As a shareholder, the benefits you receive could have significant tax implications. In many cases, shareholders are unaware that a corporation – even if wholly owned – is a separate taxpayer. Money earned by a corporation is meant to be used for business purposes, paying for expenses or costs associated with the operations of the corporation. If a corporation pays for a shareholder’s personal expenses or permits its assets to be used by the shareholder for personal purposes, a taxable benefit may result.
The corporate bank account should not be considered the shareholder’s personal piggy bank. When money or property is extracted from the corporation other than through salaries, dividends, repayment of capital or loan or reimbursement of expense, a benefit may have been conferred by the corporation on the shareholder.
Any benefit conferred on a shareholder by a company must be reported on the shareholder’s personal tax return, unless the shareholder has reimbursed the company in a timely fashion or has credit in his or her shareholder loan before the benefit was received. There may also be GST/HST consequences that need to be addressed. If the Canada Revenue Agency (CRA) audits the corporation, the shareholder could be assessed a benefit in addition to the CRA denying such expenses as deductible to the corporation, and double taxation may result.
It may be difficult to determine whether an expense is incurred for business purposes if a personal element is involved. This could be the case with meals, entertainment, parties, gifts, travel with family members, etc. It is important to document the reason for the expense to demonstrate it was incurred for business purposes. Expenses that are not deductible to the business (such as golf club dues) may still be a benefit to the shareholder.
If corporate‑owned property (such as an aircraft, a luxury yacht or a cottage) is used by the shareholder for personal reasons, the benefit may be calculated as what the shareholder would have had to pay for the same benefit in the same circumstances if he or she had not been a shareholder of the company. In order to address this issue, the shareholder is charged with fair market value rent. On occasion, fair market value rent may not be adequate to provide the business with a reasonable return on the cost or the value of its investment, and the benefit will be computed based on a normal rate of return on the greater of the cost or the fair market value. An offset of the benefit may be possible if the shareholder provided the funds to purchase the property, and the offset will be equal to the foregone interest on the loan.
A shareholder can avoid the shareholder benefit rules by characterizing the extraction of corporate funds as a loan. In order to avoid the shareholder benefit rules, it is necessary to document a debtor‑creditor relationship. This may include a loan agreement and terms of repayment. In addition, one of the following conditions must also be met:
a) The company is in the money lending business. Under recent changes, more than 90% of the total outstanding loans at any time during which the shareholder loan is outstanding must be owed by arm’s‑length parties;
b) The loan is repaid no later than one taxation year after the year the loan is made, and the loan is not part of a series of loans and repayments. For example, a loan made on July 1, 2023 must be repaid by December 31, 2024 (assuming the corporation has a calendar year‑end). Annual dividends declared to clear out the loans are acceptable to the CRA; or
c) The loan has been provided to a shareholder who is also an employee by virtue of his/her employment. The loan must be provided to enable the employee to purchase a home, a car used for work or shares of the employer, and bona fide arrangements are made for the repayment of the loan. A loan can be considered to be given to the employee qua employment if it can be considered part of a reasonable employee remuneration package. Where the shareholder is also an employee, it is difficult to argue the loan is received as an employee unless other employees are given the ability to borrow funds for the same reasons.
Even if the loan is exempted from income under one of the exceptions, interest at prescribed rate (currently 5%) less the amount paid on the loan no later than 30 days after the end of the year must still be calculated and included in income. If the loan is included in income, no interest benefit will need to be included. In addition, a repayment of the loan may be deductible.
The rules governing shareholder benefits are complex. It is important to identify whether such a situation exists on a timely basis and discuss the best path forward with your tax advisor.
We previously highlighted new expanded trust reporting rules, first announced in the 2018 federal budget, requiring certain trusts to file tax returns and provide information about “reportable entities” – including trust beneficiaries, trustees, settlors and persons able to exert influence over trustee decisions (“protectors”). However, implementation of these reporting requirements was delayed, only taking effect for taxation years ending after Dec. 30, 2023. The first reporting under the new rules is March 30, 2024 (not March 31, 2024, as it is a leap year).
The Canada Revenue Agency (CRA) has finally posted on its website the form with which trustees must begin reporting beneficial ownership information under the expanded reporting regime for trusts. However, the form left some questions unanswered. Some answers were provided during the CRA roundtable at the recent Society of Trust and Estate Practitioners (STEP) conference. We hope the 2023 Trust Guide will be updated to provide further clarity.
For many trusts, a completed Schedule 15 – Beneficial Ownership Information of a Trust – must be filed annually. Notable exceptions include Graduated Rate Estates (“GRE”), trusts in existence for less than three months at the end of the year and trusts holding assets with a total fair market value of less than $50,000 throughout the year, as long as the trust assets consist only of money and publicly traded securities.
At the 2023 STEP conference, the CRA confirmed a trust that owns collectible gold, silver coins or bars and has a dividend receivable will not qualify for this exemption. The dividend receivable would arise in situations where there has been a delay between the dividend declared and the actual payment date. The question posed to the CRA referred to public company dividends, but the CRA’s comments did not restrict its position to public company dividends. Trusts holding gold or silver coins as trust settlement property, or owning private or publicly traded shares that may have declared but unpaid dividends, should be aware of these exceptions.
Part A of the form is used to indicate whether the trust is reporting the beneficial information for the first time and whether the beneficial ownership for the trust has changed in the year. If the answer is “yes” to either question, the trustee must complete parts B and C (if applicable). If the answer is “no” to both questions, the schedule is complete. The trouble of having to obtain the necessary information may be a one‑time only exercise for most trusts.
