Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.
The Canada Emergency Wage Subsidy: The Canada Revenue Agency takes action
In response to the pandemic, the Canadian government launched in the spring of 2020 the Canada Emergency Wage Subsidy (the “CEWS”), a program that provides employers with a subsidy based on the remuneration paid to their employees and income they lost during the pandemic. Section 125.7 of the Income Tax Act (the “ITA”) sets out how the subsidy is to be calculated, and likely caused problems for those who had to interpret this ambiguous provision without supporting doctrine or jurisprudence. For instance, calculating the “qualifying revenue,” which is central to the CEWS calculation, involves many nuances. As an example, it requires that an entity’s revenue during qualifying periods be estimated and that certain items be excluded, such as “extraordinary items,” a term new to the ITA. The calculation of “eligible remuneration,” another important component of the CEWS calculation, also has a number of peculiarities, such as the inclusion of remuneration for related and managerial employees. The Canada Revenue Agency (“CRA”) now has taxpayer’s CEWS calculation in its sights. The CRA began auditing CEWS claims and issuing notices of assessment to taxpayers in an effort to reduce the amount of CEWS originally granted. With reductions in pre-pandemic period qualifying income or the inclusion of items that taxpayers had initially excluded in their qualifying period income, such assessments are likely to have a significant impact on the CEWS amounts to which taxpayers were entitled, especially for companies with a large number of employees. In specific cases, the CRA may also impose penalties which can be as high as 50% of the excess subsidy claimed. Although the time limit for amending CEWS claims has expired, submitting a fairness request to amend a previously filed claim may be possible in some circumstances. Moreover, when notices of assessment are issued, a notice of objection may be filed to contest the adjustments made by the CRA. It is important to keep all documentation related to the calculation of the “qualifying revenue,” your employees’ remuneration and any other accounting documents to support the CEWS amounts claimed. A proactive approach and early intervention in a CEWS audit will not only result in a more favourable outcome in a given case, but will also prevent many back-and-forths with the CRA. Lavery’s tax law team is familiar with the CEWS program and its intricacies, and can assist you should you be audited or should you receive a notice of assessment from the CRA.
Pre‑ruling Consultation with the Canada Revenue Agency (CRA): a little‑known yet practical service
Canada’s tax system is very complex and tends to become more complex over time. Amendments to tax laws in recent years have not simplified our tax system, quite the contrary. The introduction of various intention tests in tax laws has also further increased tax authorities’ discretion as to the application of such laws. In this context, it is often a good idea to obtain the Canada Revenue Agency’s (“CRA”) advice on the application of tax laws to proposed transactions. Given that the CRA is responsible for applying the Income Tax Act (the “ITA”) and other legislation, some Canadian taxpayers would be well advised to ensure that the CRA will agree with their interpretation of the ITA in the context of a proposed tax plan or transaction. Getting the CRA’s opinion will help to steer clear of differences in opinion that could lead to lengthy and costly debates. The CRA has long offered Canadian taxpayers the opportunity to consult it before proceeding with tax plans or transactions. The two best known mechanisms for doing so are requests for a Technical Interpretation and requests for a Ruling. As a request for a Technical Interpretation is made anonymously, the resulting interpretation as to the application of the ITA is not binding on the CRA, and it requires a considerable amount of time to obtain. A request for a Ruling, on the other hand, requires identification of the parties and details of the proposed tax plan or transaction, and the resulting Ruling will bind the CRA to certain conditions. It is also faster to obtain. The CRA charges a fee to render a Ruling, but does not charge one for a Technical Interpretation. There is, however, a third, lesser-known mechanism available to taxpayers: a Pre-ruling Consultation. Some of its advantages include: Faster feedback for taxpayers as to the likelihood that the CRA will render the Ruling sought. Lesser preparation costs, as a Pre-ruling Consultation request requires less information than a request for a Ruling. Lower fees to be paid to the CRA in cases where the CRA believes that it cannot render the Ruling a taxpayer is seeking. The use of the Pre-ruling Consultation service will often be the best way to begin the request for a Ruling process. By using the service, taxpayers can quickly determine, at a relatively low cost, whether they should engage in the request for a Ruling process. The service isn’t a substitute for obtaining such a Ruling, however, as a Ruling has the advantage of binding the CRA with respect to the tax consequences of a proposed tax plan or transaction. Our taxation team can guide you and answer your questions regarding the services that the CRA offers in connection with tax compliance.
