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Tag: CRA

Managing A MIC, a Mortgage Investment Corporation

The creation of a MIC is similar to other corporations in the method of organization, election of directors/officers and the faculty to appoint committees, hire employees, and issue shares. Generally, a MIC will authorize and issue several different classes of shares including common voting shares and preferred non-voting shares. All classes will have pari-passu rights to dividends, if any, and to participation on winding-up.Provincially licensed mortgage brokers/agents and administrators are typically accountable for the management of the MIC; this involves sourcing, originating, underwriting, acquiring and administering mortgages that would provide the greatest rate of return with the lowest possible risk. The mortgage portfolio is continuously managed with newly invested share capital and the proceeds from repaid and discharged mortgages are utilized to fund new mortgages. MICs typically include a Credit Review Committee of shareholders who are responsible for the review and approval or rejection of mortgage applications in the portfolio. This is to protect shareholders’ investments while remaining cognizant of current market conditions and any potential underlying risks. Since brokers gain commission from placing mortgages, they are restricted from acting as members of Credit Committees due to an obvious conflict of interest. At the end of every fiscal year, audits of a MIC’s annual financial statements must be made by an independent accounting firm.

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Everyone’s a “Builder”, but what does that mean in terms of HST?

For purposes below referring to a “house” includes a condo as well.  Did you know that CRA will consider you a “Builder” if:1)       You are an individual or corporation;And you own or co-own with others a house or piece of land without the primary or secondary intention to live in it;And you on your own or together with others contribute monies OR materials OR land OR services OR any combination thereof to the building or substantial renovation of a house;2)      OR You are an individual or corporation;And you enter into an agreement of purchase and sale to purchase a house while it is under construction and before it can be legally occupied without the primary or secondary intention to live in it;  (in this case legally occupied will include circumstances where condos although not yet registered have not yet reached occupancy)

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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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How Trusts are Taxed in Canada

Taxation of TrustsThe taxation of trusts and their beneficiaries are dealt with under Sections 104 to 108, inclusive, of the ITA. The fundamental principle with respect to taxation of trusts and estates is given in Subsection 104(2) of the ITA, which considers a trust or estate to be an “individual” for tax purposes. A trust (which includes estates) created by a will, also known as a testamentary trust, and the estate of a taxpayer who has died intestate are both treated, for tax purposes, as trusts. Consequently, inter vivos and testamentary trusts and estates are made distinct taxable entities. However, the estate of a deceased is separate and distinct from the deceased for tax purposes. The income of the deceased is taxable until the day of death and any income after that time is taxed separately as the estate’s income. An important and useful exception to this principle is given under ITA, s. 164(6), permitting the estate to transfer capital losses and terminal losses incurred during its first taxation year against the deceased’s income in the year of death. Considering that a trust or estate can own property or even carry on a business, it is subject to income tax on the taxable income derived from the property or earned from the business, including any taxable capital gain and recapture incurred on the sale of its capital or depreciable property.

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Filing Tax Returns for a Deceased Person

TAXATION AT DEATH AND PERSONAL TAX PLANNING Extension of Time for Filing ReturnsAlong with the extended deadline for the filing of the basic terminal return, there is a special deadline with respect to one of the elective T1 returns. This terminal return is needed when a qualifying spousal trust is created. There is no late filing penalty until 18 months after death (interest runs from normal deadlines) (ITA, s. 70(7)(a)). The personal representative is given time to determine whether or not, based on the notice of assessment, any additional tax saving could be introduced by identifying rights and things and declaring them as part of a separate return. Income Splitting and Non Arm’s Length DispositionsThough there are statutorily sanctioned breaks, much of estate planning can be regarded as an ongoing battle of wits between estate planners and those drafting tax legislation. There are two techniques, which the former engage in and the latter try to prevent: income splitting and

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When to File a Terminal Tax Return

The due date for the terminal return depends upon the date of the deceased’s death:1) For a death prior to November, the terminal return is due by the following April 30, or June 15th if the deceased had business income. The deadlines are the same for individuals alive throughout the tax year.2) For a death in November or December, the terminal return is due six months from death (ITA, s. 150(1)). There is also a specific rule in respect of the return for the year preceding the year of death, which the personal representative will often have to file if the deceased has been ill before death or has died early in the year.

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Taxation of an Estate as a Trust

Upon the death of a taxpayer, a T3 trust tax return is prepared, as well as a report of the income earned by the estate after the taxpayer’s death and before the distribution of the estate to beneficiaries are to be submitted.An estate cannot allocate its capital gains to its non-resident beneficiaries. Instead, they are to be taxed within the trust. In view of this, if the estate is immediately distributable, the estate could calculate its income, allocate all of the income to the beneficiaries (by issuing a T3 supplementary slip), take a deduction from its income of the amounts so allocated, and in the end file a return showing that there is no taxable income.It seems that the personal representative is required to file a return for income of the estate as a trust in situations where the trust generates income (ITA, s. 150(3); Income Tax Regulations, s. 204(1)). The administrative policy of the CRA is not to insist on the trust to file a return in circumstances when:

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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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