Taxation Flashcards
CCA class 1
Buildings acquired after 1987: 4%
Non-residential building: 6% - must be in separate class to get extra 2%
Manufacturing building (at least 90% manufacturing): 10% must be in separate class to get extra 6%
CCA class 3
Building acquired prior to 1988: 5%
CCA class 8
Furniture and fixtures, office equipment & any equipment not in other CCA class
20%
CCA Class 10
Automotive equipment, including passenger vehicles costing up to $30,000 before taxes
Non-passenger vehicles can be more than $30,000
30%
CCA class 10.1
Passenger vehicles costing more than $30,000 before tax
Separate class for each vehicle, recapture and terminal loss rules do not apply
30%
CCA class 12
Library books, tableware, kitchen utensils costing less than $500, dies, patterns and moulds, medical and dental instruments, tools costing less than $500, linens, feature films, computer software that is NOT systems software.
100%
Half year rule and AIIP only applies to software, patterns and moulds
CCA class 13
Leasehold improvements - straight line basis on minimum of 5 years
Period: lease period plus one renewal period
CCA class 14
Patents, franchises, concessions or licences with limited legal life
Straight line based on legal life of the asset
Pro-rated for number of days in year of acquisition and qualifies for AIIP
CCA class 14.1
Intangible assets acquired after Jan 1, 2017 that aren’t included in class 14 or 44
Includes incorporation costs after the first $3000 (which is deductible as a current expense)
5%
CCA class 17
Roads, sidewalks, airplane runways, parking areas
8%
CCA class 29
Machinery & equipment used for manufacturing and processing in Canada of goods for sale or lease
Acquired after Mar 18, 2007 and before Jan 28, 2009
50% straight line with 1/2 year rule
CCA Class 43
Machinery and equipment used for manufacturing and processing in Canada of goods for sale or lease that aren’t included in class 29
30%
CCA class 44
Patents acquired after April 26, 1993
25%
CCA class 45
General purpose electronic data processing equipment (computer hardware) and systems software for that equipment acquired between Mar 2004 and Mar 2007
45%
CCA class 50
Computer hardware and systems software
55%
CCA class 53
Manufacturing and processing equipment acquired after 2015
50%
CCA class 54
Zero-emission vehicles acquired after Mar 18, 2019 that would otherwise be included in class 10 or 10.1
30%
General implications of death
Deemed disposition of property on death
Terminal tax return filed from Jan 1 in year of death to date of death.
Deemed disposition of non-depreciable capital property on death
Possible election out of ITA 70(6)
Spouse beneficiary and ITA 70(6) is NOT elected out of:
- deemed proceeds equal the ACB of the property of deceased
- deemed cost to beneficiary is the ACB of the property
- no tax consequences as result of disposition
Beneficiary is not spouse or is spouse and ITA 70(6) IS elected out of:
- deemed proceeds equal to FMV of property of the deceased
- deemed cost to beneficiary is the FMV of the property
- deceased taxpayer has a deemed capital gain or loss
Deemed disposition of depreciable capital property on death
Possible election out of ITA 70(6)
Spouse is beneficiary and ITA 70(6) is NOT elected out of:
- deemed proceeds equal the UCC of property of deceased
- no capital gains, recapture or terminal loss for the deceased
- capital cost to the beneficiary spouse equals the capital cost of deceased
- UCC stays the same
Beneficiary is not spouse or is spouse and ITA 70(6) IS elected out of:
- deemed proceeds equal FV of property of deceased
- UCC to the beneficiary is the FV of the property
- FMV < capital cost - the difference is deemed CCA taken by beneficiary and capital cost remains the same for beneficiary upon subsequent disposal of property
- terminal loss or recapture for deceased and capital gain if FV of property > than original cost
Capital losses in year of death
If total allowable capital losses are > than total taxable capital gains, excess can be claimed:
- 1st against any other income in terminal return
- 2nd against deceased person’s tax returns of previous years
Unmatured RRIF upon death
RRIF = registered retirement income funds
Beneficiary is spouse:
- named as successor: RRIF payments after death continue to be made to the surviving spouse and are taxed their hands
- Not named as successor but is beneficiary: FMV of RRIF at time of death is taxed in hands of spouse. Spouse May transfer funds to their own RRIF and claim deduction for amt transferred which gives no tax consequences to deceased or spouse
Beneficiary is not spouse:
FMV of RRIF is taxed in terminal return
Unmatured RRSP upon death
Beneficiary is spouse:
- FMV of RRSP at time of death is taxed in hands of spouse
- spouse may transfer funds to their own RRSP or RRIF and claim deduction, no tax consequences for deceased or spouse
- spouses contribution limit is not impacted by transfer
Beneficiary is not spouse:
FMV at time of death is taxed in terminal return
TFSA upon death
Beneficiary is spouse:
- tax exempt status of TFSA is kept
No beneficiary is named or named beneficiary is not spouse:
- FMV of TFSA become part of deceased’s estate
- no tax consequences for deceased since amount withdrawn from TFSA are tax-free
- if spouse receives TFSA through the estate and not named beneficiary, proceeds may be used to make exempt contribution to spouse’s TFSA if:
-made before end of first calendar year following death
-is designated as exempt contribution in spouse’s tax return
“Rights or things” return
Rights or things:
- matured but unclipped bond coupons
- dividends declared before date of death but not received
- salaries, commissions & vacation pay owing for a period prior to death but unpaid at the date of death
3 Treatment options:
- report in terminal return along with other income
- elect to include rights or things in a separate tax return
- report on beneficiaries return if transferred
Due date is later of:
- one year after date of death
- 90 days after assessment of terminal return
- if rights or things are transferred to beneficiaries - reported on beneficiaries tax returns
Benefits of separate rights or things return:
- income could be taxed at a lower rate
- tax credits may be claimed in full on each return
Personal tax credits upon death
Can be claimed in full on each return and are not prorated for length of the period:
- basic personal amt
- age amt
- spouse/equivalent to spouse/eligible dependant
- infirm dependant over 17
- caregiver amt
- family caregiver amt for children under 18
All other credits are split between the two returns but can’t exceed amt that could have been claimed if only the terminal return had been filed
Charitable donations (personal tax)
75% of net income limitation doesn’t apply for year of death and year preceding death.