COVID-19: Anticipating Capital Gains, Wealth, Gift and Inheritance Taxes
The deficits being generated by the emergency measures that the federal and provincial governments have implemented since March 2020 are a reminder of the magnitude of our governments’ pre-crisis deficits. This situation will inevitably lead to a greater tax burden for businesses and individuals at some point. Despite the unprecedented nature of these circumstances and the difficult financial situations that organizations find themselves in, steps can be taken now to mitigate repercussions. For several years, there has been increasing speculation about the capital gains inclusion rate being increased. Rumours also abound about the potential creation of an inheritance tax, which would undoubtedly be accompanied by a gift tax and a wealth tax. In this context, it is becoming ever more plausible that the federal government will finally increase the capital gains inclusion rate and tax the value of inheritances and gifts as early as the next budget, which has been postponed because of the ongoing crisis. An annual wealth tax on high net worth individuals could likewise be in the pipeline. As is now customary, the measures would apply as of midnight the night before the budget is tabled, closing the door to most tax planning strategies to reduce the impact of such measures. In the face of this situation, several steps can be taken as of now as, for instance: Crystallization of unrealized capital gains using a business corporation, partnership or trust; Gifts of money or property to family members or trusts; Termination of Canadian tax residency in favour of a lower-tax jurisdiction. The majority of tax planning strategies aiming to reduce or postpone the impact of such measures can be reversed should the anticipated measures not be adopted. In the event that governments do not increase the tax burden straightaway or opt for other, difficult-to-predict measures, well-planned transactions, such as realizing an accumulated gain on certain assets, making a direct gift, or making a gift through a trust, will ensure that additional taxes need not be paid. If you would like more information, our taxation team is available to help you.
Payment to non-residents of Canada: How can the Multilateral Instrument (MLI) be applied?
The internationalization of trade has led to an increase in payments made by Canadian companies to non-residents of Canada, which are most of the time subject to Canadian withholding taxes. Canadian payers must ensure that they withhold the correct percentage of Canadian tax on such payments, as they are liable to the tax authorities for any failures on their part in this regard. In addition, payment recipients will normally want to minimize Canadian withholding taxes and ensure that they have benefitted from the lowest applicable rate. Canadian Tax Treaties In many cases, determining the Canadian withholding tax rate will depend on the application of a tax treaty between Canada and the payment recipient’s country of residence for tax purposes. Canadian tax treaties may reduce the rate of the tax that a Canadian payer must withhold. If interpreting tax treaties was already complex in many situations, it has become even more so with Canada’s adoption of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). Since January 1, 2020, the MLI generally applies to most tax treaties between Canada and other countries, and its application may result in the non-application of certain provisions of a tax treaty. In such situations, a Canadian payer will be required to withhold the rate provided for in the Income Tax Act (“ITA”), that is, 25%, instead of the reduced rate provided for in the tax treaty between Canada and the recipient’s country of residence for tax purposes, which will typically vary from 0% to 15%, depending on the type of payment involved and the recipient’s tax status. The application of the Multilateral Instrument (MLI) For the time being, applying the Multilateral Instrument (MLI) is tricky for several reasons. First, the MLI does not apply to all of Canada’s tax treaties, nor to all of the articles of the treaties to which it does apply. It thus becomes necessary to first verify whether the MLI applies to a reduction in the withholding rate provided for in a Canadian tax treaty. Second, the Multilateral Instrument (MLI) provides for a general anti-avoidance rule with rather unclear application criteria. When the rule does apply, it may have the effect of denying a benefit provided for in a tax treaty. In short, the MLI is making the application of the ITA’s withholding tax on payments to non-residents more complex. Given that Canadian tax authorities will now apply the Multilateral Instrument (MLI), Canadian taxpayers should exercise caution and obtain proper advice before applying a rate less than the ITA’s 25% rate. Our taxation team is available to assist you and answer your questions regarding the application of the Multilateral Instrument (MLI) to payments made to non-residents.
