Canada: Tax Planning Reminders For The End Of 2011

With the end of 2011 fast approaching, it is useful to keep in mind some key deadlines.

1. ACCRUED BUT UNPAID EXPENSES

Where a taxpayer owes an amount to a non-arm's length person that is deductible for tax purposes, there is a limit to how long it can go unpaid before the deduction gets reversed. An amount incurred by the taxpayer to a non-arm's-length person in one taxation year must be paid by the end of the second following taxation year of the payer. If it remains unpaid by that time, the amount is added back into the taxpayer's income in the immediately following taxation year, effectively reversing any deduction taken. This means that if a taxpayer incurred a deductible expense to a non-arm's length person in its 2009 taxation year, the taxpayer must pay the expense by the end of the 2011 taxation year to avoid having to add back the amount in income for the 2012 taxation year. Alternatively, the taxpayer and non-arm's length person can file a joint Form T2047 to deem the amount to have been paid and loaned back to the taxpayer, which will avoid the income add-back. However, this form must be filed by the time the taxpayer's income tax return for that following year (2012 in the above example) is due. A common situation where this arises is interest expense owing by one member of a corporate group to another.

Another rule applies to a taxpayer's accrued but unpaid employee expenses, i.e., salary, wages, pension benefits, retiring allowances and other remuneration (except reasonable vacation or holiday pay or a deferred amount under a salary deferral arrangement). The taxpayer must pay any such expense by 179 days after the end of the taxation year in which it was incurred. If the expense is not paid within that time period, the taxpayer will not be able to deduct it in the year it was incurred but only in the year when it is actually paid.

2. DEBTS OWING TO CORPORATIONS BY SHAREHOLDERS AND CONNECTED PERSONS

If a shareholder of a corporation (or someone connected to such a shareholder) owes to the corporation an amount that remains outstanding for too long, the amount will be treated as income from the corporation for tax purposes. Subject to some exceptions, the general rule is that if a person is a shareholder of a corporation (or a person not dealing at arm's length with such a shareholder) and has become indebted to the corporation (or to a related corporation), the amount of the debt is included in that person's income. The principal exception to this rule is where the indebtedness is repaid within one calendar year after the end of the corporation's taxation year in which the indebtedness arose, e.g., for a debt incurred during the taxation year of a corporation ending on December 31, 2010, the deadline for repayment is December 31, 2011. To qualify for the exception, the repayment cannot be part of a series of loans or indebtedness and repayments.

If a loan or indebtedness owed by a non-resident person is caught by the rules and is not repaid within the permitted time period, the amount of the loan or indebtedness is deemed to be a dividend received by the non-resident from the corporation and is subject to Canadian non-resident withholding tax at the 25% domestic rate (unless reduced under an applicable tax treaty).

These income inclusion rules do not apply to (1) debtors that are corporations resident in Canada, (2) amounts owing between non-residents of Canada, (3) certain loans to employees, or (4) debts arising in the ordinary course of the creditor's business where there are bona fide arrangements for repayment made at the outset. A debtor that is a foreign subsidiary of the corporation will generally not be caught by these rules; in other words, "downstream" loans are generally permitted.

3. INTEREST ON DEBTS OWING TO CORPORATIONS BY SHAREHOLDERS AND CONNECTED PERSONS

If a shareholder of a corporation (or a person connected to such a shareholder) has incurred a debt to the corporation (or to a related corporation), a specific rule requires the debtor to include in income for tax purposes at least a minimum amount of interest on the loan or debt. This rule applies even where the loan or debt has been outstanding for only part of a year. An interest benefit will be included in the debtor's income for a taxation year to the extent that interest on the loan or debt computed at a prescribed rate exceeds interest on the loan or debt for the period paid within 30 days after the end of the year.

If the debt was incurred for income earning purposes (e.g., a loan to buy common shares), the debtor may have an offsetting interest expense deduction. Otherwise, it will be important to ensure that an appropriate amount of interest is paid within 30 days of the end of the relevant taxation year, in order to prevent a deemed income inclusion. This interest inclusion rule does not apply (1) to debtors that are corporations resident in Canada, or (2) where the amount of the loan or indebtedness has been included in income under the rules described in section 2 above.

A similar income inclusion rule applies to a person who receives a loan or incurs a debt because of his/her previous, current or intended employment, as well as to a corporation carrying on a personal services business where the corporation receives a loan or incurs a debt because of the services performed or to be performed by it.

