January 2018 Newsletter

In general terms, income sprinkling occurs where a private corporation pays out dividends to shareholders who are not necessarily involved in the business of the corporation, or where an individual receives income from the provision of goods or services through a trust or partnership to a “related business” carried on by a related person. The proposals will take effect retroactive to January 1, 2018, even though they will not be passed by Parliament for some time (and conceivably could be held up by the Senate). However, the proposals were amended significantly on December 13, 2017; the amendments are meant to simplify and improve the rules.

In the July 18, 2017 income tax proposals dealing with small business tax issues (see above), one of the main proposed changes relates to the taxation of passive investment income earned by a Canadian-controlled private corporation (“CCPC”) by using its after-tax business income. Under current rules, there is a tax deferral advantage because the active business tax rate for a CCPC (between 11% and 15% depending on the province) is significantly lower than the top marginal tax rate that could apply to the individual shareholder (50% or higher). Even though the integration system of taxing dividends imposes tax on the individual receiving dividends so that the total tax rate is the same, the initial lower corporate tax rate leaves a CCPC with much more income that can be invested until it is eventually paid out.

If you realize a foreign exchange (FX) gain or incur a FX loss, it is normally treated as a capital gain or capital loss (unless, for example, you are in the business of buying and selling foreign currency). There are at least three ways in which you can have a FX currency gain or loss.

First, if you buy and later sell a foreign currency, both the “cost” and “proceeds” of the currency must be converted into and denominated in Canadian dollars. If the foreign currency has fluctuated against the Canadian dollar between the time of your purchase and sale, there will be an FX gain or loss.

If you are a Canadian resident, you are normally eligible for the principal residence exemption if you have a gain on the sale of your home.

The Income Tax Act provides that the portion of the gain that is exempt from tax is:

Most trusts are subject to tax on their income at a flat rate equal to the highest marginal personal rate of tax. For example, if you set up a trust in Ontario during your lifetime and it earns and retains $100,000 of taxable income, it will be liable to pay about 53% tax on that amount.

Most trusts must also have a taxation year that is the calendar year (ending December 31).

One notable exception, where the high flat tax and the calendar year requirement do not apply, is a "graduated rate estate" (GRE). (An estate is treated as a trust for tax purposes.) A GRE is subject to tax at the same graduated tax rates that apply to individuals. A GRE can have any fiscal period as its taxation year, including an off-calendar year or the calendar year.

Cost of replacing parking lot roof deductible

A current expense is normally an expense that does not create significant value that endures into taxation years beyond the year of expenditure and is deductible in full in the year of expenditure.

Conversely, a capital expense is normally an expense that does create significant value that endures into later taxation years and are depreciable over time.