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Resident - Taxed on…

• worldwide income

• doesn’t matter if you earn the money abroad or in Canada

• still pay Canadian taxes even if it didn’t originate in Canada

Non-Resident - Taxed on…

• Canadian under certain circumstances

• if employed in Canada but non-resident, you still pay Canadian taxes

• ex. American but selling a Canadian building - you pay tax

3 Things Non-Residents Are Taxed On

• income from employment in Canada

• income from a business carried on in Canada

• dispositions of taxable Canadian property

What’s Double Taxation?

• single source of income but taxed twice

• ex. dividend income you get from an America company but you’re in Canada → taxed in Canada, and taxed in America

What’s Foreign Tax Credit?

• refunds you the foreign tax you paid to the foreign country so you can only pay Canadian tax

• avoids Double Taxation

What are Tax Treaties?

• agreements with other countries to avoid double taxation or tax evasion

Elaborate on the Tax Treaty Exception

• American working in Canada; Canada won’t tax you if you don’t make a lot of income

• or if you’re here for a short time and paryoll needs to be managed by a American company, exception where you won’t pay tax

Income Tax Act - Part 13 Withholding Tax

• that every non-resident should pay an income tax of 25% on every gross amount

• ex. management fees, estate, dividends, rent, royalties

• non-resident doesn’t need to file tax return

Example of the Withholding Tax in Practice

• American invests in Canadian company → $100 dividend

• 25% of the $100 is kept for the govt, American actually gets $75

Part 13 Withholding Tax - Exception

• filing a tax return

• 25% is supposed to be deducted on gross, not net

• depending if you paid too much tax, you can get a refund if you tax your net income

• non-residents w Canadian benefits can also file a tax return

Section 149 Persons Exempt from Canadian Income Taxes

• employees of a country other than Canada

  • alr pay tax in their home jurisdiction

• Indian Act → Indigenous tax payers don’t have to pay Canadian tax if they have sufficient connection to a reserve lan

Primary Categories of Who Pays Tax in Canada

• individuals

• corporations

• trusts

What Does the Income Tax Act Recognize Partnerships As?

• conduits or flow through entities

• income generated in the business gets flown to the indv. partners

• they’ll pay tax on their respective amounts/income

• T5013 Statement of Partnership Income

3 Types of Partnerships

• General Partnership

• Limited Liability Partnership (LLP)

• Limited Partnership (LP)

What is a General Partnership?

• formed when persons carry on a business in common with a view to profit

• no need to draw up agreements or file something w the govt

Issue with General Partnerships

• each individual partner shares liability of the business

• if one person does something shady, you’re also liable

What’s a Limited Liability Partnership (LLP)?

• not liable for any wrongdoings of another partner, employee, or agent of your business

• liable for other amounts

  • ex. outstanding bank loan and the partnership defaults on payment; responsible along w other partners

What’s a Limited Partnership (LP)?

• one general partner that takes on all of the liability and risk

• limited partners can buy into the corp. but won’t take liability or risk of the company

  • at most they’ll just lose money

Limited Partnerships and Risk Amounts

• you can flow through losses and report it on your return

• the amount of loss you’re allowed to flow through and deduct is limited to the partner’s at risk amount

What’s an At Risk Amount?

• how much money you’d stand to lose if the company were to fail

• prevents people from claiming tax losses for more money than they actually risk losing

Example of Limited Partnerships and Risk Amounts

• investing $100 into a partnership is that max. loss you can claim on your tax return

• if company reports a $400 loss on your end, you can only tax off $100

What Are Tax Shelters?

• type of invest. designed to reduce the amount of tax you have to pay

• useful for people who don’t wanna pay a lot of taxes

Elaborate on Tax Shelters

• invest. in something that gives you a tax deduction

• your taxable income goes down

• you pay less tax

How Can Tax Shelters Be Abused?

• LP’s can be used as tax shelters but limit ability to claim losses

What are Joint Ventures?