Tax credit basis is lesser of:
- amount of donation
- 75% of net income
Amounts above 75% of net income can be carried forward for up to five years
Tax credit = (15% x A) + (33% x B) + (29% x C)
A = 1st $200 of charitable donations
B is lesser of:
- charitable donations less $200
- taxable income less $216,511
C = charitable donations - A - B
Medical expense credit (personal tax)
Year of death - claim can be made for medical expenses paid within any 24 month period that includes date of death
Qualifying medical expenses minus lesser of:
- 3% of net income
- $2,421
When claiming medical expenses of a dependant - the 3% of net income is based on the dependants net income
Can be claimed for any 12 month period ending in the taxation year
Terminal return deadlines
Taxpayer didn’t carry on a business:
Date of death Jan 1 to Oct 31: Apr 30 of following year
Date of death Nov 1 to Dec 31: Six months after date of death
Taxpayer carried on a business:
Date of death Jan 1 to Dec 15: June 15 of following year - taxes owing still due by Apr 30
Date of death Dec 16 to 31: six months after date of death
Principal residence exemption
Can be claimed if property was ordinarily inhabited anytime in the year
When deciding between two properties claim PRE on property with highest avg capital gain per year
PRE = (1 + # yrs designated)/(# of yrs owned) x CG
Up to 4 years of a rental period can be designated as PR
Claiming CCA on a property can affect PRE - shouldn’t claim CCA on any property that intention is to claim PRE
Must be designated to a property in the year of disposal
Moving expenses - eligibility
Move within Canada in order to work or run a business at a new location and new home is at least 40km closer to new location than old home.
Deduction is limited to income earned at new work location, excess can be carried forward and deducted in following year to extent of income earned at new work location.
Moving expenses must have been paid by the taxpayer - must not have been reimbursed
ITA 62
Allowable Moving expenses
Travelling costs (includes meals and lodging en route)
Transport & storage of household affects
15 days of meals & lodging near old/new residence
Lease cancellation costs of old residence
Selling costs of old residence
Legal and other costs of new residence acquisition (only if old residence was sold)
Up to $5K of interest, property tax, insurance and utilities on old residence while vacant pending sale
Costs of revising legal documents for new address (including driver license)
Utility connection & disconnection fees
Simplified method can be chosen for meals and km driven. $69/ day for meals. Rate for km depends on province of origin
Interest income - personal tax
Taxable at marginal tax rate as ordinary income
Deemed earned in a given year where it is paid or accrued. Interest is accrued on anniversary date of investment contract if interest has not been paid.
Eligible Dividends - personal tax
Paid by corporations from income not eligible for small business deduction (non-CCPCs or from GRIP of CCPCs)
Grossed up at 38%
Tax credit = 6/11 of gross up
Non-eligible dividends - personal tax
Paid by corporations from income that received the small business deduction.
Grossed up at 15%
Dividend tax credit = 9/13 of gross up
Employee home office expenses
Regular employee:
- utilities (does not included internet or phone)
- repairs and maintenance
Commissioned Salesperson:
- utilities
- repairs and maintenance
- 8(1)(f) or 8(1)(h): insurance & property taxes
- 8(1)(f) limits claim to commission income earned
- 8(1)(h) is for travel expenses which includes lodging
Employee home office requirement
Place where individual performs 50% or more of employment duties
OR
Used exclusively for purposes of earning employment income and used on regular basis for meeting customers
Business use of home expenses
Test:
Meet one of the following:
- it is your principal place of business
- use the space only to earn business income and use it on regular basis to meet clients
Automobile benefit - employee
Taxable benefit = standby charge + operating cost benefit
Standby charge:
2% x original cost x months available
2/3 x monthly lease cost x months available
- above is reduced by multiply by (personal use km/ (1667 x total available months)) when business use of vehicle is >50% and personal use is < 1667 km/month
- reduced by employee payments
Operating cost benefit - Lesser of:
- Personal use km x CRA prescribed rate
- 50% of standby charge if vehicle used more than 50% of time for business
Automobile allowances:
- not a taxable benefit if they are reasonable and based on kms driven
- Taxable if unreasonable but can claim business portion of vehicle expenses with T2200
Automobile benefit - employer
Expenses deductible based on automobile limits for vehicles:
- Max cost base for CCA is $30,000 before sales tax
- max deductible lease payment on exam reference schedule
- max deductible interest on exam reference schedule
Automobile Allowances:
- tax deductible limited to CRA specified rate - rates are on exam reference schedule
- higher rate for first 5000 km and reduced rate for all kms above.
Interest free/low interest loans - Taxable benefit for employee
Principal is not taxable
Interest benefit is based on prescribed rate less interest paid within 30 days of year-end
Prescribed rates are in exam reference schedule section 5.
May be tax deductible if for eligible purposes (purchasing investments, business use of vehicle purchase)
Interest fee/low interest loans - taxable benefits employer treatment
Interest benefit/principal is not tax deductible for the employer
If employer borrowed to lend interest-free to employee (not shareholder) interest incurred is deductible.
Stock option - taxable benefit for employee
No taxable benefit on option grant date.
Public company - benefit is on exercise date
CCPC - benefit is when tax payer sell the shares they received from the stock option
Taxable benefit = FMV of shares on exercise date - option price
ACB = FMV of shares on exercise date
Benefit is reduced by 50% if:
- FMV of shares on option grant date <= option price
- For CCPCs: shares are held for at least 2 years before being sold don’t have to meet above requirement
Stock option - taxable benefit employer treatment
Not deductible for employer
Education related - taxable benefit for employee
Not taxable if employment related.
