Unit 6
What is dividend sprinkling?
Assigning different classes of shares to family members with lower income (spouse, adult kids) and then issuing dividends to them (instead f the owner-manager) to take advantage of their lower marginal rate. -- Endorsed by SCC in Newman
What are 2 issues of dividend sprinkling from a policy perspective and how does this relate to the updated TOSI rules?
Is there good rationale for a tax-free transfer of assets into a company?
Yes, because there is no true economic disposal of the asset that would normally trigger capital gain
What are the 3 elements of a QSBC share in accordance with ss 110.6(1)?
1.) Must be a small business corporation as defined in ss 248(1).
2.) The person claiming the LCGE held the shares for 24 months prior to the sale.
3.) More than 50% of the assets in the corporation were used in an active business in Canada.
What would you recommend a trustee to distribute the trust income to the beneficiary based on tax reasons?
Because a trust has to pay tax at the highest marginal amount (47%) while distributing it to a beneficiary means they will pay it according to their marginal rate.
What is a trust rollover described in ss. 107(2)?
Why may sales tax be viewed as regressive?
Higher income people spend a smaller proportion of their income on buying goods. However, this may not be that big of a difference when looking at lifetime income rather than annual income.
What's the preferable solution?
Why did TOSI expand?
TOSI expanded to beyond those who are 18 years old to ease violations on horizontal/vertical equity.
What happens when TOSI is triggered?
In Black & Decker Manufacturing, what was an example of "fusion" and an example that wasn't "fusion" in terms of amalgamating companies?
Fusion: Shows purpose of continuing existence as a new company (like strands becoming a rope or streams becoming a river).
Not fusion: Buying assets for consideration or giving assets but then staying as a subsidiary or winding up.
What are the 3 options on selling a corporation?
1.) Sell asset-by-asset on a piecemeal basis
2.) Sell total assets including goodwill
3.) Sell shares
Reasons for choosing each option?
How do you compute income taxes for a partnership?
Step 1.) Compute business profit/loss for the partnership (ss. 96(1))
Step 2.) Allocate the income to each partner in accordance with their partnership interest
How does the invoice-credit system work?
It creates a cascading tax system where at each stage, the taxpayer receives a credit for the GST paid for the item and paying GST only for the value they added.
Benefits of this system?
Raj has a successful Farm Co (as part of the egg cartel) and makes enough income that his wife can be a stay-at-home mom. However, he insists she works part-time as an office manager. Why is that?
Because if his wife works substantially (that is, average +20h/week, as stated by the Dept of Finance), then she can receive TOSI exclusions.
What are the 4 requirements of section 86 to avoid triggering a gain?
1.) Share must be capital property
2.) Exchange all the shares of a class held by the shareholder
3.) Transaction must be during "in the course of reorganization"
4.) Shareholder must receive share considerations
Why would s 86 come in handy for estate freezes?
What are 4 reasons to why the LCGE stands on weak theoretical standing?
1.) Violates Haig-Simons definition of income by excluding what increases someone's net worth
2.) Violates the principle of an effective tax system (Mirrlees)
3.) Too much benefit for those who don't need it and not enough for those who need it (Technical Committee)
4.) We need to tax the CG on sales to prevent avoidance on corporate profits and dividends (Harris).
When a new partner enters the partnership, what happens to the partnership interest of the existing partners?
The ACB of the existing partners' interests goes up (but the ACB new partner's interest is whatever they paid for).
How else might the ACB of all the partners' interests go up or down?
Why does Cnossen (or someone else) say that alleviating VAT for food is an odd way to alleviate the plight of the poor?
The concessionary treatment of food from the VAT tends to give twice as much relief to high-income groups than to low-income groups.
Anything else you want to add to this?
Fred is 26 years old raised by his older brother who is the owner-manager of Big Bro Cleaning Co, a cleaning company that cleans people's homes. Fred receives dividends from this business. Does TOSI apply?
Yes.
How can you change the facts so Fred is excluded from TOSI?
Toni decided to rollover her Starbucks shares into her newly incorporated company, Toni Co. She bought the Starbucks shares for $5,000, but now they are worth $10,000. She wants to receive $5,000 in cash and receive the rest of the value in Toni Co. shares. Will she trigger capital gains?
No because she only took up to the Starbucks Shares's ACB.
What would the ACB and the FMV of her Toni Co shares be?
The purchaser may want to buy assets to allocate a price to depreciated assets then save taxes through CCA. The seller wants to avoid the recapture of depreciated assets and pay UCC.
Why would the seller and purchaser want to sell/buy shares?What are two reasons why trusts may be less popular today then they were in the past?
1.) New TOSI rules makes it less useful for allocating corporation income to family members.
2.) Trusts have to file a tax return (T3) every year that discloses details about the settlor, trustee, and beneficiaries even if no activity took place.
Compare and contrast zero-rated items and tax-exempt items. Include examples of each.
Both involve the consumer not paying any GST.
Zero-rated: The vendor still receive GST credits. Examples include groceries and prescription drugs.
Tax-exempt: The vendor does not receive GST credits. GST is either buried/passed onto the consumer or it is absorbed by the business. Examples include most health/dental services and daycare.
Yin and Larry were common-law who lived together for 2 years before they separated. One of the ways they split their properties is by having Yin give Larry one final dividend from Yin Dentist Prof Corp and redeeming his share. Yin is the source individual and Larry is the specified individual. Does TOSI apply?
No, prof corps aren't eligible for TOSI exemptions (120.4(1)(g)).
If it wasn't a service business, it may depend on whether they split the property pursuant to a separation agreement or by an order of the court (120.4(1)(b)).
Dalia decided to incorporate her sole proprietorship into Dalia Butter Co. Her butter inventory was worth $3,000 but it grew to $5,000 because the dairy cartel. In transferring her inventory into her new corporation, Dalia is not looking for cash nor looking to trigger capital gains. What will the ACB, PUC, and the FMV of her share consideration be?
ACB and PUC will be $3,000. FMV will be $5,000.
What was the definition of a "reasonable allocation" for a purchase price according to Transalta?
What are considerations to help determine this?
What is the “at risk” rule found in ss. 96(2.1) to 96 (2.7) for limited partnership?
A limited partner can allocate business loss to their income only up to the extent of their investment contribution.
Compare and contrast GST and RST
They're both a broad-based sales tax that are most commonly used in Canada.
GST: Tax cascading system, includes services, federal
RST: Single stage tax, excludes services, provincial