The tax system to the rescue of print media
Canadian newspapers’ loss of advertising revenues to the hands of internet giants over the past several years has jeopardized the very existence of many such newspapers. In 2018, our governments announced several advantageous tax measures in order to ensure the survival of independent print media. In 2019, two favourable tax statuses were added to the Income Tax Act1 (Canada) (the “ITA”)—that of qualified Canadian journalism organization (“QCJO”) and registered journalism organization (“RJO”). The statuses of QCJO and RJO offer the following advantages under the ITA: A 25% refundable labour tax credit for salaries or wages payable in respect of an eligible newsroom employee, effective January 1, 2019; A 15% non-refundable personal income tax credit to allow individuals to claim digital news subscription costs paid to a qualifying organization after 2019 and before 2025 The addition of RJOs as qualified donees. The qualified donee status allows an entity to issue donation receipts, and thus allows any person donating money or property to an RJO to benefit from a tax credit or deduction in the calculation of their taxable income. In addition, the status of RJO allows an entity to receive donations from other entities with a favourable tax status, such as a registered charity;2 An exemption from income tax levied under the ITA. An entity must meet several conditions to obtain the statuses of QCJO and RJO, and the application process can take several months. Obviously, having these statuses involves other federal and provincial tax consequences that must be assessed on a case-by-case basis before making such a request to the tax authorities. Our taxation team is experienced in this area of law and can help you to obtain the statuses of QCJO and RJO and assess the tax consequences involved. Subsections 149.1(1) and 248(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5thsuppl.); Subsection 248(1), ITA “registered charity”.
International tax planning endorsed by the Court
In the recent decision in Agracity Ltd. v. The Queen1, the Tax Court of Canada (the “Court”) endorsed the Canadian tax consequences of business transactions between a Canadian corporation (“Agracity”) and its Barbados affiliate (“NewAgco-Barbados”) within a group of companies operating in the agrochemical industry (the “Group”). NewAgco-Barbados is an offshore company established for the purpose of negotiating and purchasing a particular herbicide (the “Herbicide”) internationally for resale in Canada. All of NewAgco-Barbados’s profits were generated by the resale of the Herbicide, which were subject to Barbados’s low tax rate. Agracity was in charge of receiving and filling orders for the Herbicide from Canadian consumers, under a service agreement with NewAgco-Barbados for the logistics, storage and transportation of the Herbicide from abroad to Canadian consumers. The Canada Revenue Agency (the “CRA”) attempted to allocate all of NewAgco-Barbados’s profits to Agracity, relying primarily on sham transaction rules and secondarily on transfer pricing rules under subsection 247(2) of the Income Tax Act2 (the “Act”). The Court held that the negotiation and procurement of the Herbicide by NewAgco-Barbados constituted a legitimate commercial objective and a genuine function within the Group. It ruled in favour of Agracity in this case and confirmed that the transactions between Agracity and NewAgco-Barbados were not deceptive and did not warrant any adjustment to Agracity’s profits under transfer pricing rules. This case sheds new light on how to interpret the business role of foreign subsidiaries and the limits of the CRA’s remedial authority with respect to transfer pricing provided for in the Act, making it easier for domestic businesses to implement international business structures. When properly set up and operated, these structures can provide substantial tax savings. The decision in Agracity v. The Queen has not been appealed. Our taxation team can assist you with national and international tax planning for your business transactions. 2020 CCI 91 R.S.C. 1985, c. 1 (5th suppl.);
Court upholds deductibility of carrying charges