Taxable if personal interest training
Allowance for education for employee’s children is taxable to the employee
Free or reduced tuition provided to employee’s family member is taxable to the family member.
Education-related - taxable benefit - employer treatment
tax deductible
Discounts on merchandise - taxable benefit for employee
non-taxable if discounts available to all employees and discounted price is > cost
Discounts on merchandise - taxable benefit employer treatment
cost of merchandise is deductible
Gifts & awards - taxable benefit for employee
Cash and near cash gifts are taxable
Non-cash gifts/awards not taxable if total is < $500 annually; any amount in excess is taxable.
Non-cash long-service awards not taxable up to $500 if provided in 5-year intervals (does not impact above)
Gifts & awards - taxable benefit employer treatment
all tax deductible
Recreational facilities/club dues - taxable benefit employee
Non-taxable if in-house facility or another facility is contracted that is available to all employees
Non-taxable for individual membership if employer is primary beneficiary of the use.
Recreational facilities/club dues - taxable benefit employer treatment
Costs deductible for fitness facility for all employees.
Deduction denied for individual membership fees or dues in any club for which the main purpose is to provide dining, recreational and sporting activities (golf or yacht club)
Insurance premiums - taxable benefit employee
Life insurance premiums are taxable, proceeds on death are non-taxable.
Disability insurance premiums are not taxable if benefits are taxable
Insurance premiums - taxable benefit employer
All are deductible for the employer
Health care premiums - taxable benefit employee
taxable if government plan
non-taxable if private health plan
Health care premiums - taxable benefit employer
deductible
Meals - taxable benefit employee
Overtime meals are non-taxable
Subsidized meals are non-taxable if the employee pays a reasonable amount
Meals - taxable benefit employer
overtime meals - 50% deductible like all M&E
Cafeteria (subsidized meals) - revenue is taxable and operating expenses are fully deductible.
Social events - taxable benefit employee
Non-taxable if event available to all employees and cost is less than $150 per person
Social events - taxable benefit employer
Deductible for up to 6 events if provided to all employees, otherwise 50% deductible like all other M&E
Spousal travel - taxable benefit employee
Taxable unless spouse travelling at employer’s request and mostly engaged in business activities during trip
Spousal travel - taxable benefit employer
Deductible if included as taxable benefit for employee.
Cell phone & internet - taxable benefit employee
employer provided cell phone for employment duties is non-taxable
Reimbursement for employee-owned cell phone (actual hardware) is taxable
Reimbursement of cell phone service plan or internet services is non-taxable to the extent used for employment purposes (personal use is taxable)
Cell phone & internet - taxable benefit employer
deductible
Sales expenses - deduction from employment income
Conditions to meet:
1. employed to sell property or negotiate contracts
2. required by employment contract to pay expenses
3. required to work away from employer’s place of business
4. individual was paid fully or part by commissions
5. not in receipt of a non-taxable travel allowance
6. expenses cannot exceed commissions received by employee in the year.
Deductible expenses:
- advertising & promotion
- 50% of M&E (either entertaining a client or while travelling away from city in which employer is located)
- transportation costs and lodging
- motor vehicle operating costs
- vehicle lease costs subject to normal leased vehicle limitation
- parking when visiting clients
- property taxes and insurance on home office
- licenses
Can either claim expenses as sales person or not but not under both. More expenses can be claimed as sales person but limit of commissionable income may not be worth while.
Travel expense deduction - employment income
Conditions:
1. ordinarily required to carry out duties of employment away from employer’s place of business
2. payment of travel expenses required under individual’s employment contract
3. didn’t claim a deduction for the year as a commissioned sales person
4. did not received a tax-exempt allowance for travel expenses.
Deductible expenses:
- 50% of M&E while travelling away from city of employment
- transportation costs
- lodging
Motor vehicle expense deduction from employment income
Conditions:
1. required under contract of employment to pay motor vehicle expenses
2. ordinarily required to carry on the duties away from the employer’s place of business in different places
3. employee did not claim a deduction for the year as a commissioned salesperson
4. did not receive a non-taxable allowance for motor vehicle expenses
5. must maintain a log of km driven (personal vs work)
if expenses > allowance - include allowance in income and deduct expenses
Deductible expenses:
- fuel
- maintenance and repairs
- insurance
- licence and registration fees
- lease cost subject to normal lease cost limitation
Schedule 1 business income adjustments
Add back:
- income tax expense
- interest & penalties on income tax assessments
- depreciation, amortization and depletion
- recaptured CCA
- accounting reserves
- tax reserves (prior year)
- accounting losses on disposition/write down
- taxable capital gains
- accounting-based expenses: warranty, pension, scientific research
- non-deductible expenses (golf club)
- charitable donations
- political contributions
Deduct:
- CCA
- terminal losses
- tax reserves (current year)
- accounting gains on disposition/writeup
- cash-based expenditures: warranty, pension, landscaping
- SR&ED deductions
- first $3K of incorporation costs
- allowable business investment losses (ABILs)
CCA claims for CCPC
For certain depreciable properties acquired by CCPC on or after April 19, 2021 and available for use before 2024. Can immediately expense depreciable property up to $1.5 million in a year, limit must be shared amongst associated CCPCs. Deduction only available in year the property becomes available for use.
Excluded classes: 1 to 6, 14.1, 17, 47, 49 and 51
Dividends received by Corporations
- not grossed up -> no dividend tax credit
- Deductible if received from taxable Canadian corporation
if recipient is private corporation: dividend gets part IV tax at 38.33%
- part IV tax is added to relevant RDTOH balance and then refunded when dividend is subsequently paid out.
