February 2018 Newsletter

As noted near the end of this letter, the government recently announced the prescribed interest rates that apply for the first quarter of 2018. The basic prescribed rate remains at 1%, where it has been since July 2009 (except for one quarter in 2013). The low 1% rate makes certain tax planning techniques particularly attractive.

Interest-free employee loans

An interest-free loan from your employer will subject you to an imputed interest benefit that is included in your income. The benefit is based on the prescribed rate of interest, so a $100,000 interest-free loan at a 1% prescribed interest rate throughout a taxation year would mean only a $1,000 income inclusion for the year. However, if the prescribed rate goes up during the course of the loan, the benefit would increase accordingly.

There are various income tax restrictions when control of a corporation is acquired. Most of the restrictions are meant to prevent the shifting of losses or other tax attributes after an arm’s length acquisition of the corporation ("loss trading", where someone buys a corporation and moves a profitable business into it in order to benefit from its loss carryforwards).

The main rules and restrictions include:

Non-capital losses

If you have a loss from a source such as a business or property, it will automatically offset income from another source in the same taxation year. However, your income cannot be negative. Therefore, your losses from sources in excess of your positive income from sources (“non-capital loss”) cannot be used in that year.

However, such a non-capital loss can be carried back 3 years, or forward 20 years (for losses from 2006 and later years), to offset all other sources of income for those years.

If you carry on business and receive income in a year in respect of goods or services that will be delivered or rendered after the year, or income that is not otherwise earned in the year, you must nonetheless include the income in that year for tax purposes.

However, you are allowed an optional reserve to offset the inclusion in the year. The allowable reserve is basically the amount of income that is not earned in that year. The reserve is added back into income in the next year, and another reserve may be claimed to the extent of the income previously included that is still unearned. The process can continue until all of the income is earned, e.g. when all of the goods are delivered or the services are rendered.

The government recently announced the 2018 rates that will apply for the purposes of determining taxable automobile benefits for employees, and the maximum amounts of deductible automobile expenses.

The maximum tax-exempt car allowance deductible for employers for allowances paid to their employees for work purposes is increased by 1 cent from the 2017 amount to 55 cents per kilometre for the first 5,000 kilometres driven, and to 49 cents per kilometre for each additional kilometre driven during the year. For the Northwest Territories, Nunavut and Yukon, the maximum deductible tax-exempt allowance is 4 cents higher (59 cents per kilometre for the first 5,000 kilometres driven, and 53 cents per kilometre above that).

The Federal government recently released the prescribed interest rates that apply for the first quarter of 2018. These rates have remained constant for several years now, owing to the low interest rate environment. The rates are the same as the previous quarter.

Bookkeeping error meant no shareholder benefit

In the recent Chaplin case, the taxpayer was a 50% shareholder in a corporation (Triventa) Ms. Chaplin brought a legal action against the other 50% shareholder. She incurred significant legal fees in the dispute, including legal fees to document some of the corporate history that was necessary to determine the ownership of the corporation.

Four years after the lawsuit was started, the corporation Triventa recorded the legal fees as if it had actually paid them, and added a corresponding amount to Ms. Chaplin shareholder loan account. Based largely on those corporate records, the CRA assessed the taxpayer, adding a shareholder benefit in her income.