Tax planning Flashcards
What are the attribution rules regarding gifts to spouses or common law partners?
If someone gifts money to a spouse or common law partner and the money is invested, all property income is attributable back to the transferor. This includes interest, dividends, rents and royalties.
Capital gains/losses on eventual disposition is also attributed.
Attributed income is taxed at the transferor’s MTR.
What is the value at which property automatically transfers when done between spouses or common law partners?
The property is automatically transferred at the transferor’s ACB unless an election is made to opt out of the spousal rollover
When does a transfer of property result in potential double taxation when done between spouses and partners?
Transfers below or over the FMV (when opted out of spousal rollover provisions) can result in double taxation.
What are the attribution rules regarding gifts given to a minor child?
If money is given to a minor child and invested then:
All income or losses earned by the investment is attributed back to the transferor
All capital gains/losses are NOT attributed to the transferor.
What occurs when a property is transferred to a minor child?
The transfer results in a deemed disposition where any gains or losses are taxable to the transferor.
Subsequent income/losses earned by the investment are NOT attributed to the transferor in this case.
What are the liabilities of a sole proprietorship?
The sole proprietor is legally liable for any claims against the proprietorship to the extent of their personal assets. Unlimited liability
The sole proprietor also assumes any income or losses
Name 3 reasons why someone would establish a sole proprietorship.
- Low cost
- Simple to establish - no need for sophisticated management
- Owner retains full control of the business and is entitled to all the benefits of the business
Most individuals cannot incorporate so this is their next best choice
How is income taxed to a sole proprietor?
The net income earned by the business operated as a sole proprietorship is taxable to the proprietor in the year it is earned.
The proprietor may choose to let money accumulate in the business and not withdraw any cash but all net income is taxable when earned.
If proprietor withdraws cash from business, it is treated as a withdrawal and does not necessarily attract income tax.
What is the year end for a sole proprietor?
Usually December 31st but they may select a fiscal year other than Dec 31.
Restriction associated with a business year end is a disadvantage for sole proprietorship because there is no tax planning opportunity to defer taxes.
What are the liabilities of a general partnership?
All general partners are jointly and severally liable for the debts of the partnership to the full extent of personal assets.
How is the ACB of the partnership interest calculated?
Additions to the ACB:
- capital contributions (excluding loans)
- partner’s share of profits
- partner’s share of capital dividends received
- partner’s share of government grants (for Canadian resource property) in excess amounts repaid
- partner’s share of life insurance proceeds received due to a partner’s death.
Deductions
- partner’s share of drawings or capital distributions
- partner’s share of losses
- partner’s share of investment tax credits
- partner’s share of charitable gifts or political contributions
What is section 97 (2) rollover?
Section 97 (2) rollover allows a partner to rollover assets to a partnership tax free.
Eligibility for rollover:
- has to be a Canadian partnership with all partners as Canadian residents
- must be a capital property that is being transferred or a Canadian of foreign resource property, an eligible capital property or inventory
Partnership is deemed to have acquired the asset at the elected amount and partner is deemed to have disposed the property at the elected amount. Partnership takes over position of partner in respect to future CCA or capital gain upon disposition.
How are general partners taxed?
The partners themselves are taxed but there is a separate calculation of partnership income that must be completed as if the partnership were an entity. The resulting income them flows through to be taxed at the partner’s hands.
Is the capital cost allowance (CCA) calculated for the partnership or for each partner separately?
Calculated for the partnership.
What is a capital account in a general partnership?
A capital account in a general partnership is where a partner tracks his or her contributions, income allocations and draws. It represents the partner’s equity in the partnership.
What is the year end for a general partnership?
Dec 31st but a partnership may select a fiscal year end other than that date.
There is also an elimination got potential tax deferral like sole proprietorship.
What is a limited partner?
A limited partner is generally a passive investor in a limited partnership.
A limited partnership usually consists of at least one general partner and one limited partner.
What is the extent of liability in a limited partnership?
A limited partner is not liable for debts, obligations or losses of a partnership provided that they don’t participate in the management or operations of a partnership.
What are at risk rules for limited partnership?
A limited partner cannot lose more than what they invest. Financial exposure is capped at their investment.