Where a loan or debt incurred by a non-resident person is caught by this rule, the interest benefit is deemed to be a dividend received by the non- resident and is subject to Canadian non-resident withholding tax at the 25% domestic rate (unless reduced under an applicable tax treaty).

4. INTEREST ON DEBTS OWING BY NON-RESIDENTS TO CANADIAN-RESIDENT CORPORATIONS

Where a non-resident person owes an amount to a Canadian-resident corporation, a specific rule applies to ensure that the Canadian corporation reports at least a minimum amount of interest on that debt for tax purposes. To the extent that (1) the debt has remained outstanding for more than one year, and (2) the Canadian corporation includes in its income for a taxation year an amount that is less than a "reasonable" rate of interest on the debt, the Canadian corporation must include in income for the year an amount equal to interest on the outstanding debt computed at a prescribed rate, minus any interest actually received or included in income for that year. This rule governing direct debts is supported by an indirect debts provision, which applies where a Canadian corporation has made a loan or transfer to an intermediary that in turn makes a loan or transfer to the non-resident. In those circumstances, the non-resident is deemed to owe an amount directly to the Canadian corporation, so that the direct-debt rules apply.

These rules make it important to ensure that no or low-interest debts are repaid within the one-year period allowed. Certain debts are excluded from the application of these rules, including:

  • a debt, described in section 2 above, that has been deemed to be a dividend and subjected to non-resident withholding tax;
  • amounts owing by an unrelated non-resident where the amount arose in respect of goods sold or services provided by the Canadian resident corporation in the ordinary course of its business and on arm's length terms and conditions; and
  • a debt owing by a closely-held controlled foreign affiliate (CFA) of the Canadian corporation which relates to an active business carried on by the CFA (or another CFA of the taxpayer).

5. REPORTABLE TRANSACTIONS

Under the proposed mandatory reporting regime for "aggressive" tax avoidance transactions, a taxpayer must file an information return in respect of a tax avoidance transaction entered into after 2010 (or that is part of a series of transactions that began before 2011 but is completed after 2010) if it satisfies two out of three "hallmarks" regarding its fee structure, confidential protection and/or contractual protection.

The filing deadline for the information return in respect of a reportable transaction is on or before June 30 of the calendar year following the year in which the transaction first became a reportable transaction in respect of the person. However, for a transaction that is part of a series of transactions that began before 2011 but is completed after 2010, the Department of Finance Canada has indicated in the Explanatory Notes to the draft legislation that the information return will be deemed to have been filed by the June 30, 2011 deadline as long as it is filed by the end of 2011 (see http://www.fin.gc.ca/drleg-apl/ita-lir10n-eng.pdf at page 210).

6. CORPORATE MEMBERS OF PARTNERSHIPS

As a result of the 2011 federal budget, corporate members of partnerships generally can no longer defer the taxation of income earned through a partnership that has a fiscal year-end different from the corporation's own taxation year-end. For taxation years ending after March 22, 2011, a corporation that has a significant interest in a partnership (generally, an entitlement to more than 10% of the income or loss of the partnership either alone or together with related and affiliated persons) must include in income its accrued share of the partnership's income for the portion of the partnership's taxation year that falls within the corporation's taxation year. For partnerships already in existence prior to the budget announcement, a corporation may be eligible to benefit from transitional relief that allows the initial 2011 stub period income to be reported over a five-year period from 2012-2016.

In many cases taxpayers will seek to avoid these complex new rules by electing to change the fiscal period of the partnership to correspond with the taxation year of one or more corporate partners. The deadline for filing such an election is the first filing due date of any corporate partner for its first taxation year ending after March 22, 2011. The Canada Revenue Agency has stated that no elections will be accepted after the due date (see http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/dfrrl/chngfscl-eng.html).

These new rules also apply to joint venture arrangements, which in the past had benefited from the CRA's now withdrawn administrative policy allowing the joint venture to establish its own fiscal period. Income from a joint venture must now be computed for each participant based on the participant's own fiscal period. At the 2011 Canadian Tax Foundation Annual Conference held in November 2011, the CRA announced that joint venture participants will be allowed to elect to receive the five-year transitional relief applicable to partnerships. However, to claim such relief the CRA requires joint venturers to file an election to that effect on or before the filing due date for their first taxation year ending after March 22, 2011 (see CRA document 2011-0429581E5, dated November 29, 2011).

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Davies Ward Phillips & Vineberg
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Davies Ward Phillips & Vineberg
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions