Tag archives: Income Tax Act

Shareholder Loans: The Interplay of 80.4, 15(2) and 20(1)(j) of the Income Tax Act

Subject to certain exceptions, where a shareholder (other than a corporation resident in Canada) of a corporation is indebted to the corporation (a “Shareholder Loan”), the shareholder is deemed by subsection 80.4(2) to receive an interest benefit to the extent that the notional interest on the Shareholder Loan, calculated at the prescribed rate, exceeds the interest actually owing and paid. However, for a Shareholder Loan that was included in computing the income of a person under Part I of the Income Tax Act (for example under subsection 15(2)), paragraph 80.4(3)(b) provides that no subsection 80.4(2) interest benefit is … Continue Reading

Non-resident employees: withhold on worldwide income?

ITA regulation 102 requires employers to withhold tax on remuneration paid to non-resident employees who are employed in Canada. This requirement can be avoided by seeking a treaty-based waiver (regulation 102 waiver) or certification as a qualifying non-resident employer. However, often there is not sufficient time to do this before the employment is to begin, or there is a lack of awareness of the rules. Where the employer must withhold tax, should the amount be based on the non-resident employee’s Canadian income or worldwide income? Clarification from the CRA would be appreciated.

Specifically, regulation 102 imposes withholding on “any payment … Continue Reading

Excess cash, excess tax – what’s on your balance sheet?

Canadian federal income tax law provides numerous benefits to companies that engage in an “active business”. Whether a particular endeavour undertaken is an “active business” is, of course, a question of fact and depends on individual circumstances. Some scenarios are clearly those of an “active business”, such as the case of manufacturing and production, retail, mining, sales and shipping and receiving. Others are clearly more of a passive nature, such as merely owning real estate and collecting rent on the property, without any substantive management. Many could be considered somewhere in between.

When a company is in fact engaged in … Continue Reading

Private equity and Canadian partnerships: tax considerations

Canada continues to be an attractive market for private equity (“PE“) investors with recent transactions highlighting significant investments into Canadian real estate and energy infrastructure assets.

Partnerships (particularly, limited partnerships) continue to be a popular PE vehicle, providing a means of pooling and aggregating investment funds and allowing for income or losses to be “flowed-through” to its members for Canadian tax purposes, subject to certain exceptions.

However, the use of partnerships with non-resident investors in PE investments raises two particular issues.

Withholding Tax

Part XIII of the Income Tax Act (Canada) (the “Tax Act“), requires that … Continue Reading

Why have a document retention policy?

The current digital age has made it easier for companies to retain an enormous volume of documents – significantly more than a company could have afforded to keep before the advent of electronic record-keeping. In response, companies have sought to upgrade their IT systems to digitize their paper records and to allow for increased storage. These upgrades, however, are inadequate without the adoption of a comprehensive formal policy to guide a company’s record-keeping process.

Why have a document retention policy?

Besides general organization purposes, there are a few other good reasons why a company should adopt a document retention policy:… Continue Reading

Incoming legislation implements common reporting standards

On July 1, amendments to the Income Tax Act (Canada) implementing international common reporting standards (CRS) will come into force. The CRS regime is intended to facilitate the exchange of taxpayer information between governments. Financial institutions will be required to report financial information about individuals and entities not resident in Canada[1] to the Canada Revenue Agency (CRA), which will in turn share the information with the tax authorities in the individual or entity’s jurisdiction of residence.

Due diligence obligations

Under CRS, financial institutions in Canada will be required to conduct due diligence on all financial … Continue Reading

Getting the best (asset) deal: tax efficient purchase price allocations

The number one consideration for anyone buying or selling a business is price. But getting the best price is not just about the total cash value. How the purchase price is allocated across the various assets included in the deal has significant implications for the future tax liabilities of both purchasers and sellers. This article discusses some of the major considerations for purchasers and sellers in deciding how to allocate the purchase price in asset purchase agreements, and recent proposed changes to the tax treatment of goodwill which may alter the current allocation preferences of the purchaser and seller.

Inventory

Continue Reading

Avoiding tax traps: don’t forget about non-competition agreements

Non-competition agreements can be a valuable tool for purchasers who want to protect their investments in new businesses. However, non-competition agreements can have unintended and unexpected tax consequences, particularly to sellers who grant non-competition agreements to purchasers.

The Income Tax Act (Canada) (the Act) contains specific provisions regarding the taxation of “restrictive covenants”, a broadly defined term that includes, among other things, non-competition agreements, regardless of whether such agreements are legally enforceable.

Under section 56.4 of the Act, the portion of the purchase price allocated to the granting of a restrictive covenant (whether by the parties or as a … Continue Reading

LexBlog