October 2019 Newsletter

Canada employs a progressive or graduated income tax system, under which higher levels of income attract higher tax rates relative to lower levels of income. At the Federal level, there are currently five tax brackets, the lowest being 15% and the highest being 33%. Depending on the province, the combined Federal and Provincial tax rates can range from about 20% to about 54%.

There are various types of losses that you cannot use for tax purposes in your return for a given year. Fortunately, the losses are normally not “lost” forever, and can be carried back or forward and used in other years.

Non-capital loss

A business loss is called a "non-capital loss". In general terms, you will have a non-capital loss in a year when your losses from all sources exceed your positive income from all sources for the year (capital losses are dealt with separately as discussed under the next heading). For example, if you have $80,000 of investment income and a $90,000 business loss, your net income for the year will be zero, and the excess $10,000 will be a non-capital loss that cannot be used in the year.

Most readers are likely aware of their tax-filing due date for a taxation year. For the majority of individuals it is April 30 of the following year. If April 30 falls on a weekend, it is the following business day.

However, if either you or your spouse (or common-law partner) carry on business in the year, your tax-filing date is June 15. The downside is that any tax still owing for the year is due by April 30! If you owe tax and pay it on the filing date of June 15, you will be charged 45 days of interest (currently the interest rate is 6% compounded daily, so this will cost you about 0.7%).

The small business deduction applies to the first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC), and results in a combined Federal and Provincial tax rate of about 9%-14%, depending on the province. On the other hand, income from property is subject to a combined rate of about 50%-54%, again depending on the province (some of this is refundable tax that is recovered once dividends are paid out).

Active business income of a CCPC does not include a “specified investment business” ("SIB"), which is a business the principal purpose of which is to derive income from property – including rental income – unless the CCPC employs more than five full-time employees throughout the relevant year. In other words, income from a SIB is taxed the same as income from property.

Campground business not entitled to small business deduction

In the recent 1717398 Ontario Inc. (Lost Forest Park) case, the taxpayer corporation operated a campground and facility for campers and recreational vehicle (RVs). In the taxation years in question, the corporation attempted to claim the small business deduction (see above) on the grounds that it carried on a business and that earning rental income was not the principal purpose of the business. (The corporation did not employ more than 5 full-time employees throughout the year, so the exception described above did not apply.)

As discussed in the September Tax Letter (under “Bare trusts and nominee agreements”), the Quebec government introduced a rule in May 2019 requiring a nominee agreement signed after May 19, 2019 to be disclosed to Revenu Québec in an information return within 90 days of signing, with a penalty for non-compliance. However, on August 22, 2019 Revenu Québec extended the date for filing the information return to the later of the following dates: