Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to  resolving tax disputes, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Canadian tax lawyers and attorneys skilled and experienced in tax law.  Feel free to make a post on Dynamic Lawyers (it’s 100% free and anonymous) .

Many Canadians may be in a tight spot with the Canada Revenue Agency ["CRA"]: they haven’t filed their taxes, have hidden income, have claimed ineligible expenses, have made misrepresentations on past tax returns, or have otherwise evaded paying taxes.  They’re worried about the CRA discovering and prosecuting them with interest and penalties (including criminal sanctions!).  What can they do?

Well, the CRA has a Voluntary Disclosure Program ["VDP"] which allows, in certain circumstances, taxpayers to voluntary admit their tax delinquencies in exchange for an amnesty (which involves a negotiation to settle their tax disputes).  This VDP is available for income taxes and goods and services tax.  Sounds too good to be true?  Well, there are a number of tips and traps that you should be aware of – and I’ll try to shed some light on them in this blog.

What’s the Process
The VDP process begins with the taxpayer completing a CRA form and attaching it to a disclosure submission and any supporting documentation.  These documents must be be writing and mailed or faxed to the local tax services office (i.e. where the taxpayer resides).

In order for the disclosure to be valid for the VDP, it must be voluntary, complete, involve a penalty, and include information that is more than one year overdue. Each of these elements will be examined in greater detail below and in the next blog…

If the disclosure is accepted by the CRA, the taxpayer will have to pay taxes owing plus interest, but will not be subject to penalty or prosecution for amounts accepted as a valid disclosure.

If a taxpayer disagrees with the CRA’s decision, a taxpayer can request a review (either by contacting the Director of the tax services office or through a judicial review).

Voluntary
The CRA says that, for you to come forward voluntarily, you must not be under investigation.  So if you were subject to or had knowledge of an audit, investigation, or enforcement action, then you won’t be entitled to the VDP.  What’s an enforcement action?  Well, the CRA says it includes:

• requests, demands, or requirements issued by the CRA, relating to unfiled returns, unremitted taxes/installments, deductions required at source or non-registrants;
• requests, demands or requirements which have been issued with reference to other tax accounts of the taxpayer, partners of the taxpayer or corporations associated with or related to the taxpayer;
• direct contact by a CRA employee for any reason relating to non-compliance (e.g. unfiled returns, audit, collection issues); and/or
• an audit, investigation or other enforcement action by another authority or administration, such as, but not limited to, a police force, securities commission or provincial authority.

Importantly, the CRA says: “The CRA request-to-file is an enforcement action relating to all unfiled returns for that taxpayer.”  The CRA reiterates that view here: “although the aforementioned actions may only pertain to one specific year or reporting period, the procedure will be considered to be an enforcement action, for purposes of the VDP, for all taxation years or reporting periods”.

In the next blog, I’ll talk about the other requirements that are part of the VDP…

written by admin \\ tags: canadian income tax, voluntary disclosure program

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to structuring or resolving disputes involving rental income, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Canadian tax lawyers and attorneys skilled and experienced in tax law for Ontario and Canadian corporations.  Feel free to make a post on Dynamic Lawyers (it’s 100% free and anonymous).

In this blog, I’ll be discussing the tax implications of earning rental income through a Canadian Controlled Private Corporation ["CCPC"] in Ontario.

So let say you own a CCPC which owns some real property (e.g. a house or condo unit).  The real property generates rental income.  How will that income be taxed at the corporate level before it gets to you?  Remember: I won’t be discussing the tax implications (i.e. dividend gross up and tax credit for non-eligible dividends) at the shareholder level in this blog.  So lets get it started…

Well, first off, that type of income – rental income – falls under the definition of “aggregate investment income” (s. 129(4)(b) of the Canada Income Tax Act).  Since it’s not “active business income“, the CCPC will not be able to take advantage of the small business credit (which reduces the corporate tax rate to only 16.5% on the first $500,000 of active business income of a CCPC).  Furthermore, since “aggregate investment income” is excluded from the definition of “full rate Taxable Income” under s. 123.4(b)(iii) of the ITA, the CCPC will not be eligible for the General Rate Reduction of 9%.  Taken together, this means that the starting point of the corporate tax rate on this type of income is 42%.

