1 - The Law Society of Saskatchewan

TABLE OF CONTENTS
PAGE
I.
II.
INTRODUCTION
1
A. RESIDENCE
1
B. TAXATION YEAR
3
C. INSTALMENTS AND FILING REQUIREMENTS
4
D. TAX RATES
5
E. COMPUTATION OF INCOME
6
SPECIAL RULES FOR PRIVATE CORPORATIONS
8
A. DEFINITIONS
8
B. CANADIAN CONTROLLED PRIVATE CORPORATIONS
1. Small Business Deduction
2. Associated Corporations
3. Part II Tax
10
10
11
15
C. INVESTMENT INCOME
18
D. DIVIDEND INCOME
21
1. Part IV Tax
21
2. Part II Tax
25
E. ABILITY TO PAY DIVIDENDS AND LIFE
INSURANCE CAPITAL DIVIDENDS
25
III. TAXATION OF CORPORATE DISTRIBUTIONS
A. INTRODUCTION
27
B. TAXATION OF DIVIDENDS IN THE. SHAREHOLDERS'
HAND
28
C. DEEMED DIVIDENDS
30
D. SHAREHOLDER BENEFITS AND APPROPRIATIONS
33
E. LOANS TO SHAREHOLDERS
36
'.. -....'
PAGE
IV.
HOLDING COMPANIES
39
V.
SHOULD ONE INCORPORATE?
41
)
- 2 -
TAXATION OF CORPORATIONS AND CORPORATE DISTRIBUTIONS
I.
INTRODUCTION
A taxpayer may carryon a business through various forms of
organizations, including a sole proprietorship, a partnership, a
corporation, or a trust.
This paper deals with certain aspects of
the taxation of corporations and the manner in which earnings of a
corporation may flow out to the shareholders.
A.
RESIDENCE
There
are
several
determine who is taxable.
cr~teria
that
could
be
adopted
to
In Canada, the primary criterion for
income tax purposes is residence.
Subsection 2( 1) provides that
income tax shall be paid upon the taxable income for each taxation
year of every person res ident in Canada at any time of the year.
The word "person" includes both an individual and a corporation.
The term "resident" is not defined in the Income Tax Act.
With
respect to corporations, the basic principle is that a corporation
resides where its central management and control is situated:
DeBeers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455 (H.L.).
In determining where central management and control is situated,
Canadian courts look primarily at ~ jure control.
directors meet?
Where do the
In Victoria Insurance· Ltd. v. M.N.R.,
[1977]
C.T.C. 2443, 77 D.T.C. 320 the taxpayer company was incorporated
in
the
Bahamas
company.
as
a
wholly
owned
subsidiary
of
a
Canadian
The Bahamas company entered into standard form contracts
with the Canadian company and with a number of other insurance
companies.
if it fell
The acceptance of any particular risk t
wi thin the terms and condi tions of the contracts, was purely an
administrative act.
The directors
there was· little for them to do.•
met
in the
Bahamas,
though
They were presented annually
with draft contracts negotiated by a
director
of
the Canadian
company and which they approved without alterations.
The Bahamian
company was held not to be resident in Canada, because de jure
control was exercised in the Bahamas and there was "no evidence" to
show that the control de facto was exercised by the owners of the
Appellant company."
With respect to both individuals and corporations the Income
Tax Act provides an extended meaning of
common law meaning.
incorporated
"residence" beyond the
Subsection 250(4) provides that a corporation
in Canada after April
26,
1965,
is
deemed
to
be
resident in Canada if it was resident or carried on business in
Canada during any taxation
Furthermore,
year
ending
after
April
26,
paragraph 250(4)(b) contains special rules
1965.
for the
residence of a foreign business corporation.
In the case of a non-resident t subsection 2(3) provides for
taxation of income from employment in Canada, carrying on business
in Canada, or from the disposition of taxable Canadian property.
- 2 -
B.
TAXATION YEAR
)
Section
2
provides
that
income
tax
shall
be
paid
upon
taxable income for each "taxation year" of a person who is subject
to tax in Canada.
The taxation year of a corpo.ration is defined
in subsection 249(1) to mean a fiscal period while the taxation
year of an individual is a calendar year.
Where a person is a
member of a partnership he will take
income
taxation year his
taxation year
of
share
the
of
income
into
of
partnership which
taxation year: paragraph 96(1)(f).
the
for
partnership
ends
in
the
a
given
for
the
partner's
Thus, if a corporation with an
April 30 year end is a member of a partnership with a June 30 year
end the corporation will take into its income for its fiscal year
ending April 30, 1986 income from the partnership earned from July
1, 1984, to June 30, 1985.
A fiscal
period must not exceed fifty-three weeks in the
case of a corporation, nor twelve months in the case of any other
taxapayer:
subsection 248(1).
A taxpayer in business may not make a change in his fiscal
period without the approval of Revenue Canada.
policy
in
giving
such
approval
is
Bulletin IT-179.
- 3 -
outlined
The Department's
in' Interpretation
C.
INSTALMENTS AND FILING REQUIREMENTS
Section
estimated tax
157
provides
in twelve
that
equal
a
corporation
monthly
must
pay
instalments.
its
Monthly
instalments must be calculated on one of the following bases:
1.
One-twelfth
of
its
estimated
tax
for
the
currertt
taxation year, with the balance, if any, payable within
two
months
controlled
(three
private
months
in
corporations
the
case
where
of
all
Canadiart
of
their
income and all of the income of corporations associated
with them will fall withirt the small business deduction
limits) after the year end;
2.
One-twelfth of its "first instalment base" for the year,
as defined in subsection 157(4) and Regulation 5301(1)
(essentially
its
tax
payable
for
the
immediately
preceding taxation year); or
3.
For
each
of
the
first
two
months
of
the
year,
one-twelfth of its second instalment base (essentially
its tax payable for the second preceding taxation year),
and for each of "the next ten months, one-tenth of the
excess
of
the
first
two-twelfths already paid.
- 4 -
instalment
base
over
the
Any balance
after the end of
of
unpaid
tax is payable within three mnths
the taxation year in the
case of a
Canadian
controlled private corporation all the income of which, and all
the income of corporations associated with it of which, is within
the
small business
deduction
limits
for
the
year.
All
other
corporations must pay any balance of unpaid tax within two months
after the end of
the taxation year.
Althou~h
final payment of
taxes is due at the end of the second or third month following the
end of the taxation year the final return is not due until the end
of
the
sixth
month
following
the
taxation
year:
paragraph
150(l)(b) •
D.
TAX RATES
The general rate of tax for corporations is 46%:
123.
section
There is, however, a reduction to 36% under section 124 to
make room for provincial taxation.
Corporations are subject to
income tax in a province if they have a permanent establishment in
the province.
Where there is a permanent establishment in more
than one province one must look to a formula in Part IV of the
Income
Tax
permanent
Regulations
which
establishments
but
takes
also
into
labour
account
costs.
not
only
the
Saskatchewan
levies tax on corporations at a basic rate of 16%, reduced to 10%
for the portion of the corporation's income which is eligible for
the 21% small business deduction under subsection 125( 1).
The
rate is further reduced to 0% for manufacturing and processing
profits otherwise eligible for the 21% small business deduction.
- 5 -
E.
COMPUTATION OF INCOME
Income of a corporation for a taxation year is computed in
much the same way as the income of an individual, with certain
qualifications including the following:
(a)
The corporation is not entitled to a deduction for
items
which
by
their
very
nature
apply
only
to
individuals, such as child care expenses, alimony, and
medical expenses.
(b)
Corporations in the business of leasing, developing or
sellin~
real property are not
limited by
Re~ulation
1100(11) in the amount of capital cost allowance which
they can claim on rental properties.
(c)
With certain exceptions a corporation excludes from its
tax base dividends received from a taxable Canadian
corporation, or from a corporation resident in Canada
and controlled by it:
a
special
dividends
section 112.
refundable
received
tax
by
a
There is, however,
on certain intercorporate
private
corporation
under
section 186 and a 12 1/2% tax on certain dividends paid
by a corporation under section 181.
- 6 -
(d)
Corporations are limited in their loss carry-overs if
control of
the
company has
cannot be carried forward:
both
control
and
chan~ed
and
the
the
changed
[capital
losses
subsection 111(4)] or if
nature
business
of
the
in which
business
the
have
losses
were
incurred is not carried on with a reasonable expect ion
of
profit
forward:
(e)
[non-capital
be
carried
subsection 111(5)].
Corporations,
$2,000
losses. cannot
of
unlike
individuals,
allowable
capital
cannot
loss
set
against
up
to
ordinary
income.
(f)
Dividends
received
received
by
an
by
a
corporation,
individual,
are not
unlike
subject
those
to
the
section 82 gross-up and the section 121 dividend tax
credit.
(g)
Only corporations are entitled to the section 125.1 tax
credit
in
respect
of. manufacturing
and
processing
profits.
(h)
There are special rules for t.axation of business income
received by Canadian controlled private corporations
and for investment and dividend income received by all
private corporations.
- 7 -
For all taxpayers,
taxation year
is
subsection 9( 1).
it
is
the
income from property or business for a
profit
from those
sources
for
the
year:
The Act does not define the term "profit", but
generally accepted
to
mean
the
gross
revenue
from
the
business or property minus the current expenses incurred to earn
such income as determined in accordance with generally accepted
accounting principles.
There· are some exceptions to the use of
generally accepted accounting principles in determining income,
since the Income Tax Act specifies certain amounts which must be
included in income
(see,
for
example,
section 12) and
certain
deductions which are prohibited (see section 18).
II.
SPECIAL RULES FOR PRIVATE CORPORATIONS
A.
DEFINITIONS
A "private corporation" is defined in paragraph 89(1)(f) as
a corporation resident in Canada which is not a public corporation
and which is not controlled by one or more public corporations.
The active business income of a private corporation is taxed at
the 52% corporate rate in Saskatchewan, unless the corporation is
entitled
to
a
small
(income
from property
capital
gains)
corporations,
other
is
business
and
inves tment
than
initially
deduction.
dividends
taxed
- 8 -
at
Its
income,
from
the
52%
passive
income
including taxable
taxable
Canadian
corporate
rate;
however, 16 2/3% is refunded to the company on the basis of $1.00
for
every
$4.00
shareholders:
of
taxable
dividends
subsection 129( 1).
which
it
pays
to
its
It should be noted that the
untaxed 1/2 of a capital gain falls into a private corporation's
"capital dividend account" and may be distributed tax free to its
shareholders:
subsection 83(2).
Portfolio dividends received by
a private corporation are, with some exceptions, subject to a 25%
refundable tax, refundable to the company when dividends "are paid
in the
passive
same
fashion
as
described
Personal
income.
above with respect
service
business
to
other
income
(the
incorporated employee situation) is taxed at 52% without benefit
of any refunds or small business deduction.
