Under the Auspices of the Quebec Order of Chartered Professional Accountants, I am pleased to provide a copy of the 2016-2017 Québec Budget Summary / 2016-2017-Résumé du budget du Québec. I will also place a link on the Tax Links Page, and they will remain there, along with future federal and Quebec budget summaries for future reference.
The favourable tax rules enjoyed by estates and testamentary trusts until now are almost dead. Major changes that were introduced in the 2014 federal budget are about to come into effect on January 1, 2016. Don’t be caught off guard.
Estate vs. Testamentary Trust
Until now, most of us have viewed a testamentary trust in basically the same way we would an estate. They both essentially were included in the definition of a “Testamentary Trust”, meaning a trust arising as a consequence of the death of an individual. As such, they were treated in similar fashion under the law, both benefiting from graduated tax rates and both able to have an off-calendar fiscal period for tax purposes.
But now, we must make a distinction between an estate and a testamentary trust.
A testamentary trust is generally a trust that is created by the will of the deceased person. Assets from the deceased’s estate are transferred to the trust for the benefit of named beneficiaries. These assets are then administered by designated trustees. Such a trust could go on for an indefinite period of time, depending on the terms of the trust.
On the other hand an estate is essentially the bundle of assets owned by an individual at the time of death, which is to be distributed by the liquidator to the beneficiaries pursuant to the will within a relatively short period of time. The CRA likes to refer to the “executor’s year”, implying that it should take a year or so to clear the estate and distribute the assets. In many cases it may take longer.
Elimination of Benefits to Testamentary Trusts
Now that we have our terms of reference, the first thing to note is that beginning in 2016, most testamentary trusts will no longer benefit from graduated tax rates, and they will have to switch to calendar taxation years. The only exception will be for “Qualified Disability Trusts”, which essentially is a testamentary trust with a beneficiary that qualifies for the disability tax credit.
There are no grandfathering rules. All existing testamentary trusts will have to cut off their taxation years on December 31, 2015. This could result in many trusts having two tax years in 2015. You should note that the due date for the first of these calendar taxation years will be March 30, 2016.
Furthermore, beginning in 2016, these trusts will:
- be subject to the highest marginal tax rates
- will have to make quarterly tax instalments
- will lose the $40,000 alternative minimum tax exemption
- will lose the ability to object to an assessment within one year (i.e. the 90 day deadline will apply)
- will lose the ability to transfer investment tax credits to its beneficiaries
- will lose the right to apply for a refund after the normal reassessment period
- may become subject to part XII.2 tax on certain types of income where non-resident beneficiaries exist
Graduated Rate Estates
On the other hand, estates may continue to benefit from graduated rates and off-calendar fiscal years, under certain conditions. Estates that meet the requirements will be known as “Graduated Rate Estates” (“GRE”).
A GRE will qualify only under the following conditions:
- no more than 36 months have passed since the death of the individual
- the estate otherwise meets the definition of a “Testamentary Trust” under the law
- the estate designates itself as a GRE in its tax return for the first taxation year ending after 2015
- the deceased individual’s social insurance number is provided in the tax return
- no other estate is designated as the GRE with respect to that individual.
Once 36 months has expired, the estate will no longer be a GRE and will become subject to the less favourable rules described above.
Charitable Donations by a GRE
Currently, a charitable gift made by an estate that was designated by the will of an individual is deemed to have been made by the deceased, and is not deductible within the estate.
Beginning in 2016, a GRE will benefit from new and more flexible rules regarding the claiming of charitable donations. If the estate is a GRE, then such donations may be claimed by:
- the deceased in the year of death or the preceding year
- the estate in the year in which the donation is made, or
- the estate in an earlier taxation year or subsequent 5 years.
Other more complex changes regarding testamentary trusts are coming into effect as well, but a detailed description of these is beyond the scope of this short summary. Briefly, the election to pay tax within a trust, notwithstanding that income is paid to beneficiaries, will be virtually eliminated, unless certain conditions apply.
Finally, for testamentary life interest trusts, such as spousal trusts, upon the death of the beneficiary, a year-end will occur, and any gains or income triggered upon death will be deemed to have been paid to the beneficiary’s estate, making it liable for the taxes on death. This may create a mismatch between the liability for taxes and the ownership of the assets in cases where trust capital is to be paid out to persons who are not beneficiaries of the deceased beneficiary’s estate. A common circumstance where this issue could become a problem is in a case such as a second marriage where children from the first marriage are to receive the capital of a spousal trust upon the death of the beneficiary spouse.
BUSKIN’ RELEASED TODAY!