But that’s not the end of it!  Governments want to discourage people from using corporations to defer tax on investment income.  That’s why there is an Additional Refundable Tax ["ART"] on aggregate investment that qualifies for a dividend refund.  Essentially, the government wants to punish corporations that horde aggregate investment income (i.e. which don’t pass along the income through dividends to their shareholders).  ART is an additional tax of 6⅔% on aggregate investment income of CCPCs.  In theory, the additional 6⅔% ART will make the corporate tax rate (assumed to be 40%) for CCPCs roughly equal to the highest individual marginal tax rate (currently 46.41% in Ontario).  So, adding the ART to where we left off above, you’ll end up with a CCPC tax rate on aggregate investment income of 48.67%!

Basic Combined Federal and Provincial CCPC Tax Rate For Aggregate Investment Income
38% – Rate for Corporations – s. 123(1)(a) of the Canada Income Tax Act ["ITA"]
- 10% – Deduction from Corporation Tax – s. 124(1)
+ 14% – Ontario Corporate Tax Rate – from the CRA’s website
+ 6⅔% – Additional Refundable Tax – s. 123.3

=  48⅔ or 48.67% as the Basic Combined Federal and Provincial CCPC Tax Rate for Aggregate Investment Income

So, if you’re still with me, you’ll probably be saying: OUCH – THAT’S A HIGH TAX RATE! But wait – there’s relief! When the CCPC pays out dividends to shareholders from that aggregate investment income, the CCPC will get a tax refund: the CCPC gets back 26⅔% of the  aggregate investment income paid out as dividends to their shareholders: s. 129(1)(3)(a). So if $100 of aggregate investment income is earned but paid out as dividends to shareholders, the CCPC initially pays $48.67 in taxes but will get a refund of $26.67, which means that it only paid $20 of taxes on this type of income.

written by admin \\ tags: aggregate investment, business income, business investment, Canada Income Tax, canada income tax act, canadian controlled private corporation, canadian corporations, ccpc, corporate tax rate, dividend, income tax act, investment income, investment losses, legal advice, professional assistance, refundable tax, small business credit, tax implications, tax lawyers, taxable income

If you need a Canadian tax lawyer or attorney skilled and experienced in tax law for Ontario corporations, then feel free to make a post on Dynamic Lawyers (it’s 100% free and anonymous).  Our corporate tax lawyers can help you with your corporate tax planning or r tax dispute resolution matters.

So I thought it would be neat to keep blogging about the small business tax rates for corporations in Ontario and let people know about how they could pay $0 (that’s right – NOTHING) in Federal personal income tax for fiscal 2009 up to a certain limit on certain kinds of dividends they received from a Canadian Controlled Private Corporation.

Don’t believe me?  Just go here and enter $40,608 under “Cdn dividends eligible for small business div tax credit (CCPCs)“.  If this is your only source of income for the year and you don’t get fancy with anything else (e.g. deductions, tax credits, etc.), then here’s what you’ll get:

+  Federal Tax owed before non-refundable tax credits = $8,316.

-  Non-refundable tax credits from Basic Person Amount = $1,548.

-  Small business dividend tax credit = $6,768.

Total Federal Tax = $0!!!

How is that possible?  Here’s how (keep in mind that these figures change frequently, so be sure to do your own due diligence!):

1. Hold shares in a Canadian Controlled Private Corporation or CCPC (as defined in the Canada Income Tax Act).
2. Have the CCPC earn “active business income” (as defined in the Canada Income Tax Act).
3. Have the CCPC pay income taxes at a rate of 16.5% on that active business income up to a limit of $500,000 (check out my previous blog about corporate tax rates).
4. Have the CCPC declare and issue up to $40,608 to you as a shareholder and make sure the money comes from that specially low-taxed retained earnings.
5. Earn no other taxable income for the fiscal year other than those dividends.
6. The Federal Dividend Gross Up and Tax Credit kick in (for your personal income taxes) and you’re left with paying $0 in taxes on the $40,608 which you received as income in the form of dividends on your shares!