• temporary, and contract or project based “partnerships”

• people contribute different things to the project and split revenue based on roles

How Expenses Are Dealt With in Joint Ventures

• expenses borne by the individual venturers

• ex. you contribute to all the labour in a project so you claim labor related expenses

What Are Trusts?

• created when a settlor transfers legal title of property to a trustee

• trustee will hold and manage the property on behalf of one or more beneficiaries

Example of a Trust

• a doctor taking out shares of a clinic and transferring it to the trustee

• the trustee manages those shares and pays out the dividends to the beneficiaries

Certain Conditions For A Trust to Take Place

• certainty of intention; subject matter and object

• basically you need to make sure:

  • this person intended to make a trust

  • who the benficiaries are

  • how income is distributed to these beneficiarie

What’s A Bare Trust

• managing property on behalf of someone else but you’re not calling the shots

• the person/s you’re managing for still owns the property at the end of the day

Bare Trusts and Taxes

• not a taxable entity

• CRA would still want you to report info

Inter Vivos Trust

• trusts you have when you’re still alive

Testamentary Trusts

• trusts you have when you die

Taxation of Trusts

• taxed on where the money stays

• highest combined federal and provincial tax rate applicable to indvs.

• ex. invest. that’s generating income and staying in the trust before being sent to the beneficiary, that income gets taxed in the trust

Taxation of Trusts - Distributing Funds

• distributing funds to the beneficiary so that the funds are taxed on return

• beneficiaries report the income on their own tax return

• often have smaller tax rates → not paying more tax compared to keeping it in the trust

Graduated Rate Estate

• when settlor’s estate (trust) pays the same marginal tax rates (tax brackets) as any other indv. instead of being taxed the highest combined federal and provincial

GRE - Issue

• settlor has executor (trustee) to manage assets and distribute them to beneficiaries

• perhaps funds can’t be distributed bc of circumstances

• holding on to shares and money kept in the trust is subjected to high taxes

GRE - Solution

• executor designates estate to be a GRE

• maintain that designation for up to 3 years after death

• any income generated will be subjected to the same marginal tax rate as other indvs

When A Trust Ends

• trust continues until you get rid of the property

• can continue up to 21 years until you need to deem, dispose, and reacquire properties at their FMV

  • could create a gain

  • can’t defer tax consequence but it will happen every 21 years

Describe the Case: Thomson v. Minister of National Revenue (1946)

• taxpayer left Canada bc he got into a property tax dispute

• got a Bermuda passport and declared they were no longer a Canadian resident

• he kept coming back to Canada every 6 months

Thomson v. Minister of National Revenue (1946) - What He Had Left In Canada

• had a home

• his family was there

• would go back to Canada only during the summertime

Thomson v. Minister of National Revenue (1946) - Court Ruling

• guy was in fact a resident in Canada

• kept coming back to Canada as if he never left

• stay was habitual

• nothing unusual or casual about his stay → would stay as long as he wanted

CRA Income Tax Folio: Determining an Indvs. Resident Status - Primary Residential Ties

Resident if:

• do you have a home you can stay at (perhaps lease it)?

• spouse or common law partner here?

• dependents like kids or old parents you need to look after?

CRA Income Tax Folio: Determining an Indvs. Resident Status - Secondary Ties

• furniture in Canada?

• licenses and memberships?

Determining an Indvs. Resident Status - Primary vs. Secondary Ties

• primary most important → secondary may not be strong enough on its own to determine residency

• attention to temporary absence

  • ex. studying in the UK are still considered a resident in Canada bc their leave is only temporary

The Statutory Test (Deemed Residency) - First Step

• establish if someone is an ordinary resident under the Court

• if not considered resident under that assessment, look at legislative rules

Define "Sojourned”

• staying somewhere temporarily

The Statutory Test (Deemed Residency) - Second Step

• look at legislative rule → Section 250 Income Tax Act

• that every person shall be deemed a resident of Canada throughout the year if they:

