In our Tax Group at BrazeauSeller.LLP we try to keep up with the latest developments from Finance, Canada Revenue Agency (CRA) and the Courts. Here are a few items of interest which have caught my eye over the last little while.
Changes to the Dividend Tax Credit - Back on March 21, 2013, Minister of Finance Jim Flaherty handed down his Budget for 2013. The Budget proposed a reduction to the dividend tax credit on non-eligible dividends. As a result there will be just under a 2% increase in the effective dividend rate on these dividends. In Ontario for investment income we will now have a system of ‘dis- integration’ which means that the total tax cost of earning investment income in a corporation is greater than earning it personally. One consequence is that the use of investment holding companies for probate fee reduction and estate planning purposes must be carefully analyzed to ensure that the benefits outweigh the costs. When all of the factors are considered, we continue to view the investment holding company strategy as an effective estate planning tool in the right circumstances.
The relative good news for business owners is that active business income earned in a corporation continues to get preferential treatment in Ontario versus income earned personally. While the spread has shrunk by 2% there is still nearly a 1 1/2% advantage. Of course if you factor in the tax deferral opportunities on the reinvestment of income earned in a corporation, the benefits become even greater. It is worth noting that Ontario is one of only four provinces where the tax rate spread advantage is still available.
CRA speaks out on interest deductibility - In a Technical Interpretation several months ago, CRA was asked to comment on the apparent inconsistencies in two leading Supreme Court of Canada cases on the subject; Singleton and Lipson. The basic principle of interest deductibility is that the funds must be borrowed in order to earn income, or to acquire property for the purpose of earning income. Both of these cases involved a series of transactions which included borrowing funds and both income-producing and non-income-producing uses. In Singleton the Court allowed the deductions. The distinction in Lipson is that the taxpayer tried to use the attribution rules to claim the interest deductibility for himself on a portion of the mortgage interest payable by his wife. In that case, the Court applied GAAR to disallow the deduction of the mortgage interest. A couple of takeaways from these two cases and CRA’s comments are firstly that a taxpayer is entitled to structure his or her affairs to be allowed to deduct interest on borrowed money, subject to the rules of the Act being followed, and secondly if the structuring of the transactions is tantamount to an abuse of the Act, CRA will challenge the transactions and the Courts may well listen. The old adage that pigs get fat and hogs get slaughtered is a good summary of CRA’s views on this issue.
Tax dispute time limits - Even though CRA can sometimes take what seems to be an inordinate amount of time to process assessments and reassessments, taxpayers are governed by a strict set of rules relating to Objections and Appeals. The taxpayer is allowed 90 days whether it be to file an Objection in the case of an assessment, or an Appeal to the Tax Court of Canada following a confirmation of assessment. Objections are reviewed internally within CRA whereas Appeals ultimately result in a hearing before the Tax Court of Canada if the matter cannot be resolved. It is critically important to start the dispute process immediately upon receipt of an assessment that is unfavorable. Given enough time it can be advantageous to request documentation through a Freedom of Information request. Furthermore, while there are limited rights to apply for an extension of time, the Courts are hesitant to grant such extensions except in the most extenuating circumstances.
Section 160 Assessments - From my own observation it seems that there are more and more of these coming down the pike from CRA. In simple terms, section 160 provides that where one person transfers property to another while that first person owes taxes, the second person can be held liable for the taxes owing up to the value of the property received. CRA takes a very liberal stance on the meaning of the term “property transfer”. For example, if the tax debtor continues to contribute to the household expenses, including the mortgage, this can be viewed by CRA as a property transfer sufficient to invoke section 160. We have also seen CRA take a very aggressive position on the value of the property transferred and force the taxpayers to bring evidence of lower values and/or assumed liabilities to bring section 160 exposure down. In other examples, we have come across section 160 challenges in circumstances where it appears that the beneficial ownership of the property never changed.
In order to avoid the reach of section 160 the best approach is not to transfer property after the tax liability arises. Failing that, it is important to document all aspects of any transaction between non-arm's-length parties where one of them has a tax liability. Most importantly any consideration given in exchange for the transfer property should be accurately recorded. Further, any evidence of the value of property transferred should also be documented. If a person does get hit with a section 160 assessment it is important to take it seriously. Far too many times we see taxpayers bury their heads in the sand which accomplishes nothing other than to lead to clogged ears. Often with proper guidance and advice these matters can be resolved.
Harold Feder is a partner with the law firm of BrazeauSeller.LLP. He practices in the areas of tax and estate planning for individuals and business owners. Harold can be reached at 613-237-4000 ext. 242 or at email@example.com. For more information about Harold, please visit www.brazeauseller.com.