February 2019 Newsletter

If you owe a debt that is forgiven or settled without full payment, the Income Tax Act contains rules that may affect some tax amounts or tax attributes, or may result in an income inclusion. The main rules are summarized below.

The rules apply only if the debt is a “commercial obligation”, which basically means you used the debt (the borrowed money) to earn business or investment income. Debts used for personal purposes are not affected by the rules. 

Application of the rules

If your debt is forgiven without full payment, the remaining principal amount owing (“remaining debt”) is subject to the tax treatment in the order described below. Note that some of the steps are mandatory and some are optional:

A trust is a "person" and a taxpayer for income tax purposes. As a result, it will be subject to income tax on its taxable income for a taxation year. In turn, if some or all of the trust income for the year is “paid or payable” to a beneficiary of the trust, the trust can generally deduct that amount from income and the beneficiary will normally be taxed on the income instead.

For most purposes, a trust is considered an "individual" under the Income Tax Act, like a human being. However, there are some important exceptions.

Taxation of trust on retained income

Income earned and retained in the trust for taxation year − that is, the income is not paid or payable to a beneficiary in the year − is normally taxed to the trust.

Funds invested in either a registered retirement savings account (RRSP) and a tax-free savings account (TFSA) grow tax-free while in the account.

However, there is a difference between the accounts in terms of contributions and withdrawals.

Assuming you have sufficient contribution room, contributions to an RRSP are deducted from your income and therefore save you tax in the current year. Contributions to a TFSA are not deducted and therefore come out of your after-tax income.

Conversely, withdrawals from an RRSP are included in your income, whereas withdrawals from a TFSA are not included in your income.

The maximum tax-free car allowance deductible for employers for allowances paid to their employees for work purposes is increased by 3 cents from the 2018 amount to 58 cents per kilometre for the first 5,000 kilometres driven, and to 52 cents per kilometre for each additional kilometre driven during the year. For the Northwest Territories, Nunavut and Yukon, the maximum deductible tax-exempt allowance is 4 cents higher, so it is 62 cents per kilometre for the first 5,000 kilometres driven, and 56 cents per kilometre above that.

The rate to be used to calculate the taxable benefit of employees relating to the personal portion of automobile operating expenses paid by their employers will be increased by 2 cents to 28 cents per kilometre. For taxpayers who are employed principally in selling or leasing automobiles, the rate will be increased by 2 cents to 25 cents per kilometre.

Taxpayer’s anxiety and panic disorder qualified for disability tax credit

To qualify for the disability tax credit (DTC), an individual must have a prolonged and severe impairment in physical or mental functions, resulting in a marked or significant restriction in one or more basic activities of daily living. Furthermore, the impairment must be certified, in prescribed form, by a physician.

In the recent Cochrane case, the taxpayer claimed the DTC because she had serious depression and anxiety, which led to a panic disorder that in turn allegedly affected her basic daily activities. The CRA denied the claim, and Ms. Cochrane appealed to the Tax Court of Canada.