income tax act Archives - Levy Zavet Law

A MIC’s Specified Shareholder, Related Parties and Prohibited RRSP Investment Rules

The Question being asked is a brother or sister of a shareholder of a mortgage investment corporation (MIC) a specified shareholder (To qualify as a MIC for purposes of the Act, a corporation must, throughout the taxation year, meet the conditions in subsection 130.1(6) of the Act. Paragraph 130.1(6)(d) of the Act requires that the number of shareholders of the corporation be not less than 20 and that no one shareholder hold, directly or indirectly, more than 25% of the issued shares of any class of the capital stock of the corporation. However, subsection 130.1(8) of the Act provides an exception which deems the corporation to have complied with paragraph 130.1(6)(d) of the Act throughout the first taxation year in which it carries on business if the test in paragraph 130.1(6)(d) of the Act is met on the last day of its first taxation year.) for purposes of the definition of MIC in 130.1(6)? For purposes of determining if an RRSP annuitant has a significant interest in an investment, for purposes of the RRSP prohibited investment rules, is, for example, the annuitant’s brother or sister a specified shareholder?

MIC Foreign Investors & Withholding Taxes on Dividends

The Quick and Simple is that Yes, withholding taxes (usually 25% of gross amount unless subject to a tax treaty with the resident country of the payee) do apply on Dividends paid out by a Mortgage Investment Corporation (MIC), even though they are Dividends for all intensive purposes under the Canadian Income Tax Act (dividends do not normally call for a withholding of tax when paid to non-residents). The latest tax ruling (here is the link: http://taxinterpretations.com/?p=20952) specifically outlines the following reasons and expected interpretations under the Canadian Income Tax Act regarding paying out dividends to foreign investors in a Mortgage Investment Corporation (MIC):”Principal Issues: Whether a favourable ruling could be issued that the deemed interest payments paid to non-resident shareholders of a MIC would not fall within the meaning of PDI such that the payments would be exempt from Part XIII tax.Position: We were unable to provide a favourable ruling.

Taxation of a MIC, a Mortgage Investment Corporation

The MIC itself will not pay income tax so long as the profits are flowed through to the shareholders and taxed in their hands. This is advantageous to an investor who has purchased MIC shares through a self-directed registered retirement savings plan (RRSP) or a self-directed registered retirement income fund (RRIF) as the tax is deferred until the funds are transferred or annuitized.In the case of Tax Free Savings Accounts (TFSA), the dividends earned are tax-free when withdrawn. Although taxable dividends received from the MIC are considered interest income, they do not qualify for any gross-up or dividend tax credit and are subject to full income inclusion by the shareholder (ITA 130.1 (2) and (3)). Although fraudulent occurrences are uncommon since MICs must produce audited financial statements each year, an investor can research to see if the MIC is subject to any lawsuits by reviewing its yearly financial

MICs: The Technical Aspects of a Mortgage Investment Corporation

TYPE OF ENTITY FOR A MORTGAGE INVESTMENT CORPORATIONA Canadian Corporation throughout the taxation year where its business only undertakes to invest its funds, and thereafter qualifies as a MIC, is deemed to be a public corporation under the ITA, and therefore must have its financials audited. Depending on which province your MIC is registered, it will have to comply with securities legislation in that province;Depending on which province your shareholders or investors are, it will have to comply with securities legislation in that province;TYPE OF ACTIVITY & INVESTMENT/ASSET BASEMortgages secured against real estate in CanadaMortgagors can be individuals or corporateMortgagors can be Canadian non-residents

ESTATES & NFP: Income Tax and Family Law considerations at death

Income Taxes at DeathClaims arising on the death of a spouse are not many, nor is there much jurisprudence dealing therewith. But claims arising on marriage breakdown are not uncommon and a frequently litigated issue is whether, for the purpose of computing a spouse’s Net Family Property (NFP), property owned by him or her should be valued at its after tax amount in the spouse’s hands. For a time after the enactment of the Family Law Act (FLA), cases were all over the place on this point, some suggesting that income tax costs of disposition should be taken into account (with or without a discount for the likelihood of the disposition taking place relatively soon), while others suggested that in the absence of a clear indication that property would be sold by the owner spouse, no tax costs should be taken into account on the grounds that such a calculation was too speculative.When the valuation date is one day before the death of the deceased spouse, the argument that income tax costs should be taken into account is more compelling than in the case of marriage breakdown. As the Income Tax Act (ITA) deems that the deceased spouse immediately before death:

TRUSTS & ESTATES: How your Beneficiaries are taxed

Taxation of BeneficiariesUnder subsection 104(13) of the Canadian Income Tax Act (“ITA”), the income of a trust or estate that is paid or payable to a beneficiary is taxed in the hands of that beneficiary. In order to avoid double taxation, the trust or estate is allowed a deduction for an equivalent amount. This amount is considered to be payable to a beneficiary when the beneficiary is entitled in that year to enforce payment thereof, ITA, subsection 104(24). One reason for not paying is that the beneficiary has not attained a specific age and where the trust is not a discretionary trust. In addition, subsection 104(18) states that the income is to be considered payable to the minor, thereby allowing a deduction to the trust and an income inclusion to the minor.In view of this, a beneficiary will be required to pay tax on trust income that is not actually received so long as he or she has a legally enforceable right to the income. Of course, no tax should be imposed when he or she actually receives income that has already been notionally included in his or her income in a prior year, since it was payable to him or her. To this effect, subsection 104(13) rules that this income can be subsequently paid to the beneficiary tax free.

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.

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.

Trusts, Trustees and Estate Planning

What is a Trust?The word “trust” has not been defined in the Income Tax Act (ITA), nor is there any definitive guideline to establish whether or not a trust exists. The concept of trust is derived from the English common law and has been defined in various ways by different authors. Generally, a trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he or she has control (the trust property) for the benefit of persons, who are called the beneficiaries (also known as “cestuis que trust”). The creator of the trust is usually known as the settlor. Unlike a corporation, a trust is not a legal entity, it is a relationship between the trustees and the beneficiaries. A trust is the separation of legal and beneficial ownership of property. Thus an individual could act in more than one capacity, that is, as a settlor, a trustee and/or a beneficiary of the trust.

Estate Tax Planning: RRSPs and Rollovers

Registered Retirement Savings Plans (RRSPs)Like non-depreciable capital property and depreciable capital property, a spousal rollover is available for RRSPs. Money directly received by the spouse (as opposed to the estate of the taxpayer) by way of beneficiary designation is deemed to be income to the spouse and not the deceased. It is then possible for the taxpayer’s spouse to either include the proceeds of the RRSP in his or her income or, more likely, purchase an RRSP in his or her own name with the proceeds and thereby continue the tax deferral (ITA, s. 60(1)).The surviving spouse should make sure to make the RRSP contribution in, or in respect of, the same year that the income is deemed to have been received by redemption. Supposing that the death occurs in November and redemption occurs in December, a spouse would like to make the contribution by February 28 in the next year. When the proceeds of an RRSP are receivable by an estate, the estate and the spouse may jointly elect that the amounts are deemed as received by the spouse, thereby allowing the tax deferral to be preserved (ITA, ss. 146(8.2)(b),

Tag: income tax act