A separate Part B must be completed for each reportable entity. If a person is more than one entity type (for example, both a trustee and settlor), a separate Part B is required for each. The information is required for all reportable entities on the trust’s first report. In future years, Part B is only required for any reportable entity added or modified in the tax year.
The trustee must specify whether the reportable entity is a natural person, corporation, trust or other, and provide the name, address, date of birth (if a natural person), jurisdiction of residence and taxpayer identification number for each reportable entity.
If an entity ceased to be a reportable entity in the tax year, the information is still required but won’t be carried forward to the next tax year. Part B must disclose all persons who are beneficiaries under the trust, regardless of how remote their interest is. It may not be possible for the trustee to obtain all necessary information. For example, it may not be desirable for various reasons to advise the beneficiary of his/her interest as a contingent beneficiary, or it may not be possible because the beneficiary does not yet exist – for example, an unborn grandchild or a future spouse of a beneficiary.
This may include persons who are beneficiaries under a “disaster clause,” which directs trustees to distribute assets to more remote family members if all primary family member beneficiaries have died or no longer exist. The clause is unlikely to be triggered if there are multiple primary beneficiaries, and the trustees may not know the identities of the contingent beneficiaries.
The CRA’s position is that trustees must make best efforts to obtain required information from beneficiaries. Known beneficiaries should be included in Part B only.
Part C of the form is used to provide information about beneficiaries the trustee cannot list by name, such as unborn children or grandchildren. The details of the terms of the trust extending the class of beneficiaries to unknown entities must be provided to the CRA in Part C.
Part C must be resubmitted annually in its entirety if any portion of the information requires amendment (not only the change in the unknown beneficiary). Failure to make efforts to obtain information required may result in significant penalties. Some trusts are drafted to include as many potential beneficiaries as possible for tax planning reasons. This practice should be reviewed in view of the reporting requirements.
To avoid any issues, reporting requirements should be discussed with your tax advisor as soon as possible.
Know your obligations
When a relationship ends, married or common‑law partners often face financial and tax consequences of the marriage breakdown. One of the most difficult issues to deal with (aside from custody and support questions) is how assets should be divided, preferably in a manner satisfactory to each party.
This article deals with the tax implications of a division of assets under these circumstances. Other topics, such as tax issues related to custody and support arrangements, tax implications of a transfer of real property (including the family home) and shares of a private family corporation, will be discussed in separate articles.
Generally, family property division falls within a province’s family law. Provincial family law legislation begins from a presumption of equal distribution, but permits spouses to contract out of the scheme in certain circumstances by using a co‑habitation agreement (commonly known as a prenup) or a separation agreement. How spouses divide their property is often influenced by the tax consequences. Under the Family Law Act in Ontario, a domestic contract – which includes a prenup and a separation agreement – is valid if it is in writing, signed and witnessed. It is up to the individuals to determine tax consequences by consulting independent legal counsel and reviewing the financial disclosure provided.
Property owned by one spouse (spouse A) and transferred to the other spouse (spouse B) occurs automatically at cost if:
The transfer will occur at cost even if spouse B pays fair market value consideration to spouse A. It is highly unlikely, therefore, that spouse B will not insist on the election discussed below under such circumstances. A transfer at cost will not result in any immediate tax consequences to spouse A. Spouse B will have the same cost base as spouse A as a result, and essentially spouse A has transferred any future gain to spouse B (subject to comments below regarding the application of the attribution rules).
The partners may elect to transfer at fair market value under subsection 73(1) of the Income Tax Act (ITA) instead of at cost. The election must be made in the return for the year of the transfer. As there is no specific form required, the election is often a paper document. Even if filed late, the election can still be made in the late‑filed return.
Considerations as to whether to transfer the property at cost or fair market value will depend on several factors, including:
The principal consideration will be how the attribution rules affect the taxation of post‑separation income and gains realized from the property.
The attribution rules apply normally when one spouse transfers property to another spouse at less than fair market value. Future income and gains would be taxed in the hands of the transferor spouse unless the spouses make a 73(1) election and fair market value consideration is paid. Special rules apply when the transfer of property happens due to separation or divorce.
There is no attribution of future income back to spouse A for income relating to the period after separation. This rule applies automatically.
Future gains realized by spouse B, however, will still attribute back to spouse A unless the spouses are divorced by that time. Therefore, married spouses should ensure they file a joint election to be excluded from the attribution rules under 74.5(3) of the ITA. This joint election may be filed with the transferor’s return of income for the year the property is sold, or an earlier year.
If spouse B has no plans to dispose of the property, or if spouse A has sufficient losses carried forward to offset any capital gain realized on a transfer of property, a 73(1) election may not be necessary. However, a 74.5(3) election should still be made to ensure there is no attribution of future gains.
Failure to file one or both of the elections may result in unintended results to the spouses.
Each spouse should consider the tax implications of a division of property with the assistance of tax and legal professionals.
A shared responsibility
At Segal GCSE LLP, we embrace an ambitious firm philosophy: to provide our valued clients with an expansive service experience that enables greater opportunities for growth and prosperity. From innovative practices to specialty services, our agile team is on a journey to not just meet your audit, accounting, tax and business needs, but transform your entire portfolio.
For more than 45 years, we have employed a collaborative approach, leveraging the shared knowledge and expertise of our multi-disciplinary professionals, to inspire and drive enhanced client success. Additionally, we augment our specialized offering with an international association with Moore Global – one of the world’s leading accounting and advisory networks.