For business involved in the leasing of equipment or any movable property, CCA is restricted to the extent of net lease income, unless the taxpayer’s principal business involves the rental or lease of property, and income is earned in a corporation or a partnership.
Concluding Concepts to Remember
- Property income is included in paragraph 3(a) of the aggregating formula. Sources of property income include periodic returns on interest, dividends, royalties and rent from holding property as a non-active or passive investment. The computation of interest, dividends, and royalties as income follow the same general rules as the computation of business income. There are exceptions, for example, capital cost allowances may not create a loss from rental properties held as non-active investments.
- Although non-corporate taxpayers have the option of recognizing interest on a cash or receivables basis, the Act requires that interest be accrued and recognized on an annual “anniversary basis”. This requirement has limited the number of tax-deferral opportunities in interest-bearing vehicles.
- Shares are potentially an excellent tax-deferred investment. If the corporation reinvests corporate profits rather that paying them out in the form of dividends, after-tax profits compound within the corporation and accrue to the individual. Unrealized capital gains compound tax free if profits are automatically reinvested.
- Dividends received from non-resident corporations are not grossed-up for tax purposes and are not eligible for the dividend tax credit.
- Rental income differs from that of other sources of property income. First, net operating income from all rental properties must be computed before CCA. If the rental property is held individually rather than in an active rental business corporation, CCA cannot be claimed to create or increase a loss from a rental property.
- There are two sets of income attribution rules. The first is designed to prevent splitting of both income and capital gains with a spouse, or income with a minor child. The second is designed to prevent income splitting by way of a loan to a related person over 18.
- The kiddie-tax is a form of attribution. It requires that persons under 18 must pay tax at the highest marginal rate on certain types of income. There are a limited number of exemptions from this requirement
- Tax planning for investments is critical and requires more than a view to tax minimization. The focus should be on corporate strategy and long-term maximization of cash flow and return on investment. This requires an in-depth study of the investment, assessment of investment returns, and the timing of cash-flow returns over a multi-period time frame. To make decisions solely on the basis of income tax benefits could result in negative returns over the long term.
- The dividend gross-up and dividend tax credit mechanisms were designed to integrate corporate and personal taxes in order to alleviate double taxation. Because it is impossible to achieve perfect integration, a calculation should be performed to see if there is an over- or under-integration of personal taxes with corporate taxes. Under-integration may result in a tax penalty when earning income through a corporation. However, as long as the corporate tax rate is less than the personal tax rate, an opportunity to defer tax may exist, depending on the rate of return and the number of years the investment is held.
- Tax shelters intend to stimulate a certain business sector. Investors need to be cautions, however, because the chosen sector usually contains such barriers to entry as high capital requirements and inherent risk. The tax shelter selected should make sense, economically, in the long-run.