  • sojourned in the country for a period/s for a total of 183 days or more

  • is a specified indv (special forces, diplomat)

Elaborate on “Sojourning = Resident”

• coming to Canada temporarily but you’re here for mostly half the year

• you become a resident for tax purposes → file

Common Law Rule on Residency

• having enough personal and living connections to Canada that the law considers it your home/you are a resident

  • related to Primary Ties

Court View on Residency

• resident under the common law rule

• liable for worldwide tax for the time you maintain residential ties in Canada

Emigrating From Canada and Tax Liabilities

• Deemed Disposition

• under Income Tax Act, you’re deemed to dispose properties for their FMV

  • purpose to trigger a tax consequence

Elaborate on Deemed Disposition

• Canada acts like you sold your properties and if there’s a gain, they tax that hypothetical gain

Exceptions to Deemed Disposition

• doesn’t apply to Canadian real estate or resource property

  • don’t need to dispose land or buildings for ex.

• no departure tax on RRSPs or TFSAs

When Does Departure Tax Apply?

• when you leave the country, common law or spouse leaves, dependents leave, or when you establish residency in a new country

Why Tax Legislation Exists

• Income War Tax Act enacted as a temporary measure to help finance Canada’s involvement in WW1

• made permanent in 1948

• income taxes used to fund public services

Responsibilities of the Department of Finance

• developing tax policy and drafting tax legislation based on Cabinet priorities, evolving economic conditions, and public input

• prepares the federal budget and the economic update

Issue with Federal Budget and Economic Update

• not law yet

• govt puts up a Notice of Ways and Means Motion

• includes draft leg. → draft law → govt will comment before it becomes leg.

CRA Policy

• apply proposed legislation even though it has no royal assent as soon as the motion is tabled at the House

• even if something isn’t law yet, they still apply it

What’s A Capital Gain Inclusion Rate

• percentage of capital gain that’s included in your taxable income

• ex. making a $10K capital gain and the incl. rate is 50%, so $5K is included in your taxable income

Example of CRA Policy - Increase In Capital Gains Inclusion Rate

• increase from 50% to 66.67% on June 2024

• people liked capital gains bc only part of the gain was taxed rather than the full income

• concerns on the increase bc it could increase the amount of tax paid on capital gains

Increase In Capital Gains Inclusion Rate - What People Did

• some people took action and sold the investment

• others thought the govt wasn’t gonna go through with the change so they delayed taking action

Increase In Capital Gains Inclusion Rate - What Happened When People Sold Their Investment

• didn’t know how much to put on their tax return

• either do what the CRA was doing or adopted the proposed rate

Increase In Capital Gains Inclusion Rate - Ammending Your Returns

• if you did not adopt but the proposal went through, you have to ammend the return but end up paying more

• if you adopted but the proposal did not go through, you ammend and get a refund on your return

Tax Policy - Simplicity

• Laffer Curve → optimal tax rate that exists that’s simple

• if the tax rate is too low, you’re not gonna raise enough money

• if tax rate is too high, you’re also not gonna raise enough bc people will evade paying taxes

• one simple tax rate is not equitable

Tax Policy - Equitable

• tax people based on their ability to pay

• tax bracket system

• ranges of income changes based on inflation

3 Issues Relating To Tax

• Tax Evasion

• Tax Planning

• Tax Avoidance

Tax Evasion

• breaking tax law to avoid paying taxes

• ex. earning $50K but not reporting it on your tax return

Tax Planning

• using tax rules to reduce your taxes

• ex. govt encourages charitable donations so you donate to charity and claim the available tax credit

Tax Avoidance

• following the law but using transactions to get a tax benefit that wasn’t intended

• ex. having a personal house and you pay $10K in mortgage interest. You can’t deduct that interest from your taxes

  • making a transaction to make it look like the mortgage is for a business so that you can deduct the $10K

  • makes your taxes lower