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March 20, 2023

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 2003
Volume 3, Number 2

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 on the information herein.

In Brief — A Summary of Certain Recent Developments

By Howard L. Wasserman, CA, CFP, TEP
Cadesky and Associates LLP (Toronto)

Professional Incorporation

On October 30, 2002, the Ontario Business Corporations Act ("OBCA") was amended to allow certain professionals to incorporate their practices. It stated that professional corporations can carry on "activities related to or ancillary to the practice of the profession, including the temporary investment of surplus funds earned by the corporation." The recent amendments deleted the word "temporary," effective upon the Bill's receiving royal assent.

his amendment would seem to alleviate concerns that the after-tax funds earned in a professional corporation would have to be removed.

Interest Expense on Income Trust Units

In general, interest expense is deductible if a loan is used for an eligible purpose. Interest continues to be deductible after the asset is no longer owned, if the loan is reduced for any proceeds or deemed proceeds on disposition of the asset, or if the funds are reinvested.

A recent Technical Interpretation states that where a capital distribution has been received from an income trust, the capital distribution must reduce the amount of the loan upon which the interest is to be deducted. Therefore, careful monitoring will be required for those situations where borrowings have been incurred in order to buy income trust units. A similar principle should apply to all mutual fund investments, one would think.

Split Donation Receipts

The December 20, 2002 Technical Bill introduced new provisions that allow charities and political parties to issue tax receipts to donors for the difference between the value of their gift and any consideration received in return. These new rules apply to individual and corporate gifts and political donations made after December 20, 2002. The provisions deal with the calculation of how much the donation is and how to calculate the benefit conferred on the donor.

In Income Tax Technical News No. 26, the CCRA has given guidelines as whether an eligible gift exists and the value of the benefit to the donor. The eligible gift is generally the difference between the amount given to attend the event and the advantage given to the donor. The CCRA states that no advantage is conferred to the donor unless the benefit exceeds the lesser of 10% of the ticket price and $75. In making this calculation, the value of the activity, such as the meal at a fund-raising event, is excluded. Examples of benefits are such things as key chains or t-shirts that are given out at a golf tournament, souvenirs or gifts. Within these guidelines, no reduction need be made when issuing the donation receipt.

The guidelines also include details on how the split receipt policy applies to charitable annuities, donations of mortgaged property, charity auctions, lotteries, concerts, shows, sporting events, golf tournaments and membership fees. The guidelines are available for review on our website at www.taxspecialistgroup.ca

R&D Filing Crackdown

The CCRA announced in its December 2002 newsletter of the Toronto Centre CCRA & Professionals Consultation Group that, as of January 15, 2003, claims for SR&ED that are not complete by the filing deadline will be rejected.

This means that it is not sufficient to file some of the SR&ED information on time and amend it later. Instead, it must be complete. In the past, many claimants have filed within the 18-month period, but have received 30-day letters subsequently asking for the missing information. In the future, CCRA will not issue a 30-day letter for those claimants that are past the 18-month deadline for filing. Therefore, to be safe, all claimants should file their tax returns within, say, 16 months, so that if a 30-day letter is issued, there is still time to get information to CCRA on time.

Poison Pills on Foreign Spin-Offs

Foreign spin-offs can be tax-free in Canada, pursuant to section 86.1, provided a number of steps and tests have been met. However, the CCRA had previously stated that only common shares could be issued in order for a foreign spin-off to qualify as tax-free.

When asked about poison pills rights that are sometimes received along with common shares, the CCRA stated that "it is prepared to accept that, generally, section 86.1 can apply in situations involving such rights, provided that the rights were established for bona fide commercial reasons and not to obtain a tax benefit, and provided that the rights established under the plan did not have any significant value independent of the shares being spun off at the time of the spin off." Therefore, in those spin-offs where the taxpayers also receive a right under a poison pill plan, it would now qualify as a tax-free spin-off. The CCRA also stated that it will accept late-filed elections under subsection 86.1 for those foreign spin-offs that may have been disallowed in the past.