- no tax if payor is a connected corporation
Part IV tax - T2
38.33% x dividend received from non-connected taxable Canadian corporations (portfolio dividends)
PLUS
Investor’s share of dividend refund received by a connected corporation
Rental income
Expense deductibility - allocations are made for shared use of property, there must be a reasonable expectation of profit
CCA cannot create or increase a loss
Separate CCA class for buildings $50K +
Cumulative net investment loss (CNIL)
- account balance limits the taxpayer’s capital gains deduction to the extent that taxpayer has deducted passive investment losses
-balance is the cumulative excess of investment-related expenses over the investment-related income starting in 1988
(rental losses + interest and other carrying charges + net capital losses carried over & deducted against net taxable capital gain that weren’t eligible for capital gains deduction) - (property income including rental income, dividend & interest + net capital gains on property not eligible for capital gains deduction)
Receiving dividend income as shareholder remuneration will reduce CNIL balance
Lifetime Capital Gains Exemption (LCGE)
Division C deduction claimed by individual resident in Canada against capital gains arising on disposal for qualified small business corporation shares
the amount that can be claimed is the least of the following 3 amounts:
1. unused lifetime deduction $446,109 ($892,218 x 1/2) less all previous capital gains deductions claimed
2. annual gains limit: A - B, where\
A is lesser of:
a) the net taxable capital gains for the year on all asset dispositions
b) the net taxable capital gains from the year on the disposal of qualified farming or fishing property & QSBC shares
B is the total of:
a) the amount, if any, by which net capital losses deducted in the year exceed the difference between (a) and (b) above
b) the allowable business investment losses realized in the year, whether claimed or not
3. Cumulative gains limit: Sum of all components of the annual gains limits for the current and prior years (w/o adjusting for changing inclusion rates) reduced by:
a) the sum of all amounts of capital gains deductions claimed in prior years (not adjusted for changing inclusion rates)
b) the cumulative net investment loss (CNIL) balance at the end of the current year
Qualified Small Business Corporation Shares (QSBCS)
Small Business Corporation: CCPC where all or >90% of the fair market value of the assets (including internally generated goodwill) are:
a) used primarily (at least 50%) in an active business carried on in Canada by either the corporation or a related corporation; OR
b) invested in shares or debt of an SBC corporation that was connected with the particular corporation
QSBCS must meet all conditions:
a) must be an SBC (defined above) on date of sale
b) shares must be owned by the taxpayer, or spouse or a partnership related to the taxpayer
c) shares must not have been owned by anyone other than the taxpayer or related person during the 24 months before the shares are disposed of
d) throughout the 24 month holding period, more than 50% of the fair value of the assets must have been used primarily in an active business carried on in Canada
Business Investment Loss (BIL) & Allowable Business Investment Loss (ABIL)
BIL results from the actual or deemed disposition of shares or debt of a small business corporation.
- doesn’t apply to two corporations not at arm’s length
ABIL is 50% of BIL and can be deducted against any source of income.
ABIL can be carried back 3 years and forward 10 years and still deductible against any source of income.
After 10 years, any unused amount of ABIL is added to taxpayer’s net capital loss carryover balance.
If a capital gains exemption claim has been in a preceding or current year then some of the BIL will be restricted. Restricted portion of BIL becomes an regular capital loss.
Restricted portion of BIL is lesser of:
- the BIL from the year
- the cumulative capital gains deduction claimed in preceding years x factor for that year
Alternative Minimum Tax (AMT)
Tax is calculated in the normal way and AMT is calculated - taxpayer pays the higher of the two.
Purpose: to remove effect of tax preferences that have been used in calculating normal tax position
AMT adjusted taxable income calculation:
Normal taxable income
PLUS: 60% of non-taxable portion of capital gains
Plus: Certain tax shelter deductions
Plus: 3/5 of any stock option deduction
Less: dividend gross-up included in income & non-deductible fraction of ABILs claimed in the year
Less: $40,000
adjusted taxable income is then multiplied by 15% to obtain the starting AMT tax figure
Tax credits that apply to AMT:
- personal, age amount, medical, donations, disability
Tax credits that do not apply to AMT:
- dividend tax credit, pension income, credits transferred from others
Shareholder Loans
Principal amount of loan to SH will be included in SH income in year in which loan is made, except when:
1. Inter-corporate loans or loans to non-residents or in connection with ordinary business of lending
2. Loan to employee if loan was made b/c of employment with arrangements made at time loan made for repayment
- acceptable loans: to purchase home, shares of employer or related corporation, vehicle for employment use
- cannot be made to specified shareholder (owns at least 10% of shares or not arm’s length)
3. loan repaid within one year from end of corp’s fiscal year in which debt arose (can’t remain outstanding for 2 consecutive balance sheets)
4. funds lent in ordinary course of money lending business as long as arrangements made at time loan made for repayment
- imputed interest benefit when principal amount of loan is not included in income. (interest for first year outstanding, 2nd year outstanding: principal is added to income for previous year and imputed interest benefit removed)
- repayments of loan that was included in income is deductible in year of repayment
Factors to determine Capital Gain vs Income
- # and frequency of transactions
- period of ownership
- knowledge of market
- relationship to taxpayer’s business
- time spent
- financing
- advertising
- nature of assets
Recapture & terminal loss
Upon disposition of depreciable property.
Calculation:
Lower of:
a) original cost
b) proceeds of disposition
Less UCC
If positive then amount is recapture and added to taxable income
if negative then amount is terminal loss and deducted from taxable income (only if there aren’t any other assets left in the CCA class)
Personal Use Property (PUP)
personal use items like yacht or motorcycle.
Gains are taxable, losses are not deductible.
Minimum value rule - applies minimum of $1,000 to ACB and proceeds of disposition - means no gains on small transactions.
Listed Personal Property (LPP)
Collectibles: jewelry, art, rare books, etc
All rules of PUP apply except that capital losses can be claimed but only against LPP gains.
Unused LPP losses: carry back 3 years and forward 7 years
Capital Gains Reserve
Amounts not due in the year. Reserve is deducted from total gain.
