Family Trust Income Tax from the Federal Budget

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Here are some of the key features concerning Family Trust Income Tax from the Federal Budget.

Family Trust Income Tax.

If a trust does not earn income or make distributions in a year it is generally not required to file an annual (T3) return of income. The budget proposes to require that certain trusts provide additional information on an annual basis.  This information will include the identities of all trustees, beneficiaries, settlors of the trust, and each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust.

The new requirements will impose an obligation on certain trusts to file a T3 return where one is currently not required and will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return.

Express trusts are generally created by the settlor’s express intent, usually made in a Trust Deed. Exceptions to this additional reporting may be allowed for the following types of trusts:

  • mutual fund trusts
  • segregated funds
  • master trusts;
  • trusts governed by registered plans;
  • lawyers’ general trust accounts;
  • graduated rate estates and qualified disability trusts;
  • trusts that qualify as non-profit organizations or registered charities; and
  • trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year

The budget also introduced new penalties for a failure to file a T3 return, including a beneficial ownership schedule where required, equal to $25 for each day, with a minimum penalty of $100 and a maximum penalty of $2,500. If a made knowingly, additional penalties will apply.  Of course, existing penalties will also still continue to apply.

Business Income Tax

A. Passive Investment Income

There will be two limits to tax deferral advantages on passive investment income earned inside private corporations:

  1. Small Business Limit Reduction – The business limit will be reduced on a straight-line basis for CCPCs and their associated corporations having between $50,000 and $150,000 of investment income in the year. The business limit would be reduced to zero at $150,000 of investment income. This measure will affect CCPCs only to the extent that their business income exceeds the reduced small business limit.

Investment income will be measured by a new concept of “adjusted aggregate investment income” which will be based on “aggregate investment income”.  These will be adjusted to include the following:

  • taxable capital gains (and losses) will be excluded if they come from the disposition of:
    • a property that is used principally in an active business carried on primarily in Canada by the CCPC or by a related CCPC; or
    • a share of another CCPC that is connected with the CCPC, where all or substantially all of the fair market value of the assets of the other CCPC is attributable directly or indirectly to assets that are used principally in an active business carried on primarily in Canada, if certain other conditions are met;
  • net capital losses carried over from other taxation years will be excluded;
  • dividends from non-connected corporations will be added;
  • income from savings in a life insurance policy that is not an exempt policy will be added, to the extent it is not otherwise included in aggregate investment income; and
  • income incidental to an active business will be excluded.
  1. Refundability of Taxes on Investment Income – A dividend refund be available only in cases where a private corporation pays non-eligible dividends. No dividend refund will be available on the payment of eligible dividends.

The different treatment proposed regarding the refund of taxes imposed on eligible portfolio dividend income will necessitate the addition of a new RDTOH account (eligible RDTOH).  The eligible RDTOH account will track refundable taxes paid under Part IV of the Income Tax Act on eligible portfolio dividends. Any taxable dividend (i.e., eligible or non-eligible) will entitle the corporation to a refund from its eligible RDTOH account.

The second RDTOH account (non-eligible RDTOH) will track refundable taxes paid under Part I of the Income Tax Act on investment income as well as under Part IV on non-eligible portfolio dividends (i.e., dividends that are paid by non-connected corporations as non-eligible dividends). Refunds from this account will be obtained only upon the payment of non-eligible dividends.

 

 

International Tax

Cross-border surplus stripping using partnerships or trusts

The budget proposes new “look-through” rules for partnerships and trusts. These rules will allocate the assets, liabilities and transactions of a partnership or trust to its members or beneficiaries, as the case may be, based on the relative fair market value of their interests. This measure will apply to new transactions. Older transactions may be challenged using the general anti-avoidance rule.

Foreign Affiliates

The budget proposes modifications to certain rules related to foreign affiliates.

Investment Businesses: If a single foreign affiliate carries on multiple businesses, each such business would have to meet the six employees test in order to ensure that it is not an investment business. Certain taxpayers whose foreign investment activities would not warrant more than five full-time employees have engaged in tax planning with other taxpayers in similar circumstances seeking to meet the six employees test.

Each separate business of the affiliate will therefore need to satisfy each relevant condition in the investment business definition, including the six employees test, in order for the affiliate’s income from that business to be excluded from “foreign affiliate property income” (FAPI).

Controlled Foreign Affiliate Status: The budget proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI attributable to activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement.

 

Personal Income Tax

A. Medical Expense Tax Credit

Proposal to expand the medical expense tax credits for expenses incurred for animals specially trained to perform tasks for a patient (ie., service dog trained to assist with ptsd).

B. Registered Disability Savings Plan

Proposal to extend the temporary program whereby a qualifying family member is the plan holder of an adult individual’s RDSP where capacity of that adult individual is in question. The extension will be to the end of 2023.

C. Charities

If the registration of a charity is revoked, a revocation tax is imposed on the charity, based on the total net value of its assets. This tax can be reduced by making qualifying expenditures. Transfers of property to municipalities will be considered qualifying expenditures for the purposes of the revocation tax, subject to the approval on a case-by-case basis.

D. Tax Credit for Flow-Through Share Investors

The budget proposes to extend eligibility for the mineral exploration tax credit for an additional year. As a result, the credit will apply to flow-through share agreements entered into on or before March 31, 2019.

For a complete review of the proposed changes feel free to consult https://www.budget.gc.ca/2018/docs/plan/toc-tdm-en.html

Conduct Law is an Ottawa based business law firm with locations in Ottawa, Barrhaven, Kanata and Winchester.  Our professionals are experienced business lawyers who can help with corporate, estates, commercial real estate, or implementing corporate structures that assist with tax planning, whether as an operating corporation, holding corporation, partnership, family trust, testamentary trust, or many other types of legal entity depending on your legal corporate requirements.

Feel free to call or write one of our professionals at info@conductlaw.com or 613.440.4888 for all of your business, commercial, real estate and estate planning needs.

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