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Archive for March 2012

Transferring Property to a Corporation or Partnership

Transfer to a Corporation

-Certain transfers to a corporation can take place on a rollover basis given that the following criteria is met:

  1. The corporation receiving the property must be a taxable Canadian corporation;
  2. The consideration of the property transferred must include at least 1 share from the corporation;
  3. Transferred property must be eligible property. Does not include real property owned by non residence or land held as an investment.
  4. The taxpayer and corporation must complete form T2057 and file the next tax year by the individual or Corp.

-The taxpayer and the corporation are allowed to set the transfer price. The set price determines the disposition for the taxpayer and the adjusted cost base for the corporation.

-The general rule is that consideration should not exceed the adjusted cost base of the property as this would not trigger capital gains.

Property Transferred to/from Partnership or Proprietor

-Generally property transferred to a partnership is done so at FMV. However, the ACT allows a tax free rollover where a joint election is filed and consideration contains interest into the partnership.

Income Attribution Rules: Loans and Transfers

Spouse

If property is transferred from a taxpayer to his/her spouse it will result in:

-any income or loss from the property will be attributed to the taxpayer; and

-any net taxable capital gain or allowable capital loss resulting from the disposition of the property will be attributed to the taxpayer.

Attribution does not apply for property that is transferred for its fair market value. The taxpayer may loan his/her spouse money for the transfer purchase but the loan has to meet certain criteria in order to avoid attribution:

-a written agreement must be developed that highlights the specifics for the repayment of the loan;

-the borrowing spouse must pay a interest rate greater then, or equal to the lesser of:

  • the prescribed rate of interest; or
  • a rate that is reasonable for parties dealing at arms length; and

-the borrowing spouse must make a loan interest payment no later then 30 days after the taxation year. If interest is not paid back during the proper time any income earned during the year and all future income will be attributed to the taxpayer.

Eligible Capital Expenditures

Eligible Capital Expenditures refers to intangible item such as:

  • goodwill;
  • trademarks;
  • customer lists;
  • government rights;
  • incorporation and reorganization costs; or
  • farm quotas.

CEC Account

75%, representing the inclusion rate, of all eligible capital property is added to a notional account called the Cumulative Eligible Capital Account (CEC). At the end of the taxation year, the taxpayer is allowed to deduct 7% of any positive CEC balance from business income. This deduction is referred to as amortization; the taxpayer has the ability to deduct up to the 7%. If the taxpayer has multiple businesses, each business would have its’ own CEC account.

Disposition

If the taxpayer disposes of eligible capital property there is a credit to the CEC account equal to 75% of net proceeds (proceeds of disposition (-) cost of disposition). The ACB is not accounted for in this situation.

Capital Gains Exemption

The income tax ACT provides for a $750,000 capital gains exemption on any capital gains from Qualified Farm Property (QFP), for fisherman and Qualified Small Business Corporation Shares (QSBCS) over a taxpayer’s lifetime.

The capital gains deduction is the least of:

unused lifetime deduction*;

annual gains limit**; and

cumulative gains limit***.

*Unused Lifetime Deduction

The unused lifetime deduction is $375,000 (50% of $750,000) less all previous claims from QFP and QSBCS and claims from previous deduction limits (i.e. $500,000 and $100,000).

**Annual Gains Limit

The annual gains limit refers to the taxpayer’s maximum entitlement to capital gains deductions during the current year.

***Cumulative Gains Limit

The cumulative gains limit refers to the taxpayer’s entitlement to capitals gains deduction for all years.

Exclusions from Capitals Gains Treatment

Life Insurance Policy

If a taxpayer incurs a gain on the disposition of a life insurance policy, the cash value/investment account exceeds the adjusted cost base (ACB), the gain is treated as income and doesn’t receive any preferential tax treatment i.e. Capital Gains.