Tax Aspects of Dividends Paid by Corporations

Private corporations pay dividends of various kinds, often in order to achieve a particular result for the purposes of the Income Tax Act (Canada).  

The Business Corporations Act (Saskatchewan) distinguishes between a dividend (which, under corporate law, means the distribution of an equal amount, per share, of money or other property to the holders of all shares of a particular class of shares) and the payment of the value of a particular share by the corporation to the holder of that share upon the redemption or purchase for cancellation of the share. Nevertheless, the Income Tax Act (Canada) deems that, generally, the excess of the amount paid to the shareholder (upon redemption or purchase of a share for cancellation) over the paid-up capital of that share is also a dividend for income tax purposes. Any of the following references in this memo to a dividend includes a deemed dividend. Dividends and deemed dividends must be authorized by a resolution adopted by the directors of a corporation.

Canadian-controlled private corporations are generally eligible for a low rate of corporate income tax on active business income. In Saskatchewan, the combined rate of such federal and provincial tax is 11%. If all of the taxable income reported by a corporation was subject to that low rate of tax, the only kind of dividend that the corporation can pay is a taxable “non-eligible” dividend. Such dividends do not require any form of designation or election by the corporation.  In the hands of a recipient that is a Canadian resident individual, such dividends qualify for a dividend tax credit that reduces the combined federal and Saskatchewan marginal rate of income tax on the dividend to as little as 6.87% and to no more than 40.37% (depending on the amount of other income reported by the recipient).

If a Canadian-controlled private corporation earns active business income that is in excess of the amount that is eligible for the low rate of corporate income tax, it must pay tax at a higher rate. In Saskatchewan, the combined rate of such federal and provincial tax is 27%. Having paid that higher rate of tax, however, the corporation can add 72% of such active business income to its general rate income pool (“GRIP”). If the corporation makes a designation (which it does by informing the recipients of a dividend in writing), it can pay an eligible dividend to a maximum of the balance in its GRIP as of the end of the current taxation year. (Eligible dividends paid by such a corporation are deducted from its GRIP and any eligible dividends received by such a corporation are also added to its GRIP.)  Since a public corporation must pay income tax at the combined rate of 27% on all of its business income, a public corporation can designate any amount of dividends as eligible dividends.

In the hands of a recipient that is a Canadian resident individual, eligible dividends qualify for an enhanced dividend tax credit that reduces the combined federal and Saskatchewan marginal rate of income tax on the dividend to as little as 0% and to no more than 29.64% (depending on the amount of other income reported by the recipient).

Some of the federal income tax paid by a Canadian-controlled private corporation on investment income (which includes taxable capital gains), to the extent of 30 2/3% of that income, is refundable if the corporation pays dividends. A private corporation resident in Canada (regardless of whether it is Canadian-controlled) also pays refundable Part IV tax at the rate of 38 1/3% on all dividends that it receives (other than on dividends received from a connected corporation on which no tax refund was received by the payer thereof). Part IV tax paid on eligible dividends received is tracked by way of the eligible refundable dividend tax on hand (“ERDTOH”) account, and is refundable (at the rate $0.38333 per $1.00 of dividends paid) upon the payment of either an eligible or non-eligible dividend. All other refundable tax paid is tracked by way of the non-eligible refundable dividend tax on hand (“NERDTOH”) account, and is only refundable (at the same rate as above) upon the payment of a non-eligible dividend.

Certain sources of income are tax-free. Common examples are one-half of a capital gain and a death benefit received by the beneficiary of a life insurance policy. A private corporation resident in Canada (regardless of whether it is Canadian-controlled) tracks in its capital dividend account (“CDA”) the tax-free half of capital gains that it realizes plus the excess of any death benefits that it receives from a life insurance policy over the adjusted cost basis of the policy, minus one-half of any capital losses that it realizes. The corporation may elect (by filing form T2054 with the Canada Revenue Agency) to pay a capital dividend to a maximum of the corporation’s current balance in its CDA. A capital dividend is tax-free to a Canadian resident recipient. A private corporation decreases its CDA in respect of any capital dividends that it pays and increases its CDA in respect of any capital dividends that it receives.

The provisions of the Income Tax Act (Canada) related to dividends are more complicated than the simplified description set out in this memo. You should only pay eligible dividends or capital dividends after obtaining advice from a tax accountant or a tax lawyer. Melvin Gerspacher is a tax lawyer. You can contact him at [email protected] or at 306-380-5753.

