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March 2, 2024

Tax Perspectives

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Please note that these publications may not be up-to-date as taxation matters are subject to frequent changes.

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Summer 2001
Volume 1, Number 1

The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.

In Brief: News of Important Tax Developments

By Howard Berglas, CA

Surviving the kiddie tax

Effective after 1999, the so-called kiddie tax applies to minor beneficiaries of inter vivos trusts that earn dividends from private corporations. It also applies to business income earned by management partnerships that provide administrative and other support services to related businesses.

Close analysis of the rules can suggest creative ways to still split income among family members and reduce the overall tax liability while avoiding the kiddie tax:

  • "Split income" subject to the kiddie tax does not include capital gains or interest income. Dividends can be converted to capital gains by various means, and built-up capital can be loaned to operating corporations at reasonable rates of interest.
  • Income from a partnership can be distributed to nieces and nephews of the persons carrying on the partnership business.
  • Income generated by trusts or by limited partnerships with trusts as their partners, that provide services directly to arm's-length persons, should not be subject to the rules.
  • Spouses and children over 18 are not caught by the rules.
  • Dividends from public companies are excluded.
  • Split income is not subject to federal or provincial surtaxes.

Taxpayers with family trusts should also consider other income-splitting or deferral strategies such as RESPs, reasonable salaries to minors for work performed, and gifts to adult children.

Partnerships and statute-barred periods

Partnerships with five or fewer partners are not required to file partnership information returns. However, if a return is not filed, the partners' tax returns may be reassessed even after the normal statute-barred period (usually three years following assessment) with respect to their partnership income or loss. In light of this rule, it may always be advisable to file a partnership return.

Clergy get clobbered

Recent court decisions have expanded the number of persons who meet the definition of clergy, enabling them to claim a deduction in respect of their residence.

In response to the decisions, the Department of Finance has made legislative changes to limit the deduction commencing in the 2001 taxation year. The deduction will be limited to the least of

  • the clergyman's remuneration from the office or employment;
  • one-third of the remuneration or $10,000, whichever is greater; and
  • the fair rental value of the residence.

In the past, the clergy deduction was limited only by the first and third amounts. It seems that when it comes to the Department of Finance, nothing is sacred.

Tax-free perks?

A recent court decision and two tax rulings illustrate that some perks received by employees from their employers may not be taxable, even if they contain a personal element.


The court in Chow et al. decided that employees were not required to include in taxable income the value of free parking spaces provided to them. The court found unfair the Crown's presumption that employer-provided parking is by its nature a taxable benefit; each case must be looked at on its facts to determine whether an economic benefit accrued to the employee as opposed to the employer. Where it can be shown that the economic benefit arose in favour of the employer, as it did in Chow, a taxable benefit should not arise. For example, if an employer provides free parking to improve employee performance or to save on taxi fares, the courts may see the "perk" as being primarily for business purposes that benefit the employer, and thus not taxable to the employee.

Tuition fees, computers

In two recent tax rulings involving tuition fees and computer costs, the CCRA acknowledged that no benefits would arise in the hands of employees.

In the case of tuition fees paid by an employer, the CCRA ruled that "fees and other associated costs such as meals, travel, and accommodations, which are paid for courses leading to a degree, diploma or certificate in a field related to the employee's current or potential future responsibilities in the employer's business," will not result in a taxable benefit to the employee.

In the case of computer costs, the CCRA stated that no taxable benefit would arise on an arrangement to share the cost of computers whereby the employer leases computers and the employees have the option of buying the computers from the lessor at the residual value. Participation in the program must be voluntary. In the CCRA's view, as long as the employees are not behind the initiative of acquiring the computers and the employer benefits because the employees, as a result, are better trained and informed, no taxable benefit would arise.

Chow et al. and the rulings leave open the door for the creation of very interesting incentive programs that may not give rise to taxable benefits.

New thin cap rules

Rules limit or prohibit the deduction by corporations of interest on debt paid to certain specified non-residents.

Prior to recent amendments, an interest deduction was disallowed where the corporation's debt-to-equity ratio in relation to specified non-residents exceeded 3: 1.