Hello everyone. I know I usually post on tax issues on this website, but today I’d like to share with you something I’ve been working on for the last 2 years. I’ve just released my new CD, entitled BUSKIN’. It contains 10 songs of original material and it is now available at iTunes, Amazon, CDBaby and many other music sites.
Please take the time to listen to the first single released last month, entitled One More Talk.
Thanks for listening, and I hope you enjoy the album!!
Under the Auspices of the Order of Chartered Professional Accountants of Canada, I am pleased to provide a summary of 2015 Federal budget summary / 2015 Résumé du budget fédéral. I will also place a link on the Tax Links Page, and it will remain there, along with future federal and Quebec budget summaries for future reference.
Under the Auspices of the Quebec Order of Chartered Professional Accountants, I am pleased to provide a copy of the 2015-2016 Québec Budget Summary / 2015-2016-Résumé du budget du Québec / I will also place a link on the Tax Links Page, and they will remain there, along with future federal and Quebec budget summaries for future reference.
The sale of real property in Quebec is never something that should be undertaken without regard to all the tax consequences. There are income tax issues, as well as sales taxes that should be considered. Furthermore, you should never ignore the application of Land Transfer taxes on any transaction.
Land Transfer taxes are imposed under the Act Respecting Duties on Transfers of Immoveables (“the Act”) and are invoiced to the purchaser by the relevant municipality after the registration of the deed of transfer. The rates range from 0.5% to 1.5%, but Montreal’s highest rate is 2%, applying on transfers of more than $500,000.
The question I most often have to deal with in my practice is whether any of the exemptions for land transfer taxes will apply to a given transaction. Transfers among parents and children and between spouses are generally exempt under section 20 of the Act. Transfers among siblings are not exempt.
Exemptions involving corporations are found in section 19 of the Act, and are applicable, inter alia, under the following situations:
- where the transferee is a new corporation resulting from the amalgamation of several corporations;
- where the transfer is made by an individual to a corporation of which at least 90% of the issued voting stock is owned by such transferor immediately after the transfer;
- where the transfer is made by a corporation to an individual, if such person is, immediately before the transfer, the owner of at least 90% of the voting stock of the transferor;
- where the transfer is made between two closely related corporations. For the purposes of this exemption, two corporations are closely related where there is at least a 90% ownership of voting shares between the two corporations or their subsidiaries. For example, this opens the door for exemptions between sister corporations where they are both owned by a single holding company.
Notably, sister corporations owned by individual shareholders would not qualify for the exemption.
There is a provision directly relating to the above that is (weirdly) not contained in the above Act, but rather in section 1129.29 the Quebec Taxation Act. Essentially, it is an anti-avoidance provision that prevents taxpayers from simply issuing 90% voting shares to the transferor of property to avoid the land transfer taxes and then immediately thereafter extinguishing the shares.
It provides that any time control has been acquired within 24 months after the transfer of property to a corporation, and where it may reasonably be considered that the property was transferred in contemplation of the acquisition of control , then the corporation will be liable for 125% of the land transfer taxes that would have been payable.
It should be noted that there is no exemption in the Act for transfers to partnerships. However, in the case of Statour v. Bromont, the courts went beyond the precise letter of the law. This case involved the transfer of property between two partnerships, both of which were controlled by the same company. In effect, the court viewed the partnerships as corporations and, because the ultimate parent corporation remained the at all times the beneficial owner of the property, allowed the exemption.
In the case of Productions Merveilles Inc. v. Montreal, the court did not stretch the law any further. This case involved the transfer of property between a corporation owned by one spouse and a partnership with both spouses as its partners. The court refused to view the two companies as being closely related under the law.
As we can see, the rules governing these tax exemptions appear strict, and in some ways illogical, but the courts seem to make an effort at times to infuse them with some common sense. No transfer of real property in Quebec should be made without considering these rules.
These days, with all the complexities of the GST/HST rules regarding what is taxable and what isn’t, many businesses and professionals may find themselves providing a mix of supplies; that is, sales are taxable or exempt, depending on the rules (for example, a pharmacist who sells taxable items as well as exempt prescription drugs). This begs the question: to what extent can a business or professional claim input tax credits (“ITC’s”) with respect to the GST/HST paid on its expenses?
With the notable exception of financial institutions, which have their own set of specific rules, in general, a business may claim ITC’s based on the amount of its expenditures consumed in pursuit of its commercial activities.