The Tax Court of Canada (the “Court”) recently upheld the deductibility of carrying charges incurred in connection with an issuance of shares. In so doing, the court upheld the tax benefits arising from a common financing practice. In addition, the Court reiterated the principle in tax matters according to which, save in exceptional cases, the legal relationships established by one or more taxpayers must be respected. In this case1, Laurentian Bank (the “Bank”) issued shares from its share capital to the Caisse de dépôt et placement du Québec (“CDPQ”) and the Fonds de solidarité des travailleurs du Québec (“FSTQ”) totalling $120M, through a private placement. In addition to assuming a portion of the costs incurred by CDPQ and FSTQ in connection with this issuance of shares, the Bank agreed to pay each of the investors, as professional fees for services rendered in connection therewith, an amount corresponding to 4% of the total amount of their investment. The Canada Revenue Agency challenged the Bank’s deduction, over 5 years, of the total amount of $4.8M paid to CDPQ and FSTQ, in particular on the grounds that no services had been rendered to the Bank by the two investors and that the expense was unreasonable. The Court ruled in favour of the Bank and allowed it to deduct the amount of $4.8M in computing its income on the basis of paragraph 20(1)(e) of the Income Tax Act, namely, in 20% increments over five fiscal years. Not only did the Court recognize the merits of the Bank’s arguments as to the fact that it had incurred an expense for services obtained from the CDPQ and the FSTQ, but the Court also confirmed that the expense was reasonable under the circumstances. In this decision, the Court recognized the favourable tax consequences for an issuer of shares arising from a common practice in the field of financing through share issuance. It also appears that the reasons for the Court’s decision could be applied to other costs incurred in the context of financing activities and thus allow entities incurring such costs to obtain a significant tax advantage. It is therefore to the advantage of corporations issuing shares or borrowing to carefully analyze and negotiate the financing agreements they are considering in order to maximize their tax benefits. Our taxation team can assist you in setting up a share issuance that is both successful and optimal from a tax standpoint. Banque Laurentienne du Canada c. La Reine, 2020 CCI 73
Sale of a Business: New Tax Planning Option
The sale of a business is often the most significant business transaction in an entrepreneur’s life. In addition, the net proceeds from such a sale often represent an entrepreneur’s only retirement fund. Therefore, it is crucial to maximize such proceeds by reducing or deferring the taxes resulting from the transaction as much as possible. The Canada Revenue Agency (“CRA”) recently reversed an administrative position that it had expressed in 2002 with respect to beneficial tax planning as part of the sale of a business. This change in its rather technical administrative position opens the door to very effective tax planning that offers real tax deferral opportunities to business owners wishing to sell their business. Consider the following example: Sale of 100% of shares to a third party without prior planning Ms. Tremblay wishes to sell 100% of the shares of her company (“Opco”) to a third party for their fair market value (“FMV”) of $10 million. These shares have an adjusted cost base of $1.00. Ms. Tremblay’s direct sale of 100% of Opco shares to a third party would result in a capital gain of approximately $10 million and total income taxes of approximately $2.7 million, assuming that her capital gain is not eligible for the capital gains exemption. In this scenario, Ms. Tremblay would be left with a sum of approximately $7.3 million after taxes. Sale of shares with the newly approved prior tax planning In the second scenario, prior to the sale to the third party, Ms. Tremblay would create a management company (“Gesco”) and transfer 50% of Opco shares to it on a rollover basis, with no immediate tax consequences. Gesco would then internally exchange Opco shares in order to realize a $5 million capital gain within Gesco, resulting in income taxes of approximately $1.26 million for Gesco, a portion of which would later be refunded through the use of a non-eligible refundable dividend tax on hand account. Subsequently, Ms. Tremblay would sell her remaining 50% of Opco shares to Gesco in two transactions of 25% each, both payable by a promissory note equal to the FMV of the shares—in our example, $2.5 million per transaction. Ms. Tremblay would then be deemed to have received two dividends of $2.5 million each. The first would be designated as a capital dividend by Gesco and would therefore be tax-free for Ms. Tremblay. The