Foreword
Introduction
Summary of chapters
Tax compliance calendar
List of tables
List of CCRA forms
Key definitions
PART I - TAX PLANNING
Chapter 1 Tax Planning Concepts
I. What is tax planning?
1. Types of tax savings
II. Absolute tax savings
1. Exploiting our progressive tax system
2. Choosing investments that generate income that is preferentially taxed
3. Utilizing all available deductions and credits
III. Tax deferral
Chapter 2 Tax Planning Checklist
I. RETIREMENT SAVINGS
II. TAX-PREFERRED INVESTING
III. LOSS UTILIZATION
IV. INCOME SPLITTING
V. PERSONAL TRUSTS
VI. ADMINISTRATIVE/REPORTING
PART II - INVESTMENT INSTRUMENTS
Chapter 3 Stock
I. ADJUSTED COST BASE (ACB)
1. Foreign currency
2. Identical properties
3. Employee stock options
II. TYPES OF SHARES
1. Small business corporation
2. Qualified small business corporation (QSBC) shares
(a) Limitations
(b) Definition of QSBC share
(c) Tax reporting
3. Eligible small business corporation (ESBC) shares
(a) Limitations
(b) Definitions
(c) Tax reporting
4. Flow-through shares
(a) Definition of flow-through share
(b) Resource deductions
(c) Tax benefits
(d) Investment tax credits
(e) Tax reporting
5. Canadian security
III. SUMMARY
IV. REFERENCES
Chapter 4 Debt
I. ADJUSTED COST BASE (ACB)
II. TYPES OF DEBT
1. Investment contract
2. Prescribed debt obligation
3. Indexed debt obligation
4. Income bond and income debenture
5. Small business bond and small business development bond
6. Canadian security
III. SUMMARY
IV. REFERENCES
Chapter 5 Options, Warrants, and Rights
I. EMPLOYEE STOCK OPTIONS
1. Overview
(a) Taxable benefit of employment
(b) Stock option deduction
(i) Charitable donation of employee option securities
(c) Adjusted cost base (ACB)
2. Classification of employee stock options
(a) CCPC options
(b) Other employee stock options
3. Key dates
4. Computation and timing of the taxable benefit of employment
5. Adjusted cost base (ACB) computations
6. Ordering rules
II. TRADING IN SHARE OPTIONS
1. Income account or capital account
2. Treatment of the taxpayer who acquires or holds options
3. Treatment of the taxpayer who sells or writes options
III. RIGHTS TO ACQUIRE THE SECURITIES OF A CORPORATION
IV. CONVERTIBLE SECURITIES60
V. SUMMARY
VI. REFERENCES
Chapter 6 Commodities, Futures Contracts, and Foreign Currency
I. TRADER OR SPECULATOR
II. PERSONAL USE PROPERTY
III. FOREIGN CURRENCY GAINS AND LOSSES
1. The $200 exemption for individuals
IV. SUMMARY
V. REFERENCES
Chapter 7 Mutual Fund Trusts
I. QUALIFYING AS A MUTUAL FUND TRUST
II. THE TAXATION OF A MUTUAL FUND TRUST
1. Flow-through of income
(a) Capital gains
2. Taxation year
III. THE TAXATION OF A UNITHOLDER
1. Taxation of undistributed pre-acquisition income
2. Capital gains
(a) The cost of a unit
3. Tax reporting
IV. SUMMARY
V. REFERENCES
Chapter 8 Income Trusts (and other Unit Trusts)
I. QUALIFYING AS A UNIT TRUST
1. The open-end unit trust
2. The closed-end unit trust
3. The real property unit trust
II. THE TAXATION OF A UNIT TRUST
III. THE TAXATION OF A UNITHOLDER
IV. SUMMARY
V. REFERENCES
Chapter 9 Mutual Fund Corporations (and Investment Corporations)