General Rule for Claiming ITC’s:
The starting point is the general rule which requires ITC’s to be calculated based on the following formula:
A x B
A is the GST/HST paid or payable on the purchase of a property or service, and
B is a percentage, which represents the extent to which the person acquired the property or service in the course of the commercial activities of the person.
Based on the above, it is therefore necessary to determine what is meant by the term “commercial activity”. The law defines a commercial activity as a business carried on by a person, except to the extent to which the business involves the making of exempt supplies by the person.
Therefore, to the extent that the business activities do not involve the making of exempt supplies, they constitute commercial activities.
Allocation of Expenditures for ITC Purposes:
There is no requirement to apportion expenditures based on revenues or any other measurement. The only criterion set out in the law is that the apportionment must be reasonable and consistent.
The CRA provides guidance as to how to allocate ITC’s between commercial and non-commercial activities. In its GST Memorandum 8.3, it states that the methods used should link the property or service on which the input tax was paid to commercial and other activities. It suggests that directly allocating expenses to a commercial activity is most desirable. For example, where an expenditure relates exclusively to a taxable (or zero-rated) sale, then a full ITC should be claimed on this amount. The CRA suggests that expenditures be categorized between two groups, as follows:
1. single-use property and services used wholly in a particular activity; and
2. multiple-use property and services used in more than one kind of activity;
In the case of single-use property and services, it is clear that either a full ITC will be claimed (commercial activity) or no ITC will be claimed (exempt activity).
Note that a property or service consumed substantially all (i.e.90%) for a single purpose (either commercial or non-commercial) it will be deemed to be used 100% for that purpose and so will be considered a single-use property.
For multiple-use property or services, the recommended method is an “input” based method. This means that the allocation should be made based on usage. For example, if a self-employed contractor is providing services to both the taxable and exempt activities, then an allocation based on time spent may be reasonable. Rent may be allocated base on square footage used in either activity.
The CRA goes on to state that allocation based on “output”, i.e. revenues, should be made with caution to ensure such a method fairly represents the ratio of inputs used in each activity.
The issue of “reasonable allocation” was addressed by the Federal Court of Appeal in the case of Ville de Magog v. the Queen. The point made in this case was that the law requires only that the allocation method be reasonable and consistent. If the government performs an audit, and, as they did in this case, disagrees with the method for allocating expenses, they cannot change the allocation used by the taxpayer, as long as the taxpayer’s method was reasonable. In other words, the government was not allowed to change the method used on the basis that their method was “more reasonable” than the taxpayer’s method.
Under the Auspices of the Quebec Order of Chartered Professional Accountants, I am pleased to provide a copy of the new Liberal government’s 2014-2015 Québec budget summary / Résumé du budget du Québec 2014-2015 I will also place a link on the Tax Links Page, and they will remain there, along with future federal and Quebec budget summaries for future reference.
The Tax Issue:
Our rental property is coming up for mortgage renewal. Can we take equity out of the rental to pay down on our principal residence? Obviously then, the mortgage on the rental has increased and the interest is being written off. Can we do this?
Well, since this is the second time this week I’ve been asked the same question, here’s the answer: NO!
Perhaps I should elaborate.
Under Canadian tax law, interest on borrowed money is deductible only under certain specific conditions. For the sake of bandwidth, I will only mention the most important:
The borrowed money must be used for the purpose of earning income from a business or property.
The emphasis on the word used is intentional. The Supreme Court of Canada, many years ago, laid down the rule that it is the use of the borrowed funds that we look to to determine whether this condition is met. To be more specific, it the direct use made of the borrowed funds. This is a technicality that has both helped and hindered the CRA over the years.
In your case, for example, even though you have dutifully paid down the mortgage on the rental property and now own equity in it, refinancing it is simply borrowing money, using your equity in the rental property as collateral. It is not the collateral that is important, but the direct use of the borrowed funds. Therefore, if you use the borrowed money, as you intend, to pay down you personal mortgage, this will be viewed as money borrowed for personal use, and the interest would not be deductible.
One often recommended strategy, taking advantage of the “direct use” rule, would be to use funds that you currently have invested in savings, such as stocks and bonds to pay down your personal mortgage. Then, refinance the rental property, and use the borrowed funds to repurchase your income-earning investments.
Alternatively, if you remortgaged your rental property and purchased a second rental property, or invested in some other income-earning vehicle, then the interest would be deductible.
Under the Auspices of the Quebec Order of Chartered Professional Accountants, I am pleased to provide a copy of the Québec Budget Summary 2014-2015 / Résumé du budget du Québec 2014-2015. I will also place a link on the Tax Links Page, and they will remain there, along with future federal and Quebec budget summaries for future reference.