July 2020 Newsletter

We discussed the Canada Emergency Wage Subsidy (“CEWS”) in the May Tax Letter. The CEWS is one of the federal government’s responses to the COVID-19 situation in Canada.

As discussed in the May letter, the CEWS provides a 75% wage subsidy to certain eligible entities (employers) for up to 12 weeks, from March 15, 2020 and up to June 6, 2020.

On May 15, 2020, the Department of Finance announced that it was extending the eligibility period a further 12 weeks, to August 29, 2020. Each 4-week period from March 15 through August 29 is a “qualifying period”.

There are generally two types of options – a call option and a put option.

A call option gives the holder of the option the right to purchase a property at a set price (“exercise price”) at or up to a certain date. Conversely, a put option gives the holder of the option the right to sell a property at an exercise price at or up to a certain date.

The small business deduction generally applies to the first $500,000 of the active business income of a Canadian-controlled private corporation (CCPC). The “deduction” is actually a deduction from tax, not from income, so it is really a credit. It results in a combined federal and provincial rate of around 9% to 13%, depending on the province. The $500,000 threshold also applies to each province, except for Saskatchewan, which has a $600,000 limit for provincial tax purposes.

A corporation is a taxpayer that pays income tax on its business income and other income. And of course, an individual shareholder in the corporation is a taxpayer who pays income tax on dividend income received from the corporation. Since a corporation pays a dividend out of after-tax income (that is, dividends are not a deductible expense to the corporation), there is the potential for double taxation.

In order to prevent double taxation, the Canadian income tax system provides a “gross-up” and “dividend tax credit” mechanism for individual shareholders receiving dividends from taxable Canadian corporations.

Taxpayer liable for spouse’s tax liability for unremitted source deductions

Under the Income Tax Act, a director of a corporation can be liable for the corporation’s failure to remit source deductions to the Canada Revenue Agency (CRA), such as income tax that is withheld from salary of the corporation’s employees.

Under a different rule (the “transfer of property rule”), if a person transfers property to a non-arm’s length person such as a spouse, then the transferee can be liable for the transferor’s tax debts owing for the year of transfer or previous years.