A "public corporation" is defined in paragraph 89( 1) (g) as a
corporation
resident
in
Canada
whose
shares
are
listed
on
a
prescribed stock exchange in Canada or a corporation resident in
Canada which has elected to be a public corporation.
A public
corporation is taxed at the 52% corporate rate (Saskatchewan) on
both active and
passive
income with one exception.
No tax is
payable, as a general rule, on dividends received from "taxable
Canadian corporations":
section 112.
A "Canadian controlled private" corporation" is defined in
paragraph 125(7) (b) as a private corporation that is a Canadian
corporation (that is, a corporation that was either incorporated
- 9 -
in Canada or resident in Canada from June 18, 1971 to date) and
that is not controlled in any manner whatever by one or more
non-resident persons or· public corporations
thereof.
A Canadian
controlled
or any combination
private
corporation
(CCPC)
receives special treatment with respect to its active business
income.
B.
CANADIAN CONTROLLED PRIVATE 'CORPORATIONS
1.
Small Business Deduction
Subsection
125(1)
gives
a
CCPC
a
deduction
from
tax
otherwise payable equal to 21% of the least of three amounts:
(a)
the corporation's net income from active businesses in
Canada (i.e. income minus losses)
(partnership income
of the corporation will be ignored for the purposes of
this discussion);
(b)
the corporation's taxable income minus the aggregate of
ten-fourths of the foreign tax credit with regard to
property income and two times the foreign tax credi t
with regard to business income; and
(c)
the corporation's business limit for the year (defined
by subsection 125(2) as $200,000 unless the corporation
- 10 -
is· associated with other Canadian controlled private
corporations which share the business limit);
Beginning with its 1985 taxation year a Canadian controlled
private
corporation
can
claim
the
small
business
regardless of the cumulative amount of its earnings.
large
corporations
respect
to
their
have
first
thus
once
$200,000
again
per
become
year
of
deduction
Some fairly
eligible
active
with
business
income.
Also beginning with the 1985 taxation year the concept of
"non-qualifying
professional
certain
business"
(which
corporations,
certain
service
enterprises
companies)
became eligible
was
previously
management
elimated
once
again
and
for
applied
to
companies,
and
income
the full
from
such
21% small
business deduction.
It should be noted that
the
small
business
deduction
is
available only if the corporation was a CCPC throughout the year.
Therefore, where Canadian residents acquire control of a Canadian
corporation from non-residents the small business deduction will
not be available in the year that control changes.
2.
Associated Corporations
The concept of associated corporations was devised so that
- 11 -
taxpayers could not multiply their small business deduction entitlement
merely by having a number of separate corporations to carryon various
phases of their business.
to
force
associated
The effect of subsections 125(3) and (4) is
corporations
business limit among themselves.
corporation
is
associated
with
to
allocate
the
$200,000
per
year
Subsection 256( 1) defines when one
another.
Essentially,
they
are
associated if one controls the other, both corporations are controlled
by the same person or group of persons, or the two corporations
controlled
by
ownership.
related
The
groups
definitions
of
can
persons
be
and
illustrated
their
is
10%
are
cross
diagrammatically
as
follows:
A
(1)
I
51%
We
One controls the other.
will discuss control below.
1\
Both
corporations
are
controlled by the same person
or group of persons.
i
(2)
(3)
,---.-.
relate~l-
!A~
x
One corporation is controlled
by a person who is related to
the person who controls the
other corporation, and one of
those persons owns at least
10% of the issued shares of
any
class·
of
both
corporations.
10%
B
( 4)
The person who controls one
corporation is related to each
member of the group of persons
who
controls
the
other
corporation, and either the
- 12 -
person or the group of
persons owns at least
10% of the issued shares
of any class of the
other corporation.
,.--.,.( 5)
:
cl"
{'
JaIl
\ 1 1S% re1at;d
30%
!m~
~,~O%
f
(6)
S1%
"'
I
'\;:'r
~,-~
...
~ / ~3 ~
Same as in (4) above
except that there are
two groups, with one
group holding at least
10% of the shares of any
class
of
both
corporations.
~20%
20~~0%
.,.,.-------.
..... ~
re1a/Kated"
,.--~
~10%
sr
Two
corpora~ions
associated with the same
corporation
are
associated
with
each
other.
10%'-. S1%
ABC
It will be noted that unless one person or group of persons
controls both corporations or unless one corporation controls the
other
corporation
there
are
two
requirements
corporation will be considered associated:
1.
The persons controlling each of the
corporations must be related to each
other, and
2.
The
persons
controlling
one
corporation must own at least 10% of
the shares of any class of the other
corporation.
- 13 -
before
the
Under subsection 247(2) the Minister can deem two corporations to
be associated if he is satisfied that they meet two tests:
1.
The
separate
existence
of
those
corporations is not solely for the
purpose of carrying out the business
of
those
corporations
in the lOOst
effective manner, and
2.
One
of
the
main
reasons
for
such
separate existence is to reduce the
amount of taxes that would otherwise
be payable.
The
definition
of
relationship
in
section
251
should also
be
noted.
The definition of associated corporation is also important
for
the
purposes
of
subsection
intended to prevent the
129(6).
That
subsection
is
payer corporation from converting what
would be business income taxes at the high corporate rates into
property income by making deductible payments of a property nature
(such as
interest and rent) to an associated corporation which
would otherwise treat the income as income from a property source
and claim the refundable tax treatment· when it subsequently paid
- 14 -
dividends
out
subsection
sharing
of
of
that
property
129(6)
such
payments
the
small
income.
would
business
not
deduction
In
the
be
subject
among
absence
to
of
the
associated
corporations since the small business deduction only applies to
active business income and the income received by the associated
corporation in this case would be property rather than business
income.
Subsection 129(6) will not apply to income which would
not otherwise be treated as property income -in the hands of the
recipient
(so it does not apply to management fees
and service
fees), nor does it apply where the payer corporation does not earn
active business
income and therefore cannot
deduct
the payment
from active business income.
Where the subsection applies the payment, to the extent that
it
was
deducted
in
computing
the
payer
corporation's
active
business income, will be treated in the hands of the recipient
corporation as active business income.
3.
Part II Tax
Active business income earned in taxation years commencing
after 1982 which has benefitted from the full 21% small business
deduction is subject to a-further 12 1/2% tax under Part II of the
Income Tax Act when it is distributed as dividends.
The purpose
of this tax is to increase the level of taxation on income flowing
through a corporation to the level of taxation which would have
- 15 -
applied
had
the
income
been earned directly by an individual.
This "integration" assumes that the corporate income was subject
to combined provincial and federal tax of 25% initially and that
the provincial personal tax rate is 47% of basic federal tax.
you may be aware, the Saskatchewan basic personal
t~x
As
rate is 51%
of federal tax, so the integration is imperfect.
Part
II
tax
is
imposed
on
the
Corporation
paying
the
dividends, not on the recipient.
In simplified terms the tax is
equal to the lesser of 1/8 (i.e.
12 1/2%) of taxable dividends
paid
and
1/9
of
the
corporation's
retained
benefitted from the 21% small business deduction.
earnings
which
Consider the
following example which uses the theoretical tax rates on which
the tax is based.
Assume that the individual is in the highest
tax bracket.
Earned by
Individual
Income
Basic corp. tax
Part II tax
Dividend paid
Dividend gross-up
Included in
individual's income
Individu~l tax
Federal @ 34%
Less dive tax
credit
Provo @ 47%
Total individual
tax
Cash retained by
individual
Earned through Corporation
Without Part
With Part II Tax
II Tax
$100.00
$100.00
25.00
8.33
66.67
33.33
$100.00
25.00
100.00
100.00
112.50
34.00
34.00
38.25
34.00
iSo98
22.67
11.33
5.33
25.50
12.75
5.99
49.98
16.66
18.74
50.02
50.01
56.26
- 16 -
75.00
37.50
Using the rates which actually exist in Saskatchewan the results
would be as follows:
Earned through Corporation
Wi thout Part
With Part II Tax
II Tax
Earned by
Individual
Income
Basic corp. tax
Part II tax
Dividend paid
Dividend gross-up
Included in
individual's income
Individual tax
Federal @ 34%
Less dive tax
credit
Prove @ 51%
Prove surtax @ 12%
Total individual
tax
Cash retained by
individual
$100.00
25.00
8.33
66.67
33.33
$100.00
25.00
100.00
100.00
112.50
34.00
34.00
38.25
34.00
17.34
2.08
22.67
11.33
5.78
.69
25.50
12.75
6.50
.78
53.42
17.80
20.03
46.58
48.87
54.97
$100.00
A corporation may have
retained
earnings
75.00
37.50
which
did not
benefit from the small business deduction (such as income earned
in taxation years commencing before 1983, dividend and investment
income, and active business income in excess of the corporation's
small business deduction limits).
However, for purposes of the
Part II tax dividends are deemed to come first out of the taxable
pool.
For purposes of dividend refunds they may simultaneously be
deemed to be paid out of passive income.
Thus, a dividend may
trigger both Part II tax and a dividend refund at the same time.
- 17 -
C.
INVESTMENT INCOME
Canadian investment income is defined in subsection 129(4).
Essentially it means taxable capital gains in excess of allowable
capital losses
(disre~arding
foreign source gains and losses, and
gains and losses which accrued on property while it was owned by a
corporation
which
was
not
corporation,
an
investment
corporation,
or
a
mutual
property held for
a
corporation,
fund
investment
property sources.
Canadian
Exempt
a
controlled
mortgage
corporation),
minus
income,
losses
and
for
dividends,
private
investment
income
from
year
from
the
and income of a
non-CCPC from real property are specifically excluded.
Income or
losses from a specified investment business carried on in Canada
are
included
in
Canadian-source
subsection 129(4.1).
However,
property
income
or
losses:
a corporation other than a
if
Canadian controlled private corporation carries on a specified
investment
business
any
income
of
that
corporation from real
property will not fall within the definition of investment income
and will be taxed at full corporate rates.
initially
pay
Saskatchewan),
investment
tax
but
income)
at
a
the
portion
goes
into
full
of
a
corporate
that
tax
notional
"refundable dividend tax on hand" (RDTOH)
- 18 -
0
rate
(16
account
(52%
of
the
called
the
2/3%
This portion of the
tax
is
refundable
to.the
corporation on the basis of
a $1.00
refund for every $4.00 which the corporation pays in dividends.
The end result is that the corporation pays tax at a 35 1/3% rate
i f all of its money is paid out as
retained in the corporation.
dividends rather than being
To relieve the cash problem which
the corporation will have in paying sufficiently large dividends
to get all of the refundable tax back subsection 157(3) provides
for reduction of the tax instalments on investment income by the
estimated amount of the dividend refund.