Lesser of:
- total gain x (proceeds not receivable until after the end of current year / total proceeds of disposition)
- 1/5 of gain x (4 - # of preceding years)
Replacement Property Rules
Election required in year replacement property acquired to amend return in year disposition took place.
Voluntary disposition requirements:
1. must be replace within 1 year from end of tax year of sale
2. must be land/building
3. used to produce income from same/similar business
Involuntary disposition requirements:
1. must be replaced within 2 years from end of tax year of sale
2. land/building/equipment
Capital Gain = lesser of actual capital gain and proceeds/deemed proceeds not reinvested
Recapture = lesser of actual recapture and recapture not reinvested
ACB of replacement property = replacement cost - CG deferred
UCC of replacement property = replacement cost - CG deferred - recapture deferred
Loss carryovers
Non-Capital: back 3 years, forward 20 years. can be claimed against any source of income
Net Capital loss: back 3 years, forward indefinitely. can only be claimed against net taxable capital gains.
LPP: back 3 years, forward 7 years. can only be claimed against net LPP gains
ABIL: back 3 years, forward 10 years. can be claimed against any source of income. After 10 years an unused amount becomes a net capital loss.
Inadequate consideration in Non-arm’s length transactions
When consideration is > FMV:
proceeds to transferor = actual consideration
ACB for transferee = FMV
When consideration is < FMV:
Proceeds for transferor = FMV
ACB for transferee = actual consideration
when consideration is $0 (GIFT)
Proceeds for transferor and ACB for transferee are both FMV
Spousal transfer of property
Occur at tax cost of the property to the transferor (ACB for non-depreciable property, UCC for depreciable property) and thus is tax free. Automatically applies whether consideration is paid or not.
Can elect to not have above rule apply, in which case regular NAL transaction rules apply.
Attribution rules:
- applies if election is not made OR FV consideration is not paid
- does not apply if election is made AND FV consideration is paid
NAL transfer of depreciable property
FMV > transferor’s capital cost: Transferee’s UCC bumped up by 50% of difference between FMV and capital cost
FMV < transferor’s capital cost: Transferee’s capital cost deemed to be same
FMV < transferor’s UCC: terminal loss is denied
Attribution rules: NAL transactions
from transfer of property to spouse or related minor (children, grandchildren, nieces & nephews)
- considered minor until the year they turn 18
Income or loss arising from the transferred property will be taxed in hands of the transferor.
Income earned on property transferred with be attributed back to transferor.
For capital gains on sale of transferred property, attribution only applies when transferee is a spouse.
Attribution doesn’t apply to business income.
Tax on Split Income (TOSI)
Discourages income splitting with specified individual by taxing income at highest marginal tax rate with no claim for basic personal tax credit. Usually arises from child receiving dividends from corporation controlled by parent.
Exceptions:
- Excluded business: individual must be 18 or older & actively involved in business
- Excluded shares: individual must be 25 years or older & represent min of 10% of votes & value of corporation
- Reasonableness test: amounts received are reasonable for amount of work performed, contribution of capital or assumption of risk
- Spouse who is 65 or older
- marital breakdown
- Capital gains on qualified property, eligible for LCGE
Child Care Expenses
Claimed by parent with lower net income
Deduction is least of:
1. actual Amount paid
max amounts allowed for boarding school/overnight camp:
- $200/week for child under 7
- $275/week for child with disability
- $125 per week for all other children
2. Sum of annual child care expenses amounts:
- $11K for child of any age eligible for disability credit
- $8K for child under 7
- $5K for child aged 7 to 16
3. 2/3 of taxpayer’s earned income
above is reduced by any amounts claimed by higher income earner.
Earned income includes:
- employment income before deductions
- training allowances & research grants
- net business income
- government disability pension
Maximum deduction of higher income earner:
- when lower income earner is in school, medically unable to care for children, in prison, living apart due to marital breakdown
least of:
1) actual amount paid
2) sum of weekly boarding school amounts multiplied by number of weeks lower income earner is not able to care for children
3) 2/3 of higher-income earner’s earned income
Spousal Support Payments
taxable to recipient and deductible for payor if:
- paid as alimony or maintenance of ex-spouse
- living apart and separated pursuant to divorce, separation agreement
- payments made pursuant to court order or written agreement
- recipient has discretionary use of amounts
- payable on periodic basis (lump sum payments are not deductible)
Child support payments
- not taxable/deductible
- parent receiving support can claim child care expenses and child as equivalent to spouse
RRSP contribution limit for current year
Unused RRSP deduction room carried forward + 18% x earned income of preceding year subject to annual max - pension adjustment for the prior year
Earned income includes:
- employment income including taxable benefits less employment related deductions
- business income/loss
- income/loss from rental or real property
- royalty income
- support income/payments
- research grants
- disability pension benefits
RRSP termination
Must be terminated in the year taxpayer turns 71
Options for termination:
- Deregistration: lump sum fully taxable
- Transfer to RRIF: continues the deferral and amount taxed as amounts are taken out
- Purchase annuity: continues the deferral and amount taxed as received
Tax Free savings Account (TFSA)
Eligible to residents 18 yrs and older
Annual contribution limit of $6,000, unused limit carried forward indefinitely
- contributions not deductible
- withdrawals not taxable but restore previously used contribution room in the following year
Not subject to income attribution rules
Residency - tax effect
Full-year resident: taxed on worldwide income for full year
Part-year resident: taxed on worldwide income for part of year in which resident
- deductions allocated to period of residence
- non-refundable tax credits pro-rated
Deemed resident: non-resident who is physically present in Canada for 183 days or more in a year
- taxed on worldwide income for full year
Residency Status
Primary ties:
- dwelling place in Canada
- spouse or common-law partner in Canada
- Dependents in Canada
Secondary ties:
- personal property kept in Canada
- Social ties
- Economic ties
- memberships
- maintaining driver’s license, passport…
Dispositions upon ending residency
Date of becoming non-resident is later of:
- date taxpayer leaves Canada
- date individual’s spouse or dependents leave Canada
- date individual becomes resident of new county
Dispositions deemed at FMV except for real property & business property & registered pension plans.