Here’s the detailed analysis of how the Dividend Gross Up and Tax Credit work to allow you to pay $0 in Federal personal income taxes:

When you receive a dividend from a Canadian Controlled Private Corporation (as defined in the ITA), that income is deemed non-eligible (because it received beneficial treatment from the small business tax rate for Ontario corporation – 16.5% for 2009), here’s what happens…

1. The amount you received is grossed up by 25%.  So if you received $40,608, then the amount of the Grossed Up Dividend is now $50,760.
2. Apply the Federal Tax Rate (which is progressive) to the amount of the Grossed Up Dividend.  This gives you a federal tax payable of $8,316 (here’s the simple breakdown: the difference between $0-$40,726*0.15% tax = $6,109 for the first level of tax + the difference between $40,726-$50,760*22% = $2,207 for the second level of tax).
3. Deduct the Personal Tax Credit of $1,548 (which is 15% of $10,320).
4. Deduct the Federal Dividend Tax Credit of $6,768, which is 13.33% of the Grossed Up amount of $50,760.
5. Together, the Federal Personal Tax Credit and the Federal Dividend Tax Credit amount to $8,316.
6. So the Personal Tax Credit and the Dividend Tax Credit combined equal the amount of tax owed, resulting in $0 taxes at the personal level!

Although $40,608 seems like it would be enough for someone to get by on in the year (especially considering that the CCPC only paid 16.5% tax on those dividends before they were distributed), remember that you’ll still need to pay some minimal Ontario personal income taxes on these dividends – but that’s another story

written by admin \\ tags: active business income, Canada Income Tax, canadian controlled private corporation, dividend tax credit, dividends

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to structuring or resolving disputes involving allowable business investment losses, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Canadian tax lawyers and attorneys skilled and experienced in tax law for Ontario and Canadian corporations.  Feel free to make a post on Dynamic Lawyers (it’s 100% free and anonymous).

In this blog, I’ll be discussing “Allowable Business Investment Losses” (“ABIL“) for Canadian income tax purposes (Note: I will be looking at ABIL from the simplest viewpoint).

So what’s an ABIL?  Simply put, it’s a type of preferential business loss which can be used by taxpayer to offset income from any source. The idea behind it is simple: the government wants to encourage investment in certain types of businesses  (namely, Canadian Controlled Private Corporations carrying on active business in Canada).  So if you take a risk in such business and experience a loss, you’ll be able to offset your income from other sources with a portion of that loss.

So how does it work?  Well, if you can bear with me, I’ll do my best to explain the definitions regarding the application of ABIL.

In a nutshell, a taxpayer’s ABIL is 50% of a “business investment loss” for a taxation year (s. 38 of the Income Tax Act (“ITA”)).  So what’s a “business investment loss”?  I discuss that next…

A “business investment loss” arises when there is a “capital loss” from a “disposition” of shares  of a “small business corporation” (s. 39(c) of the ITA).  Once again, there are a number of terms that require clarification here.

First, there must be a “capital loss” from a “disposition” of shares.  The ITA gives the following examples of when this happens:

• if during the year the corporation becomes bankrupt (s. 50(b)(i) of the ITA);
• if the corporation is insolvent and a winding-up order has been made in the year (s. 50(b)(iii) of the ITA); or
• if at the end of the year, the corporation is insolvent, does not carry on business, the fair market value of the shares is nil, and it is reasonable to expect that the corporation will be dissolved or wound up (and won’t continue carrying on business) (s. 50(1)(b)(iii).

In any of these situations, the taxpayer shall be “deemed to have disposed of the…share…at the end of the year for proceeds equal to nil…” (s. 50(1)(b)(iii)).  The bottom line is that if the corporation is essentially bankrupt, worthless, not carrying on business, is expected to close down, etc. (as per above), then the taxpayer will be deemed to have disposed of their shares for $0.  So if the taxpayer paid $100 for their shares, they will have a $100 capital loss from their deemed disposition.