I. MUTUAL FUND CORPORATIONS
1. Qualifying as a mutual fund corporation
2. Taxation of mutual fund corporations
(a) Capital gains
(b) Dividends
(c) Other income
3. Multi-class funds
4. Taxation of a shareholder
II. INVESTMENT CORPORATIONS
1. Qualifying as an investment corporation
2. Taxation of investment corporations
(a) Capital gains
(b) Dividends
(c) Other income
III. SUMMARY
IV. REFERENCES
Chapter 10 Labour Funds
I. QUALIFYING AS A PRESCRIBED LSVCC
II. THE FEDERAL TAX CREDIT
1. Use it or lose it no carryforward
2. Alternative minimum tax
3. Capital loss and adjusted cost base implications
III. MINIMUM HOLDING PERIODS
1. Part XII.5 penalty tax recovery of labour-sponsored funds tax credit
IV. RRSP INVESTMENTS
1. Foreign property limits in RRSPs
V. PROVINCIAL TAX CREDITS
VI. TAX REPORTING
VII. SUMMARY
Chapter 11 Limited Partnerships
I. ADJUSTED COST BASE (ACB)
1. Adjustments to the cost of a tax shelter
2. Negative cost base
II. THE TAXATION OF PARTNERSHIP INCOME
1. Alternative minimum tax (AMT)
2. At-risk rules limited partnership losses
III. TAX REPORTING
IV. SUMMARY
V. REFERENCES
Chapter 12 Tax Shelters
I. OVERVIEW
II. TAX SHELTER REGISTRATION
1. Definitions
2. Tax shelter identification number
3. Tax reporting
4 .Adjustments to the cost of a tax shelter
III. ALTERNATIVE MINIMUM TAX
1. Overview
2. Tax preference items
(a) Non-taxed portion of capital gains
(b) Taxable Canadian dividends
(c) Partnership losses
(i) Allowable capital losses
(ii) Business losses
(iii) Property losses
(d) Partnership carrying costs
(e) Tax shelters
(f) Resource expenses
(g) Rental or leasing properties
(h) Film properties
(i) Loss carryovers
(j) Other adjustments
(k) Amendment relating to RRSP, RPP and DPSP deductions
3. Basic minimum tax credit
4. Minimum tax carryover
5. Provincial AMT
6. Tax reporting
IV. AT-RISK RULES LIMITED PARTNERSHIP LOSSES
V. MATCHABLE EXPENDITURE RULES
1. Mutual fund limited partnerships
2. Deductibility of matchable expenditures
VI. THIRD PARTY CIVIL PENALTIES
1. Planner penalty
2. Preparer penalty
3. Principles of application
VII. REASONABLE EXPECTATION OF PROFIT TEST
VIII. GENERAL ANTI-AVOIDANCE RULE (GAAR)
IX. SUMMARY
X. REFERENCES
PART III - INVESTMENT INCOME
Chapter 13 Dividends
I. TAXATION OF DIVIDENDS
1. Gross-up and tax credit mechanism
2. Ordering of tax credits
3. Timing of dividend income recognition
II. MAXIMUM TAX-FREE DIVIDEND LEVEL
III. COMPARATIVE AFTER-TAX YIELDS: DIVIDENDS VS. INTEREST
IV. ELECTION TO REPORT SPOUSE'S DIVIDENDS
V. ALTERNATIVE MINIMUM TAX (AMT)
VI. STOCK DIVIDENDS
VII. CAPITAL DIVIDENDS
VIII. CAPITAL GAINS DIVIDENDS
IX. TAX REPORTING
X. SUMMARY
XI. REFERENCES
Chapter 14 Interest
I. TIMING OF INTEREST INCOME RECOGNITION
1. Received and receivable methods
2. Annual accrual rules
(a) Prescribed debt obligations
(i) Non-interest-bearing debt obligations
(ii) Obligations where the principal is not proportional to the interest
(iii) Deferred interest obligations
(iv) Contingent interest obligations
3. Corporations, partnerships and unit trusts
II. THE COST BASE OF A DEBT OBLIGATION
1. Accrued interest bought and sold
2. Discounts and premiums
(a) Deep discount bonds
III. TAX REPORTING
IV. SUMMARY
V. REFERENCES
Chapter 15 Capital Gains and Losses
I. TIMING OF CAPITAL GAINS AND LOSSES
1. The meaning of disposition
2. Settlement date
3. Beneficial ownership and legal ownership
(a) Joint accounts probate fee avoidance
4 Attribution rules who reports the capital gain or loss?
5. Deemed dispositions
6. Election to dispose of bad investments
7. Transactions not resulting in a disposition
II. COMPUTING THE AMOUNT OF A CAPITAL GAIN
1. Adjusted cost base (ACB)
(a) Identical properties
(b) Foreign exchange rate
(c) Gifts and bequests
(d) Capital gains election
(e) Exercising employee stock options
(f ) V-day elections (1972)
(g) Foreign spin-off elections
2. Proceeds of disposition
3 .Expenses
4. Tax-deferred rollovers
(a) Eligible small business corporation (ESBC) shares
(b) Foreign spin-offs
(c) Transfers of property under section 85
(d) Other rollover provisions
5. Inter-spousal rollovers
(a) Spouse and common-law partner
6. When a gain is not a capital gain
7. Arm's length and related persons
III. PREFERENTIAL TAX RATE
1. Gifts of publicly traded securities
2. Capital gains exemption
