July 2015 Newsletter

Income splitting among family members can be beneficial largely because of the graduated tax rates used in our income tax system. For federal income tax purposes, we have four tax brackets: the lowest bracket of 15% applies up to taxable income of $44,701, while the top tax bracket of 29% applies to taxable income over $138,586 (2015 amounts).  All provinces similarly have graduated tax rates (Alberta has a flat tax rate of 10%, but that it expected to change with the recent election of an NPD government). As a result, if you are in a lower tax bracket than your family members, the splitting of income can subject the income to a lower rate of tax. In addition, their tax credits can further reduce tax payable on the split income.

Where a Canadian corporation receives a dividend from another Canadian corporation, the dividend is included in the recipient corporation’s income but is normally deducted from income in computing its taxable income. In other words, inter-corporate dividends generally pass from one corporation to another corporation on a tax-free basis.

The rationale for this treatment is that dividends are paid out of after-tax income, and taxing the dividend in the hands of the recipient corporation would constitute double taxation. For example, if you own a parent corporation that owns a subsidiary corporation, business income earned by the subsidiary is subject to tax. If the subsidiary paid a dividend to your parent corporation and it was taxable, there would be double tax. In the case of multi-tiered corporate structures (e.g. your subsidiary owns another subsidiary, and perhaps that other subsidiary owns yet another subsidiary), there could be triple tax, or quadruple taxation, or worse.

The intent of the “superficial loss” rules is to prevent you from claiming a loss if you sell property at a loss and reacquire it within a specified period. Basically, the government doesn’t want you to dump your loss properties, use the capital losses to offset capital gains, and then repurchase the loss properties within the specified period. More particularly, the superficial loss rules apply in the following circumstances:

Re-zoning costs deductible from rental income

In the recent Jennings case, the taxpayers purchased a rental property in Ottawa with three rental units. When they purchased the property, they assumed that the property was properly zoned for rental purposes.

However, six years later the City of Ottawa informed the taxpayers that the property was not zoned for three rental units. The taxpayers applied for re-zoning of the property and were allowed to rent it out while the decision was made. The taxpayers claimed a deduction for the application fees and fees paid to a consultant who helped with the application.  Re-zoning was eventually allowed for two rental units.