Going back to the definition of “business investment loss” above, however, we see that it’s not just any shares of a corporation that qualify: the corporation must be a “small business corporation“. I discuss this next…

A “small business corporation” is a “Canadian Controlled Private Corporation” (“CCPC“) that uses “all or substantially all” (90% is the accepted standard) of the fair market value of its assets in an “active business” carried on primarily in Canada (s. 248(1) of the ITA).  Importantly, a corporation that was a small business corporation at any time in the 12 months before the disposition of the share will be considered to be a small business corporation.

OK, so now we need to define “CCPC” and “active business“.

The ITA defines a CCPC, among other things, as a “private corporation” that is a “Canadian corporation” that is not controlled by one or more non-resident persons or by one or more public corporations (or a combination thereof) (s. 89(1) of the ITA).  OK so now we have more terms to define…

• Here, a “private corporation” includes a corporation “resident in Canada” that is not a “public corporation” and is not controlled by a public corporation (s. 89(1) of the ITA).  OK, more terms to define..
  • Corporations deemed to be “resident in Canada” include corporations which were incorporated in Canada after April 26, 1965 (this includes corporations originally incorporated in foreign jurisdiction which are continued in Canada), corporations resident in Canada under the common law “mind and management” test at any time, and corporations carrying on business in Canada in any taxation year ending after April 26th, 1965 (s. 250(4)(a) and (c) of the ITA).
  • A “public corporation”, among other things, is defined as a corporation whose shares of capital stock are listed on a prescribed stock exchange both in Canada and abroad (s. 89(1) and 125(7)(c) of the ITA).
• The term “Canadian corporation” include a corporation that is currently resident in Canada and that was either “incorporated in Canada” or was resident in Canada throughout the period that began on June 18th, 1971; a “corporation incorporated in Canada” includes “a corporation incorporated in any part of Canada before or after it became part of Canada” .

So that takes care of the definition of “CCPC”.  Phew!

What about “active business“?  Well, it’s defined as “any business carried on by the taxpayer other than a specified investment business or a personal services business”.  Specified investment business generally means a business the principal purpose of which is to derive income from property (e.g. rent, royalties, dividends, etc.), but this doesn’t include, for example, a corporation that has 5 or more full time employees.  A personal services business is essentially an incorporated individual who resembles an employee of a client, but this doesn’t include, for example, a corporation that has 5 or more full time employees (s. 125(7) of the ITA).

So there you have it in a nutshell, definitions and all.

Please note that there are many additional rules concerning ABILs which you should consult with a lawyer with (e.g. by going on Dynamic Lawyers).  What I’ve discussed above is just general information about ABIL and there may be additional rules which apply to your situation to either make the ABIL inapplicable or reduce the amount to which you would otherwise be entitled to.  Please consult with a lawyer to find out which, if any, of these additional rules apply to your situation!

FYI, here’s some further reading (and here too) about ABIL from the CRA (please note that these are outdated a bit).

written by admin \\ tags: allowable business investment losses, business investment losses, canadian tax

If you need a Canadian tax lawyer or attorney skilled and experienced in tax law for Ontario corporations, then feel free to make a post on Dynamic Lawyers (it’s 100% free and anonymous).  Our corporate tax lawyers can help you with your corporate tax planning or resolving tax disputes.

So I thought it would be worthwhile to break down the corporate tax rates (read: as they presently EXIST!) for corporations in Ontario with calendar fiscal years.  For the purpose of this blog, I’ll only be breaking down the Basic Combined Federal and Provincial Rate and the Small Business Combined Federal and Provincial Rate as of January 1, 2009.  So here it goes (and remember, these rates change every year so do your own due diligence!):

Basic Combined Federal and Provincial Corporate Tax Rate
38% – Rate for Corporations – s. 123(1)(a) of the Canada Income Tax Act ["ITA"]
- 10% – Deduction from Corporation Tax – s. 124(1)
-   9% – General Deduction from Tax – s. 123.4 of the ITA
+ 14% – Ontario Corporate Tax Rate – from the CRA’s website

=  33% as the Basic Combined Federal and Provincial Corporate Tax Rate

Small Business Combined Federal and Provincial Rate (on the first $500K of active business income of a CCPC)
38% – Rate for Corporations – s. 123(1)(a) of the Canada Income Tax Act ["ITA"]
- 10% – Deduction from Corporation Tax – s. 124(1)
- 17% – Federal Small Business Deduction – s. 125 of the ITA
+ 5.5% – Ontario Small Business Rate – from the CRA’s website