3. Flow-through entities and exempt capital gains balances
IV. CAPITAL LOSSES
1. Restrictions on the deductibility of capital losses
(a) Superficial losses
(i) Affiliated persons
(b) Transfers to registered plans
(c) Losses sustained on personal debt
(d) Share redemptions by affiliated corporations
2. Loss carryback/carryforward rules
(a) Adjustment to capital gains inclusion rates
(b) The inclusion rate for year 2000 a special case
3. Allowable business investment losses (ABILs)
4. Accessing the unrealized capital losses of a spouse
V. TAX REPORTING
VI. SUMMARY
VII. REFERENCES
Chapter 16 Business Income
I. CAPITAL ACCOUNT VS. INCOME ACCOUNT
1. Transactions on income account based on the nature of the transactions
2. Transactions on income account based on the taxpayer's course of conduct
3. Guaranteed capital gains election
II. TAX TREATMENT OF BUSINESS INCOME (LOSSES)
III. SUMMARY
IV. REFERENCES
Chapter 17 Foreign-Source Income (and Offshore Investments)
I. OVERVIEW
II. DIRECT PORTFOLIO INCOME
1. Foreign tax credits
(a) Canadian tax otherwise payable
(b) Computation and reporting rules
III. FOREIGN INCOME VERIFICATION FORM T1135
1. Foreign affiliates and controlled foreign affiliates
IV. TAX MOTIVATED OFFSHORE ARRANGEMENTS
1. Overview
2. Tax evasion
V. NON-RESIDENT CORPORATIONS
1. Overview of taxation
(a) Dividends received from non-resident corporations
(b) Foreign accrual property income (FAPI)
(c) Deduction for foreign accrual tax
(d) Deduction for distributed FAPI
2. Determining the residency of a corporation
(a) Common law test of residency
(b) Statutory tests of residency
(c) Treaty tests of residency
3. Types of non-resident corporations
(a) Controlled foreign affiliate
(b) Foreign affiliate
VI. NON-RESIDENT TRUSTS
VII. OFFSHORE INVESTMENT FUNDS
VIII. SUMMARY
IX. REFERENCES
Chapter 18 Expenses
I. COSTS INCURRED ON CAPITAL ACCOUNT
II. COSTS INCURRED ON INCOME ACCOUNT
1. Interest on borrowed money
2. Accrued interest bought
3. Fees paid to investment counsel
4. Tax preparation and accounting fees
5. Investment publications
6. Foreign withholding taxes
7. Resource expenses
8. Allowable business investment losses
9. Miscellaneous non-deductible expenses
III. SUMMARY
IV. REFERENCES
PART IV - SPECIAL INVESTORS
Chapter 19 Private Corporations
I. CORPORATE TAX STATUS
1. Private corporations
2. Canadian-controlled private corporations (CCPCs)
3. Small business corporations
II. THE TAXATION OF CORPORATE INCOME
1. Dividend income
2. Investment income
(a) Capital gains and losses
(i) Capital dividend account
(b) Income from property
(c) Tax rate investment income
(i) Refundable portion of tax on investment income
(d) Integration
3. Active business income
(a) Specified investment business
(b) Personal services business
4. Other income
III. TRANSFERS OF PROPERTY TO A CORPORATION
IV. THE TAXATION OF CORPORATIONS VS. INDIVIDUALS
V. SUMMARY
VI. REFERENCES
Chapter 20 Estates and Trusts
I. OVERVIEW
1. The three certainties
2. The settlor
3. The trustee
4. The beneficiary
II. TYPES OF TRUSTS
1. Inter vivos trusts
2. Testamentary trusts
3. Personal trusts
4. Spousal trusts
5. Alter ego trusts
6. Joint spousal or common-law partner trust
III. TAXATION OF PERSONAL TRUSTS
1. Flow-through vehicle
(a) Paid or payable
(b) Preferred beneficiary election
(c) Election to tax income or capital gains in the trust
(d) Designations of income by type
(e) The entitlements of minors
(f) Capital losses
2. Taxed like an individual
3. Transfers of property to/from personal trusts
4. 21-year deemed disposition
5. Tax-motivated uses for trusts
(a) Income splitting testamentary trusts
(b) Education trusts
(c) Avoiding probate fees
IV. TESTAMENTARY TRUSTS AND DECEASED TAXPAYERS
1. Trust tax returns
2. Terminal tax return
3. Clearance certificates
V. TAX REPORTING
VI. SUMMARY
VII. REFERENCES
Chapter 21 Non-Residents
I. RESIDENCY DETERMINATION
1. Sojourner rule
2. Tax treaties
3. Residency rulings
II. DEPARTURE RULES
III. IMMIGRATION
IV. TAXATION OF A NON-RESIDENT
1. Non-resident withholding tax on passive income
(a) Tax reporting
V. SUMMARY
VI. REFERENCES
Chapter 22 Canadians With US Connections
I. US ESTATE TAX
1. Overview
2. Gross estate
(a) Valuation date
3. Allowable deductions
(a) Deduction for expenses and debts, etc.
