Author Archives: Michael Atlas

NEW CANADIAN TAX REGIME FOR COMBATING INCOME SPLITTING DOES NOT APPLY TO PAYMENTS TO NON-RESIDENTS

Effective 2018, there is a totally new set of rules aimed at curtailing the ability of Canadians to shift business income to family members in lower tax brackets.

This is an extension of the “kiddie tax” regime that has been in place for many years. However, this “tax on split income” (“TOSI”) regime is far more extensive than the “kiddie” tax. It can apply to amounts received by family members of all ages.

Most commonly, it will apply to dividends received from private corporations carrying on a business in which a family member is involved. However, it can also apply to capital gains on shares in such companies.

Where TOSI applies, income will be taxed at the highest tax rates.

However, TOSI only applies to income taxed under Part I of the ITA. A dividend paid to a family member who is not resident in Canada will be taxed under Part XIII. In the absence of a tax treaty applying, the rate will be 25%-this is considerably lower than the rate on TOSI. In cases where the recipient is resident in a country with which Canada has a tax treaty, the rate will generally be reduced, most commonly to 15%.

It should be possible to introduce non-residents family members as shareholders without too much difficulty. One way would be to do a typical “freeze” and issue some of the new Common shares to them. However, this would not always be necessary. Usually, “discretionary” or “dividend sprinkling” shares can be created and issued for nominal consideration without implementing a freeze.

Similarly capital gains realized by non-residents from the disposition of shares in private Canadian corporations will generally not be subject to Canadian tax unless most of the underlying value is derived from Canadian real estate. In the case of normal operating corporations, gains will generally not be subject to Canadian tax.

Similar considerations will generally apply where the non-resident is a beneficiary of a Canadian trust that receives dividends from the family company. Dividends passing through the trust, and out to the beneficiary, will be taxed under Part XIII of the ITA, not Part I, so TOSI will not apply

Of course, in all cases, tax implications in the non-residents country of residence will have to be considered.

TAX CONSIDERATIONS FOR NON-RESIDENTS USING CANADIAN LPs

In the past year, I have had a number of inquiries from non-residents looking to register a Limited Partnership (“LP”) in a Canadian province-generally Ontario. The motivation for doing that is to have an entity that they can use for banking or credit card processing purposes that benefits from the “clean” reputation of Canada. One… Continue Reading

JULY 18 TAX PROPOSALS WILL ENCOURAGE FOREIGN OWNERSHIP OF CANADIAN CORPORATIONS

On January 15 of this year, I published an article, as part of this Blog, entitled “Wealthy Immigrants to Canada Should Consider Foreign Ownership of Cancos” (see http://taxca.com/blog-2017-1/). The thrust of that article was that better tax treatment of dividends and capital gains might result if family members, who were resident outside of Canada, held shares… Continue Reading

CANADIANS SHOULD THINK TWICE BEFORE USING U.S. 1031 EXCHANGES

Just about everyone who deals with U.S. real estate investments hears about “1031 exchanges” at one time or another. For the few who have not, it is, essentially, a mechanism whereby a gain on the sale of real estate may be deferred for tax purposes by acquiring a new property. Canadians investing in U.S. real… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 5

In the last article in this series, I reviewed the basics of the dreaded Canadian “departure tax”. The purpose of this article is to discuss some special considerations applicable to expats with investment or real estate holding companies. I will outline these special considerations in point form below. 1) As I indicated in the last… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 4

In the last article in this series, I explained what I call my “Guaranteed No-Fail Recipe for Becoming a Non-Resident”. Assuming that the expat is successful in becoming a non-resident, there is often a significant cost and hurdle in the form of the so-called “departure tax”. If ridding oneself from the ongoing burden of Canadian… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 3

In the last article in this Blog, I provided an overview of how Canada’s tax treaties can help a Canadian seeking to become a non-resident, particularly in the wake of the July 18, 2017 release from the Ministry of Finance. Canada currently has tax treaties in force with 93 countries in various parts of the… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 2

In the last article in this Blog, I predicted that, “After the July 18, 2017 release from the Ministry of Finance, many affluent and successful Canadians will start to seriously consider finding a more hospitable place to reside.” Feedback from my contacts suggest that my prediction was quite accurate. The purpose of this article is… Continue Reading

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 1

After the July 18, 2017 release from the Ministry of Finance, many affluent and successful Canadians will start to seriously consider finding a more hospitable place to reside. First it was an additional 4% in personal income taxes.  That was a little present from Justin Trudeau’s government shortly after he took office. Now, there is… Continue Reading

INTERNATIONAL TAX ASPECTS OF CANADIAN TAX PROPOSALS RE PRIVATE CORPORATIONS

On July 18, 2017, Canada’s Finance Minister Bill Morneau released a document entitled Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies. This was no surprise-the Minister had hinted at this some months ago at a tax conference. In a nutshell, the Minister, and his many left-leaning… Continue Reading