The purpose of the refundable tax is to prevent corporations
from deferring tax at the second (shareholder) level by not paying
dividends but to make the total tax payable at the corporate and
shareholder
levels
equal
to what would have
been paid
if
the
individuals had earned the investment income directly rather than
through a corporation.
integration
is
The following example illustrates that the
imperfect,
and
that
slight
tax
savings
can be
achieved by earning the investment income through a corporation.
We will assume that the individual is in the highest tax bracket,
and will compare the amount of tax which he would pay on $100 of
investment income earned directly (about $53.42) with the amount
of tax which he pays when that investment income flows through a
private corporation:
- 19 -
Interest income
$100.00
).
Corporate tax @ 52%
52.00
Amount in RDTOH
16.67
Di'\Tidend paid
Dividend gross-up
Amount on which shareholder
tax is calculated
64.67
32.33
Federal tax on shareholder
Less dividend tax credit
97.00
$32.98
21.99
Provincial tax @ 51%
federal tax
5.60
Provincial surtax @ 12%
.67
17.26
Total shareholder tax
Total corporate tax
Less dividend refund
10.99
$52.00
16.67
Total tax
35.33
$ 52.59
Tax savin~ by usin~ a corporation:
$53.42 - 52.59 = $.83
To prevent corporations which earn business income in excess
of their small business deduction entitlement from converting that
business income to investment income by renting premises from or
paying interest to an associated corporation, subsection 129( 6)
provides that to the extent that an amount paid to an associated
corporation is deductible from the active business income of the
- 20 -
payer corporation it will retain in the hands of the recipient
associated corporation the character of the income from which it
was deducted by the payer corporation.
Consequently, it will not
be eligible for the refundable tax treatment illustrated above.
D.
DIVIDEND INCOME
With certain exceptions section 112 allows a corporation to
deduct
from its income
taxable dividends
received
from
taxable
Canadian corporations and from corporations resident in Canada and
controlled
by
it.
Section 113 gives
a
similar deduction
for
certain dividends from non-resident corporations.
1.
Part IV Tax
In
the
individual
or
corporations,
case
of
a
public
corporation
a
related
group
the
special
benefit
of
of
controlled
individuals,
sections
and
112
and
by
an
private
113
is
partially taken away by section 186 which imposes the 25% Part IV
tax on such dividends when they are received by the corporation.
An exception to the Part IV tax is made in the case of dividends
received
from
a
corporation
with
which
the
recipient
is
"connected" which do not generate a dividend refund to the payer
(i.e. dividends out of non-passive income).
- 21 -
"Connection" is defined in subsection 186(4) to mean control of
the payer corporation by the recipient corporation or ownership by
the
recipient
corporation
of
share
capital
of
the
payer
corporation having more than 10% of the voting rights and more
than 10% of the fair market value of all the issued shares of the
capital stock of the payer corporation.
"Control" means ownership
of more than 50% of the voting shares by the other corporation, by
persons with whom the other corporation does not deal at arm's
length, or by a combination thereof:
A controls Company B for
subsection 186(2).
Company
the purposes of Part IV tax in the
following illustration:
Mr. A
I'
A is
251(2)(b)(iii)
I
100%
Ico. A,
Company
Mrs. A
r.
related
and
to
Mrs.
therefore
[paragraph 25I( 2)(a)].
~co.
5%
is
A by
not
95%
B
virtue
at
arm's
J
of
subparagraph
length with her
Therefore, i t can be said that more than
50% of the voting shares of Company B are owned by Company A or by
persons
with whom Company A does
not
deal
at
arm's
length.
Company A controls Company B even though they are not associated
corporations.
The 25% tax on dividends is fully refundable when dividends
are paid by the recipient corporation.
- 22 -
The mechanism of the RDTOR
is used to achieve this end, since the entire 25% tax goes into
the ROTOH.
The following example illustrates that the same total
amount of tax is paid whether the dividend is received by the
individual
directly
or
through
an
intermediary
private
corporation:
Dividend Received Directly by Individual
Dividend income
Plus gross-up
$100
50
Federal tax @ 34%
Less dividend tax credit
51.00
34.00
Provincial tax (including
surtax) -
$150.00
17.00
9.71
Total tax -
26.71
Dividend Received through Private Holding Company
Dividend received by company Part IV tax (refundable under
section 129) -
$100.00
25.00
100.00
Dividend paid Tax on individual shareholder (as
above) -
$ 26.71
Total tax -
$ 26.71
A private corporation can reduce the amount on which the
Part IV tax is calculated, if it so chooses, by the following
amounts:
(a)
Allor part of its non-capital loss or farm loss for
-
23 -
the year;
and
(b)
Allor part of its non-capital losses or farm losses
for the preceding 7 or the suceeding 3 taxation years.
If this is done t the losses cannot later be deducted in computing
taxable income:
paragraphs 186(l)(c) t 11l( 3)(a)(ii).
Assume that
a private corporation receives taxable dividend income in the year
of $10 t OOO and incurs interest expense attributable to that income
of $9 t OOO.
The corporation's non-capital loss is $9 t OOO computed
as follows:
Taxable dividend income Less interest Income Less amount of dividend:
112(1) -
subsection
Non-capital loss -
In these circumstances the corporation could elect to reduce the
amount of $10 t OOO on which Part IV tax would otherwise be payable
by all or part of its non-capital loss of $9,000.
The purpose of the refundable tax on dividends received by
private corporations is to prevent the corporation from deferring
- 24 -
tax on dividend income merely by not
payin~
the dividends out to
its individual shareholders.
The dividend refund is calculated at the end of the year,
and
to
be
entitled
to
it,
the
corporation must
be
a
private'
corporation at the end of the year.
2.
Part II Tax
Where a corporation which is paying dividends has retained
earnings which benefitted from the 21% small business deduction,
the special benefit of sections 112 and 113 is
also partially
taken away by section 181 which imposes the 12 1/2% Part II tax on
such dividends.
This is a tax on the paying corporation, not the
recipient, and it is not refundable.
It applies no matter who the
shareholder is - individual, associated corporation or other.
The
concept of Part II tax has been described earlier in this paper.
It is beyond the scope of this paper to discuss all of the details
of the Part II tax or the anti-avoidance rules connected with it.
E.
ABILITY TO PAY CAPITAL DIVIDENDS AND LIFE INSURANCE CAPITAL
DIVIDENDS
The concept of the "capital dividend account" allows certain
non-taxable
receipts
of
a
private
- 25 -
corporation
to
retain
their
non-taxable character as
shareholder.
free
half
throu~h
to the corporation's
The capital dividend account is made up of the tax
of
corporations
they flow
capital
out
of
gains,
their
dividends
capital
from
dividend
other
private
accounts,
the
non-taxable portion of eligible capital amounts, and the excess of
life
insurance
pre-June·29,
proceeds
1982,
received
policy over
by
the
corporation
the adjusted
cost
base
from
of
a
the
policy.
To the extent that the private corporation has a positive
balance
in this notional account it can elect under subsection
83( 2) that any dividends which it pays are capital dividends and
therefore
non~taxable
in
the
hands
of
the
shareholder.
privilege is not available to public corporations.
corporations
receive
non-taxable
amounts
those
This
When public
amounts will be
taxed at the full rate when they are passed on to shareholders.
The life insurance capital dividend account is made up of
the excess of life insurance proceeds received by a corporation on
a policy of which the corporation was not a
beneficiary on
or
before June 28, 1982, over the adjusted cost base of the policy.
Life insurance capital dividends received by the corporation from
another
corporation
dividend account.
also
go
into
its
life
insurance
capital
The life insurance capital dividend account
works in much the same way as the capital dividend account.
To
the extent that a private corporation has a positive balance in
this notional account it can elect under subsection 83(2.1) that
- 26 -
any dividends which it pays are life' insurance capital dividends
and therefore non-taxable in the hands
of a shareholder.
The
difference between capital dividends and life insurance capital
dividends is that i f the share on which a life insurance capital
dividend is paid was acquired (otherwise than by way of purchase)
as a consequence of the death of a person (e.g. it was inherited)
the life insurance capital dividend will reduce its adjusted cost
base under
para~raph ·S3(2)(r).
If the adjusted cost base of the
share thus becomes a negative amount there will be an immediate
capital gain:
capital
subsection 40( 3).
dividend
was
added
to
The concept of life insurance
the
Act
in
1982
to
circumvent
procedures which were commonly used to defer taxation upon death
of accrued capital gain on corporate shares.
III.
TAXATION OF CORPORATE DISTRIBUTIONS
A.
INTRODUCTION
"Dividend" is a residuary expression.
If a distribution to
shareholders cannot be classified in some other way, for instance
as interes t, rent, salary, or shareholder appropriation, it is a
dividend.
Dividends paid by a corporation are not deductible in
calculating its taxable income.
Thus, there is taxation both at
the corporate and shareholder levels.
in cash.
They can be
paid
Dividends need not be paid
in kind or in the stock of other
- 27 -
corporations.
A stock dividend (that "is, the issuance of further
stock in the corporation) no longer falls within the definition of
"dividend" if it is paid by a public corporation, except in very
limited circumstances,
or by a non-resident
corporation.
Such
stock when issued by a public or non-resident corporation receives
capital gain rather than income treatment, in that the adjusted
cost base of the shares is considered to be zero.
When a private
corporation issues a stock dividend the shareholder is taxed as on
any
other dividend
and
is
amount equal to the amount
deemed to acquire the shares
of
the stock dividend:
at
an
subsection
52(3) •
Apart
from dividends,
amounts received from a corporation
might be treated as shareholder appropriations under subsection
15( 1), as a loan tmder subsection 15( 2), as an indirect payment
under subsection 56(2), or as imputed interest under section 80.4.
B.
TAXATION OF DIVIDENDS IN THE SHAREHOLDERS' HAND
Paragraph
reci pient ,
12( 1) (j)
subj ect
to
makes
all
such provis ions
dividends
as
income
subsect ions
to
83 (2)
the
and
(2.1), which allow shareholders to receive non-taxable dividends.
When the shareholder is an individual and the dividend is from a
taxable
Canadian corporation,
not
only is
the
dividend
itself
included in his income, but an additional one-half of the amount
- 28 -
of the dividend is added to income.
"gross-up".
This is referred to as the
Federal tax is computed on the grossed-up dividend,
and a dividend tax credit equal to to 34% of the actual amount of
the dividend is deducted from the federal tax otherwise payable
before provincial tax on the dividend is computed.
tax credit is provided for by section 121.
The dividend
Provincial tax is
computed as a percentage of federal tax (51% in Saskatchewan plus
a surtax of 12% on provincial tax in excess
of $4,000) after
deduction of the dividend tax credit.
