July 2019 Newsletter

Readers may recall that the 2018 Federal Budget restricted the tax advantages for a Canadian-controlled private corporation (“CCPC”) when it generates investment income. This is aimed at CCPCs investing their after-tax business income that was subject to the small business corporate tax rate.

Basically, the new rules provide that where a CCPC (along with any associated corporation) earns more than $50,000 of investment income in a year, its small business limit, which is normally $500,000, is ground down for the next year. The small business limit is the maximum amount of CCPC active business income that is subject to the small business corporate tax rate, which varies from about 9% to 13% depending on the province. Business income above the small business limit is subject to the general corporate tax rate, which ranges from about 26% to 31% depending on the province.

If a corporation undergoes a change in control, various income tax rules come into play. Most of these rules are restrictive in nature, and are generally meant to prevent the takeover of a corporation for the purpose of accessing its existing tax losses and credits that it has been unable to use because it is not profitable, and effectively transferring those losses to another business.

For these purposes, a change in control normally means the acquisition of more than 50% of the voting shares in the corporation. There are some exceptions – for example, if X purchases the shares of Yco from a person related to X who already controls Yco, there will not be a change in control.

The principal residence exemption is one of the most widely used tax breaks under the Canadian income tax system. As most readers likely know, the exemption means that in most cases individuals pay no tax on capital gains realized on the sale of their home. However, there are various conditions that must be met. These are summarized below.

General conditions

The exemption is available only to Canadian resident individuals. It is not available to corporations or non-residents. However, the exemption can apply to a home owned anywhere in the world and not just in Canada.

Generally, you can realize a foreign exchange gain or loss for income tax purposes in one of three ways.

First, you can have a foreign gain or loss when you buy and sell a foreign currency. The gain or loss will be the difference between what you paid for the currency in Canadian dollars relative to what you realized on the sale in Canadian dollars. In this case, a special rule in the Income Tax Act says you ignore the first $200 of net foreign exchange gains or losses for each year. Of the remaining net gain or loss, half will normally be a taxable capital gain or allowable capital loss, as the case may be. (However, if you are actively trading in foreign currency, it could be business income or loss.)

Legal expenses incurred by employee to avoid criminal charges not deductible

Under the Income Tax Act, employees can deduct from employment income only those expenses that are expressly permitted by the Act. One such deduction under paragraph 8(1)(b) of the Act is for legal expenses incurred for the purpose of collecting salary or wages owed to the employee.

In the recent Dauphin case, the taxpayer was the Mayor of Lachine, Quebec. He was the subject of a criminal investigation and incurred legal expenses in defending himself against those charges. He attempted to deduct the legal expenses, essentially on the grounds that they were necessary to keep his job and therefore to collect his salary or wages as required by paragraph 8(1)(b) of the Act. The CRA denied the deduction and the taxpayer appealed to the Tax Court of Canada.