Insurance Companies Cannot Compel Customers to Undergo Genetic Testing

In a recent Reference re Genetic Non-Discrimination Act, 2020 SCC 17, the Supreme Court of Canada upheld a federal law that forbids companies from making people undergo genetic testing before buying insurance or other services.

The Genetic Non-Discrimination Act (the Act) also outlaws the practice of requiring the disclosure of existing genetic test results as a condition for obtaining such services or entering into a contract.

The act is intended to ensure Canadians can take genetic tests to help identify health risks without fear that the results will pose a disadvantage when seeking life or health insurance.

In a 5-4 decision, the Supreme Court held that the measures are a valid exercise of Parliament’s power over criminal law set out in the Constitution.

Penalties for violating the provisions of the Act include a fine of up to $1 million and five years in prison.

This case came to the Supreme Court as an appeal from a provincial “reference.” References are questions that governments ask courts for their opinion on. Reference re Genetic Non-Discrimination Act began as a reference to the Quebec Court of Appeal by the Quebec government.

For more information, contact Jennifer D. Pereira, Q.C. at [email protected]

Am I entitled to be notified that my family member has made a new Will?

When a loved one passes away unexpectedly, the shock can be made worse by finding out that the deceased also had made a new will totally contrary to their former will.

Sometimes clients will ask me if it is legal for their loved one to make a new will, cutting out family members, or naming a new executor, all without notifying the prior executor or beneficiaries?

The answer is that yes, a person is entitled to make as many wills as they want, provided they have capacity. Moreover, there is no law requiring a will-maker to notify their prior executor, or their affected beneficiaries.

However, if you are making a new will, it is good advice to notify all of your affected beneficiaries or prior executor. Explaining what your wishes are during your lifetime, can better avoid the chance that they are later surprised by your new will, or suspicious of what motivated it.

James Steele’s preferred practise area is estate litigation, including will challenges, executor disputes, power of attorney issues, etc. Contact James Steele at 1-306-933-1338 or [email protected]. The above is for general information only. Parties should always seek legal advice prior to taking action in specific situations. 

Income Splitting With a One Percent Prescribed Rate

For every calendar quarter, the Canada Revenue Agency (the CRA) announces prescribed interest rates for different purposes under the Income Tax Act (Canada). The Income Tax Regulations state that the basic prescribed interest rate is calculated as the average of the yields on 90 day Government of Canada Treasury Bills auctioned in the first month of the preceding calendar quarter, rounded up to the nearest whole percentage. April was the first month of the second calendar quarter of 2020.  Not surprisingly (given the COVID-19 pandemic), the average yield in April on such treasury bills declined greatly, by more than one-half, so that it went down to 0.27 percent. By virtue of rounding upward, the basic prescribed interest rate for the third calendar quarter of 2020 (July 1, 2020 to September 30, 2020) is set at 1 percent. The basic prescribed interest rate plus 2 percent (for a total of 3 percent during the third calendar quarter of 2020) is the rate of interest paid by the CRA on tax refunds owed to individuals. The basic prescribed interest rate plus 4 percent (for a total of 5 percent during the third calendar quarter of 2020) is the rate of interest that accrues on income tax arears.

The basic prescribed interest rate is relevant to the concept of income splitting under the Income Tax Act. Each individual resident in Canada files a separate income tax return and is subject to tax on his or her income at increasing marginal federal and provincial tax rates as the individual’s income increases. An individual resident in Saskatchewan earning more than $214,368 must pay a combined tax rate of 47.50% on each dollar of additional interest, business or salary income. If that individual has a spouse or other family member with much lower income, that family member would pay a much lower combined tax rate (or even no tax) if he or she reported the same additional income. The most obvious way in which the lower income family member could earn additional investment income in place of the higher income family member would be for the higher income family member to make a gift or interest-free loan of the capital (that he or she would otherwise invest) to the lower income family member. However, the Income Tax Act has “attribution rules” which generally deem the investment income which the lower income family member earns from the capital that he or she received or borrowed from the higher income family member to be income of that higher income family member. There are a few exceptions to the attribution rules.  The most helpful exception to the attribution rules applies if the lower income family member borrows the capital pursuant to a loan agreement under which the borrower is required to pay interest on the borrowed capital at a rate not less than the basic prescribed rate in effect at the time that the capital is borrowed and the borrower pays such interest that accrues during each calendar not later than January 30th following each calendar year.