Can elect to have deemed disposition of real property & business property (taxable Canadian property)
- make the election if there is capital or other losses that would otherwise not be able to use at time of becoming non-resident. If election results in capital loss it can only be deducted against taxable capital gains from a deemed dispositin.
Individual filing & payment deadlines
Filing: April 30th unless individual has business income, then June 15th
Payment: April 30th
Corporate filing & payment deadlines
Filing: 6 months after a year end
Payment: 2 month after year-end or 3 months for CCPC that is eligible for SBD
Tax installments - individual
Quarterly instalments on Mar 15, Jun 15, Sep 15 and Dec 15.
When taxes payable after deducting amounts withheld at source are greater than $3,000 in current and either of 2 preceding years.
Calculation:
4 installment amount is least of:
1. 1/4 x estimated tax payable for the current year
2. 1/4 x tax payable for the immediately preceding year
3. first 2 installment: 1/4 x tax payable for the second preceding year; last two installments: 1/2 tax payable for preceding year minus first 2 instalments for current year
Tax installments - corporate
Monthly installments required if Part I tax payable for year or preceding year was $3,000 or more
Corporation can choose installments calculated as any of the 3 (usually pick the smallest):
1. 1/12 x estimated tax payable for the current year
2. 1/12 x tax payable for the immediately preceding year
3. first 2 installments: 1/12 x tax payable for second preceding year. last 10 instalments: 1/10 x tax payable for the preceding year minus first two installments
Quarterly installments available for CCPC with income at or below SBD threshold in current or preceding year and had perfect compliance history for past 12 month period
Installment Penalty
Installment penalty: 50% of amount by which the interest on the late or deficient instalments exceeds the greater of:
- $1,000
- $25% of the interest that would have been payable if no instalments had been paid
Failure to file return by due date penalty
1st occurrence:
5% x unpaid tax + 1% x unpaid tx x # of months return is outstanding (can’t exceed 12)
Second late return (if CRA sends demand to file for first late return before second late return is filed):
10% x unpaid tax + 2% x unpaid tax x # of months return is outstanding (can’t exceed 20)
Penalty: Repeated failure to report income equal to or greater than $500
has to occur more than once in a 3 year period
penalty is lesser of:
- 10% x amount of unreported income
- amount equal to 50% of difference between the understatement of tax and the amount of tax paid in relation to unreported amount
CRA owed interest on refunds for individuals - start date
calculated starting on latest of the following:
1) 30 days after the balance due date for the relevant tax return
ii) 30 days after the return is actually filed
iii) the day on which the overpayment arose
CRA owed interest on refunds for corporations - start date
Calculated starting on latest of the following:
1) 120 days after the end of the relevant taxation year
2) 30 days after the return is actually filed
3) the day on which the overpayment arose
False statements or omissions penalty
Penalty exists whether knowing of false statements or from gross negligence.
Penalty is greater of:
- $100
- 50% of the understated tax
Voluntary disclosure program may result in penalty being waived
Failure to e-file penalty
For tax preparers who prepare at least 10 T1s or 10 T2s per calendar year
Penalty is total of:
$25 per paper-filed T1
$100 per paper-filed T2
Misrepresentations in tax planning arrangements
Penalty is greater of:
- $1,000
- 100% of gross revenue derived by person from activity
for someone participating in misrepresentation - penalty is greater of:
- $1,000
- 50% of tax sought to be avoided to a mx of $100,000 plus the fee charged
Small Business Deduction (SBD)
For first $500K of Active Business Income (ABI). $500K limit has to be shared amongst associated corporations.
Business limit of $500,000 is reduced when:
- combined taxable capital employed in Canada for the preceding tax year of CCPC & associated CCPCs is > $10 million
- AAII for the preceding taxation year of the CCPC and associated CCPCs is > $50,000
SBD calculation: 19% x least of:
1) ABI earned in Canada
2) Taxable income, less:
- 100/28 x FTC on foreign non-business income
- 4 x FTC on foreign business income
3) annual business limit allocated to the company
Taxable capital business limit reduction: business limit x (0.225% of corporations taxable capital employed in Canada in previous year in excess of $10 million)/11,250
Passive income business limit reduction = (BL/$500,000) x 5 x (AAII - $50,000)
Active business income (ABI)
Doesn’t include income from property or net taxable capital gains.
Calculation:
Net income for tax purposes (before Division C deductions)
Less:
- AII in net income
- Foreign business income
Aggregate Investment Income (AII)
Property income & net taxable capital gains adjusted for certain division C deductions
Calculation:
Interest + net rental income + royalties + dividends + net taxable capital gains = AII in net income (Div B income)
AII in net income - net capital loss carryforwards deducted under division C - dividends deducted under division C = AII
Adjusted aggregate investment income (AAII)
AII in net income - net taxable capital gains realized in the year from disposition of active assets - Division C deduction for dividends from connected corporations
OR
net property income included in net income (excluding dividends from Canadian corps) + dividends from non-connected Canadian corps + net taxable capital gains on disposal of passive assets
Active assets: property used principally in active business carried on in Canada by CCPC or related CCPC
Corporate tax payable calculation
+ Basic federal tax (38%) on total taxable income
- Federal abatement (10%) on taxable income allocated to a province
- Small business deduction (only for CCPC) (19%)
- Manufacturing an processing profits deduction (13%)
- General rate reduction (13%)
+ Additional refundable tax
- Foreign tax credits
- Investment tax credits
= Federal Part I tax
+ Provincial tax
+ Part IV tax
- Dividend refund from RDTOH balance
= taxes payable before installments
Corporate Taxable income
Net income for tax purposes (Business income + property income + net taxable capital gain)
Less division C deductions:
- Charitable donations (limited to 75% of corporation’s net income for tax purposes)
- Loss carryovers
- Dividends received from a corporation resident in Canada
Charitable donations not used in a year can be carried forward and used in any of the following 5 years.