(b) Charitable deduction
(c) Marital deduction
4. Tax rates
5. Allowable credits
(a) Estate tax credit
(b) State death taxes
(c) Canadian marital credit
6. Small estate exemption
7. Canadian tax credit for US estate taxes
8. Clearance certificates
9. Reporting
II. TRADING CANADIAN INESTMENT ACCOUNTS FROM THE US
1. Overview
2. Federal exemption for temporary presence
3. Federal exemptions for Canadian Retirement Accounts
(a) Exemption from registration for Canadian broker-dealers
(b) Exemption from registration for foreign securities offered for sale
(i) Rule 237 under the Securities Act
(ii) Rule 7d-2 under the Investment Company Act
4. State securities regulations
III. FORM W-8BEN AND WITHHOLDING ON US SOURCE INVESTMENT INCOME
PART V - INVESTING STRATEGIES
Chapter 23 Income Splitting
I. THE ATTRIBUTION RULES
1. Income (and losses) from property transferred or loaned to a spouse or minor
2. Capital gains (and losses) realized on property transferred or loaned to a spouse
(a) Property
(b) Income from property
(c) Losses from property
(d) Income-on-income exemption
(e) Transfers of property
(f) Commingled funds
(g) Loans of property
(h) Transfers and loans prior to marriage
(i) Marriage breakdown
(j) Minors attaining majority
(k) Transfers and loans prior to attaining residency
(l) Indirect loans or transfers
(m) Substituted property
(n) Turning attribution off
(o) Debt repayment
(p) Capital gains exemption
(q) Exception for fair market transfers and commercial loans
3. Transfers and loans of property to trusts
4. Transfers and loans of property to corporations
(a) Deemed interest
(b) Interest offsets
(c) Outstanding amount
(d) Purpose test
(e) Marriage breakdown
5. Back-to-back loans and transfers
6. Loan guarantees
7. Reversionary and revocable trusts
(a) Reversion of property
(b) Beneficiaries to be determined
(c) The requirement for consent
8. Interest-free or low-interest loans
9. Indirect payments and transfers of rights to income
10. Short-term spousal RRSP contributions
11. Split income tax (kiddie tax)
II. INCOME SPLITTING STRATEGIES
1. In-trust-for (ITF) accounts
2. Anti-avoidance rule
III. SUMMARY
IV. REFERENCES
Chapter 24 Borrowing To Invest
I. INTEREST DEDUCTIBILITY
1. Paid or payable
2. Legal obligation to pay
3. Income-earning purpose
(a) Income from a business or property
(b) The tracing rule
(c) Rearranging financial affairs to make interest deductible
(d) The source of income ceases to exist
II. OTHER RESTRICTIONS AND LIMITATIONS
III. SUMMARY
IV. REFERENCES
Chapter 25 Short-Selling and Hedges
I. SHORT-SELLING
1. Securities lending arrangements
II. HEDGES
1. Income account or capital account
2. Timing of gains and losses
(a) Capital account
(b) Income account
(c) Income splitting hedge strategies
III. SUMMARY
IV. REFERENCES
PART VI - REGISTERED PLANS
Chapter 26 Registered Retirement Savings Plans (RRSPs)
I. GENERAL
II. TAXATION OF AN RRSP
1. Part I tax tax on income
2. Part X.1 tax excess contributions
3. Part XI tax foreign property
4. Part XI.1 tax non-qualified investments
III. CONTRIBUTIONS AND DEDUCTIONS
1. RRSP deductions
2. Carryforward of undeducted contributions
3. Designated transfers
4. Spousal contributions
5. Over-contributions
(a) Part X.1 penalty tax
IV. DIRECT TRANSFERS FROM RRSPs
V. TAXATION OF BENEFITS
1. Benefits received before maturity
2. Benefits received after maturity
