend subject to tax = cash available to redeem shares - PUC of shares = deemed dividend - CDA = deemed dividend subject to tax
    cash available to redeem shares - deemed dividend before CDA = adjusted proceeds - adjusted cost base = CG/CL
  4. personal tax paid and after-tax cash = cash available to redeem shares - personal tax paid
133
Q

Sale of assets - tax implcations

A

deemed YE when sale closes
proceeds included in personal tax as dividend

134
Q

Sale of assets - facts

A
  • purchaser can choose what assets are purchased
  • not responsible for undisclosed liabilities
  • cost and UCC increase to amount paid for assets
  • amounts paid above FMV = purchase GW and can claim CCA
  • seller may be left with assets purchaser doesn’t want or are hard to sell
  • not eligible for LCGE
135
Q

Acquisition of control (control acquired by unrelated party) - process

A
  1. identify if acquisition of control has occurred (when >50% of votes to elect board of directors)
  2. acquisition of control rules apply
  3. determine the deemed YE (date before AOC)
    - short tax year required proration of CCA, SBD, etc.
    - short year counts as 1 fiscal year for loss carryforward limits
  4. identify all individual assets with accrued losses (accrued losses deemed to be triggered)
  5. identify potential tax planning opportunities (electing to trigger CG and/or recapture to utilize expiring losses)
  6. determine the balance of NCL that may be carried forward to use in the future
  7. identify loss utilization strategies to use NCL carried forward
136
Q

AOC - losses

A
  • net capital losses, ABILs, and NCL from property expire if not utilized at deemed YE
  • NCL may only be used in carryforward period if:
    i) the business that generated the loss is carried on throughout the tax year the losses are to be utilized in
    ii) the business is carried on for a profit or with expectation of profit
    iii) restricted loss can only be deducted against income from the same or similar business that generated the loss
  • NCL = NI - accrued losses + deemed disposition = NI for tax - NCL - charitable donations = NCL
  • accrued losses are triggered at deemed YE & realized at AOC
    i) depreciable capital property = FV compared to UCC - if FMV<UCC, loss triggered = NCL
    ii) non-depreciable capital property = if FV < cost, loss = capital loss
137
Q

AOC - deemed disposition

A

in deemed YE, can elect to have deemed disposition of capital property on which CG or recapture have accrued = can use up NCL or net capital losses that would’ve expired

triggering will increase tax/cost base = increase CCA to be deducted and decrease future CG

elected amount or deemed POD - lesser of:
1. FMV
2. greater of:
i) ACB of property
ii) amount designated by the corporation

138
Q

Partnership - pros and cons

A

Pros:
- losses realized in startup can be deducted against other sources of income as losses are included in partner’s personal return
- full set of FS not required for tax purposes
- salaries may be paid to the partner’s spouse and children to the extent they work in the business and salaries reasonable

Cons:
- no tax deferral as income must be included in personal return in year earned
- can’t use for estate planning or estate freezes as no separate entity from partner
- LCGE can’t be claimed on sale of assets

139
Q

Trusts - purpose

A
  • management of assets
  • protecting assets (from creditors, during marriage breakdown, etc.)
  • controlling distribution (property & income distributed to beneficiaries over time)
  • privacy (will = public, trust agreement private)
  • access to multiple LCGE and/or PRE
  • income splitting
140
Q

types of trusts

A
  1. testamentary trust = arises as a result of the death of an individual
    - graduated rate estates (GRE) = must have a fiscal YE no later than 1 year after the death of settlor; once ceases to be GRE, the YE becomes calendar YE
  2. inter vivos trust = established by the settlor during their lifetime (must have calendar YE)
141
Q

Trust filing deadline

A

T3 required to be filed within 90 days of trust’s fiscal period

142
Q

Trust - tax

A
  • if taxed in trust, trusts taxed at top personal rate (except for GREs)
  • entitled to most of the same tax credits as individual (except basic personal)
143
Q