Taxable Capital
Liabilities + Shareholder’s equity - investments in debt & equity instruments of other corporations
Manufacturing & Processing Credit
13% x lesser of:
1) M&P profits, less mounts eligible for SBD
2) Taxable income, less the sum of:
- amount eligible for SBD
- 4 x FTC on foreign business income
- AII (CCPC only)
General Rate Reduction
13% x full rate taxable income
Full rate taxable income:
Taxable income
- income eligible for SBD (CCPC only)
- income eligible for M&P profits deduction
- AII included in taxable income (CCPC only)
Additional Refundable Tax (ART) (part I refundable tax)
Paid by CCPCs on AII
10.67% of the lesser of:
1) AII included in taxable income
2) taxable income less amount eligible for SBD
Foreign tax credits - personal tax
FTC for non-business income is lesser of:
1) Foreign tax paid (limited to 15% of foreign non-business income)
2) Net foreign non-business income/adjusted net income x tax otherwise payable (estimate of Canadian tax paid on Foreign income)
FTC for business income is least of:
1) Foreign tax paid
2) Net foreign non-business income/adjusted net income x tax otherwise payable
3) Basic Part 1 tax less non-business FTC
Part IV tax
38.33% dividend received from non-connected taxable Canadian corporations
PLUS
Investor’s share of dividend refund by a connected corporation
Dividend refund (corporate)
Dividend refund for the year is lesser of:
1) 38.33% of taxable dividends paid
2) RDTOH balance at the end of the year
Eligible dividends can not trigger a refund out of NERDTOH balance. but non-eligible dividends can have refund come from ERDTOH balance
Ordering rule:
1st: ERDTOH refund from eligible dividends paid
2nd: NERDTOH refund from Non-eligible dividends paid
3rd: ERDTOH refund from non-eligible dividends paid in excess of NERDTOH balance
NERDTOH balance
NERDTOH balance at end of preceding year
Less: Dividend refund on non-eligible dividends paid in the preceding year
Plus: Refundable portion of Part I tax on investment income
Plus: Part IV tax paid on non-eligible dividends received in the year
Refundable portion of Part I tax:
Least of:
a) 30.67% of AII less (non business FTC - 8% of Foreign investment income)
b) 30.67% of (taxable income - amount eligible for SBD - 100/38.67 x non business FTC - 4 x business FTC)
c) Part I tax
ERDTOH balance
ERDTOH balance at end of previous tax year
less: dividend refund on eligible or non-eligible dividends paid in previous year
Plus: Part IV tax paid on eligible dividends received in the year
Simplified corporate tax rates
Federal tax rates:
CCPC ABI up to up the business limit: 9%
CCPC AII income: 38.67% Part I tax + Part IV tax
Non-CCPC income and CCPC income above business limit: 15%
Provincial rates: Densmore suggestion
add 3% for CCPC with ABI qualifying for SBD
add 11% for all other income
Schedule 1 adjustments
Depreciation/Amortization
50% M&E
Other non-deductible expenses (financing costs)
Accounting gains/losses
Reserves
CCA
Taxable capital gains
Taxable Income (personal)
Employment income
business income/loss
property income/loss
other income (Pension, OAS, grants, support payments, etc)
+ net taxable capital gains (1/2 of capital gains net of capital losses)
- other deductions (CPP contributions, OAS clawback, EI benefit repayment, moving expenses, child care, RRSP)
=net income for tax purposes
- Division C deductions (Employee stock options, loss carryovers, LCGE, deduction for northern residents)
= taxable income
Associated Corporations
5 ways to be associated:
1. One company controls the other company either through direct or indirect ownership
2. Both corporations are controlled by the same person or same group of people
3. Each corporation controlled by a person, person who controls one corporation is related to person who controls the other corporation. One of the two people owns at least 25% of shares of both corporations.
4. One corporation is controlled by a person, the person is related to each member of a group that controls the other corporation. the person owns at least 25% of shares of both corporations
5. each corporation is controlled by a related group, each member of one related group is related to all members of the other related group, 1 or more persons who are members of both related groups, either alone or together own at least 25% shares in both corporations
Associated corporations must share $500,000 small business limit.
ITA 256(1)
Counselling services - taxable benefit
Financial counselling and income tax return preparation are taxable.
Counselling services for mental health, physical health, re-employment or retirement are not taxable.
Spousal amount (personal tax credit)
Amount should be reduced by income of lower income spouse less child care expenses
Enhanced CPP
$3,500 basic exemption.
(Employment income - $3,500) x 0.5%
Max CPP contributable earnings is $61,600
direct deduction to income to arrive at net income for tax purposes
CPP non-refundable tax credit
basis for credit = CPP paid - enhanced CPP deducted to arrive at net income for tax purpose
OR
(employment income - 3,500) * 4.95%
maximum employment income subject to CPP is $61,600 for 2021
Basis for credit is then multiplied by 15%
total CPP at 5.45% (4.95% CPP basis for tax credit + 0.5% enhanced CPP income deduction)
Amounts received for damages to reputation - business income
Considered a tax-free capital receipt since they do not represent a form of income replacement.
Deduct from net income to determine net income for tax purposes.
Personal tax credit - age amount
base is reduced by 15% of individuals income above threshold
base amount and threshold are on reference schedule
EI Premiums personal tax credit
base is lesser of amount of EI paid and max required contribution
max required contribution is max insurable earnings x 1.58%
$953 in 2022, $890 in 2021
Canada caregiver - infirm adult dependant relative personal tax credit
base is reduced by amount of dependant’s income above $17,256
Disability amount personal tax credit
Cannot be claimed if individual has claimed a medical expense tax credit for a full-time attendant or care in a nursing home.
