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Tag: Canada Revenue Agency

TRUSTS & ESTATES: Transfering assets to your spouse or children

Trusts and AttributionThe attribution rules for trusts, transferors, and so on are given in Subsections 74.1(1) and 74.2(2) of the Canadian Income Tax Act (“ITA”).  These rules are meant to attribute back to the transferor any income or capital gains generated from property transferred at less than fair market value consideration or for no consideration to a spouse of the transferor, as well as to attribute income, but not capital gains, on similar transfers to a non-arms length minor such as a child. Such rules apply in similar fashion to loans at less than fair market value interest. These rules are not applicable to the transferor to attribute any income, loss, taxable capital gains or allowable capital losses that relate to a period following the death of the transferor. Consequently, these rules are not applicable to a testamentary situation.

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Real Estate Law: Goods and Services Tax/Harmonized Sales Tax (GST/HST)

In the OREA standard form agreement (“OREA Agreement”), there is a blank space provided where it should be indicated whether taxes are “included in” or “in addition to” the purchase price. Generally in residential resale transactions, this space is completed with “included in”, but it is essential to be correct because even though a used-residential property is not subject to HST, if the property is commercial or has a commercial component, it would be subject to the tax.The problem often arises with commercial properties because sometimes the agreements are prepared on the wrong OREA form and the section for HST is overlooked as a formality.  As stated above, commercial properties and even mixed residential/commercial (although only the commercial part would be subject) are subject to the tax.   A commercial property can be a storefront, an office building, a condominium office or store, etc.  There are ways to off-set the HST payable by the purchaser however it is extremely important to be clear that the purchaser and seller are aware of the tax consequences and therefore understand whether the purchase price is “included in” or “in addition to”.  Having regard to this, if there is any doubt, advice should be sought from professionals with specific knowledge such as lawyers or accountants.

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Trusts and Estates: Different Types of Trusts in Canada

Classification of Trusts1. Testamentary TrustsThe Income Tax Act defines a testamentary trust as a trust or estate that is formed consequent to the death of a tax-paying individual (ITA, s. 108(1)). It can also be created under the terms of a will or by an order of a court made pursuant to dependants’ relief legislation. As compared to this, an inter vivos trust is defined in the ITA as a trust other than a testamentary trust.2. Inter Vivos TrustsFrom June 17, 1971, inter vivos trusts are taxed at the highest marginal rate, while testamentary trusts are subject to the graduated rates applicable to individuals. Ideally, it is possible for a taxpayer to establish a testamentary trust, to which property can be contributed after his or her death by someone other than the taxpayer. The testamentary trust so created could then take advantage of the graduated rates of tax. With a view to prevent such abuse, the definition of a testamentary trust was amended. Consequently, for taxation years commencing after November 12, 1981, the following trusts are excluded from qualifying as testamentary trusts, thereby being converted into inter vivos trusts taxable at the highest tax rate:

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The Taxation of Trusts: Understanding Rates of Tax

Rates of TaxUnder s. 117, ITA, a testamentary trust is subject to tax, at the same graduated rates as an individual, while the rate of tax payable by an inter vivos trust depends on the date the trust was established. Such trusts established after June 17, 1971 are subject to a flat rate of tax equal to the highest marginal tax rate applicable to individuals ITA, s. 122(1) and CRA, Interpretation Bulletin IT-406R2, “Tax Payable by an Inter Vivos Trust”.According to subsection 122(2), ITA, an inter vivos trust is taxed at the regular graduated rates, when the trust (a) was established before June 18, 1971; (b) was resident in Canada on June 18, 1971 and remained so without interruption thereafter until the end of the year; (c) did not carry on any active business in the year; (d) has not received any property by way of gift since June 18, 1971; (e) has not, after June 18, 1971, incurred (i) any debt or (ii) any other obligation to pay an amount, to, or guaranteed by, any person with whom any beneficiary of the trust was not dealing at arm’s length; and (f) has not received any property after December 17, 1999, where (i) the property was received as a result of a transfer from another trust, (ii) subsection (1) applied to a taxation year of the other trust that began before the property was so received, and (iii) no change in the beneficial ownership of the property resulted from the transfer.

