January 2019 Newsletter

In our November 2018 Tax Letter, we discussed the refundable Part IV tax that can apply to a Canadian-controlled private corporation (“CCPC”) on certain dividends that it receives from another corporation.

In general terms, the 38 1/3% Part IV tax applies to dividends that a CCPC receives from a corporation where the CCPC owns 10% or less of the shares of the corporation (based on either votes or fair market value). These dividends are often referred to as “portfolio dividends”.

The Part IV tax can also apply if the CCPC receives dividends from another corporation that are not portfolio dividends (that is, where the CCPC owns more than 10% of the other corporation), if the other corporation receives a dividend refund on the payment of the dividends to the CCPC.

The Part IV tax is added to a notional account called the refundable dividend tax on hand (RDTOH) account.

On November 21, 2018, the Department of Finance announced income tax measures to address recent corporate tax changes made in the United States. The new measures focus on accelerating the claim for capital cost allowance (“CCA” − tax depreciation), for most capital properties acquired after November 20, 2018.

The changes are intended to keep Canada’s corporate tax system competitive with that of the United States. However, unlike the recent changes in the United States, the new measures do not reduce Canadian corporate income tax rates. Despite that, the Department of Finance states the new accelerated CCA measures “will give businesses in Canada the lowest overall tax rate on new business investment in the G7, significantly lower than that of the United States”.

Depreciable capital property is divided into Classes, and each Class is a pool of assets on which CCA is claimed each year. For example, computers generally go into Class 50. When depreciable property is purchased (e.g., a new computer), its purchase price is added to the "Undepreciated Capital Cost" (UCC) of the Class. Each year, a percentage of the UCC for the class (55% for Class 50) can be deducted as CCA, and the UCC for that Class is reduced by the amount deducted.

Buildings used to earn rental income or for business purposes are considered depreciable property. As such, tax depreciation, or CCA as discussed above, can be claimed on a building. Land is not depreciable.

When CCA is claimed on a building, the amount claimed reduces the undepreciated capital cost (“UCC”) in respect of the building. If the building is subsequently sold, the proceeds of disposition (to the extent of the original cost of the building) in excess of the UCC at that time is treated as “recapture” and is fully included in income. On the other hand, if the building is sold for proceeds less than the UCC, the remaining UCC pool can be fully deducted from income as a “terminal loss”.

Any gain on the sale of the land on which the building is situated will be a capital gain, only half of which is included in income (assuming the land is capital property – if it was bought for the purposes of resale, then these rules do not apply and any gain is taxed as business income).

If you receive a dividend from a corporation, the dividend is normally included in your income.

However, a capital dividend is not included in your income. In other words, it is received free of tax.

In general terms, a private corporation can pay capital dividends to the extent of its “capital dividend account”. Public corporations cannot pay capital dividends.

The capital dividend account includes certain amounts that are tax-free to the private corporation, and that are allowed to pass tax‑free to the shareholders. For example, one-half of capital gains are not subject to tax. Therefore, if a corporation earns net capital gains (capital gains in excess of its capital losses), one-half of that amount is added to the corporation’s capital dividend account and can be paid out as a tax-free capital dividend. In addition, the corporation’s capital dividend account includes:

If you incur child care expenses because you are employed, carrying on a business, or attending school, you will normally be allowed to deduct some or maybe all of those expenses in computing your income.

The deduction for a taxation year is the lowest of the three following amounts:

  • Your actual child care expenses for the year. This includes amounts paid for baby-sitting, nanny costs, and day care. A limited amount is allowed for boarding camps and schools, as discussed below.
  • The total of the annual child-care limits for the year. These amounts are $8,000 for each child you have under age 7 at year-end, and $5,000 for each child you have that is 7 through 16. (The expenses aren't limited for each child; this limit is a total, so if you spend $13,000 on your baby and nothing on your 12-year-old, the $13,000 can be deductible.) The annual child care limit is $11,000 for children who are disabled and eligible for the disability tax credit.
  • Two-thirds of your earned income for the year, which includes your gross income from employment, your business income (after expenses) for the year, and your disability pension under the Canada Pension Plan or the Quebec Pension Plan.

Spousal support payments were “periodic” and therefore deductible

Spousal support payments are deductible for the payer of the support if certain conditions are met. For example, the payments must be made pursuant to a court order or written agreement, and normally they must be made “on a periodic basis”.

In the recent Ross case, the taxpayer made payments to his former spouse. Although most of the conditions for deductibility were met, the CRA denied the deduction on the grounds that the taxpayer’s payments were not made on a periodic basis.

The taxpayer made five instalments payments to his former spouse: a lump sum of $20,000 on the signing of their separation agreement in November 2015; the transfer of a car (a payment-in-kind) worth $20,000 in December 2015; and three further payments in December 2016 of $4,000, $3,000 and $3,000. Apparently, the reason the payments were all made near the end of the years, rather than throughout the years, was because Mr. Ross did seasonal work as a lobster fisherman. His income generally peaked in the fall and early winter.