Question: Is there tax on a gift to a family member?
Answer: There is no “gift” tax per se, but giving a gift to a “non-arm’s length” individual (which would include a spouse, child, parent, sibling, etc.) may trigger a capital gain if the property being transferred is a capital asset that has appreciated in value since it has been acquired. So, for example, if you bought a property for $1 million and it is now worth $2 million, if you transfer it to a non-arm’s length individual, section 69 of the Income Tax Act (Canada) (the “ITA”) deems the transfer to occur at fair market value, and you would trigger a $1 million capital gain ($2 million FMV minus $1 million cost base).
Of course, if the property qualifies as a “principal residence” then, although technically the capital gain would still be triggered, the tax on the gain may be sheltered by virtue of the principal residence exemption.
Giving a gift of cash would not result in any tax.
Question: If I have an income tax liability, can I transfer my assets to a spouse, friend or other family member to get around paying the tax?
Answer: It may be true that the CRA would have a hard time collecting from you if you had no assets, but under section 160 of the ITA, the CRA can assess your spouse, friend or other family member for the income tax liability. Section 160 of the ITA is a provision that allows the CRA to assess a transferee of property for the income tax liability of the transferor, if the property was transferred to the transferee for less than fair market value. If the spouse, friend or other family member paid fair market value for the asset, the CRA would not be able to assess the spouse, friend or other family member.
Question: Can the shareholders of a company be held liable for the company’s income tax bill?
Answer: Not directly. However, if the company paid dividends to non-arm’s length shareholders, it is possible that the shareholder can be assessed under section 160 of the ITA. (Section 160 of the ITA is described briefly above.)
Question: I am buying a business. Should I buy the assets or the shares?
Answer: There is no absolute right or wrong answer to this question. However, usually a purchaser would prefer to purchase the assets of a company, rather than the company itself (i.e., the shares of the company). Buying the shares of the company means that you inherit all of the company’s history, including its tax filings, its potential for lawsuits from events that occurred prior to your purchase. Purchasing shares therefore often results in the need for more extensive due diligence in order to protect your purchase. On the other hand, sometimes there is a specific reason why a purchaser would want to buy the company itself including, for example, the company may already have a certain license or status with a government body for which the transition of the business is easier via a share purchase. Every case, of course, has its own nuances.
A vendor will usually want to sell shares in order to, among other things, utlitize his or her lifetime capital gains exemption on the sale of shares.
Question: What is a tax “rollover”?
Answer: A “rollover” refers to any transaction which would normally give rise to a taxable event, but, by operation of law or by the filing of an election (depending on the circumstances), such transaction actually occurs on a tax-deferred basis. The classic “section 85 rollover” is used where one taxpayer transfers a property that has appreciated in value to a “taxable Canadian corporation”, and the transferor and transferee file an election form to have the transfer occur at cost. By virtue of the transfer occurring at cost (as opposed to at fair market value), no immediate tax consequence ensues. A simple example is where someone owns shares of a private corporation personally and wants to transfer those shares to a holding company (so as to, for example, pay inter-corporate dividends up to the holding company). A straight up transfer would result in a taxable event to the shareholder. However, if a rollover election form is filed, the transfer can be accomplished without triggering any tax. An example of where a rollover happens automatically (without the filing of an election form) is where there is a transfer between husband and wife. In such a case, the transfer automatically occurs on a rollover basis.
Question: How can I secure a loan that I have advanced?
Answer: A loan can be secured via a mortgage against real property, or by registering a “PPSA” against the assets of a debtor. PPSA is an acronym for the legislation called the Personal Property Security Act. If you advance money to a debtor as a loan and your loan remains unsecured, any other creditors who have secured their loans to the same debtor would have priority over you with respect to collection of the debt. A “general security agreement” should be entered into by the lender and the borrower, and then the PPSA gets registered with the Ontario government, just like a mortgage would get registered in the Land Registry.
Question: If I have a holding company which has advanced money to a subsidiary or sister operating company in order to finance the business, can I register a PPSA to secure that money?
Answer: Yes. Even though you may technically be the ultimate owner of the two companies, the companies are two separate legal entities and may contract with each other in a creditor/debtor relationship. It is always wise to secure such loan in the event that there are other creditors (such as trade creditors, claimants in a lawsuit, etc.) of the debtor (i.e., your company) in order to give the loan of your other entity priority over that of other unsecured creditors.