We deal with two main areas of tax law: tax planning and tax disputes.
Tax planning can mean many different things. We use standard, well known tax strategies but we also develop proprietary tax strategies to address the nuances of each scenario we face. Our tax strategies have saved clients millions of dollars in taxes. We have experience in highly complex corporate reorganizations. We can design and implement a tax-efficient corporate structure for your group of companies.
We have experience in dealing with CRA audits as well as reassessments. We always try to resolve tax disputes at the earliest stage possible – i.e., at the audit stage. If a reassessment has already been issued, we are experienced in filing notices of objection to dispute the reassessment of the CRA. A notice of objection must be filed within 90 days of the date of the notice of reassessment. If it is beyond this 90 day deadline, there are provisions in the Income Tax Act that allow one to file an objection within one year, if certain criteria are met. We also have experience with late-filed objections.
Some strategies and information about tax planning
Corporate Tax Planning
Corporations can be tax-efficient, or not tax-efficient, depending on the scenario. Generally speaking, a Canadian-Controlled Private Corporation (a “CCPC”) pays a very low rate of tax (currently 15.5% in Ontario) on “Active Business Income” (“ABI”) that is eligible for the “small business deduction”. This percentage will drop as low as 12% in the coming years. ABI up to $500,000 in a particular taxation year is eligible for the small business deduction. Income earned by a corporation in excess of the small business limit is taxed at the general corporate rate of 26.5% (currently, in Ontario).
However, passive investment income (such as rental income from a residential or commercial property) earned by a CCPC is generally subject to a very high up-front corporate tax rate of over 50% (currently, in Ontario). A percentage of this up-front tax is refundable to the Corporation upon the declaration of taxable dividends to the shareholders. Therefore, using a corporation to earn passive investment income may or may not be the most tax efficient option, depending on the circumstances. Some strategies may be available to reduce corporate tax on a corporation earning passive investment income.
“Inter-corporate dividends” can be paid tax free between, for example, an operating company (“Opco”), and a holding company above (“Holdco”). To be eligible for the inter-corporate tax-free dividend, the two corporations have to be “connected” within the meaning of subsection 186(4) of the ITA. This essentially means that Holdco must either “control” Opco, or Holdco must hold shares of Opco that represent more than (i) 10% of the voting power of Opco, and (ii) 10% of the fair market value of all of the issued capital stock of Opco.
Often, the owner of Opco will want to remove excess cash from Opco (for creditor proofing purposes, and for capital gains exemption purification purposes (discussed elsewhere)),but will not yet want to pay tax on the cash removed. The owner can accomplish this via Holdco.
Capital Gains Exemption
The capital gains exemption (the “CGE”) is one of the greatest gifts Canadian tax law has given Canadian residents. Every individual (i.e., a person) who is a Canadian resident is eligible for the CGE on the sale of what are called “qualified small business corporation shares” (“QSBC Shares”). For a share to qualify as a QSBC Share, it must meet several tests as set out in section 110.6 of the ITA. In summary terms, a QSBC Share is, essentially, a share of a Canadian-Controlled Private Corporation that carries on an active business in Canada, and which meets certain active vs. passive asset thresholds.
This means that if a person sells QSBC Shares of their company for $800,000, the entire capital gain will be sheltered from capital gains tax. (Note that other tax may apply in certain scenarios, such as “alternative minimum tax”, so it is important to plan properly to obtain the full benefit of the CGE. Note also that other restrictions apply – such as where taxpayer has what is called a “CNIL” balance (a cumulative net investment loss balance)).
The best part of this story is that if you are in the right scenario, you might be able to benefit from two, three or even four CGEs, if you have family members that can also utilize their CGE. A very common way to accomplish this is through the use of a trust. With two CGEs, you can shelter $1.6 million of sale proceeds. With three CGEs, you can shelter $2.6 million of sale proceeds, and so on.
International and Non-Resident Tax
International and non-resident tax scenarios can complicate the picture. In the absence of proper planning, more tax will likely be paid.
Some basics of Canadian non-resident tax laws are as follows:
- Various payments to non-residents of Canada are subject to a 25% withholding tax (Part XIII of the ITA), such as (for example) payments of rent, dividends and management fees. This amount may be reduced by a tax treaty. For example, many payments to a resident of the U.S. are reduced by the Canada-U.S. Tax Treaty to 15%, and in some cases 10%, 5%, or even 0.
- When a non-resident disposes of “taxable Canadian property”, the purchaser is required to withhold 25% of the grossproceeds in the absence of obtaining a certificate of compliance under section 116 of the ITA (a “116 Certificate”) in advance of the transaction. A 116 Certificate may also be applied for within 10 days after the transaction (and mustbe applied for if it was not applied for prior to the transaction), and the vendor of the taxable Canadian property is entitled to a refund of the overpayment of tax.
- Income derived from a business carried on in Canada by a non-resident will also be, generally speaking, subject to Part I Tax in Canada.
- A tax-deferred rollout of trust property to a non-resident is not available.
Where there is a non-resident in the mix, appropriate planning is absolutely crucial so as to not pay more tax than necessary.