April 2016 Newsletter

Under recent changes to the charitable donation rules relating to death, an individual can claim a tax credit for a donation made under the individual’s will or by the individual’s estate in the year of death or the previous year. Alternatively, the estate can claim the credit in the year it actually makes the gift or in any earlier year of the estate. The changes took effect as of the beginning of 2016.

For these purposes, the estate must be a “graduated rate estate”, generally meaning an estate during the first 36 months after death (certain other criteria apply).

Draft amendment released by the Department of Finance on January 15, 2016 will extend the 36-month period to 60 months after death for the purposes of the individual’s credit in the year of death or the preceding year (the estate must still meet the other criteria for a graduated rate estate). This amendment, once enacted, will apply retroactively to the beginning of 2016.

General rules

If you receive a taxable dividend from a Canadian corporation, you will normally be entitled to the dividend tax credit (“DTC”) in respect of the dividend. The purpose of the DTC, along with the gross-up mechanism discussed below, is to provide you with a credit that reflects the income tax presumed to have been paid by the corporation on the income from which the dividend was paid.

In other words, because the dividend is paid out of the corporation’s after-tax income, the DTC is meant to prevent double taxation.

There are two sets of DTC and gross-up rates, depending on the type of dividend. It will be either an "eligible dividend" or a non-eligible dividend.

Computation of income or loss for partner

A partnership is a relationship between persons (i.e., partners) carrying on business in common. A partnership is not a person under the Income tax Act and therefore does not pay tax. Instead, the income or loss of the partnership is computed on a notional basis, and each partner then includes their share of the income or loss of the partnership.

In general terms, the amount and character of the income or loss (e.g. business income, royalties, taxable capital gains) flows out to each partner. The partner’s share of the income is normally determined under the applicable partnership agreement or other legal instrument that sets out the rights of the partners. Each partner then reports the income or loss on the partner’s individual tax return for the year.

If you receive a loan from employer “because of your office or employment” with no or low interest, an imputed interest rule in the Income Tax Act will generally apply to include an imputed interest benefit in your income. For these purposes, the loan will be deemed to be received by you because of your office or employment if it is reasonable to conclude that, but for your employment, either the terms of the loan would have been different or the loan would not have been received. (If you are, or are related to, a significant shareholder in the company, the CRA will normally say that the shareholder-benefit rules apply and these rules do not.)

General requirements

If you dispose of a capital property and acquire a replacement property within a set time period, you may be able to defer part or all of the capital gain that would otherwise be recognized on the disposition. Similarly, if the property is depreciable property, you can defer the recognition of any “recapture”, which is an amount in excess of the undepreciated capital cost of the property.

The time period for the acquisition of the replacement property depends on the type of disposition:

  • For voluntary dispositions, you must normally acquire the replacement property within 12 months after the end of the taxation year in which the former property was disposed of;
  • For involuntary dispositions, the replacement period is 24 months after the year of the disposition. An involuntary disposition includes a destruction or expropriation of the former property where you receive compensation, such as insurance proceeds or expropriation compensation from a government).

Annual lump sum spousal support was deductible

In order for spousal support payments to be deductible for the payer, the payments must normally be payable on a periodic basis (there are other requirements). A lump sum is often not deductible.

In the recent Ken Blue case, the taxpayer and his spouse agreed that the taxpayer would pay her $1,000 per month of spousal support for five years. They subsequently agreed that the taxpayer could pay her a lump sum of $12,000 at the end of each year in full satisfaction of the original amounts. The taxpayer attempted to deduct the $12,000 payment in the year at issue. The CRA denied the deduction on the grounds that the $12,000 annual lump sums were not periodic in nature but rather in the nature of a capital non-deductible lump sum.