Life in the Tax Lane - December 2018

This FREE 10-minute video for Canadian Tax Professionals includes rapid-fire discussion of select recent developments in the wonderful world of Canadian tax presented by the Video Tax News Team. 

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Interest Deductibility - Return of capital may impact the deductibility of interest on funds borrowed to finance an investment.

INTEREST DEDUCTIBILITY – RETURN OF CAPITAL

In an April 20, 2018 Tax Court of Canada case (Van Steenis vs. H.M.Q., 2017-3305(IT)I), at issue was whether the taxpayer could deduct interest incurred in 2013, 2014 and 2015 related to $300,000 borrowed in 2007 to purchase mutual funds. From 2007-2015, the taxpayer received a return of capital from the funds, totalling $196,850 over the period. The taxpayer used some proceeds to reduce the loan principal, but the majority was used for personal purposes.

Taxpayer loses
To deduct interest paid on borrowed money used for the purpose of gaining or producing income from property(Paragraph 20(1)(c)):

  • the amount must be paid or payable in the year;

  • the amount must be paid under a legal obligation;

  • the borrowed money must be used for earning non-exempt income from a business or property; and

  • the amount must be reasonable.

The Court examined the third criterion noting that there must be a sufficient direct link between the borrowed money and the current use of the money to gain or produce income from property. As much of the returned capitalwas used for personal purposes, there was no longer a direct link to the income earning purpose. The Court dismissed the appeal and upheld CRA’s denial of interest expense.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 442

Charitable Donation Receipts - Effective March 31, 2019, charities must include the new CRA website on all donation receipts.

DONATION RECEIPTS – NEW INFORMATION REQUIRED

Effective March 31, 2019charities and qualified donees must include the new website address of CRA, www.canada.ca/charities-giving on all donation receipts. This follows the move to the official www.canada.ca website. For all other items required to be included on a donation receipt, see https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/operating-a-registered-charity/issuing-receipts.html.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 442

Share Purchase and Capital Dividend - Where one of the purposes of acquiring a share is to receive a capital dividend on the share acquired, the dividend may be deemed to be a taxable dividend.

CAPITAL DIVIDEND ACCOUNT (CDA) – ANTI-AVOIDANCE PROVISION

Where one of the main purposes of a series of transactions which includes an acquisition of a share is to receive a capital dividend on the share acquired, the dividend is generally deemed to be paid and received as a taxable dividend (Subsection 83(2.1)) absent an exception.

In a November 9, 2017 Technical Interpretation (2017-0704221E5, Seguin, Marc), CRA considered the potential application of this anti-avoidance provision where a resident individual acquired the shares of a corporation with a CDA balance.

CRA noted that there are several exceptions to the conversion of a capital dividend to a taxable dividend. One exception is where it is reasonable to consider the purpose of the capital dividend is to distribute an amount received by the corporation which was added to its CDA due to receipt of life insurance benefits (Subsection 89(2.3)). CRA noted that it was a question of fact whether this purpose test was met.

More complex exceptions exist where capital dividends flow through multiple corporations or there has been an amalgamation to enable the life insurance to be paid out without conversion to a taxable dividend.

In the hypothetical example considered by CRA, the CDA balance under discussion arose from the proceeds of a life insurance policy on the death of a shareholder. CRA opined that even where one of the main purposes of the share purchase by the individual was to receive a capital dividend, the anti-avoidance provision would not apply due to these exceptions.

CRA also noted that, even where a technical exception applies, the General Anti-Avoidance Rule (GAAR, Section 245) could apply based on all of the facts and circumstances.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 441


Stock Option Benefit - Withholding Requirement - CRA confirms there is no withholding requirement on stock option benefits arising from the disposition of CCPC shares.

STOCK OPTION BENEFIT – WITHHOLDING REQUIREMENTS

At the time when a stock option is granted to an employee, no benefit is recognized (Paragraph 7(3)(a)). When the option is exercised, a benefit is recognized unless the employer is a CCPC dealing at arm’s length with the employee. In those cases, the benefit is generally deferred until the year in which the share is disposed of (Subsection 7(1.1)).

An employee’s stock option benefit is generally subject to withholding and remittance requirements (Subsection 153(1.01)). In a January 3, 2018 Technical Interpretation (2017-0709811I7, Pietrow, Victor), CRA noted that where the income deferral (Subsection 7(1.1)) is applicable, no withholding is required in respect of the disposed stock (Paragraph 153(1.1)(b)).

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 441