The treatment of dividends received by a corporation has
already. been discussed.
It will be noted that corporations which
receive dividends do not get the gross-up and dividend tax credit
treatment.
Corporations, like individuals, can receive tax free
capital dividends and life insurance capital dividends out of the
capital
dividend
account
account
respectively
of
and
a
life
private
insurance
capital
corporation.
dividend
Only
if
the
recipient corporation is a private corporation itself can it pass
the tax free
characteristic of
the dividend along to
its own
shareholders.
Where an individual receives dividends from taxable Canadian
corporations up to $1,000 of the grossed-up amount of the dividend
is
exempt
from
taxation
by virtue
of
treatment is not available to corporations.
- 29 -
section
110.1.
This
The following example illustrates that if the individual has
no
income
from
other
sources t
a
very
substantial
amount
of
dividend income can be received from taxable Canadian corporations
without payment of any tax at the shareholder level:
$42 t OOO
Dividend income
Plus gross-up
ii t o66
$63 t OOO
Less personal exemption [s. 109
(l)(c)] and s. HO.1
$l t OOO dividend deduction
$14 t 121
14 t 280
Federal tax
Less s. 121 dividend tax credit
Nil
Nil
Provincial tax
C.
DEEMED DIVIDENDS
The
general
rule
is
that
a shareholder
is entitled
to
receive back his investment in a corporation on a tax free basis.
The problem is to determine whether the amount which he receives
is a return of his investment or a distribution of income earned
by the corporation.
shareholder
upon
If a corporation makes a distribution to a
the
winding
up
or
reorganization
of
the
corporation t upon a reduction of capital t or upon the redemption
or acquisition by the corporation of shares of the corporation t
the shareholder is deemed to have received a dividend if
the
return to him exceeds the paid up capital with respect to those
shares.
Such dividends are not eligible for the $l t OOO interest
- 30 -
and dividend deduction, but if they are received by an individual
from a taxable Canadian corporation they are entitled, like other
dividends, to the gross-up and dividend tax credit treatment.
Paid up capital of shares in a corporation is determined on
a
class by class or series by series basis.
If a
transaction
relating to a certain number of shares causes an increase in the
paid up capital of those shares, then the increase is averaged out
over the whole class or series.
Therefore, the paid up capital of
a given share is determined as a proportion of the paid up capital
of all the shares in the class or series.
individual was issued 100 treasury shares
For example, if an
of a
corporation for
$100, the paid up capital of the class of shares would, assuming
that there are no other shares outstanding, be $100.
If, several
years later, a further 100 shares of the same class were issued,
but this time for $2.00 each, the paid up capital of the whole
class would be $300, and the paid up capital of each share would
be $1.50.
There are several exceptions to the principle that paid
up capital for tax purposes is equivalent to stated capital for
corporate purposes, but these exceptions are beyond the scope of
this paper.
There are several common situations in which a shareholder
will be deemed to receive a
dividend
Income Tax Act:
- 31 -
under section 84 of
the
(a)
A dividend will be deemed where an increase in paid up
capital is not matched by an increase in the net assets
of the corporation.
This would occur when assets are
sold to a corporation for more than their fair market
value, in
exchan~e
for shares of the corporation.
The
deemed dividend will affect the whole class of shares.
(b)
Where assets or funds are distributed to shareholders
on the
windin~
up, discontinuance, or
reor~anization
of
the corporation a dividend is deemed to have been paid
equal to the value of funds or property distributed
minus
the amount
reduced
on
the
by which
the
distribution.
paid up
Again,
capital
is
the
deemed
dividend affects the whole class of shares,
and to
determine the amount of the deemed dividend received by
an individual shareholder one must take the proportion
of the deemed dividend that his shares are to all the
issued shares in the class.
(c)
Where a corporation redeems, acquires, or cancels its
shares
(such as upon a corporate repurchase of
shares)
there
is
a
deemed
dividend
if
the
the
amount
received exceeds the 'paid up capital of those shares.
Such a deemed dividend affects only the shares involved
and
not
the
whole
class.
- 32 -
Where
the
corporation
acquires its own shares in the open market there is no
deemed dividend:
(d)
subsection 84(6).
Any other reduction of paid up capital gives rise to a
deemed dividend equal to the excess of the amount paid
by the corporation over the amount by which the paid up
capital was reduced.
D.
SHAREHOLDER BENEFITS AND APPROPRIATIONS
Subsection 15( 1) deals with appropriations of property to
shareholders and the conferral of. benefits on shareholders by a
corporation.
)
It reads as follows:
.
"(1) Wherein a taxation year
(a)
a payment has been made by a corporation
to a shareholder otherwise than pursuant
to a bona fide business transaction,
(b) funds or property of a corporation have
been appropriated in any manner whatever
to, or for the benefit of, a shareholder,
(c) a benefit or advantage has been conferred
on a shareholder by a corporation,
otherwise than
(d) on
the
reduction
of
capital,
the
redemption, cancellation or acquisition
by the corporation of shares of its
capital
stock
or
the
winding-up,
discontinuance or reorganization of its
business, or otherwise by way of a
transaction to which section 88 applies,
(e) by the payment of a dividertd or a stock
dividend,
(f) by conferring on all holders of common
shares of the capital stock of the
corporation a right to buy additional
common shares thereof, or
- 33 -
(g)
by an action described in paragraph 84(1)
(c.1) or (c.2),
the amount or value thereof shall, except to
the extent that it is deemed to be a dividend
by section 84, be included in computing the
income of the shareholder for the year."
Income will not be imputed to a shareholder unde subsection 15(1)
where
the
payment
is
made
pursuant
to
a
bona
fide
business
transaction between the shareholder and the corporation, where the
entire amount would be covered by the deemed dividend provisions
in section 84, or where the benefit is the conferral on all common
shareholders of the right to buy additional common· shares at a
price which is lower than the
prevailin~
Canada's position on some of
these matters
Interpretation
Bulletins
which
are
market price.
is
attached
set
to
Revenue
out
in two
this
paper:
IT-116R and IT-432.
Paragraph 15( 1) (c) has
been applied to tax a shareholder
receiving excessive payments in consideration of the "goodwill" of
a
business which he transferred to
M.N.R.,
[1957]
C.T~C.
the
company.
In Losey v.
146, a business with net assets of about
$8,750 was transferred to a
corporation for $85,000,
the extra
consideration being attributed to the goodwill of the business.
The Exchequer.Court held that the goodwill was worth no more than
$1,000,
former
so
the annual
proprietor
in
payments made by the corporation to
respect
of
the
goodwill
were
the
considered
taxable benefits under paragraph (c) to the extent in excess of
- 34 -
$1,000.
Personal use of company assets might also be considered a
shareholder benefit.
In Zakoor v. M.N.R. (1964), 35 Tax A.B.C.
378 the
the
taxpayer had
use
of
a new,
company-owned,
$8,000
automobile each year, and the Tax Review Board held that he had
received a taxable benefit equal to the 33 1/3% "luxury element"
of the capital cost allowance plus 20% of· the remaining normal
expenses.
Today,
subsection
15(5)
incorporates
by
reference
subsections 6( 1), (2), and (2.2) relating to employee automobile
benefits to determine the amount of shareholder benefit from an
automobile.
free
Free holiday trips,
improvements
to
the
free
shareholder's
living accommodation,
property might
also
or
be
considered shareholder benefits.
When
amounts
are
included
in
a
taxpayer's
income
subsection 15(1) they are taxed as ordinary income.
is
no
enti tlement
dividends.
received
to
the
special
tax
under
Thus, there
treatment
accorded
Furthermore, the corporation from whom the benefit is
gets
no
deduction
for
the
amount
taxed
in
the
shareholder's hands, resulting in double taxation.
Section 56(2) provides for the taxation of indirect payments
where a payment or transfer of property is made pursuant to the
direction of a taxpayer to some other person for the benefit of
the taxpayer or as a benefit that the taxpayer desires to have
conferred on the other person.
In M~N.R. v~Bronfman, [1965]
- 35 -
C.T.C. 378, 65 D.T.C. 5235 the Exchequer Court held that directors
who had concurred in large sums of money being given as wedding
gifts to their relatives and to needy retired employees were taxed
on
the
amount
shareholdings.
of
the
gifts
in
proportion
to
their
own
The case invoved the application of subsection
56(2).
The section has occasionally been used successfully by
Revenue
Canada
to
attack
personal
service
corporations
[e.g.
Barbeau v. The Queen, [1981] C.t.C. 496, 84 D.T.C. 6148 (F.C.)]
and dividend sprinkling [e.g. Champ v •. The Queen, (1983] C.T.C. 1,
83 D.T.C. 5029 (F.C.)].
E.
LOANS TO SHAREHOLDERS
Subsection 15(2) is designed to discourage the withdrawal of
corporate profits in the guise of loans or other indebtedness.
reads as follows:
"(2)
Where a person (other than a corporation
resident in Canada) or a partnership (other
than a partnership each member of which is
a corporation resident in Canada) is a
shareholder of a particular corporation, is
connected with a shareholder of a particular
corporation or is a member of a partnership,
or a beneficiary of a trust, that is a
shareholder of a particular corporation and
the person or partnership has in a taxation
year received a loan from or has become
indebted to the particular corporation, to
any other corporation related thereto or to
a partnership of which the particular
corporation or a corporation related thereto
is a member, the amount of the loan or
indebtedness shall be included in computing
the income for the year of the person or
partnership, unless
- 36 -
It
(a)
the loan was made or the indebtedness
arose
(i)
in the
lender's
and, in
lending
ordinary
ordinary course of the
or creditor's business
the case of a loan, the
of money was part of its
business,
(ii)
in respect of an employee of the
lende r or creditor or the spouse
of an employee of the lender or
creditor to enable or assist the
employee or his spouse to acquire
a dwelling for his habitation,
(iii)
where the lender or creditor is a
corporation, in respect of an
employee of the corporation to
enable or assist the employee- to
acquire
from
the
corporation
fully paid shares of the capital
stock of the corporation, or to
acquire from corporation related
thereto fully paid shares of the
capital stock of
the
related
corporation, to be held by him
for his own benefit, or
(iv)
in respect of an employee of the
lender or creditor to enable or
assist the employee to acquire an
automo bile to be used by him in
the performance of the duties of
his office or employment,
and bona fide arrangements were made, at the
time the loan was made or the indebtedness
arose,
for repayment
thereof wi thin a
reasonable time; or
(b)
the loan or indebtedness was repaid within
one year from the end of the taxation year
of the lender or creditor in which it was
made or incurred and it is established, by
subsequent events or otherwise, that the
repayment was not made as part of a series
of
loans
or
other
transactions
and
repayments."
