August 2018 Newsletter

The superficial loss rules in the Income Tax Act apply to deny capital losses on the disposition of property, if the taxpayer acquires the same or identical property within a certain time period. Basically, the rules are meant to prevent you from triggering capital losses, which can be used to offset any of your capital gains, and then re-acquiring within a short time the same or identical property that generated the loss.

In particular, the superficial rules can apply where

  • you sell a property at a loss,
  • you or an “affiliated person” acquires the property or an identical property (“substituted property”) within the period beginning 30 days before the sale and ending 30 days after the sale (“relevant period”), and
  • you or an affiliated person owns the substituted property at the end of the relevant period.

Normally, if you transfer property into a personal trust, such as one for the benefit of you or your family members, you are deemed to have sold the property at its fair market value. As a result, any accrued capital gain will normally be triggered, and half of that gain will be included in your income as a taxable capital gain. The trust will be deemed to acquire the property at a cost equal to its fair market value.

However, in some cases, a tax-free “rollover” is allowed for transfers into trusts. By a “rollover”, we mean that you are deemed to have sold the property at your tax cost (so you have no gain for tax purposes), and the trust inherits the same cost. The main examples of these trusts are summarized below.

The government generally frowns on income-splitting amongst family members. However, a specific rule in the Income Tax Act allows you to split certain pension income with your spouse or common-law partner.

The rule provides that you and your spouse can make a joint election, under which you split some of your pension income with your spouse. You can split any amount up to 50% of the income. The split amount is reported on your spouse’s tax return, while you report the other portion of the pension income. The election is annual, meaning that you can change the split amount for each taxation year, or you can choose not to split in any particular taxation year.

The split is allowed even if you do not actually transfer any of the pension income to your spouse.

Life insurance premiums are not normally deductible for income tax purposes because they are considered personal expenses. However, there are two scenarios under which the premiums are deductible.

First, if an employer pays life insurance premiums for an employee and the insurance is for the benefit of the employee or his or her family (e.g. the beneficiaries are the employee’s estate, or spouse or children), there is a taxable benefit for the employee. On the payment side, the employer can normally deduct the premiums as a business expense.

Second, there is a special rule in the Income Tax Act that allows a deduction if a taxpayer takes out life insurance and is required to assign the insurance policy to a financial institution as collateral for a loan. A deduction for the premiums is allowed, generally if the loan is used for the purpose of earning income from a business or property.

The CRA recently announced the prescribed interest rates that apply in the third quarter of 2018. The rates remain the same as those that apply in the second quarter.

  • The annual interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums is 6%, compounded daily.
  • The interest rate paid on late refunds paid by the CRA to corporations is 2%, compounded daily.
  • The interest rate paid on late refunds paid by the CRA to other taxpayers is 4%, compounded daily.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans is 2%.

If you transfer property into a partnership of which you are a member, or a partnership of which you are a member immediately after the transfer, the transfer can take place on a tax-free rollover basis under subsection 97(2) of the Income Tax Act. Basically, you can elect an amount, and the elected amount becomes your proceeds of disposition of the property. Therefore, if the elected amount equals your tax cost of the property, there will be a complete rollover.

In addition, the elected amount, net of any other consideration you receive (other than your interest in the partnership), is added to your adjusted cost base of your interest in the partnership. The other consideration is sometimes called “boot”. For example, if you elect $10,000 and receive back $4,000 boot, you will add $6,000 to the adjusted cost base of your interest in the partnership.

Where the rollover does not apply, a general rule provides that the adjusted cost base of a partnership interest is simply the cost of the interest.