27 Nov 2014
CRA, Wills, Joint Venture Transitional Relief, Capital Gains Exemptions
The less you owe to the CRA, the better – right?
Sometimes owing a little bit in taxes can save you a lot down the road.
When applying a tax loss from one year to wipe out the income in another year, the general inclination would be to eliminate the entire balance of taxes owing.
Unbeknownst to many, by doing so you’re also giving up the ability to challenge the CRA's reassessment for this tax year. A recent decision by the Federal Court of Appeals found that a zero dollar assessment did not constitute the legal definition of an "assessment." This means that the taxpayer essentially has no available recourse should a disagreement later arise. For example, if the CRA calculates interest on the wrong principal amount or erroneously denies a legitimate expense.
Fortunately, there is an easy solution to avoiding scenarios like these - leave a balance owing of greater than $2.00 after the application of the loss carryover. This exercise in financial fiscal restraint could make your next interaction with CRA just a little more pleasant.
Time to Revisit your Will?
The 2014 Federal budget will impact your estate plan if your Will contemplates the creation of trusts upon your passing. Currently trusts created in a person’s Will (i.e. “testamentary trusts”) have access to graduated tax rates which can result in annual tax savings of approximately $25,000. In addition, testamentary trusts are not subject to the quarterly instalment requirement, can claim the $40,000 exemption from Alternative Minimum Tax (“AMT”) and can have an off calendar year-end. In certain situations, one individual’s Will would contemplate the creation of several testamentary trusts to multiply the benefits noted above.
Draft legislation released in 2014 will limit these benefits. The government has proposed to allow only Graduated Rate Estates (“GRE”) and Qualified Disability Trusts access to the benefits which were originally provided to all testamentary trusts.
It is important to note that this legislation is in draft form only. It has not been finalized nor become law. However, the likelihood of the legislation being finalized as it is drafted is quite high and as such we recommend that you revisit your Will to ensure that it adequately reflects your wishes.
Joint Venture Transitional Relief Expires December 31, 2014
Joint ventures (“JVs”) are not recognized by Canada Revenue Agency (“CRA”) as a separate entity. Accordingly, each venturer should account for its own Goods and Services Tax (“GST”) or Harmonized Sales Tax (“HST”) and report its own input tax credits (“ITCs”) based on its proportionate share of the assets.
There is an election available to allow a participant of a JV to be considered the operator of the JV and collect and remit the GST/HST and claim the ITCs on behalf of the JV.
Commonly, JVs choose to use a bare trust or nominee corporation as the operator of the JV. However, this may not satisfy the eligibility requirements for the election if the bare trust or nominee corporation is not a participant.
Participant is defined as one of the following;
1. A person who makes an investment in the JV and takes a proportional share of the income or losses from the JV, or
2. A person who is designated in a written agreement as the operator and is responsible for controlling the JV.
CRA has granted administrative relief by giving JVs until December 31, 2014 to examine their current elections to ensure compliance with eligibility criteria and make any necessary changes to their agreements. Where ineligible, CRA has the ability to deny any ITCs claimed by the JV.
New Income Tax Folios released by the CRA
Income Tax Folios are replacing interpretation bulletins over the coming years. They can be found on the CRA’s website: http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/menu-eng.html
On September 19, 2014, the CRA released two new Income Tax Folios:
Suggestions about content and structure of the new folios can be emailed to email@example.com until December 19, 2014.
The Impact of Future Income Tax Assets on Capital Gains Exemptions
Most Canadian small business owners are aware of the ability to shelter capital gains of up to $800,000 using the Capital Gains Exemption (“CGE”) on the disposition of Qualified Small Business Corporation ("QSBC") shares.
The definition of QSBC sets out three tests that must be met in order for the shares to qualify for the CGE:
1) “small business corporation” test,
2) “holding period ownership” test, and
3) “holding period 50 percent active asset” test.
The last two tests are generally not onerous; however, it is the first of the QSBC tests that causes taxpayers the most difficulty in accessing the benefits of QSBC status. In order to be a “small business corporation”, at the time the shares are sold the company must be a Canadian-controlled private corporation of which 90% of the fair market value of its assets must be either:
- used principally in an active business carried on primarily in Canada, or
- shares or debt of another small business corporation with which the particular corporation is connected.
Prior to 2013, the CRA’s position made qualifying as a QSBC more difficult because the value of future tax assets were considered in the 90 percent threshold test and the value of such assets was excluded as inactive or ineligible assets. For example, if a company recognized a future tax asset for the non-capital losses that it had available to carry forward against future taxable income, this asset could put the company offside for CGE eligibility. Steps would have to be taken to “purify” the company to bring the active asset level back up over 90% of total assets.
In 2013 the CRA changed its position on the matter to one much more favourable for taxpayers:
“The CRA is of the opinion that a future income tax asset is not an asset for the purposes of the definition of QSBC and of the definition of SBC. Consequently, future income tax assets should not be taken into account when determining whether a share is a QSBC or whether a corporation is a SBC.”
This is a welcome change for Canadian taxpayers.
 Income Tax Folio S6-F1-C1, replacing Interpretation Bulletin IT-447 Residence of a Trust or Estate
 Income Tax Folio S6-F2-C1, replacing Interpretation Bulletin IT-385R2 Disposition of an Income Interest in a Trust
 ITA 110.6(1)
 ITA 248(1)
 Tax Interpretation 2014-0537611C6, October 11, 2013