Tax Archives - Levy Zavet Law

What If A Mortgage Goes Bad In A MIC? What are the Investment Benefits In A MIC?

Management of the MIC must be vigilant and selective with whom they lend to, and investors can inquire about whether the MIC in question will allow investments within various percentage brackets ranging from low to high risk. This option would provide investors with the opportunity to select an investment according to their level of risk (this option does exist with certain MICs). Also, investors that are researching potential involvement in MICs should be aware that there are some MICs in limited markets, such as smaller towns, that concentrate on specific industries. Considering the location, economy and possible market downturn is essential for investors to decide if they feel that risk is not an option.However the Benefits of Investing in a MIC include:

Securities Law & Regulations of a MIC, a Mortgage Investment Corporation

A “Trade” (i.e. selling shares to investors in this case) triggers the “Registration” requirement, even if the trade is not a “distribution”. Just because there is not a prospectus requirement does not mean there is no registration requirement to sell the shares to an investor. However, most prospectus exemptions will come with a registration exemption to sell the shares.Assembling a prospectus is usually not cost-effective for most MICs, hence raising funds through selling shares needs to fall under an exemption under securities law, which will depend more so in which province your shareholders are located. Thus, most MICs will distribute their shares based on an exemption catered to the province they intend to solicit investors/shareholders from. Common Prospectus Exemptions Include:Accredited Investor: Those investors who are sophisticated or deemed to be, such as institutions, governments, persons or companies who meet an income and asset test.“Private Issuer”, i.e. Closely-held Issuer Exemption: The shares are all subject to restrictions on transfer found in the Articles of Incorporation, and all the shares cannot be owned by more than 50 persons, not including employees, former employees, or corporate affiliates. The purchasers must be a director/officer/employee of the MIC or Affiliate of the MIC, or close family, friends and business

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.

Property Tax in Ontario: A Primer

One of the most contentious issues in real estate and property is how real property taxes are assessed and charged to the property owner, of course, it is only contentious when one’s property taxes are assessed at a higher rate than it should be.In Ontario, the Municipal Property Assessment Corporation (MPAC) is a non-profit corporation created by legislation and is governed mainly by the Assessment Act R.S.O. 1990, although it also governed by other legislation such as the Assessment Review Board Act R.S.O. 1990, and the Municipal Property Assessment Corporation Act, 1997. MPAC’s main duty is to evaluate properties in Ontario in order to assess their tax liability and to classify them for tax purposes as either residential, commercial, industrial, farm, etc. MPAC looks at many factors when assessing a property but most importantly the following: Sales of comparable properties; location; lot dimensions; living area; age of the property; and quality of construction. Other factors may include such things as improvements to the property and unique and key features of the property. Properties belonging to or being used as churches, cemeteries, public education, public hospitals, some non-profit organizations, conservation lands, and lands owned by governments are exempt from property tax.

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.

Utilizing Spousal Trusts for Estate Planning

If capital property of a taxpayer is transferred to a qualifying inter vivos spousal trust, s.73(1) of the ITA permits the property to be transferred at its adjusted cost base. This is also allowed in respect of its undepreciated capital cost where it is depreciable property of a prescribed class. Under subsection 73(1), the transferor can elect in his or her tax return, the year in which the property was transferred, to forego the rollover. In that event, s. 69 will apply to deem the transfer or gift to take place at fair market value.The requirements to qualify as an inter vivos spousal trust are the following:1) The transferor and the trust should be resident in Canada when the property is transferred to the trust;

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.

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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