second would be designated as an ordinary (non-eligible) dividend, resulting in total income taxes of approximately $1.18 million for Ms. Tremblay. The designation of the second dividend as an ordinary dividend would result in a refundable dividend tax on hand for Gesco of approximately $766,000. Gesco, owning 100% of Opco shares having an adjusted cost base equal to their FMV, would sell them to a third party for a sum of $10 million, generating no additional capital gain within Gesco. By using the tax mechanisms of a capital dividend account and a non-eligible refundable dividend tax on hand account, the sale of Opco shares would result in total income taxes of approximately $1.67 million, split between Ms. Tremblay and Gesco. Ms. Tremblay would then be left with proceeds of $3.82 million after taxes, while Gesco would be left with $4.51 million after taxes. Given that Ms.Tremblay would keep funds within Gesco, she would be able to defer the time at which she would be taxed on them, that is, when Gesco would pay her a dividend. In the meantime, she could make investments through Gesco. This type of planning would result in a tax deferral of almost 38% of the income taxes that, without prior planning, would have been payable on the sale of the shares. Our taxation team will be happy to answer all your questions and advise you on the most appropriate tax planning for your business. The information and comments contained herein do not constitute legal advice. They are intended solely to enable readers, who assume full responsibility, to use them for their own purposes.
Resumption of Mergers and Acquisitions: What May Change After the Crisis
The COVID-19 crisis has significantly slowed economic activity in all respects. The area of corporate mergers and acquisitions is no exception, and the level of activity, which was high before the crisis, has dropped significantly because of it. It is difficult to predict when and at what pace such activity will resume, but we expect that, like many other sectors of the economy, this market will be different from what it was before the crisis. Among other things, we expect that the uncertainty regarding economic recovery will see vendors and purchasers increasingly rely on earnout clauses to reach agreements on the value of a business. Opportunities to obtain financing for the acquisition of a competitor or a complementary business are also likely to be limited, which will change how such transactions are financed. The new behaviours made necessary by the post-crisis economic environment will certainly have considerable fiscal impacts. The tax rules applicable to earnout clauses can be complex, and parties to such transactions should learn about them before signing a letter of intent for a potential transaction. Those wishing to sell could get an unpleasant surprise in terms of the net result of the sale of their business if they aren’t properly advised from the outset. In some cases, the sale of a business that would normally be expected to generate a capital gain with only 50% of such gain being included as taxable income could instead be 100% taxable as business income. Earnout clauses offer very interesting tax planning possibilities in some cases, such as the maximization of capital dividend accounts that corporations can use to pay tax-free dividends to their shareholders. The same care should be applied by those wishing to acquire or sell a business with regard to the different methods of financing transactions that are likely to become popular after the crisis, such as partial financing by the vendor. Poor tax planning in this regard could result in liquidity problems for vendors if payment of the balance of the sale price is spread out over too long a period. Purchasers will also want to maximize the tax benefits of this type of financing. The main way to do so involves banking on interest costs resulting from the financing of the purchase price, but to reap such benefits and others, the commercial agreements relating to the purchase must be carefully structured. Tax complexities are numerous in M&A transactions, and those mentioned above are just two examples. The tax incidence of such transactions should be analysed as soon as they are contemplated. Parties to M&A transactions often wait too long before analyzing tax aspects. They thus greatly limit their opportunities to benefit from optimal tax planning. For more information, our taxation team is available to help you.
COVID-19: How to adapt your current tax planning?