- 37 -
Subsection 15( 2) applies to all kinds of indebtedness, not
just to loans actually received from the corporation.
for
example,
shareholder on
apply
if
the
corporation
It
instalments.
sold
applies
not
It would,
property
only
to
the
where
the
shareholder himself incurred the debt, but also where a person
"connected with a shareholder"
[defined in subsection 15(2.1)]
incurred
the
the
debt,
or
where
debtor
is
a
member
of
a
partnership or the beneficiary of a trust which is a shareholder
of the corporation.
It will be noted that there are a number of exceptions to
the rule that a shareholder must include in his income the amount
of indebtedness owing to the corporation.
these involves the repayment period.
The most important of
No matter for what purpose
the debt was incurred it will not be included in the shareholder's
income if it is repaid within 1 year from the end of the taxation
year of the lender in which i t was made, as long as the loan is
not part of a series of loans and repayments.
..
If repayment is not made in time to avoid inclusion of the
loan in the shareholder's income, but is subsequently repaid; and
is not part of a series of loans
and repayments,
the future
payments can be deducted from the shareholder's income when they
are made:
paragraph 20(1)(j).
- 38 -
Although there
loan,
section
is
80.4
no obligation
deems
a
to charge
shareholder
or
interes t
employee
on a
to
have
received a benefit to the extent that the interest charged on such
a
loan is
less
than
quarter of 1985).
the
prescribed
rate
(10%
for
the
second
The imputed benefit is deemed by section 80.5
to be interest paid by the shareholder or employee.
Therefore, if
the debt was incurred for a purpose (such as purchase of shares)
which would otherwise allow for deduction of interest the imputed
interest benefit can be cancelled out by a corres·ponding interest
deduction.
IV.
HOLDING COMPANIES
Holding
companies
dividend income.
slight
tax
are
neutr~l
in
their
tax
effect
on
With respect to investment income there can be a
saving
from
the
mere
fact
of
incorporation,
as
illustrated by the following example which compares the total tax
which would be paid when investment income is flowed through a
private corporation with
the
tax which would be
paid
if
such
income were earned directly by an individual in the highest tax
bracket.
1985
Saskatchewan rates
are used.
Accordingly,
all
income at the individual level is taxed at a combined federal and
provincial marginal rate of 53.42%.
- 39 -
Individually
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
12)
13)
Income Earned
Corp. Tax
Retained in Corp.
R.D.T.O.H.
Received by Shareholder
Gross-up (1/2 Dividend)
Taxed at Individual Level
Personal Tax
Less Dividend Tax Credit
Retained by Individual
(5-10)
Income Tax Deferral
Through Incorporation
Absolute Income Tax
Savings Through
Incorporation
Through Corporation
$100,000
$100,000
52,000
48,000
16,670
64,670
32,335
97,005
51,821
34,547
100,000
100,000
53,421
46,579
47,396
1,421
817
An individual in a lower tax bracket would suffer prepayment
of tax through incorporation of his investments'and if his income
was so low that he could not fully utilize the dividend tax credit
there would be
an absolute
income
tax cost to incorporation.
Consider the following example of an indiviual with $25,000 of
investment
income
and
no
other sources
of
income.
Personal
exemptions and the $1000 investment deduction are ignored.
Individually
1)
2)
3)
4)
5)
6)
Income Earned ~
Corp. Tax
Retained in Corp.
R.D.T.O.H.
Received by Shareholder
Gross-up (1/2 Dividend)
7) Taxed at Individual Level
8) Personal Tax
Federal
Div. tax credit
Provincial
9) Retained by Individual
10) Income Tax Prepayment
Through Incorporation
ll) Absolute Income Tax
Cost of Incorporation
$ 25,000
25,000
25,000
7,582
17,418
Through Corporation
$ 25,000
13,000
12,000
4,168
16,168
8,084
24,252
0
4,639
(5,497)
0
0
16,168
5,418
1,250
- 40 -
The
biggest
investments
is
advantage
to
to allow one
to
one's personal income.
adjusting
the
amount
one
owns
shareholders
of
shares
avoid
a
holding
dramatic
company
for
fluctuations
in
Income levelling can be accomplished by
of
dividends
corporation to its shareholders.
where
using
in
an
which
are
paid
by
the
This is particularly important
operating
company
and
the
other
the operating company want dividends paid at a
time which might be inopportune for oneself.
If
one owns
the
shares through a holding company there would be no necessity to
take the dividends into one's personal hands right away.
levelling can also be
Income
accomplished by borrowing money from the
corporation in low income years (which will be included in income
under subsection 15(2) in the circumstances which have already
been discussed) and paying it back in high income years [when one
would get a deduction under paragraph 20(1)(j)] provided that it
was not part of a series of loans and repayments.
Of
course,
there would be an imputed interest benefit under section 80.4 if
less than a commercial rate of interest was charged on the loan.
v.
SHOULD ONE INCORPORATE?
If one's personal tax rate is at a sufficiently low level we
have seen that it is not possible to fully utilize the dividend
tax credit, and more tax will be paid with a
without
a corporation.
corporation than
One must have in excess of $40,000 of
- 41 -
taxable
income
to break even on tax as
corporation rather
detailed
than
discussion
of
being
the
earned
income flows
personally.
advantages
and
throu~h
For
a
a
very
disadvanta~es
of
a
corporation reference should be made to Kellough and McQuillan,
"The Decision To Incorporate" in Taxation 'Of Private Corporations
And Their 'Shareholders at 27.
of
the
points
which
The following is a summary of some
should
be
considered.
First
the
disadvantages:
1.
Corporate rather than personal ownership of business assets
(such as the family farm) may entail some emotional cost;
2.
Incorporation costs
and
the
on~oin~
legal and accounting
fees for incorporation are not inconsequential;
3.
It can be very expensive from a tax point of view to undo a
corporate structure when assets have been transferred to a
corporation;
4.
Losses cannot be transferred out of a corporation.
If the
incorporated business
losses
is unsuccessful
the business
cannot be set against personal income from other sources;
5.
Interest and dividends from non-arm's length sources do not
qualify for
the $1,000 investment deduction under section
- 42 -
110.1.
If one has
a corporation one should ensure that
sufficient investments are retained in one's personal hands
to yield $1,000 of qualifying interest and dividend income;
and
6.
British
Columbia,
Quebec
levy
Saskatchewan,
capital
taxes
Manitoba,
on
Ontario,
corporations.
and
While
Saskatchewan has a substantial threshold before the capital
tax kicks in, Ontario and Quebec have a minimum capital tax
of $50.00 and $100.00 respectively.
There are a number of advantages to incorporation:
1.
A
corporation
~ives
one
limited liability and
perpetual
existence;
2.
Certain
special
tax
rules
are
available
only
to
-corporations, such as the section 125.1 manufacturing and
processing tax credit;
3.
A parent who wants to pass on his business to his child can
defer tax on the first $200,000 of capital gains when shares
of a small business corporation are transferred to the child
either on death or inter vivos.
No such deferral of capital
gains is available when an unincorporated business (other
than a family farm) is transferred to a child; and
-
43 -
J
4.
Corporations
renting,
whose
developing
prevented
from
principal
or
business
selling of
creatin~
losses
real
is
leasin~,
the
property
through
are
capital
not
cost
allowance claims.
The decision to incorporate is one which must be made on a
case by case basis.
In some cases the intangible factors, such as
increased complexity, will tip the scales against incorporation.
In many instances, unless the proposed business carries with it
great
liability
risks,
it
is
best
to
start
out
without
a
corporation and to incorporate only after the operation has become
profitable.
This
will
not
be
the
case,
however,
where
the
business involves the buying and selling of real property, since
real estate inventory cannot later be rolled into a corporation.
... 44 -
DEPARTMENT OF NATIONAL REVENUE, TAXATION
INTERPRETATION
BULLETIN
MINISTERE OU REVENU NATIONAL, IMPQT
,
D'INTERPRETATIOr{
SUBJECT: INCOME TAX ACT
Rights to Subscribe to Common Shares
OBJET
SERIAL NO:
IT-116R
DATl5eptemberl5.1975
REFERENCE: Paragraph
15( I )(f)
(also
subparagraphs
115(1 )(b)(iii) and (iv) and subsection 115(3»
NODE SERlE: IT-116R
OATE: Ie 15 septembre 1975
RENVOI: Alinea 15(1)f) (voir aussi les sous~alineas 1150)b )(iii)
et (iv) et Ie paragraphe 115(3»
This bulletin replaces and cancels Interpretation Bul/etin
IT-116 dated August 9,1973.
Cc bulletin rem place et annule Ie Bulletill J 'in til
IT-116 du 9 aout 1973.
1. Pursuant to paragraph 15(1 )(f), when the right to
buy additional common shares is conferred on all
holders of common shares, no amount or value is
thereby included in computing the shareholder's income.
Subsection 248( 1) defines a common share as "a share
the holder of which is not precluded upon the reduction
or redemption of the capital stock from participating in
the assets of the corporation beyond the amount paid up
thereon plus a fixed premium and a defined rate of
dividend".
1. Suivant I'alinea IS(1 )0, lorsque tous de kntcurs d'actions
ordinaires se voient attribuer Ie droi~ d'acheter d'alltres actions
ordinaires, aucun montant ni valeur n'est par Iii inclus dans Ie
calcul du revenu des actionnaires. Le paragraphe ~480.1 definit
une action ordinaire comme "une action dont Ie deteni:eur
n'est pas empeche, lors de la reduction ou du rachat du
capital-actions, de participer dans l'actif de la corporation
au-deIa de la somme versee pour cette action, d'une prime fixe
et d'un taux determine de dividende".
2. Where rights to subscribe for common shares are
issued by a Canadian corporation it may be that certain
non-resident shareholders are barred from subscribing
for such shares. This situation may be caused by
restrictions in a Canadian law or because the corporation
did not comply with the securities regulations in the
country where the non-resident shareholders reside. In
these circumstances, paragraph 15(1 )(f) is still considered to apply provided that rights are in fact issued to
the non-resident shareholders and they are .entitled to
sell such rights.
2. Advenant que les droits de sOllscription d'actions ordinaires soient emis par une corporation canadienne, il peut se
presenter des cas ou certains actionnaires non-residents soient
empeches de souscrire ces actions. Ceci pellt provenir des
restrictions d'une loi canadienne ou du fait que la corporation
ne se conformait pas aux reglements sur les valeurs en vigueur
dans Ie pays ou reside les actionnaires non-residents. Dan5 ces
circonstances, I'alinea I sO)f) est encore repute s'appliquer
pourvu que les droits soient effectivement emis a des actionnaires non-residents et ils sont autorises ales vendre.
