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Tag Archive for Income Tax Act

Canada Tax: Capitalization Of Development Cost Under The Income Tax Act

During the development phase or period of construction, there are many costs that are incurred. The majority of these expenditures are added to the capital cost of property or to the cost of inventory.

Soft costs do not have to be capitalized once the construction is complete or on the day that the building is substantially (at least 90%) used for its intended purpose. An occupancy certificate or completion certificate issued by the municipal building department is sufficient evidence that construction is complete. Read more

Formula For Success: Tax = Money X Politics

The Income Tax Act (ITA) is a lot like those word problems we all remember from grade school math. The word problem is a story told in numbers. Tax is a story told in numbers but the characters in the story are real life politicians and voters.

Let us take a humorous approach and give a real life example. Imagine you are a politician looking to get re-elected. You have the power to change the ITA because you currently hold office. You decide to change the ITA to encourage voters to vote for you. Let’s say you want to get young families to vote for you. You introduce a new tax credit that only young families can use. The tax credit gives a tax refund to families with children in registered sports activities. The formula in your head is: Read more

Tax Rules For Bad Debts On A Balance Sheet

Grant Gilmour, balance sheets, canada, tax

How do income tax rules treat bad debts?

Facts:

There are two provisions in the Income Tax Act (ITA) for bad debts.

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Personal Services Provided By U.S. Person Coming To Canada

Larry Stolberg

Similiar to the U.S. rules, Canada may tax personal services provided in Canada by U.S. persons who are not residents of Canada for income tax purposes. The provisions governing this are regulations 102, 105 and section 115 of the Income Tax Act (‘ITA”).

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Borrowing To Redeem Shares Or Pay Dividends

Larry Stolberg

It is my understanding that the Canada Revenue Agency (“CRA” Canada) has not changed it’s position on the deductibility on interest incurred on borrowing to fund the redemption of shares or the payment of dividends.

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Act Immediately In Filing Your Canadian Notice Of Objection

Larry Stolberg

Taxpayers who do not agree with their notice of assessments or reassessments can file a notice of objection, appealing the Minister’s decision. Generally, one would first to go the appeals division as opposed immediately to Tax Court. Sometimes we file a T1 adjustment form where the Ministers’ adjustments are simply based on incorrect information. However, where there is a misinterpretation of the facts or it is a grey area, the appeals process is the best route. The appeal process also stops the tax collection process but still with arrears interest accruing on the account until the matter is resolved.

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Small Business Inter-Corporate Dividends

Larry Stolberg

Revisions to Section 55 of the Income Tax Act (“ITA”) may prevent the tax-free payment of inter-corporate dividends within a related corporate group.

With the exception of Part IV tax where applicable, the related party exemption per S55(3)(a) will no longer be available to allow cash dividends say paid from Opco to Holdco unless there is safe income in the payor corporation at the time of the dividend payment.

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Canada-US Cross Border Tax Issues In Connection With Employee Stock Options

Canada and the US both tax employees who receive benefits from options they are granted to acquire shares in their employer or a related entity. This article will focus on the Canadian tax implication of employee stock options (“ESO”), and how these rules apply in certain Canada-US cross-border situations.

As a general rule, stock options benefits are taxed under section 7 of the Income Tax Act (“the Act”). No taxation results at the time that the ESO is granted-rather taxation results at the time the ESO is exercised. The amount taxable will be equal to the excess of the fair market of the stock at that time over the exercise price.

In cases where the ESO was not “in the money” at the time of grant (i.e. exercise price no Read more

The Tax Efficient Way For Foreign Corporations To Acquire Canadian Corporations

Envision a situation where a foreign corporation (“Forco”) buys all of the shares of a private Canadian corporation (“Canco”) for $10 million.

What happens if Canco generates profits, and Forco would like to use those profits to recover the $10 million cost of its investment in Canco?

Can Forco just take funds from Canco up to the amount of that cost without paying any Canadian withholding tax? It should be able to, since it is just trying to recover its cost, right?

Unfortunately, that is not the case. Any dividends that Canco pays to Forco will be subject to Read more

The Basics of Offshore Tax Planning For Canadian Corporations – Part 10

Canada Revenue Agency Reporting Requirements

A Canco which controls a Forco will have an obligation to submit certain special returns to the Canada Revenue Agency annually.

Failure to file such returns on a timely basis will expose Canco to significant penalties.

Form T1134

Any Canadian resident, whether a corporation or individual, with respect to which there is a “foreign affiliate” (“FA”) in a taxation year, must file form T1134 within 15 months after the end of that year with the CRA. An exception applies in connection with “dormant” FAs. Read more

The Basics of Offshore Tax Planning For Canadian Corporations – Part 9

Techniques for Minimizing Tax on the Sale of Forco Shares

In many cases, Forco will not be saleable by Canco as a stand-alone entity. Its value is strictly tied in to functions it performs for Canco’s corporate group.

However, there may be cases where Forco has value, and is saleable, on its own. This might particularly be the case if it owns valuable IP.

This article will discuss three techniques that may be used to eliminate or minimize the tax that would otherwise be payable by Canco on any gain resulting from the sale of Forco shares. Read more

The Basics of Offshore Tax Planning For Canadian Corporations – Part 8

The New Upstream Loan Rules

A Canco that will be using one or more Forcos as part of its offshore tax planning, should be aware of the new upstream loan rules.

Before the introduction of these rules, there were no Canadian tax consequences if Canco received a loan from Forco, even if that loan remained outstanding indefinitely.

Accordingly, if a dividend payment from Forco to Canco would have been taxable, because it was not derived from “exempt surplus”, Canco could, instead, just borrow money from Forco without paying any tax. This would be particularly relevant in connection with Forcos that operate in countries with which Canada has no tax treaty or tax information exchange Read more

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