November 2018 Newsletter

General Rule

Normally, if a Canadian resident corporation (“Recipient”) receives dividends from another Canadian corporation (“Payer”), the dividends are tax-free for Recipient. More specifically, Recipient will include the dividends in income, but will be allowed an offsetting deduction in computing taxable income. With no net addition to taxable income, there is no tax payable.

The reason Recipient can receive the dividend without paying tax is that Payer presumably paid corporate income tax on its earnings that generated the dividend. (Dividends are paid out of after-tax corporate profits.) If Recipient were also subject to tax, there would be double taxation. 

Refundable Tax for Certain Dividends

General rules

The charitable donations tax credit is one of the more generous tax credits under our tax system. The federal credit equals:

  • 15% of the first $200 of donations in a year;
  • 29% on additional donations in the year, except that to the extent you are in the highest tax bracket (over $205,842 of taxable income for 2018), the credit is 33% for all donations that come from income subject to that highest rate of tax.

Special income tax rules apply to options, whether you purchase them or sell or grant them.

First, some terminology. A “call option” on a property provides the holder of the option with the right to buy the property at a set price, sometimes called the exercise price. In contrast, a “put option” on a property provides the holder with the right to sell the property at the exercise price.

Purchase and sale of call option

Employee stock options have specific rules that are different from the tax rules that apply to other options as discussed in the article above.

Generally, an employee stock option refers to an option granted to an employee of a corporation that entitles the employee to buy shares in the employer (or a related corporation) at a set price over a set term. In other words, the option is basically a call option for the employee on shares in the employer (or related corporation).

The grant of the option is not a taxable event for either the employee or employer.

Instead, the Income Tax Act provides a “wait and see” approach, under which the employee has tax consequences only if the employee exercises the option and acquires the shares. If the employee does not exercise the option, it simply expires with no tax consequences. (In the rare case where the employee paid something for the option, the amount paid will constitute a capital loss for the employee if the option expires. But generally employees do not pay for these options − they receive them as an employee benefit.)

Royalties Qualified for Small Business Deduction

A Canadian-controlled private corporation (CCPC) is entitled to the small business deduction on the first $500,000 of its active business income in a taxation year. The small business deduction reduces the corporate tax rate to around 11-14%, depending on the province, as compared to the regular corporate tax rate of around 25-30%, again depending on the province.

As a general rule, active business income does not include income from a "specified investment business", which includes a business the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property.