April 2020 Newsletter

Overview of rules

The Income Tax Act has several rules that combat the splitting of income among family members. However, an important exception applies to certain types of pension income. Back in 2007, the government enacted specific rules to allow spouses and common-law partners to split “eligible pension income”. Under these rules, you can split up to 50% of your eligible pension income with your spouse or common-law partner for income tax purposes.

The pension split is made by "joint election", by filing Form T1032 with your tax return for the relevant taxation year. Each year, you can elect to split anywhere between 0% and 50% of your eligible pension income for the year with your spouse, or not elect at all.

Life insurance premiums are normally not deductible in computing income because they are considered personal expenses.

However, there is an exception, where you (or your corporation) may deduct life insurance premiums. Typically, this will apply when you run a business and go to a bank or other financial institution for a loan. If your business does not have “hard” collateral, the institution may ask for collateral in the form of life insurance on your life (or that of another key employee in the business). Basically, you would assign the insurance policy to the institution as collateral on your loan.

General rules

The charitable donations tax credit applies to your gifts made to a “qualified donee”, which includes registered charities, universities and colleges, and federal, provincial and municipal governments (as well as certain other donees, including registered journalism organizations as of this year). The federal credit equals the total of:

  • 15% of the first $200 of donations made in the year;
  • 33% of additional donations, to the extent you are in the top tax bracket by having taxable income exceeding $214,368, and
  • 29% on donations over $200 that don't qualify for the 33% rate above.

When a person makes a gift or donation of property other than cash, the person is normally deemed to receive proceeds of disposition equal to the fair market value of the property. This deeming rule can trigger a taxable capital gain or allowable capital loss, depending on whether the property is worth more or less than its cost.

However, taxable capital gains from the donation of most publicly-traded securities are deemed to be nil and therefore are not included in income. (Similarly, gains from donations of certified ecological property or cultural property are not included in income.)

A qualifying spousal trust can be used to defer tax when transferring property from one spouse to the trust in which the other spouse (or common-law partner) is a beneficiary. Normally, you can transfer property
into the spousal trust on a tax-free rollover basis. That is, the transfer takes place for proceeds equal to your tax cost of the property, and the trust takes over that same tax cost.

However, when your spouse, the beneficiary of the trust, dies, there is a deemed disposition of the trust properties at their fair market values. Also, the trust is deemed to have a taxation year-end on their death, with a new taxation year beginning immediately thereafter.

The Minister of Finance was scheduled to deliver the 2020 Federal Budget on March 30, 2020. However, due to concerns surrounding the COVID-19 virus, the House of Commons has been adjourned to at least April 20, 2020. As a result, the Budget will be delayed. As of the time of writing, a new Budget date had not been announced.

When you die, you are deemed to dispose of most of your properties for fair market value proceeds. The deemed disposition can generate capital gains or losses. The transferee who acquires the property as a consequence of your death gets the property with a deemed cost equal to that fair market value.

Although the transferee will typically be one of your heirs, in some cases it will simply be your estate. Thus, for example, if your property goes into your estate and the estate then sells the property, the estate may have a gain or loss, depending on its actual proceeds of disposition on the sale relative to its deemed cost on acquiring the property from you. The estate is a person (a trust) and a taxpayer for income tax purposes, and therefore must file a tax return if it owes tax.