Trust - GRE criteria

A

GRE = estate that arose as a consequence of an individual’s death if:
- no more than 36 months have passed since their death
- the estate is considered a testamentary trust for tax purposes
- the estate designates itself as the GRE of the individual
- no other estate is designated as a GRE of the individual

144
Q

Trust - designated to beneficiaries

A

if designated to beneficiaries, trust gets a deduction for amounts designated to beneficiaries & amount included in beneficiaries income & taxed at their marginal tax rate

145
Q

Amounts deductible in determining NI of trust

A
  • amounts paid or payable to beneficiaries
  • interest and other expenses incurred in earning income of the trust
  • trustee or executor fees
  • amounts paid by the trust to 3rd parties to provide goods or services to a beneficiary that are allocated to the income of a beneficiary
146
Q

Rule of association

A
  • each corporation is controlled (directly or indirectly) by a person, and the person who controls one corporation is related to the person who controls the other AND either of those owns not less than 25% of the share in both corporations
  • de jure control = owning 50% of voting shares to obtain control
  • indirect control = when individual or corporation indirectly controls another without owning shares directly in the corporation
147
Q

Losses denied on transfers of property to affiliated persons

A

transferor is a corporation, trust, partnership:
- capital loss = denied & retained by transferor until transferee sells the property to a non-affiliated person
- terminal loss = denied & transferor keeps terminal loss in separate CCA class & continues to claim CCA on the UCC; transferor can deduct remaining UCC when asset is sold to non-affiliated party; transferee adds FV of asset to appropriate CCA class & retained the original cost of hte asset

transferor is an individual:
- capital loss = denied as superficial loss & added to ACB of property
- terminal loss = same as above

148
Q

connected corporations

A
  • control rule = corporation controlled by the other corporation (ownership >50% of voting shares)
  • votes and value rule = corporation shares held by the other corporation represent more than 10% of the voting shares and more than 10% of the FMV of total issued shares
149
Q

TOSI

A
  • income received taxed at highest marginal rate
  • applies to children under 18 and adult family members
  • can’t deduct basic personal BUT can claim dividend tax credit
150
Q

TOSI - exceptions

A
  • if family member is 25+ and owned shares that represent at least 10% of the votes and value of the corporation
  • income received on excluded shares (shares at least 10% of votes and value of company)
  • less than 90% of the income of the corporation is from the provision of services
  • the shares are not shares in a professional corporation
  • amounts paid must be reasonable based on their contribution to the business
151
Q

Shareholder manager remuneration - reasonability

A
  • amount of bonus in relation to the company’s profit and services provided by the s/j
  • justification for expecting a bonus over regular salary
  • amount of time between determining company’s profit and establishing bonus
  • legal obligation to pay the accrued bonus (if unpaid at 180 days, amount not deducted)
152
Q

shareholder manager remuneration - salary vs dividend

A
  • shareholder manager’s desire to participate in CPP, RRSP, etc. which requires earned income
  • child care expenses incurred - deduction required earned income
  • cumulative net investment loss balance (CNIL) - if have a balance, dividends paid reduce the CNIL = greater availability of CG deduction
  • s/h manager’s age (younger = more risk and need less cash)
  • corporate tax rate (income above BL taxed higher)
  • s/h manager’s personal tax rate (higher income = higher bracket)
  • amount of s/h manager’s tax credits and deductions (want to have enough income to use them all)
153
Q

shareholder loan inclusion - must include in income unless

A

must include unless:
- s/h is an employee of the corporation and meets exemptions for employees
- loan is repaid within 1 tax year after the year it was made
- loan was made in the ordinary course of money-lending business
- loan is intercompany loan or made to non-resident

154
Q

methods to clear shareholder loan account

A
  1. clear debit balance using dividends, salaries, or bonuses
    - if paying via salary, must divide the shareholder loan amount by marginal tax rate to account for income tax withheld
  2. dividends paid = balance in s/h loan
155
Q

shareholder/employee loan exempt if:

