April 2018 Newsletter

The Federal government presented its annual budget on February 27, 2018. Some of the major tax announcements are summarized below.

  • Enhancement of the Working Income Tax Benefit, to be renamed the Canada Workers Benefit
  • Medical expense tax credit
  • Mineral exploration credit
  • Reporting requirements for trusts
  • Passive investment income of CCPC
  • Artificial losses and stop-loss rules
  • At-risk rule for limited partnerships
  • Re-assessment periods

There are some fairly onerous rules under the Income Tax Act that apply where a shareholder of a corporation receives a loan from the corporation.

The main rule provides that if you are a shareholder and receive a loan from the corporation, the full amount of the loan is included in your income (although it is deductible when repaid, as explained further below). Furthermore, the same general rule applies if a person “connected” with a shareholder of a corporation receives a loan from the corporation.

For these purposes, a person is connected with a shareholder if the person does not deal at arm’s length with, or is affiliated with, the shareholder. Generally, a person does not deal at arm’s length with a shareholder if the two persons are related for tax purposes, but also if they actually do not deal at arm's length (such as because they are acting in concert without separate interests). For example, if you are a shareholder of a private corporation and your child or spouse receives a loan from the corporation, the loan may be included in their income.

The “affiliated” concept is more complex, but it similarly captures certain relationships between closely-connected taxpayers.

Fortunately, there are some exceptions where the shareholder loan inclusion rule does not apply. The main exceptions are discussed below.

There are certain tax credits that you can claim when you support another individual and / or the other individual lives with you.

One credit is the spousal credit, which you may be able to claim if your spouse (or common-law partner) does not have a significant amount of income. The credit recognizes that you are likely supporting your spouse if he or she has income below a certain threshold. For 2018, the federal credit is 15% x ($11,809 minus your spouse’s net income). Thus, you get a credit only if your spouse’s net income is less than $11,809. If your spouse is dependent upon you because of a mental or physical infirmity, his or her net income threshold for these purposes is increased by $2,182 to $13,991. (These figures are indexed annually to inflation.)

Scheme to extract tax-free dividends from trust disallowed

Under the Income Tax act, a “reversionary trust” rule provides that a person who contributes property to a trust must include in income any income from the property, generally if the property may revert or be returned to the person.

Another rule, quite separate from the above rule, provides that a Canadian resident corporation can deduct dividends received from another Canadian corporation in computing its taxable income. In other words, inter-corporate dividends are normally allowed on a tax-free basis.