=  16.5% as the Small Business Combined Federal and Provincial Corporate Tax Rate

So what exactly do these different rates mean?  Well, if you have a corporation that is a CCPC or “Canadian Controlled Private Corporation” (which has its own definition under the ITA) and it earns, for example, $1.0-million dollars in taxable active business income (which has its own definition under the ITA), then the first $500,000 it earns will be taxed at 16.5% (for a total of $82,500 in income tax liability) and the rest of it will be taxed at 33% (for a total of $165,000 in income tax liability for the second half).  If the corporation was not a CCPC or its taxable income was not active business income, then (to simplify things) all $1.0-million would have to be taxed at 33% and $330,000 of taxes would have to be paid.   Hence, having the first $500,000 taxed at a lower rate ends up saving the corporation $83,000 in taxes on the $1,000,000 ($330,000-247,000 = $83,000).

written by admin \\ tags: combined federal and provincial corporate tax rate, corporate income tax rates, federal small business deduction, ontario corporation, small business rate

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to creating a limited liability company or amending a corporation’s articles of incorporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto and Ottawa business lawyers registered on the website who can answer your questions or help you with your  Ontario or Federal corporations.

As a follow up to my recent post about income-splitting shares, I neglected to mention one of the biggest benefits of using income splitting preference shares: income splitting to reduce reduce household taxes.

Take the following example.  You have a corporation.  It earns $300,000 in taxable income.  Because of the small business credit (which I will be discussing in a future blog post), the corporation only pays 16.5% tax on that amount (this rate is going down to 15.5% starting July 1, 2010).  What do you do with the after-tax dollars?  Well, you could either keep it in the company and let it accumulate or you could dividend it out.  The latter is where the income-splitting shares come into play.  You can simply give these shares to members of your family who have little or no income.  Then, when the corporation’s directors (e.g. you) declares a dividend to the shareholders of this class of shares, they will receive and have to pay tax on those dividends.  They will get the benefit of the dividend tax credit.  But the beautiful thing is that less taxes end up being paid than if someone (e.g. you) had a higher income and received the same dividends (because of how our marginal taxes work).  These shares are not susceptible to the attribution rules found in the Canada Income Tax Act.

Remember, if you need help structuring your corporation to create income-splitting preference shares, you should make a post on Dynamic Lawyers.

written by admin \\ tags: articles of incorporation, business, canada, Canada Income Tax, canadian income tax, canadian income taxation, corporation, declarations, dividend, dividend tax credit, income tax act, incorporation, lawyers, shareholder, shareholders

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to tax issues, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto business and tax lawyers registered on the website who can answer your questions.

As a follow up to my recent blog post about a corporate interest-free loan being made to a shareholder’s spouse, I thought it would be worthwhile to discuss one of the main exemptions to the tax treatment of that loan. Recall that, in my previous blog, the Canada Income Tax Act could apply to require the spouse to have to include in his or her income and pay taxes on the principal amount of the loan.

Recall that I also mentioned in that blog that there were exemptions to this rule.  One such example, which I will discuss in this blog, deals with repayment of the corporate loan within one year.  Section 15(2.6) of the Canada Income Tax Act provides as follows:

15 (2.6) Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments [emphasis added].

So section 15(2.6) provides that, if the corporate loan to the spouse is repaid by the spouse within 1 year after the end of the taxation year (of the lender/creditor in which the loan arose), then it would not need to be included in the spouse’s income (and hence no taxes would need to be paid).  So, the spouse would not need to include the amount of the loan in his or her income and pay taxes on it so long as the loan was repaid within 1 year from the end of the corporation’s taxation year.  To better understand this situation, take the following example.  A corporation’s year end is August 31.  A shareholder’s spouse took out a loan on December 31st, 2008.  The clock would not start ticking until August 31st, 2009 and the spouse would only need to repay it by August 31st, 2011 to avoid including it in his or her tax return.