3. It may happen that a shareholder does not receive
rights to subscribe for additional common shares solely
for the reason that his holdings are too small to entitle
him to sufficient rights to purchase a full share. For
example, a holding of five shares may entitle the owner
to purchase one additional share and a shareholder may
only own four shares. In these circumstances, paragraph
ISO )(f) is considered to be applicable if the rights so
withheld are issued to a trustee who sells them and pays
the proceeds, less expenses, on a pro rata basis to the
shareholders concerned.
3. n peut se presenter des cas ou un actionnaire n'acquiert
pas de droits de souscription de nouvelles actions ordinaires,
pour la seule raison que son avoir en actions est trop petit pour
lui permettre d'avoir les droits suffisants pour acheter une
action complete. Par exemple, un avoir de cinq actions peut
autoriser leur proprietaire a acheter une action supplementaire;
or, un actionnaire peut ne detenir que quatre actions. Dans ce
cas, les dispositions de 1'alinea 150)f) sont reputees pouvoir
s'appliquer si les droits ainsi refuses reviennent a l'actionnaire
apres qu'un fiduciaire, a qui ils ont ete emis, les lui vende Ie
produit, moins les depenses, repartis sur une base proportionnelle entre les actionnaires concernes.
4. Rights to buy additional common shares are normally capital property having no cost (unless they are
purchased) and thus a capital gain may arise if they are
disposed of rather than exercised.
4. Les droits a l'achat de nouvelles actions ordinaires sont
normalement des biens en immobilisations n'ayant pas de COli t
(a moins, qu'ils aient ere achetes) et de ce fait, ils peuvent
donner lieu a des gains en capitaux au cas ou ils sont cedes
plutat qu'exerces.
PUBLISHEC UNCER THE AUTHORITY OF THE CEPUTY
MINISTER OF NATIONAL REVENUE FOR TAXATION
LOI DE L'IMPOT SUR LE REVENU
Droits de souscription d'actions ordinaires
Y
[J7I: fa tion
PUBLIE: AVEC L'AUTORISATION CU SOUS-MINISTRE
CU REVENU NATIONAL POUR L'IMPOT
REVENUE CANADA. TAXATION
INTERPRETATION
SUBJECT:
NO:
IT-432
REFERENCE:
BULLETIN
REVENU CANADA. IMP(lT
D'INTERPRETATION
LOI DE L'IMroT SUR LE REVENU
Attribution de biens it des actionnaires
INCOME TAX ACT
Appropriation of Property to Shareholders
OBJET:
June 25,1979
Subsection 15(1) (also subsections 52(1),
56(2)! 69(1), 84(1) and 245(2))
IT-432
OATE
Ie 25 juin 1979
RENVOI:
Paragraphe 15(1) (aussi paragraphes 52(1), 56(2),
69(1), 84(1) et 245(2))
DATE:
General
1. The purpose of subsection 15(1) is to include in a
shareholder's income the amount or value of any distribution of corporate property and the value of any benefit
conferred on the shareholder which would not otherwise
be included therein and which cannot properly be considered as a return of capital or as having been received in his
capacity as an employee; in the latter case the provisions
of paragraph 6(1)(a) are applicable. In certain circumstances other provisions of the Income Tax Act apply
to include such amounts in the shareholder's income.
Consequently, pursuant to paragraphs 15(1)(d) and (e), no
amount is to be included in the shareholder's income
under subsection 15(1) where the corporate property is
distributed to the shareholder by a resident or non-resident
corporation:
(a) on the reduction of capital,
(b) on the redemption, cancellation or acquisition
of shares,
(c) on the winding-up, discontinuance or reorganization of the corporation's business,
(d) on the winding-up of a Canadian corporation
(e) on the dissolution of a foreign affiliate and
(f) on the payment of a dividend or stock dividend.
NO:
Generalites
1. L'objet du paragraphe 15(1) est d'inclure dans Ie revenu
d'un actionnaire Ie montant ou la valeur de toute attribution de
biens d'une corporation et la valeur de tout avantage accorde a
I'actionnaire qui ne pourraient par ailleurs y etre indus et qui ne
peuvent dument etre consideres comme un remboursement de
capital ou comme ayant ete r~us en sa qualire d'employe; dans
ce dernier cas, les dispositions de I'alinea 6(1)a) s'appliquent.
Dans certaines circonstances, d'autres dispositions de la Loi de
l'impot sur Ie revenu s'appliquent pourinclure de tels monbmts
dans Ie revenu de I'actionnaire. En consequence, conformement
aux alineas 15(1)d) et e), aucun montant ne doit etre indus dans
Ie revenu de l'actionnaire en vertu du paragraphe 15(1) lorsque
Ie bien de la corporation est attribue it I'actionnaire par
)
corporation residante ou non residante lors:
a) de la reduction du capital,
b) du rachat, de I'annulation ou de I'acquisition d'actions,
c) de la liquidation, de la cessation ou de la reorganisation
de I'entreprise de la corporation,
d) de la liquidation d'une corporation canadienne,
e) de la dissolution d'une filiale etrangere et
f) du paiement d'un dividende ou d'un dividende en actions.
2. Pursuant to paragraph 15(1)(f), no amount is to be
included in a shareholder's income under subsection 15(1)
where the benefit arises from a resident or non-resident
corporation conferring a right on all common shareholders
to purchase additional common shares. For further com'ments in this regard see Interpretation Bulletin IT-116R,
2. En vertu de l'alinea 15(1)f), aucun montant ne doit etre
inclus dans Ie revenu d'un actionnaire en vertu du paragraphe
15(1) lorsque l'avantage provient du fait qu'une corporation
residante ou non residante attribue Ie droit it tous les detenteurs
d'actions ordinaires d'acheter d'autres actions ordinaires, Pour
de plus amples renseignements it cet egard, voir Ie Bulletin
d'interpretation IT-II6R.
3. Where a shareholder sells or otherwise transfers assets to a corporation and the consideration received consists of or includes shares in the capital stock of the
corporation and the paid-up capital of these shares issued
by the corporation exceeds the value of its net asset increase, if any, subsection 84(1) deems the amount of such
excess to be a dividend received by all persons owning
shares of the particular class and in proportion to their
shareholdings. In addition, if the fair market value of the
non-share consideration exceeds the fair market value of
3. Lorsqu'un actionnaire vend ou par ailleurs transfere des
biens it une corporation et que la contrepartie re~ue consiste en
ou comporte des actions du capital-actions de la corporation et
que Ie capital verse de ces actions emises par la corporation
excede la valeur de l'augmentation nette de I'actif, s'H en est, Ie
montant·de I'excedent est repute par Ie paragraphe 84( I) etre un
dividende re~u par toutes les personnes detenant des actior . ~l
la categorie particuliere, en proportion de leur portefeuille..
outre, si la juste valeur marchande de la contrepartie ne consistant pas en actions excede la juste valeur marchande des biens
~.LISHED UNDER THE AUTHORITY OF THE DEPUTY
MINISTER OF
NATIONAL REVENUE
FOR
TAXATION
au SOUS-MINISTRE
DU REVENU NATIONAL. POUR L.'IMPOT
~UIILIE AVEC L'AUTORISATION
IT-432
2
)
the assets sold or transferred, such excess is included in
income pursuant to subsection 15( 1). The result is that the
taxable amount is brought into income under subsection
84( I) to the maximum extent possible and the remainder,
if any, under subsection 15( I). The foregoing comments'
are illustrated in the following example.
Assumptions:
$ 500
Fair market value of assets transferred
Paid-up capital of shares issued
$1,000
Fair market value of non-share
$1,200
consideration
84(1) Deemed Dividend:
Paid-up capital increase
$1,000
84(1)(d) net asset increase,
if any ($500 - $1,200 )
84( 1) deemed dividend
$1,000
15(1) Income Amount:
Fair market value of
non-share consideration
$1,200
Fair market value of assets
transferred
$ 500
15(1) income amount (the
net asset decrease)
$ 700
vendus outransferes, cet excedent est indus dans Ie revenu en
vertu du paragraphe 15(1).11 en resulte que Ie montant imposable entre dans Ie revenu en vertu du paragraphe 84( I) jusqu' a
concurrence du maximum possible et que Ie reste, s'il en est, y
entre en vertu du paragraphe 15(1). Les observations qui precede~t sont illustrees par l'exemple suivant.
Hypotheses:
Juste valeur marchande des biens transferes
$ 500
Capital verse des actions emises
$1,000
Juste valeur marchande de la contrepartie ne
consistant pas en actions
$1,200
Dividendes reputes en vertu du paragraphe 84(1):
Augmentation du capital verse
$1,000
Augmentation nette de I' actif en vertu de
I'alinea 84(1)d), s'il en est ($500 - $1,200)
Dividende repute en vertu du
paragraphe 84(1)
$1,000
Montant du revenu en vertu du paragraphe 15(1):
Juste valeur marchande de la contrepartie
ne consistant pas en actions
$1,200
Juste valeur marchande des biens
transferes
$ 500
Montant du revenu en vertu du
paragraphe 15(1)
(la diminution nette de l'actif)
$ 700
4. For resident shareholders, amounts brought into income are classed as income from property. For nonresident shareholders, paragraph 214(3)(a) deems such
amounts to bea dividend to which the normal non-resident
tax rules under Part XIII apply. Paragraph 214(3)(a) is for
the purposes of Part XIII only. Consequently; the deemed
dividend does not qualify as a dividend paid by the corporation for subparagraph 129(1)(a)(i).
4. Pour les actionnaires residants, les montants inclus dans Ie
revenu sont classes comme etant un revenu tire d'un bien. Pour
les actionnaires non residants, I'alinea 214(3)a) fait qu'un tel
revenu est repute etre un dividende auquel les regles fiscales
normales de la Partie XIII concernant les non-residents s'appliquent. L'alinea 214(3)a) ne vise que la Partie XIII. En consequence, Ie dividende repute n'est pas admissible a titre de
dividende paye par la corporation aux fins du sous-alinea
129(I)a)(i).
5. Subsection 15(7) confirms that subsection 15(1) is
applicable to a resident shareholder of a non-resident
corporation even though that corporation is not, or was
not, resident in Canada or has not carried on business in
Canada.
5. Le paragraphe 15(7) conflI'Ille que Ie paragraphe 15(1)
s'applique a unactionnaire residant d'une corporation non residante, meme si cette corporation n'est pas ou n'etait pas residante au Canada oun'a pas exploite une entreprise au Canada.
6. The words "shareholder" and "corporation" are
defined in subsection 248(1). The "taxation year", as
referred to in subsection 15(1), refers to the taxation year
of the shareholder and not that of the corporation.
6. Les tennes "actionnaire» et "corporation» sont definis au
paragraphe 248(1). L'"annee d'imposition» mentionnee au paragraphe 15(1) designe l'annee d'imposition de l'actionnaire et
non celie de la corporation.