A
  • not a specified employee (owns less than 10% of shares)
  • loan to a specified employee for 1 of 3 reasons:
    i) to acquire a dwelling for their own occupation
    ii) to acquire newly issued treasury shares
    iii) to acquire a motor vehicle for employment use
  • loan is from a corporation in the business of lending money

AND:
- bona fide repayment terms (pay back in reasonable time)
- loan arises because of employee’s employment (all employees get similar loan)

156
Q

Death - beneficiary = spouse with no election out of ITA 70(6)

A
  • non-depreciable asset = no tax (ACB from deceased transfer to spouse; proceeds = ACB)
  • depreciable asset = no tax (proceeds = UCC to deceased)
157
Q

death - beneficiary = spouse elected out of ITA 70(6)

A
  • non-depreciable asset: proceeds = FMV for deceased and cost to beneficiary = FMV
  • depreciable asset: proceeds = FMV for deceased and UCC for beneficiary = FMV; if FMV<cost for deceased, difference between cost & UCC = deemed CCA for beneficiary; deceased will have recapture/terminal loss if FV>cost
158
Q

death - beneficiary = not spouse

A
  • non-depreciable asset: disposed of at FMV
  • depreciable asset = disposed of at FMV
  • attribution doesn’t apply if minor children beneficiary
159
Q

death - beneficiary = spouse (other items)

A
  • unmatured RRIF & spouse is successor annuitant = spouse continues to received RRIF and no tax implications to deceased
  • unmatured RRIF & spouse is NOT successor but is beneficiary of RRIF = FMV at time of death is taxed in hands of spouse; spouse can transfer funds to their own RRIF and claim deduction for amount transferred
  • unmatured RRSP: FMV of RRSP taxed in spouse’s hands but can transfer to own RRSP and claim deduction
  • TFSA = no tax implications (tax-exempt status kept)
160
Q

death - beneficiary = not spouse (other items)

A
  • unmatured RRIF: FMV of RRIF taxed in deceased’s terminal return
  • unmatured RRSP: taxed in deceased’s terminal return
  • TFSA: income taxable to beneficiary (if no beneficiary, proceeds become part of deceased’s estate & no tax implications)
161
Q

ITA 70(6) spousal rollover for death

A
  • property left to the taxpayer’s spouse or partner transfers to the spouse at the tax basis of the property to the deceased taxpayer
  • provision automatically applies but can be elected out of
  • if elected out of, property deemed to be disposed of at FMV
  • beneficial when deceased has NCL or net capital loss carryovers that would be lost
162
Q

Terminal return - losses

A

if capital losses > taxable CG in terminal return, excess can be deducted against any other income and income from the PY return

163
Q

Deceased - returns and deadlines

A

terminal/final return - later of:
1. normal filing deadline
2. 6 months after date of death

right or things return - later of:
1. 1 year after date of death
2. 90 days after assessment of the final return

estate tax return - required to be filed if any income is earned on any assets held in estate from date of death until assets distributed
- due 90 days after YE of estate

164
Q

Right or things return

A

right or things = matured but unclipped bond coupons, dividends declared before date of death but not received, salaries, commissions, and vacation owing prior to death but unpaid

165
Q

Right or things treatment options

A
  1. amounts reported in terminal return
  2. an election made to include value in a separate tax return (right or things return)
  3. if right or things transferred to 1 or more beneficiaries, reported in beneficiaries’ returns
166
Q

Right or things return - benefit

A
  • some of income may be taxed at lower rate
  • some tax credits may be claimed in full on each return (ie basic personal, age amount, spouse) & don’t need to prorate
  • donation credit not limited to 75% of NI
  • medical expense credit = special rule to claim over 24 month period
167
Q

Attribution - to prevent taxpayer from shifting income to lower-income earner

A
  • spouse = attributed to transferor (income earned & CG on sale)
  • NAL minor = income earned on property transferred attributed to transferor (CG on sale of property NOT attributed to transferor)
  • can be avoided if child pays FMV consideration or if loan interest at least the prescribed rate
168
Q

