Unit 7 Flashcards
Associated vs Affiliate vs Related vs Connected
- Related: ITA251
- Grandfathers, fathers, siblings, children
- Doesn’t include cousins, nephews, uncle
- Extends to corps if they are owned by any of the above if they own more than 50% of voting shrs
- NAL transactions - Affiliated ITA 251-1
- Spouse or any of the company you control (50% ownership OR indirect control)
- Stop loss in place for some transactions - Connected
- Important for taxation between companies
- 2 companies are connected if they own more than 10% of shrs
Stakeholder relationships
-Association summary below
-Note they would be limited to SBD and immediate expensing
-De jure control: more than 50% of voting shares
-Indirect control: when ind or a corp indirectly controls another corp without owing shrs directly
-Group: includes 2+ persons who own the shares of the same corp
Basic association rules
ITA 256
(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other;
(b) both of the corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons;
(c) each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof;
(d) one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; or
(e) each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more persons who were members of both related groups, either alone or together, owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof.
Affiliated persons
ITA 251.1
1) Person includes an individual, corp, partnership or trust
2) person is considered to be affiliated with themselves
3) Affiliated group is a group of persons where each member of the group is affiliated with all other members of the group
Affiliated transfer of property
-Capital loss
- Corp,trust, partnership: loss are denied until sold to 3rd party
- Individual: Loss is denied as a superfucual loss and added back to ACB
-Terminal loss
- Corp, trust, partnership, individuals: loss are denied, transferor keeps TL in a separate CCA class until its sold to 3rd party
a) Transferee adds FV of asset transferred to appropriate CCA class
Connected corps
When the following applies:
1) Control rule: the corp is controlled by the other corp. Control is represented by ownership of more than 50% of voting shares
2) Votes and value rule: corp shares held by the other corp represent more than 10% of the voting shares of the corp and more than 10% of FV of total issues shrs
-Part IV tax os paid by corp on dividend received from either non/connected corp that received a dividend refund.
Tax on split income
-When TOSI applies split income will be taxed on the recipient at the highest marginal personal tax rate and no claim is permitted for basic personal tax credit
-Includes dividends or interest paid by priv corp to an individual from a related business
TOSI applies
- Income received by minor children (<18 yr at YE) from related or unrelated priv busi
-Dividend and interest received by adult children and spouses from related priv corp
TOSI Exclusions
1) Excluded busi exception:
-applied to fam members 18yr+
-Ind must have worked an average of 20 hrs/week in current yr or prev taxation yrs
2) Excluded shrs
-Apply to income rec by a fam member who is 25 yr + if all of the following apply:
a)Income is received on excluded shrs–> shrs that rep atleast 10% of voting company
b) Less than 90% of the income of the corp is from provision of services
c) hrs are not shrs in a prof corp
3) Reasonable returns
-Apply to fam members 25yr+–> amount received would be an exclusion if the amount is considered a reasonable return for the fam member cont to the business
- Following factors to determine reasonable return
a) Work performed by the fam member for the busi
b) Prop contributed by family member to the busi
c) Risks assumed by the fam member with respect to the busi
d) Payment made in the past to fam member for their cont
e) Other relevant factors
Salary vs dividend
1) Manager desire to participate in CPP,QPP, RPP,RRSP
2) Child care exp incurred by taxpayer: deduction on earned income which excludes dividends
3) Cumulative net investment loss b al: tax payer has a + bal in their CNIL account, div, paid out of the corp will reduce the CNIL bal resulting in greater availability of CG deduction
4) Manager age, busi strat, pref: older taxpayers more conservative
5) Corp tax rates applicable to the type of income earned in the corp: reduce TI to below 500K
6)Manager combined federal/prov personal rates
7) Amount of credits and deductions: ensure personal income is high enough to use all non-refundable deductions
SH benefit
-When a corp grants a benefit to the SH (or NAL SH), FV of the benefit must be included in the SH income and fully taxed as prop income
SH loan
-When a loan has been made to a shareholder or someone with whom the
shareholder does not deal at arm’s length, the amount of the loan is required to be included in the taxpayer’s income in the year that the loan was made
a)if the loan is paid back within a yr no benefit is required
If SH loan has been OS 2 consecutive corp yr ends, the loan will be included in the shr income for the yr it was borrowed—> requires an amended return
Clearing out SH balance
-Salaries: instead of paying the after-tax amount to the SH, the amount is cr to the SH loan
-Dividends: declare amount to clear SH account
Imputed interest benefit on SH loans
-If loan qualifies as an exception under 1 yr rule, imputed interest benefit is included in SH income.
-Benefit is = to dif between prescribed rate vs interest paid by SH
-Classified as prop income
Other exceptions on inclusion of SH loan in personal income
1) Indebtedness between nonresidents: the loan isnt included in SH income if its a loan between nonresidents (lender and recipient are both nonresidents)
a) loan from a CAD corp to a non resident would be a deemed div if not paid in a yr
2) Loan from corps that are busi of lending money and bona fide arrangements are made for repayment within a reasonable time frame and req the borrower to pay interest
3) A loan is made to a SH who is also an employee of the lender but is not a specified employee
OR
a loan is made to a SH who is also an employee to assist them to acquire a home for their own occupation
Purification
Quants:
1. Calc GW on purchase
2. Determine updated assets FMV including GW
3. Calc WC
4. Find the variance between current WC and the expected WC
5. Use FV of assets to determine % active needed (10%*FMV assets)
6. Dif between #5 & #3
Ways to deal with purification:
1. Pay salary/dividend prior to closing: Inc personal taxes
2. Paying off liab: NOT CURRENT, only LTD
3. Pay off RP balances
4. Corp reorg