3. Spousal plan withdrawals anti-avoidance
4. Transfers of property to/from an RRSP
5. Acquisition of non-qualified investments and pledging plan assets as security
6. Deregistration of an RRSP
VI. PLAN MATURITY AND RETIREMENT INCOME
1. Locked-in RRSPs (or LIRAs)
VII. DEATH OF AN ANNUITANT
1. Refund of premiums
(a) Election to deem a refund of premiums
(b) Limitation on deduction available to deceased annuitant
2. Spouse becomes annuitant
(a) Election to become the annuitant
3. Tax-paid amounts
4. Other payments to beneficiaries
5. Direct designations to qualified donees
VIII. DEFINITIONS
1. Annuitant
2. Benefit
3. Earned income
4. Foreign property
5. Issuer
6. Maturity
7. Non-qualified investment
8. Pension adjustment reversal (PAR)
9. Premium
10. Qualified investment
11. RRSP deduction limit
12. RRSP dollar limit
13. Refund of premiums
14. Retirement income
15. Spousal plan
16. Tax-paid amount
17. Unused RRSP deduction room
18. Definitions Part X.1 penalty tax
(a) Cumulative excess amount
(b) Undeducted RRSP premiums
(c) Group RRSP amount
(d) Qualifying group RRSP premium
(e) Qualifying arrangement
(f) Transitional amount
IX. REFERENCES
Chapter 27 Registered Retirement Income Funds (RRIFs)
I. GENERAL
II. TAXATION OF A RRIF
1. Part XI tax foreign property
2. Part XI.1 tax non-qualified investments
III. PLAN INCOME AND BENEFITS
IV. CONTRIBUTIONS
1. Life income funds (LIFs) and locked-in retirement income funds (LRIFs)
V. TAXATION OF BENEFITS
1. Spousal plan withdrawals anti-avoidance
2. Transfers of property to/from a RRIF
3. Acquisition of non-qualified investments and pledging plan assets as security
VI. DEATH OF AN ANNUITANT
1. Direct designations to qualified donees
VII. DEFINITIONS
1. Annuitant
2. Carrier
3. Designated benefit
4. Minimum amount
5. Qualified investment
VIII. REFERENCES
Chapter 28 Registered Education Savings Plans (RESPs)
I. GENERAL
II. BENEFICIARIES
III. CONTRIBUTIONS
1. Part X.4 penalty tax over-contributions
2. Canada education savings grants
3. Death of a subscriber
IV. BENEFITS
1. Educational assistance payments (EAPs)
(a) Post-secondary educational institution
(b) Qualifying educational program
2. Refund of payments
3. Payments to designated educational institutions
4. Accumulated income payments (AIPs)
(a) Part X.5 tax
V. INVESTMENTS
VI. TRANSFERS BETWEEN PLANS
VII. TAXATION OF AN RESP
VIII. REFERENCES
Chapter 29 Deferred Profit Sharing Plans (DPSPs)
I. GENERAL
II. INVESTMENTS OF A DPSP
III. TREATMENT OF THE EMPLOYER
IV. TREATMENT OF THE EMPLOYEES
1. Tax treatment
2. Purchase of an annuity
3. Inter-plan transfers
4. Shares of the employer
V. REFERENCES
Appendix A -- PERSONAL TAX RATES, 2007
Appendix B -- QUALIFIED INVESTMENTS OF REGISTERED PLANS
Appendix C -- FOREIGN ACCRUAL PROPERTY INCOME (FAPI)
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?I>Writing about tax in a clear and palatable manner is no mean feat, but Mott has done so, canvassing all the relevant materials and drawing the information together Believe it or not, there is evidence of a subtle sense of humour in this work.?/I>
Stewart Lewis
Investment Executive
?I>It is hard to overestimate the value of this book for the serious advisor, which wraps up in a few paragraphs what hours of searching on the CCRA website or talking to tax officials often cannot.?/I>
Scot Blythe
advisor.ca
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