The spread of COVID-19 is having a considerable negative effect on the global economy. Several tax planning strategies adapted to the current situation can be considered in order to mitigate the impact. Tax planning for individuals helps to (i) reduce the taxes payable upon death, (ii) encourage intergenerational business transfers, and (iii) maximize the use of the capital gains deduction, through a trust or otherwise. For businesses in the current economic crisis, creativity and strategic vision are needed. In this context, certain tax plans will allow businesses to (i) maximize liquidity, (ii) reduce a corporate group’s taxes payable in the short term, (iii) optimize the use of losses, and (iv) bring about major tax savings in the long term. Here are a few examples of tax plans that are particularly appropriate for the current situation: Employee stock option plans Reviewing strike prices Strategies for using the capital dividend account Strategies for using losses within a corporate group, including: Intragroup management fees Loans between corporations Amalgamation or liquidation of business corporations Deferral of taxes on imports Recovering the GST/QST on bad debts Strategies to increase the fiscal cost of certain corporate assets and shares Estate freeze in order to lower taxes upon death Estate thawing and refreezing Applicable to a previous freeze whose value exceeds the current value Planning with regard to the rule of the average cost of identical properties Income splitting Leaving Canada Dismantling or creating legal entities to facilitate tax planning These plans are particularly effective in a context of economic downturn and a decrease in the fair market value of investments and assets. It is therefore important to act quickly. Our taxation team is available to answer all of your questions about establishing a tax plan to suit your needs.
The 2020-2021 Quebec Budget: New Measures to Promote Innovation!
Quebec’s Minister of Finance tabled his budget for 2020-2021, titled Your Future, your Budget1, on March 10. Among the new measures introduced by the government, new tax incentives for innovation and the commercialization of Quebec intellectual property were announced. The incentive deduction for the commercialization of innovations: establishing the most competitive tax rate in North America The Quebec government is committed to promoting research and development (R&D) and accelerating the development of innovative products through a highly competitive tax environment. The incentive deduction for the commercialization of innovations (the “IDCI”) will allow businesses to benefit from a combined tax rate of 17% on eligible income. Businesses that have an establishment in Quebec, have incurred R&D expenses there and commercialize intellectual property (“IP”) in Quebec will have their revenues from the sale or rental of goods, services and royalties from such IP taxed in Quebec at an effective rate of 2%. IP covered by the IDCI includes software protected by copyrights, patents, certificates of supplementary protection for drugs and plant breeders’ rights. The IDCI also replaces the deduction for innovative companies as ofJanuary 1, 2021. Companies eligible for that deduction will be eligible for the IDCI. The synergy capital tax credit: investing in start-ups The synergy capital tax credit is designed to encourage businesses to invest in innovative SMBs with high growth potential, more commonly known as “start-ups.” A business corporation with a permanent establishment in Quebec that is not primarily engaged in financing or investing in businesses may receive a non-refundable tax credit equal to 30% of the value of its eligible investment, up to a maximum of $750,000 per year, for a total tax credit of $225,000 per year. An eligible investment is an equity participation that does not result in control of an eligible SMB, which the investing corporation deals with at arm’s length. An eligible SMB is a Canadian-controlled private corporation with a permanent establishment in Quebec, with paid-up capital of less than $15 million and gross income of less than $10 million, operating in one of the following sectors: Green technology; Information technology; Life sciences; Innovative manufacturing; Artificial intelligence. Corporations claiming the synergy capital tax credit will have to hold the shares of the eligible SMB for a minimum period of 5 years. Start-ups interested in obtaining the designation of eligible SMB will have to submit an application to Investissement Québec. The investment and innovation tax credit: Modernizing SMBs The investment and innovation tax credit (the “C3i”) is designed to encourage businesses in all sectors to invest in their modernization, particularly in digitization and the use of leading-edge technology. A credit of 10%, 15% or 20%, determined according to the economic vitality index of the area where the investments are made, will be applicable for the acquisition of: Manufacturing and processing equipment; Computer hardware; Management software packages. The C3i will apply to acquisitions made before January 1, 2025, and will be fully refundable for SMBs2. Businesses with total assets and gross income of $100 million or more will also have access to this credit, although it will not be refundable. Eligible expenses for the C3i will be amounts exceeding $5,000 for the acquisition of computer hardware or management software packages and amounts exceeding $12,500 for the acquisition of manufacturing and processing equipment. Businesses involved in the distribution of such hardware and software packages would certainly benefit from informing their customers that the acquisition of their products is potentially eligible for the C3i. Businesses located in resource regions and still benefiting from the tax credit to foster the acquisition of manufacturing and processing equipment introduced in 2008 will be able to choose to continue to benefit from this credit or claim the C3i. Conclusion Quebec’s tax landscape is full of opportunities for innovators and creators of leading-edge technology. We should also mention the enhancement of R&D tax credits that promote collaboration between private businesses and research institutions that contribute to the vitality of Quebec’s knowledge economy. If you are a company involved in R&D and IP commercialization in Quebec, the professionals of Lavery’s intellectual property and taxation teams will be able to support you throughout your projects. Ministère des Finances, Budget 2020-2021, “Your Future, your Budget,” City of Québec, Government of Quebec The credit repayment rate decreases linearly based on an SMB’s total assets and gross income when they exceed $50 million but are less than $100 million.