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Taxation at Death: Using Rollovers to Defer Taxes

RolloversAccording to the Canadian Income Tax Act there are two circumstances under which death need not bring forth a deemed realization of non-depreciable capital property or depreciable capital property:1) Outright transfer to a spouse, or transfer to a qualifying spousal trust; and2) Intergenerational transfer of farm property.In these examples the transferee would acquire the property at the deceased’s tax cost. It allows a deferral, but not an elimination, of the capital gain (and recaptured depreciation) until an actual or deemed realization by the transferee takes place. This is preferred because taxes are deferred and can be properly planned for. With respect to RRSPs, outright transfers to spouses also can avoid a deemed disposition.Transfers

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The Liability of Personal Representatives in Estate Administration

Personal Liability of Personal RepresentativesThe purpose of the personal liability provision is to encourage personal representatives to ensure that they do not overlook their obligations, such as to file tax returns on behalf of an estate and to provide the CRA with a direct source for the payment of tax. Taking into account such provisions of the ITA, a prudent personal representative looking to avoid personal liability should settle the deceased taxpayer’s estate after the assessment and audit process of the CRA. Due to this, significant delays can occur before the estate was fully distributed. It is very difficult to administer an estate on this basis.As an alternative, many personal representatives assume the personal liability described above by making interim distributions and retain a reserve to meet and exceed anticipated taxes. They do not distribute the reserve until the clearance certificate is in hand. Otherwise, if the personal representative is on good terms with the beneficiaries (and considers them to be solvent), he or she may be prepared to distribute the entire estate prior to the receipt of a clearance certificate and to accept the undertaking of the beneficiaries to indemnify the personal representative to the extent that the personal representative is subsequently found to be liable for additional tax.

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How We’re Taxed when We Die

A pertinent question often asked in respect of taxation at death is: Would there be any estate taxes or succession duties? Strictly speaking, the answer is “no”. In Canada, there is generally no tax on wealth or the value of an inheritance; Canada instead taxes income. However, this is not always true for property held in other countries. For example, in the U.S., an estate tax is levied on the value of the capital of an estate. Therefore, Canadians owning assets with a U.S. situs (such as real estate and securities traded on U.S. exchanges) could be subject to U.S. estate taxes on the value of those assets. Despite the fact that Canada only taxes income, certain specific rules have the effect of casting the “income net” more widely in the year of death. However, there are several special concessionary rules applicable only to taxation at death.Creation of Two TaxpayersOn the death of a person, income earned or deemed to be earned between the end of the last taxation year and his or her death is included in his or her T1 tax return, due in the year of death. As it deals with the income earned between January 1 and the date of death, it is known as a “terminal” return. Furthermore, the day after the taxpayer’s death is the first day in the fiscal period of a new taxpayer, the estate of the

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INCOME TAX LAW: A Share Purchase vs. an Asset Purchase of an Incorporated Business

This article is attempting to illustrate the type of reasoning necessary in order to decide if an asset purchase or share purchase of an incorporated business is best.  As well as what short of spin-offs, butterflies or other divisive reorganizations for tax planning would be advantageous when purchasing a company that may have more than one location or subsidiaries etc… And then finally the process in preparing a request for an Advance Ruling from CRA and what the CRA looks for when providing you with an answer.

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INCOME TAX LAW: General Anti-Avoidance Rule

The GAAR:  Overriding, Overarching or Just Over?In most legal structures, rules and regulations tend to expressly or implicitly instruct or guide a person or any other legal entity for that matter, on how to conduct its affairs internally or externally (in regards to the public).  Further, with the passage of time, courts, regulatory bodies and the legislator have provided guiding principles, where necessary, on how to apply, effect and interpret these rules and regulations in accordance with the intent and purpose of their creators.  Much too often does it become difficult to distinguish doctrine from rule and

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THE NEW HST: What all Home Buyers are Asking!

As part of its provincial budget, the Ontario government chartered a bill on March 26, 2009 that will adopt a single sales tax system tagged as the Harmonized Sales Tax (HST). This will take effect on July 1, 2010. Effective this date, Ontario will facilitate a federally administered Harmonized Sales Tax (HST) that will apply to most purchases and transactions, including real estate. The HST will be carried out by the

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