Attribution - spousal transfers

A
  • automatically rollover under 73(1) = no immediate tax consequence as deemed POD to transferor = tax cost of property & deemed cost to transferee = tax cost
  • can elect out of 73(1) & pay FV consideration then ITA 69 (NAL transactions) applies
169
Q

Transfers of property to former spouse

A

marital assets - section 73(1) applies thus transfers to spouse & former spouse tax-free

  • can elect out so cost = FMV (beneficial if have NCL, PRE can be claimed, or LCGE can be claimed on QSBCS)
170
Q

Attribution - RRSP

A

RRSP can be transferred tax-free if:
- former spouses are living apart
- payment is made pursuant to either a decree, judgement or order OR written separation agreement
- the transfer is made directly between plans

171
Q

GST - reporting periods

A
  • taxable supplies >$6m = report monthly; deadline = 1 month after reporting period
  • taxable supplies $1.5m - 6m = report quarterly (or monthly); deadline = 1 month after
  • taxable supplies <$1.5m = report annually (or monthly/quarterly); deadline = 3 months following end of reporting period for corporations, June 15 for individuals
172
Q

GST instalments

A
  • required if annual filer and net tax in PY >$3,000
  • 2 methods to calculate:
    1. PY method = 4 equal instalments of 25% of net tax from PY
    2. CY method = 4 equal instalments of 25% of estimated net tax owing for CY (if actual tax higher than estimate, instalment interest charged on difference between CY method and PY method)
  • instalment deadlines same as filing deadlines
  • individuals with Dec 31 YEs must pay by April 30
173
Q

GST - interest on late payment

A

interest based on CRA prescribed rate

174
Q

GST - penalty on late filing

A

if interest charges >$1,000, penalty = A + (B xC)
A = 1% of amount owing on filing
B = 25% of A
C = # months return overdue (max 12 months)

175
Q

GST - small supplier exemption

A
  1. 4 calendar quarters test - if last 4 quarters exceed #30k limit, cease to be small supplier at end of month following quarter in which #30k limit exceeded
    - 1st day of 2nd month following quarter in which limit exceeded need to start collecting GST/HST
    - need to formally register within 29 days of the first day of the 2nd month following the quarter limit exceeded
  2. calendar quarter test - if exceed $30k in any calendar quarter, cease to be small supplier immediately before sale resulting in exceeding limit is made
    - date to start collecting GST/HST = date sale exceeding $30k is made (need to collect on 30k sale)
    - need to formally register within 29 days after the date the person is first required to collect GST/HST
176
Q

ITCs - quick method

A
  • annual taxable supplies of $400k or less (including GST/HST)
  • not available to person providing legal, accounting, or consulting services
  • election required (for annual filer, election must be made by 1st day of 2nd fiscal quarter)
  • calculation = taxable supplies (including GST/HST) x remittance rate - 1% of 30k - ITCs on capital expenditures

pros:
- don’t have to keep detailed records of GST/HST paid on expenditures
- usually will received more than required to remit = taxable government assistance for income tax purposes

177
Q

ITCs - simplified ITC method

A
  • taxable supplies made in preceding year of $1m or less, and annual taxable purchases made in preceding year of $4m or less
  • no election required
  • calculation = how done at titmouse
  • items excluded: capital expenditures for real property, purchases of zero-rated supplies, purchases of exempt supplies
178
Q

GST on purchase and sale of business

A
  • both parties must be GST registrants
  • jointly complete form GST44 and file by due date of GST return where transaction occurred
  • only available to elect IF 90% of assets sold used to carry on the business
179
Q

GST - special rules for property

A
  • long-term rental exempt
  • commercial rent not exempt
  • new residential property can claim rebate if intend to live for at least 12 months
180
Q

GST - zero-rated supplies

A

basic groceries, prescription drugs, medical and assistive devices, agricultural products, most exports

181
Q

GST - exempt supplies

A

sale of used residential and long-term residential units, financial services, health and dental services, educational courses toward degree or diploma, childcare services

182
Q

Auditing - income statement assertion

A

accuracy and valuation, existence, completeness, rights & obligations, presentation & disclosure

Tax (1 decks)

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