Losses that become non deductible to a limited partner because of tax rules can be carried forward indefinitely as deductions against future income from the same partnership.
What scenario will income attribution occur with regards to a limited partnership?
When a taxpayer loans, gifts or transfers funds to a spouse or common law partner or related minor who uses the funds to invest in a limited partnership, the income generated from the partnership is property income (not business income) and is attributed to the transferor.
What liabilities do partners in a limited liability partnership (LLP) assume?
LLPs are like general partnerships but partners are not personally liable for the negligence of another partner.
The partnership assumes the liability and the partner who was negligent is also personally liable for their negligence, but not the other partners.
In other words, the partnership assets and the negligent partner’s assets may be subject to judgement but not the other partner’s assets.
What is a business loss?
A business loss is when expenses are greater than revenues in the business.
If the business loss is large enough to create a negative amount of total income, the excess loss can be used to create or increase a non capital loss.
What are examples of non capital losses?
Unused losses from office, employment, business property
Unused allowable business investment losses
Unused portion of share of partnership losses
Unused portion of share of partnership ABILs
What is the loss carry forward/back for non capital losses.
Non capital losses may be deducted against income from all sources in the year incurred.
They may be carried back 3 years and forward 20 years
What is a private corporation?
A corporation that is not a public corporation and not controlled directly or indirectly by one or more public corporations or crown corporations.
What is a public corporation?
A corporation that is:
Canadian resident and has a class of shares listed on a prescribed stock exchange in Canada
A Canadian resident and has elected in a prescribed manner to be a public corporation. And composed with the requirements for the number of shareholders and disbursement of ownership.
What is a Canadian Controlled Private Corporation (CCPC)?
A CCPC is a private corporation that incorporated in Canada and is a resident of Canada and
Is not a public corporation or not controlled directly or indirectly by one or more public or crown corporations
Not controlled directly or indirectly by one or more foreign individuals, trusts, partnerships or corporations
What is authorized share capital? Issued capital? Paid up capital?
Authorized share capital - maximum number of shares that a corporation may issue as prescribed in the charter
Issued capital - portion of authorized shares that have been issued
Paid up capital - portion of shares that have been issued and fully paid for.
How is a corporation taxed?
Apply full basic tax rate +38%
Determine if qualifying corporation (CCPC) or non qualifying (public)
Apply general rate reduction of -13% for non qualifying
And SBD -19% for qualifying
Apply federal tax abatement -10%
Deduct federal tax payable -15% for non qualifying or
Deduct federal tax payable -9% for qualifying
Apply appropriate provincial tax +
= effective tax rate (total)
What is the small business deduction (SBD)?
A preferential tax rate (reduces tax) used for CCPCs applied to the first $500,000 of active business income.
What is a specified investment business (SIB)?
A specified investment business (SIB) is a business where the primary purpose is to derive income from property (interest, dividends, rents and royalties) unless the corporation employs more than 5 full time employees.
Credit unions and non real property leasing businesses are excluded from SIB
What is a personal service business?
A personal service business (PSB) is one where a person incorporates a company to provide services to an entity which he would normally have rendered as an employee of that entity.
A PSB does not qualify for the SBD and is taxed at regular corporate income tax rates. It is to discourage individuals from incorporating simply to gain a tax advantage
Do corporations qualify for the gross-up and dividend tax credit schemes to which individual taxpayers are entitled to?
No
What is the part IV tax for corporations?
- Applies to only private corporations and subject corporations
- Designed to preclude “parking” of dividends in a corporation to postpone tax
- Imposes a tax on dividends received by the receiving corporation and then subsequently refunds it when the dividends are paid to the shareholders
- passive dividends are subject to 38 1/3% tax
- the tax payable is placed in a notional refundable tax account called the refundable dividend tax on hand (RDTOH)
- when dividends are paid to shareholders then the tax is refunded $38.33 for every $100 (or $0.38 for every $1)
What is a subject corporation?
A subject corporation is a corporation resident in Canada other than a private corporation which is controlled by or for the benefit of an individual or related group of individuals
What is the refundable dividend tax on hand (RDTOH)?
A notional account where the Part IV refundable tax is kept when corporations receives dividends which is then refunded when the dividends are paid out.