7. The rules in subsection 15(1) are supplemented by,
and should be read in conjunction with, the provisions in
subsections 56(2), (see IT-335), 245(2) and 245(3) in so
far as they relate to indirect payments or transfers made by
a corporation for the benefit of a shareholder or as a
benefit that the shareholder desired to have conferred on
some other person. For comments regarding dividends
waived by one shareholder in favour of another shareholder see IT-208.
7. Les regles du paragraphe 15(1) ont comme complement (et
dont la lecture doit etre simultanee) les dispositions des paragraphes 56(2), (voir Ie IT·335), 245(2) et 245(3) en ce qu'elles se
rapportent aux paiements indirects ou aux transferts faits par une
corporation pour l'avantage d'un actionnaire ou comme avantage que I' actionnaire desire voir accorder aune autre personne.
Dans Ie IT-208, il y a des observations concernant des dividendes ayant fait l'objet d'une renonciation par un actionnaire en
faveur d'un autre actionnaire.
8. Where an amount is to be included in the income of a
shareholder under this subsection, such amount will not
be allowable to the corporation as a deduction from income.
8. Lorsqu'un montant doit etre indus dans Ie revenu d'un
actionnaire en vertu du present paragraphe, un tel montant ne
sera pas deductible du revenu de la corporation.
-
-
=====
3
IT-432
Paragraphs 15(1)(a), (b) and (c)
Not MutuaUy Exclusive
9. The following interpretations of subsection 15(1)
have been grouped under the rules applicable to paragraphs 15(1)(a), 1S(l)(b) and 15(1)(c). It is to be noted,
however, that these paragraphs are not mutually exclusive
so that, in regard to a particular transaction, more than one
paragraph may be invoked to establish that the transaction
has resulted in income to a shareholder.
Les alineas 15(1 )a), b) et c) ne
s'excluent pas mutueUement
9. Les interpretations qui suivent du paragraphe 15( 1) ont {
regroupees selon les regles applicables aux alineas 15(1)a},
15(l)b) et 15(l)c). 11 est a noter toutefois que ces alineas ne
s'excluent pas muteUement, ce qui fait que, par rapport a une
operation particuliere, plus d'un alinea peut etre invoque pour
etablir que I'operation a confere un revenu un actionnaire.
a
Paragraph 15(1)(a)
Alinea 15(I)a)
Meaning of "Bona· Fide"
Signification d'operation commerciale ..veritable"
10. Paragraph 15(1)(a) is not applicable where a payment
made by a corporation to a shareholder is pursuant to a
bona fide business transaction. Normally, the test as to
whether a transaction is bona fide is whether the terms and
conditions are essentially the same as they would have
been if the transaction had ~n completed between two
parties dealing at arm's length.
10. L'alinea 15(1)a) ne s'applique pas 10rsqu'un paiement fait
par une corporation a un actionnaire est verse en vertu d'une
operation commerciale veritable. Nonnalement, la faC;on de
savoir si une operation est une operation veritable est de savoir si
les conditions sont essentiellement les memes qu' eUes auraient
ete si la transaction avait ete faite entre deux parties n'ayant pas
de lien de dependance.
Paragraph 15(1)(b)
AUnea 15(I)b)
Application
Application
11. Generally speaking, any transfer of property by a
corporation to or on behalf of a shareholder for inadequate
or no consideration may give rise to an appropriation of
property within the meaning of paragraph 15(1)(b) unless
the provisions of paragraphs (d), (e) or (f) apply. For
purposes of paragraph 15(l)(b), as elsewhere in the Act,
the word •'property" is not restricted to real estate but has
the broad meaning given to it in subsection 248(1).
11. En general, tout transfert de biens par une corporation aun
actionnaire ou pour celui-ci, pour une contrepartie inadequate
ou nulle, peut entrainer une attribution de biens au sens de
I'alinea 15(1)b), a moins que les dispositions des alineas d), e)
ou f) ne s'appliquent. Aux fins de I'alinea 15(1)b), com~
aiUeurs dans la Loi, I'expression ..bien" ne se rapporte ~
uniquement aux biens immeubles mais a Ie sens large que lui
donne Ie paragraphe 248( 1).
Cost of Property Acquired by Shareholders
Coot des biens acquis par les actionnaires
12. Where an amount is included in the income of a
resident shareholder pursuant to subsection 15(1) as a
consequence of the acquisition of a capital property by
him from a corporation, subsection 52(1) provides that
such an amount is an addition to the cost to the shareholder
of the property. Subsection 52( 1.1) contains the same rule
in respect of a non-resident shareholder where the property acquired would, on disposition by the shareholder, be
classed as taxable Canadian property. As the rules in
subsections 52( 1) and 52(1.1) are only for the purpose of
computing capital gains or capital losses, they are not
applicable where the property acquired by the shareholder
is inventory or eligible capital property, nor do they affect
the amount of capital cost for the purposes of capital cost
allowances. Also, they do not apply where ITAR 20( 1) or
ITAR 26(5) applies to the transaction.
12. Lorsqu'un montant est inclus dans Ie revenu d'un actionnaire residant en vertu du paragraphe 15(1) par suite de l'acquisition de biens par lui d'une corporation, Ie paragraphe 52(1)
stipule qu 'un tel montant s'ajoute au cout du bien pour I' actionnaire. Le paragraphe 52(1.1) contient la meme regie relativement it un actionnaire non residant Iorsque Ie bien acquis serait
classe, lors de sa disposition par l'actionnaire, comme un bien
canadien imposable. Les regles des paragraphes 52( 1) et 52( 1.1)
n'existant qu 'aux fins du calcul des gains en capital ou des pertes
en capital, elles ne s'appliquent pas lorsque Ie bien acquis par
I'actionnaire est un bien figurant dans un inventaire ou un bien
en immobilisations admissible. EUes n' affectent pas non plus Ie
montant du cout en capital aux fins des deductions pour amortissement. En outre, eUes ne s'appliquent pas lorsque la RAIR
20(1) ou RAIR 26(5) s'applique a I'operation.
13. Where, however, the comments in IT-405, are
applicable, the Department may permit an adjustment to
the amount of the purchase price to reflect the amount
deemed by paragraph 69(1)(b) to have been received by
the corporation.
13. Lorsque, toutefois, Ies observations du IT-405 s'appliquent, Ie Ministere peut permettre un rajustement du prix
d'achat pour refleter Ie montant repute par I' alinea 69( 1)b) avoir
ete rec;u par Ia corporation.
IT-432
4
Exchange of Properties
Echange de biens
14. Another example of a transaction that would give rise
)\n appropriation, within the meaning of that word in
r •.ragraph
15(1 )(b), is where a corporation and a
shareholder exchange property, whether by sale or otherwise, with the value of the property transferred by the
corporation being greater than the value of the property
received by it. The fair market values of the properties
concerned must be determined at the date of the transaction. The value of the benefit to be included in the income
of the shareholder is the amount by which the fair market
value of the property transferred by the corporation exceeds the fair market value of the property received by the
corporation.
14. Un autre exemple d'une operation qui entrainerait une
attribution au sens qu'a cette expression dans I' alinea I5( l)b) est
celle d'une corporation et d'un actionnaire qui echangent des
biens, que ce soit par Ia vente ou autrement, la valeur du bien
transfere'par Ia corporation etant plus grande que Ia valeur de
bien re~u par elle. Les justes valeurs marchandes des biens
concernes doivent etre determinees it la date de I'operation. La
valeur de l' avantage it inclure dans Ie revenu de I' actionnaire est
Ie montant de l' excedent de la juste valeur marchande du bien
transfere sur la juste valeur marchande du bien reeru par la
corporation.
Funds Stolen or Embezzled by Shareholder
Fonds voles ou detoumes par I'actionnaire
15. The words "in any manner whatever" as used in
paragraph 15( I)(b) in relation to an appropriation of funds
or property, are sufficiently wide to embrace a situation
where funds or property of a corporation have been stolen
or embezzled by a shareholder in his capacity as shareholder. Any amount fraudulently taken and retained by a
shareholder, or diverted for his own use, is income under
paragraph 15( I)(b) even though the corporation may recover part or all of its loss through a claim on an insurer.
15. L'expression «de quelque maniere que ce soit» telle qu'elle
est utilisee dans l'alinea 15(l)b) relativement it une attribution
de fonds ou de biens est suffisamment large pour englober une
situation dans laquelle des fonds ou des biens d'une corporation
auraient ete voles ou detournes par un actionnaire en sa qualite
d'actionnaire. Tout montant frauduleusement pris et conserve
. par un actionnaire,ou detourne pour son propre usage, est un
revenu en vertu de I' alinea 15( I)b), meme si la corporation peut
recouvrer une partieou la totalite de sa perte au moyen d'une
demande de reglement aupres d'un assureur.
Paragraph 15(1)(c)
Alinea 15(1)c)
16. For the application of paragraph 15(1)(c) in the case
') the personal use of aircraft, see IT-160R and in the case
<It interest-free or low interest loans, see IT-421.
16. En ce qui coneerne I'application de I' alim~a 15( I)c) dans Ie
cas de I'usage personnel d'un aeronef, voir Ie IT-I60R et dans Ie
cas de prets it interet reduit ou nul, voir Ie IT-421.
Addition or Improvement to Shareholder's Building
Ajout ou amelioration au batiment de I'actionnaire
17. A corporation that is renting a building owned by a
shareholder may make an addition or improvement to the
building. If, as is usual, such an addition or improvement
vests in the owner ofthe building, a benefit is considered
to have been conferred on the shareholder by the corporation pursuant to paragraph 15(1)(c). The amount of the
benefit is considered to be the amount, if any, by which
the addition or improvement increases the value of the
building to the shareholder at the time the building reverts
to.the shareholder. Therefore, in determining the amount
of the benefit it is necessary to consider the particular facts
of each case. The facts to be considered include the nature
of the addition or improvement, the term of the lease,
provisions for extension of the lease, provisions of the
lease in respect to leasehold improvements and the
amount of rent being charged. The benefit considered to
be conferred in a particular taxation year is based upon the
p<.'rtion of the addition or improvement completed during
that year.
17. Une corporation qui loue un batiment appartenant it un
actionnaire peut faire un ajout ou apporter une amelioration au
batiment. Si, selon la coutume, un tel ajout ou amelioration
revient au proprietaire du blitiment, un avantage est considere
comme ayant ete· accorde it I' actionnaire par la corporation en
vertu de I'alinea (l5)(l)c). Le montant de l'avantage est considere comme etant Ie montant, s'il en est, de I'augmentation
qu' apporte l' ajout our amelioration it la valeur du batiment pour
l'actionnaire au moment ou Ie blitiment revient it I'actionnaire.