Substantial upcoming tax impact on investment funds’ management compensation
On September 8, 2017, the Minister of Finance introduced unexpected legislative and regulatory proposals regarding partnership distributions to a general partner, which will now be subject to GST/HST. On the other hand, the Québec government has yet to propose similar changes, but we believe it will follow suit, if the federal government adopts such rules. Under the current federal and provincial (Québec) tax regimes, a general partner carrying on activities (such as management or administration) in its capacity as a general partner is generally not considered to be making a supply to the limited partnership, provided such activities are made in the normal course of the partnership’s activities. As such, no GST/HST is applied to distributions made by the partnership to the general partner for such activities. Under the proposed rules, a new tax concept known as an “Investment Limited Partnership” will be introduced into the law. In general terms, a limited partnership will be described as an investment limited partnership if its primary purpose is to invest funds in property consisting primarily of financial instruments, and if it is represented or promoted as a hedge fund, mutual fund, private equity fund, venture capital fund, or other similar collective investment vehicle. For example, this could include limited partnerships in tiered investment fund structures such as master-feeder funds or funds-of-funds. If a limited partnership were recognized as an investment limited partnership, as described above, even if the general partner provides the management or administrative service to the partnership pursuant to its obligations as a partner of the partnership, the provision of the service would be deemed not to be done by the general partner as a member of the investment limited partnership, and the supply of such service would be deemed to have been made otherwise than in the course of the investment limited partnership’s activities. Therefore, certain limited partnership distributions which are paid or became payable to general partners after September 7, 2017 may now be subject to GST/HST, and the limited partnership will normally not be able to claim input tax credits on such distributions. The Minister of Finance will be receiving comments on the proposed rules until October 10, 2017. We are currently studying the new rules in greater detail and recommend that you contact us to discuss potential ways to reduce their negative impact on your structure.
Federal budget and capital gain: Time for tax planning
There is currently speculation in the media that Liberal Finance Minister Bill Morneau’s next federal budget will increase the capital gain inclusion rate from 50% to 75%.The combined marginal tax rate on capital gains is currently 26.7% for a resident of Québec. This rate would reach nearly 40% if the budget was to increase the capital gain inclusion rate to 75%. A $1,000,000 capital gain would thus generate approximately $133,000 in additional taxes. Proposed tax planning Assuming that the rumour materializes, it is possible to counter the adverse effects of such change by implementing a simple tax planning measure before the budget is tabled. The planning involves transferring assets that have appreciated in value to a corporation. Subject to certain conditions, the transfer allows for the gain to be made prior to the new rules coming into force, thus allowing the taxpayer to benefit from the current 50% inclusion rate. Such a course of action could be of interest to someone who is considering selling assets in the short or medium term. Impact if anticipated measure is not adopted Should the budget not include the anticipated change, it would be possible to reduce and even cancel the capital gain by filing rollover tax forms after the budget is released. No gain would be realized and consequently no tax would be payable. Our highly qualified tax team is available to assist you in that regard.