October 2017 Newsletter

The capital gains exemption allows Canadian resident individuals to earn tax-free capital gains when they sell qualified small business corporation (“QSBC”) shares. The lifetime exemption limit as of 2017 is $835,716 of capital gains. Since one-half of capital gains are included as taxable capital gains, the limit is actually $417,858 of taxable capital gains. The limit is indexed each year to account for inflation.

In addition to describing the current exemption, this section of the letter discusses some proposed changes to the exemption, scheduled to take effect in 2018.

If you receive an interest-free loan from your employer, or a loan at an interest rate lower than the prescribed rate of interest under the Income Tax Regulations, you are required to include a deemed interest benefit in your employment income.

In particular, you must include (and pay tax on) deemed interest on the amount of the loan outstanding during the year computed using the prescribed rate of interest that applies during the year. The prescribed rate is set quarterly, so it may change during the year (it hasn’t moved from 1% in several years, but due to a recent Bank of Canada rate increase it might move to 2% in the last quarter of 2017).

Canadian dividends

If you receive a taxable dividend from a corporation resident in Canada, you are subject to tax on the dividend at a preferential rate of tax. The effective rate of tax will be less than your regular marginal rate of tax. Therefore, for example, dividends will be subject to less personal tax than investment income such as interest or rental income.

(If proposals released on July 18, 2017 are implemented, many dividends from private corporations will be taxed at a much higher rate, in situations where the person receiving the dividend is not involved in running the business. This "anti-income sprinkling rules" may or may not come into effect, and are discussed further in this article.)

If you set up a trust and transfer property to the trust, there is normally a deemed disposition of the property for proceeds equal to its fair market value. Therefore, for example, if there is an accrued gain on the transfer, you will realize a capital gain, half of which will be included in your income. Obviously, if the transfer is cash, you won’t have to worry about this issue (except possibly in the case of foreign currency).

However, for certain types of trusts, you can transfer property to the trust on a tax-free “rollover" basis. Effectively, you have a deemed disposition at your tax cost of the property, which results in no tax. The trust is deemed to acquire the property at your tax cost.

Legal fees to defend criminal charges not deductible employment expense

In the recent Geick case, the taxpayer was a police officer who was charged with several criminal offences. He hired a lawyer to defend him and incurred legal fees in contesting the charges, some of which were subsequently withdrawn. He was suspended from employment pending the outcome of the charges, but with pay, so he continued to collect his salary.

The taxpayer attempted to deduct the legal fees in computing his employment income, under Income Tax Act paragraph 8(1)b), which permits legal fees paid to "collect or establish a right to" employment income. He argued that any criminal conviction would have resulted in the loss of his employment and therefore his employment income. As such, he argued that the legal fees were deductible because they protected his right to employment income.