I bolded the last part of s. 15(2.6) for a reason. The Canada Revenue Agency Interpretation Bulletin (IT-119R4) on shareholder loans helps explain what is meant by the phrase “series of loans or other transactions and repayments”:

¶ 28. It is a question of fact whether or not a repayment of a loan is part of a series of loans or other transactions and repayments. In most cases, when there are only a few loans or other transactions and a few repayments made during a taxation year of a lender, there is no such series. However, when only one loan or other transaction and one repayment occur in each taxation year of a lender, a series of loans or other transactions and repayments may still be in evidence. This could occur, for example, when a repayment is of a temporary nature, such as a loan that is repaid shortly before the end of the year and the same amount, or substantially the same amount is borrowed shortly after the end of the year. Such a repayment of a temporary nature is not considered to decrease the loan balance in applying subsection 15(2) and paragraph 20(1)(j) to a series of loans or other transactions and repayments.

So if a shareholder’s spouse were to take out a corporate loan and repay that amount before the year end (e.g. August 31st), and then shortly thereafter take out “substantially the same amount” as was repaid before the corporation’s year end, then the Canada Revenue Agency may deem such transactions to be “a series of loans or other transactions and repayments” – for which the spouse will need to include the amount as income under s. 15(2).

Remember, if you need tax and/or business advice from a Toronto or Ottawa lawyer or attorney, go to Dynamic Lawyers and make a post.

written by admin \\ tags: canada, Canada Income Tax, corporate interest, corporate loan, income tax act, interest free loan, ottawa attorneys, ottawa lawyer, profit corporations, tax lawyers, taxable benefit, toronto attorney, toronto lawyer

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to tax issues, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto business and tax lawyers registered on the website who can answer your questions.

So you have a corporation and you want to give your spouse and interest-free loan?  What could go wrong, you say?  Well, the tax implications may not make it worth your while.

For starters, s. 15(2) of the Canada Income Tax Act provides as follows:

15 (2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is

(a) a shareholder of a particular corporation,

(b) connected with a shareholder of a particular corporation, or

(c) a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation

and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, any other corporation related to the particular corporation or a partnership of which the particular corporation or a corporation related to the particular corporation is a member, the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership.

So if a person is “connected” with a shareholder of a corporation and receives a loan from that corporation, then the amount of that loan is to be included in that person’s income for the year (and hence tax must be paid on it).  Here, the word connected is defined in s 15(2.1) to include person with whom the shareholder does not deal at arm’s length with (which includes your spouse).

What about the interest free part of the loan, you say?  Well, under s.80.4(2), the spouse may have to include the amount of interest that would have otherwise been paid in their income tax (and hence pay tax on it):Idem

80.4(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) was

(a) a shareholder of a corporation,

(b) connected with a shareholder of a corporation, or

(c) a member of a partnership, or a beneficiary of a trust, that was a shareholder of a corporation,

and by virtue of that shareholding that person or partnership received a loan from, or otherwise incurred a debt to, that corporation, any other corporation related thereto or a partnership of which that corporation or any corporation related thereto was a member, the person or partnership shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which

(d) all interest on all such loans and debts computed at the prescribed rate on each such loan and debt for the period in the year during which it was outstanding

exceeds

(e) the amount of interest for the year paid on all such loans and debts not later than 30 days after the later of the end of the year and December 31, 1982.

So if a person is “connected” with a shareholder of a corporation (i.e. which includes a spouse) and receives a loan from that corporation, then that person will be deemed to have received a taxable benefit (i.e. must pay tax on) equal to the difference of the interest they paid in the year and the interest they should have paid in the year (i.e. a prescribed rate).

Overall, therefore, a shareholder of a corporation who offers his or her spouse an interest free loan could be doing more harm than good: the principal and the interest might end up being included in the spouse’s income for tax purposes.

Please keep in mind, however, that there are other provisions in the Canada Income Tax Act which modify or make these sections inapplicable; it really depends on the particular situation.  For this reason, you are once again cautioned to consult with a tax lawyer on Dynamic Lawyer to get a clear understanding of your legal rights and obligations before taking action.

written by admin \\ tags: canada, Canada Income Tax, income tax act, indebtedness, interest free loan, partnership, professional assistance, profit corporations, shareholder, tax implications, tax lawyers, taxation, toronto business

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to Ontario Not-For-Profit Corporations, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto business and tax lawyers registered on the website who can answer your questions.

