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October 2015 Newsletter

General rules

A trust is a taxpayer under the Income Tax Act (“ITA”), and is deemed by the ITA to be an “individual”, so that it must file a tax return, subject to many exceptions to the tax rules that apply to individuals. There is a special return for a trust, the T3 return, along with relevant schedules. An estate (after a person’s death) is considered a trust for purposes of the ITA.

In many ways, a trust computes its income and taxable income in the same manner as other individuals. For example, it will determine its income from business or property, or taxable capital gains, using most of the same rules that apply to individuals. A trust’s tax payable is computed by applying the relevant tax rate to its taxable income.

Treatment of taxable dividends

If you receive a taxable dividend from a Canadian corporation, you must “gross up” the dividend by  a percentage and include that grossed-up amount in your income. However, you are then entitled to a dividend tax credit, which is roughly meant to credit you for tax paid at the corporate level on the income from which the dividend was paid.

The gross-up and dividend tax credit mechanism results in taxable dividends being subject to a lower tax rate in your hands than ordinary income.

For example, the highest marginal tax rate on “eligible dividends” (combined federal and provincial) is about 21 - 38%, depending on the province. The highest marginal rate for other dividends is about 30 - 46%. In contrast, the highest marginal tax rate on regular income ranges from about 40 - 54%.

General rule

If you are a shareholder of a corporation or “connected” with a shareholder of a corporation, and you receive a loan from the corporation, you may be required to include the entire principal amount of the loan in your income under the “shareholder loan” provisions of the Act. In most cases, you will be connected with a shareholder if you do not deal at arm’s length with the shareholder. In turn, you will not deal at arm’s length with a shareholder if you are “related” to the shareholder (as defined in the Act).

Obviously, the rule can be quite harsh. The basic intent of the rule is to prevent shareholders of private corporations from extracting funds tax-free from their corporations in the form of loans, which might not be repaid for a long time, if at all.

Losses from sports blog deductible as business losses

If you run a business that includes a personal element, you can deduct any business losses from all sources of income. On the other hand, if your activities do not constitute a business, any losses will normally be considered personal or without a source of income, which means they are not deductible.

In the recent Berger case, Howard Berger had been employed as a sports journalist on the Toronto “Fan 590” sport radio station. For about 20 years, he had two program slots each day, and developed a solid following for his hockey insights, particularly with respect to the Toronto Maple Leafs.