En consequence, pour determiner Ie montant de l' avantage, il
est necessaire de considerer les faits particuliers a chaque cas.
Les faits it prendre en consideration incluent la nature de I' ajout
ou de I'amelioration, I'echeance du bail, les dispositions pour
une extension du bail, les dispositions du bail relativement aux
ameliorations de la propriete louee abail et Ie montant du loyer
qui est demande. L'avantage considere comme ayant ete accorde dans une annee d' imposition particuliere repose sur la
fraction de I'ajout ou de I'amelioration execute durant I'annee
en cause.
18. In accordance with Regulation 1102(4), the cost to a
corporation of making an addition or improvement to
property leased from a shareholder. may be subject to
J1pital cost allowance under either Regulation l100( 1)(b)
~6r Regulation 1102(5), depending on the circumstances,
18. Conformement au Reglement 1102(4), Ie cOllt, pour une
corporation, d'un ajout ou d'une amelioration a un bien loue a
bail it un actionnaire peut etre assujetti it une deduction pour
amortissement en vertu de I'un ou de I'autre des Reglements
ll00(1)b) et 1102(5), suivant les circonstances, et ceci n'est
IT-432
4
Exchange of Properties
Echange de biens
14. Another example of a transaction that would give rise
to an appropriation, within the meaning of that word in
paragraph 15( I )(b), is where a corporation and a
shareholder exchange property, whether by sale or otherwise, with the value of the property transferred by the
corporation being greater than the value of the property
received by it. The fair market values of the properties
concerned must be determined at the date of the transaction. The value of the benefit to be included in the income
of the shareholder is the amount by which the fair market
value of the property transferred by the corporation exceeds the fair market value of the property received by the
corporation.
14. Un autre exemple d'une operation qui entrainerait une
attribution au sens qu' a cette expression d~ns l' alinea 15( l)b) esT
celIe d'une corporation et d'un actionnaire qui echangent des
biens, que ce soit par la vente ou autrement. la valeur du bien
transfere par la corporation etant plus grande que la valeur de
bien r~u par eUe. Les justes valeurs marchandes des biens
concemes doivent etre determinees a la date de l'operation. La
valeur de I'avantage ainclure dans Ie revenu de I' actionnaire est
Ie montant de l' excedent de la juste valeur marchande du bien
transfere sur la juste valeur marchande du bien re~u par la
corporation.
Funds Stolen or Embezzled by Shareholder
Fonds voles ou detoumes par I'actionnaire
IS. The words "in any manner whatever" as used in
paragraph 15( 1)(b) in relation to an appropriation of funds
or property, are sufficiently wide to embrace a situation
where funds or property of a corporation have been stolen
or embezzled by a shareholder in his capacity as shareholder. Any amount fraudulc:ntly taken and retained by a
shareholder, or diverted for his own use, is income under
paragraph 15(1)(b) even though the corporation may recover part or all of its loss through a claim on an insurer.
15. L'expression «de quelque maniere que ce soit" telle qu'elle
est utilisee dans l' alinea 15(1)b) relativement a une attribution
de fonds ou de biens est suffisamment large pour englober une
situation dans laqueUe des fonds ou des biens d'une corporation
auraient ete voles ou detoumes par un actionnaire en sa qualite
d'actionnaire.Tout montant frauduleusement pris et conserve
par un actionnaire, ou detoume pour son propre usage, est un
revenu en vertu de I' alinea 15( I)b), meme si la corporation peut
recouvrer une partie ou la totalite de sa perle au moyen d'une
demande de reglement aupres d' un assureur.
Paragraph 15(1)(c)
Alinea 15(1)c)
16. For the application of paragraph 15(1)(c) in the case
of the personal use of aircraft. see IT-160R and in the case
of interest-free or low interest loans, see IT-421.
16. En ce qui concerne l'application de l'alinea 15(1)c) dans Ie
cas de I' usage personnel d' un aeronef, voir Ie IT-160R et dans 1"
cas de prets a interet reduit au nul, voir Ie IT-421.
'
Addition or Improvement to Shareholder's Building
Ajout ou amelioration au batiment de I'actionnaire
17. A corporation that is renting a building owned by a
shareholder may make an addition or improvement to the
building. If, as is usual, such an addition or improvement
vests in the owner of the building.. a benefit is considered
to have been conferred on the shareholder by the corporation pursuant to paragraph 15(1)(c). The amount of the
benefit is considered to be the amount, if any, by which
the addition or improvement increases the value of the
building to the shareholder at the time the building reverts
to.the shareholder. Therefore. in determining the amount
oCthe benefit it is necessary to consider the particular facts
of each case. The facts to be considered include the nature
of the addition or improvement, the term of the lease,
provisions for extension of the lease. provisions of ,the
lease in respect to leasehold improvements and the
amount of rent being charged. The benefit considered to
be conferred in a particular taxation year is based upon the
pt'rtionof the addition or improvement completed during
that year.
17. Une corporation qui loue un batiment appartenant a un
actionnaire peut faire un ajout ou apporter une amelioration au
batiment. Sit selon la coutume, un tel ajout ou amelioration
revient au proprietaire du batiment, un avantage est considere
comme ayant ete accorde a l' actionnaire par la corporation en
vertu del'alinea (15)(1)c). Le montant de l'avantage est considere comme etant Ie montant.s'U en est. de l'augmentation
qu' apporte I' ajout ou I' amelioration ala valeur du batiment pour
l'actionnaire au moment ou Ie batiment revient a l'actionnaire.
En consequence. pour determiner Ie montant de I' avantage, il
est necessaire de considerer les faits particuliers a chaque cas ..
Les faits 11 prendre en consideration incluent la nature de l' ajout
ou de l'amelioration, l'echeance du bail. les dispositions pour
une extension du bail, les dispositions du bail relativement aux
am~liorations de la propriete louee abail et Ie montant du loyer
qui est demande. L'avantage considere comme ayant ete accorde dans une annee d'imposition particuliere repose sur la
fraction de l'ajout ou de l'amelioration execute durant l'annee
en cause.
18, In accordance with Regulation 1102(4), the cost to a
corporation of making an addition or improvement to
property leased from a shareholder may be subject to
capital cost allowance under either Regulation 1100( 1)(b)
or RegUlation 1102(5), depending on the circumstances.
18, Conformement au Reglement 1l02(4), Ie cout, pour une
corporation. d'un ajout ou d'une amelioration a un bien loue a
bail a un actionnaire peut etre assujetti a une deduction pq
amortissement en vertu de l'un ou de l'autre des Reglemen.._
llOO(l)b) et 1102(5), suivant les circonstances, et ceci n'est
IT-432
5
and this is not affected by the application of subsection
15(1) to the shareholder. From the standpoint of the
shareholder, the amount included in income under subsection 15( I) does not add to the capital cost of the property
for purposes of capital cost allowances although, in accordance with subsections 52(1) and 52( 1.1), it is an
addition to the cost of any capital property for the purpose
of computing subsequent capital gains or capital losses.
change en rien par I' application du paragraphe 15( 1) a I' actionnaire. Du point de vue de I'actionnaire, Ie montant indus dans Ie
revenu en vertu du paragraphe 15(1) n' ajoute rien au cout en
capital du bien aux fins des deductions pour amortissement bien
que, conformement aux paragraphes 52( I ) et 52( 1.1), iI s' agisse
d:une addition au cout de tout bien en immobilisations aux fins
du calcul des gains en capital ou des pertes en capital subsequentes.
Commitment by Corporation on Acquisition of Shares
.by a Shareholder
Engagement par la corporation lors de I'acquisition d'actions par un actionnaire
19. Where one shareholder acquires the shares of another
shareholder in a particular corporation and a commitment
by that corporation to pay consulting fees or to make other
payments to the ex-shareholder for future services is, in
fact, part of the consideration for the shares sold, the
Department will consider such a commitment to be an
appropriation of property of the corporation for the benefit
of the shareholder acquiring the shares in the year when
the commitment was made. Where the payments by the
corporation to the ex-shareholder must be made whether
or not the ex-shareholder renders any services to the
corporation is one indication that such a commitment is, in
fact, part of the consideration for the shares sold.
19. Lorsqu'un actionnaire acquiert les actions d'un autre actionnaire dans une corporation particuliC~re et qu' un engagement
par cette corporation de payer des honoraires d'expert-conseil
ou de faire d'autres paiements I'ancien actionnaire pour des
services futurs fait effectivement partie de la contrepartie pour
les actions vendues, Ie Ministere considere qu'un tel engagement est une attribution de biens de la corporation ai' actionnaire
qui acquiert les actions dans l'annee ou I'engagement est pris.
Lorsque les paiements par la corporation 11 I' ancien actionnaire
doivent etre faits independamment de la question de savoir si
I'ancien actionnaire rend des services 11 la corporation, cela
constitue une indication qu 'un tel engagement est, en fait, une
partie de la contrepartie pour les actions vendues.
Co-operative Apartments
Appartements cooperatifs
20. A number of individuals may form a corporation for
the purpose of having the corporation own an apartment
block. Each shareholder becomes entitled to occupy a
specific suite in the apartment block. Generally, monthly
service rates charged by the corporation to the sharehold·
ers are calculated so as to defray as nearly as possible the
estimated cost of financing and operating the building.
The intention of this arrangement is that the corporation
does not have a profit or loss and the shareholders receive
accommodation at actual cost. In these circumstances,
while the shareholders are charged less by the corporation
than the fair market rent, subsection 15(1) is not considered applicable to the shareholders nor is paragraph
69( 1)(b) considered applicable to the corporation. The
foregoing view may not be taken if the corporation accumulates surplus funds and the income earned thereon is
used to pay part of the operating costs of the building.
20. Un certain nombre de particuliers peuvent former une corporation pour que la corporation detienne un immeuble appartements. Chaque actionnaire acquiert Ie droit d'occuper un
appartement precis dans l'immeuble 11 ·appartements. En general, les tarifs des services mensuels demandes par la corporation
aux actionnaires sont calcules de maniere 11 defrayer au plUs pres
possible Ie cout estimatif de financement et d'exploitation de
l'immeuble. L' intention d' un tel arrangement est que la corporation ne fasse pas de profits ou de pertes et que les actionnaires
re~oivent un logement au cout reel. Dans de telles circonstances, bien que les actionnaires se voient demander moins par la
corporation que Ie juste loyer marchand, Ie paragraphe 15(1)
n'est-pas considere comme s'appliquant aux actionnaires et
l' alinea 69(1)b) n' est pas considere comme s' appliquant 11 la
corporation. Le point de vue qui precede ne peut pas entrer en
ligne de compte si la corporation accumule des fonds en surplus
et si Ie revenu gagne y afferent est utilise pour payer une partie
des frais d'exploitation de l'immeuble.
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