ITA Archives - Levy Zavet Law

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are transferred or annuitized.In the case of Tax Free Savings Accounts (TFSA), the dividends earned are tax-free when withdrawn.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

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.

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

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.

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:

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.

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

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.

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),

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