Not-for-profit corporations are generally exempt from paying taxes (see  legislation below) on any income and capital gains.

At the Ontario level, the Ontario Corporations Tax Act provides as follows:

PART II
INCOME TAX

Division E – Computation of Income Tax Payable

Exemptions

57. (1)  Except as hereinafter provided, no tax is payable under this Part upon the taxable income of a corporation for a period when that corporation was,

Non-profit organizations

(b) a club, society or association that, in the opinion of the Minister, was not a charity within the meaning given to that expression by subsection 149.1 (1) of the Income Tax Act (Canada) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, which has not in the taxation year or in any previous taxation year distributed any part of its income to any proprietor, member or shareholder thereof, or appropriated any of its funds or property in any manner whatever to or for the benefit of any proprietor, member or shareholder thereof, unless the proprietor, member or shareholder was a club, society or association, the primary purpose and function of which was the promotion of amateur athletics in Canada.

…

PART III
CAPITAL TAX

Division A – Liability for Capital Tax

71. (1) Except as provided in subsections (3), 11 (15) and 66 (6), none of the following corporations are required to pay any tax otherwise payable under this Part:

1. A corporation referred to in subsection 57 (1), other than a corporation subject to the rules in subsection 149 (10) of the Income Tax Act (Canada) as made applicable by subsection 57 (7) of this Act.

So taken together, an Ontario not-for-profit corporation is generally exempt from paying income or capital gains tax at the Ontario level (remember: corporate entities in Ontario must file a tax return for both Ontario and Canada (i.e. federally).

At the federal level, not-for-profit corporations are generally exempt from paying income tax as well.  The relevant provisions in the Canada Income Tax Act are as follows:

PART I INCOME TAX

DIVISION H EXEMPTIONS

Miscellaneous Exemptions

149. (1) No tax is payable under this Part on the taxable income of a person for a period when that person was

(l) a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada;

Among other things, Ontario not-for-profit corporations need to file an Annual Information Return.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to Canada Income Tax, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have tax lawyers registered on Dynamic Lawyers who can offer information, advice, and assistance with respect to your Canadian income tax issues, questions, and concerns.

So you’ve probably already read about one of the Canada Revenue Agency’s best kept secrets in my previous blog – namely, Taxation Operation Manuals or TOMs for short.  As previously discussed, the CRA prints TOMs for its employees’ use. TOMs cover all aspects of the operation of the Department, from purely internal matters such as Management Information Systems and Personnel Procedures, to maters that have an impact on taxpayers, such as Audit Techniques and Assessing Procedures.

Well, while I was cleaning up, I came across a couple of the TOMs which I had photocopied last spring and thought it would be worthwhile to scan one and make it available to the public.  Please keep in mind that this document, while up-to-date at the time I photocopied it (last spring) may be out of date.  As such, you are cautioned to attend your District Taxation Office and request to inspect and photocopy the latest and most applicable versions of the TOMs you’re looking into.  Also note that the line throughout the photocopy was a result of my scanner acting up and I apologize for the eyesore.

With this warning in mind, the following TOM (Section 7038) deals with Ministerial Discretion with respect to requests to cancel or waive interest and/or penalties.  While many TOMs have sections or entire pages missing (left blank) under privacy legislation, this particular TOM seems to be intact (although I could be wrong).

No doubt, knowing what the CRA and its employees have learned and been instructed/guided to follow through a TOM sheds valuable insight into how a party might go about trying to resolve a dispute.  It’s unclear the degree, if any, to which the CRA and its employees are bound by TOMs, but it seems safe to suggest that having the TOM in your hand when your negotiating or litigating a tax dispute with the CRA could add some degree of leverage.

written by admin \\ tags: audit techniques, best kept secrets, Canada Income Tax, canada revenue agency, canadian income tax, cra, CRA ministerial discretion income tax act, income tax issues, information advice, internal matters, ministerial discretion under the ITA, operation manuals, personnel procedures, privacy legislation, professional assistance, tax lawyers, taxation office, taxation operation manuals, TOMs