October 2020 Newsletter

In response to the COVID-19 pandemic, the federal government has provided various benefits and tax measures, including the Canada Emergency Response Benefit (“CERB”), the Canada Emergency Student Benefit (“CESB”), the Canada Recovery Benefit (“CRB”), the Canada Recovery Sickness Benefit (“CRSB”), and the Canada Recovery Caregiving Benefit (“CRCB”). If you received any of these benefits you must include the amount in your income. You will receive a T4A slip indicating the amount you must report on your tax return.

There are various tax restrictions that apply when “control” of a corporation or trust is acquired. Some of the major restrictions are:

  • Net capital losses cannot be carried forward to years after the acquisition of control or back to years before the acquisition. This is a major exception to the regular rule that normally allows a three-year carry-back and indefinite carry-forward of net capital losses.
  • Non-capital losses (e.g. business losses) can be carried forward or back, but only to the extent of income generated by the business that generated the losses, or a similar business (this is a very general summary of a complex rule).
  • Investment tax credits (e.g. for scientific and experimental research) are restricted unless the same or a similar business is carried on, along the same lines.
  • There is a deemed taxation year-end immediately before the acquisition of control, and a new taxation year begins immediate after the acquisition. This will typically result in at least one short “stub” taxation year ending upon the acquisition of control. The short stub year will accelerate the tax-filing date for the tax return for that short year and will require the pro-ration of certain deductions like capital cost allowance (tax depreciation).
  • All capital properties with accrued losses are written down to fair market value, resulting in capital losses in the taxation year ending upon the acquisition. As noted above, these losses cannot be carried forward to years beyond the acquisition of control. However, the corporation or trust can elect to trigger any accrued capital gains in the taxation year ending upon the acquisition, to the extent of the capital losses in that year, including those resulting from the write-down rule described above. The capital gains can be offset by those capital losses, and result in an increased adjusted cost base of the gain properties. The following is an example of the application of this rule:

If you own a debt instrument like a bond, term deposit, or even a bank account, you often receive interest at least once a year. Normally, you just report the interest on your tax return in the year that you receive it.

However, there are some debt instruments that do not pay interest annually. For example, you might purchase a zero-coupon bond or term deposit that pays all the interest upon maturity.

In these cases, you must report the interest income annually on an accrual basis. The general rule is that you report the accrued interest income in a taxation year that accrues to each “anniversary date” that ends in the taxation year. Each anniversary date is basically 12 months from the date of the issue and each 12-month period after that. Due to the 12-month rule, there typically will be a deferral of tax, as illustrated in the example.

There are various employment benefits that are taxable for employees. One such benefit occurs where an employee receives a no or low-interest loan from their employer, or more particularly, a loan with interest lower than the “prescribed rate” under the Income Tax Act.

The general rule provides that if you receive a loan from your employer, you will have a taxable benefit equal to the prescribed rate of interest on the principal amount of the loan, minus any interest you actually pay on the loan in the year or within 30 days after the year. (Right now the prescribed rate is just 1%.)

The interest calculations are rounded off without compounding.

If you have a loss from a business or a rental property in a taxation year, you can use the loss to offset other sources of income in the year.

For example, if I have $50,000 of employment income but also carry on a side business with a loss of $30,000, my income for tax purposes will be $20,000.

The “catch” is that the loss must be from a “source”.

Line of credit replaced other loan – is the interest deductible

Interest expense on a loan or debt is deductible for income tax purposes if the loan is used for the purpose of earning income from a business or property.

In addition, there is a rule that states that if you take out a new loan to repay a previous loan that was used to earn income from a business or property, interest on the new loan is deductible.