Medical expense claim of <= $10,000 for part time attendant is allowed
Supplement of an additional $5,053 is available for disabled children under 18 but is reduced for childcare costs in excess of $2,959
Any unused credit can be transferred to spouse or equivalent to spouse
Medical expense personal tax credit
Medical expenses minus lower of (3% of net income or ceiling on reference schedule)
All medical expenses for taxpayer, spouse and children can be claimed on one of the spouses tax return. Usually best to claim all expenses on lower earning spouse,
For medical expenses of dependant other than a spouse or children the net income ceiling is the dependants net income.
Home accessibility amount - personal tax credit
Available to taxpayer 65+ yrs old or eligible for disability tax credit
Base is lesser of costs of renovations and $10,000
Home buyers’ amount - personal tax credit
$5000 is base
conditions that must be met:
- home must be in Canada
- home must be registered in name of individual or spouse
- individual or spouse must intend to inhabit the home as their principal residence within one year of the purchase date
Considered a first time home buyer if neither the individual or their spouse lived in or owned another home in the year of purchase or in the preceding four years.
Pension income amount - personal tax credit
$2000 is base
Eligible pension income includes:
- periodic payments from a RPP
- annuity payments from a RRSP
- payments from a RRIF
- annuity payments for a DPSP (deferred profit sharing plan)
The RRSP, RRIF and DPSP payments are only eligible to those over 65 or someone under 65 if they are receiving the amounts as a consequence of the death of a spouse
Credit can be transferred to spouse
Interest on student loans - personal tax credit
No max
Basis for credit = interest paid in year or any of the 5 preceding years for which credit has not being claimed
Private student loans do not qualify
Tuition amount - personal tax credit
Min tuition fees = $100
Can be transferred to spouse or parent/grandparent to a max of $5,000 per year less any amount of the basis for the credit required by the student to reduce their tax payable to $0
Excess amounts may be carried forward for use by the student in future years
Political contribution tax credit - personal tax
for contributions to federal political contributions
Credit is:
- 75% on first $400
- 50% on next $350
- 33% on next $525
OAS clawback
Clawback is lesser of:
- OAS received
- 15% of net income in excess of base on reference schedule
Clawback is deducted in determining taxpayer’s net income and amount is added to income tax payable as repayment of OAS.
EI benefits clawback
Clawback is 30% of lesser of:
- EI benefits received
- Amount by which individual’s income exceeds 1.25 x max yearly insurable earnings
Clawback is deducted in determining taxpayer’s net income and amount is added to income tax payable as repayment of EI.
Pros & Cons of Incorporating (Tax considerations)
Pros:
- limited liability for shareholders
- tax deferral on earnings, earning are retained in corp and dividend payments to SHs are delayed
- potential tax deduction on earnings subject to SBD, depends on combination of personal and corp tax rates
- greater potential for income splitting among family members
- flexibility for owner-manager compensation (salary vs dividend)
- flexibility with year end selections
- LCGE on future disposition of shares of the corp if QSBC shares
Cons:
- cost of incorporation & ongoing compliance (FS prep, Corp tax returns, annual filing fees)
- can’t claim business net loss against other sources of personal income
Section 85 rollover
Used when transferring assets of a sole prop to a corp or transferring shares of an operating company to a holdCo
Elective provision that is used to transfer most assets with accrued gains to a Canadian corp on a tax-deferred basis. In exchange for the assets, the transferor receives shares in the corporation and possible non-share consideration (NSC)
Requirements:
- assets must be transferred to a taxable Canadian corp
- assets transferred must be eligible assets
- transferor must take back a share(s) of the corp as consideration
- transferor may take back NSC (usually promissory notes of the corp or sole prop debt assumed)
- cosideration for the transfer must equal the FMV of the property transferred and can include both shares and NSC
Eligible Property for Section 85 rollover
Eligible property
- inventories
- non-depreciable capital property
- depreciable capital property
Assets with accrued losses and/or terminal losses can not be transferred under Section 85, instead they are sold to the corp at FMV.
Accounts receivable - Section 85 rollover
Considered capital property, with tax value equal to face value (amount owed by customer) and FMV is the amount that is expected to be collected from customers. FMV will always <= tax value and thus cannot be transferred under section 85 since there would be accrued losses.
The receivables would then have to be sold to the corp. If sold for less than face value then there will be a capital loss for the seller, with 50% deductible against capital gains. If the corp then collects more than it paid for the receivables, the corporation will incur a capital gain.
Section 22 election: joint election between purchaser and seller. Receivables no longer considered capital property and thus any losses realized by the seller are fully deductible business losses. If purchaser collects more than the amount paid to acquire receivables, additional amount collected is fully taxes as business income.
Elected amount/transfer price - section 85 rollover
the amount establishes:
- proceeds of disposition to the transferor, used to determine tax consequences
- cost of consideration taken by the transferor from the corp in return for the properties transferred
- the cost of the property acquired for the corporation
Max elected amount is FMV of asset being transferred
Min elected amount is greater of: FMV of any NSC & tax value of the asset being transferred
Tax value is lesser of:
- FMV of asset
- ACB of asset (non-depreciable property or inventory)
- UCC of class of asset (depreciable property)
- Capital cost (depreciable property)
Terminal loss - section 85 rollover consequences
Transferor cannot claim terminal loss on sale but is permitted to hold the terminal loss in a separate CCA class of the same classification and claim the CCA going forward.
Temporary 100% CCA deduction rule
Only for CCPCs
Net additions can be fully deducted only in the year the asset becomes available for use.
For assets available for use on or after April 19, 2021 and before Jan 1, 2024.
Limited to a max of $1.5 million per taxation year.
Not applicable for CCA classes: 1 to 6, 14.1, 17, 47, 49 and 51
Foreign advertising
Not deductible when advertising cost is paid to foreign broadcaster when directed at a primarily Canadian market