If a loan agreement is entered into specifying an interest rate of 1 percent, the loan is advanced during the third calendar quarter of 2020 and the borrower pays the resulting interest that accrues during 2020 not later than January 30, 2021, the borrower would report any income that he or she earned during 2020 from the investment of the borrowed funds. The lender would report the interest that he or she received from the borrower in January, 2021 on his or her 2021 income tax return (assuming that the lender follows the cash basis). The borrower is entitled to deduct the interest that he or she pays to the lender in the year in which the interest is paid (assuming that the borrower also follows the cash basis). The above income tax reporting can go on indefinitely, from year to year, even if the basic prescribed interest rate in effect in future calendar quarters increases from 1 percent.

A trust of which lower income family members are beneficiaries could be the borrower from the higher income family member.

There are subtle aspects of the Income Tax Act, the interpretation of which requires expert knowledge. Therefore, anyone that is considering implementing an income splitting strategy should seek advice from a tax accountant or a tax lawyer. Melvin Gerspacher is a tax lawyer.  You can contact him at m.gerspacher@rslaw or at 306-380-5753.

Sinclair lifts publication ban on name of teen

Sean Sinclair successfully brought an application to lift a publication ban for the CBC in a sexual assault and drug trafficking case.  The victim, Tonya Pahtayken, a 15-year old leukemia survivor, died shortly after testifying in the criminal trial.  There had been a publication ban on Tonya’s name and any information that might identify her. The CBC, at the request of Tonya’s family who wanted to tell her story, was able to lift that ban and has published an account of Tonya’s struggles here: https://www.cbc.ca/news/canada/saskatoon/judge-lifts-pub-ban-on-name-of-teen-1.5609368.

COVID-19 and Parenting: How can I seek relief from the Court?

COVID-19 has presented many new challenges for parents to face.  You may find yourself in difficult situations.  What if the other parent is not physically distancing and continues to see relatives and friends and I feel their access should be limited to FaceTime only to protect the children?  What if I am not receiving the child or spousal support I should be?  Or what if I want to make an application for child or spousal support?  If you cannot reach an agreement with the other individual concerning these and other family law issues, you may want to seek relief from the Court.  However, the Court is only hearing matters on an emergency basis.

The purpose of this article is to provide a summary of the threshold you must meet in order for your matter to be heard by the Court right now.  If your matter does not reach this urgent threshold, then you may wish to consider mediation, arbitration, collaborative law, or another form of negotiation.

The Court’s Directive:

 

There are essentially four ways that your family law matter will be heard by the Court right now:

  1. The safety of either the child or a parent is at risk. This includes things like restraining orders, non-contact orders, and orders for exclusive possession of the family home;
  2. An essential medical decision must be made regarding a child or if a child has been wrongfully removed from the jurisdiction or wrongfully retained by one party (such as if one party withholds the child from the other; more on this below);
  3. There are dire circumstances of financial need, including where one party may squander or dispose of property such that an order to preserve property is required; or
  4. Any other circumstance which the Court considers urgent.

There are few reported decisions in Saskatchewan and, therefore, much of the case law is from Ontario. These cases are certainly still relevant in Saskatchewan as the Court looks to cases outside of the province, especially when dealing with novel matters such as COVID-19. The following are examples of cases which were, or were not, considered urgent enough to be heard by the courts.

The benchmark case is Ribeiro v Wright, 2020 ONSC 1829. In this case, the Ontario Superior Court explained that the presumption in most cases is that orders or agreements for parenting time should remain in place during COVID-19, unless there is evidence that one parent has been exposed to COVID-19 through their employment or otherwise, or there are heightened risk factors given their employment or personal behaviours. In these circumstances, a matter will be considered urgent and adjustments to the parenting schedule required.

The courts in Ontario have been clear that there needs to be a real concern for the safety of a child or parent in order for a matter to be heard on this ground. One example would be an imminent risk of harm to a child or one of the parties involved. Cases on this topic are addressed below in the “any other circumstance” category.

Essential Medical Decisions or Wrongful Removal/Retention/Relocation:

 

In L-AF v KVS, 2020 ONSC 1914, the father brought an application to prevent the mother from relocating with the child to a different city. His evidence was that the mother had listed her home for sale. The father was also concerned with strangers coming to view the house during the current quarantine as it violated physical distancing protocols.  The matter was viewed as urgent and set to be heard at a later date.

Placha v Bennett, 2020 ONCJ 164, was a case where the father took the child, who normally resided with the mother, on a holiday to Newfoundland and Labrador from Ontario. In the midst of the trip, the COVID-19 pandemic became an emergency and he refused to return the child to the mother in Ontario, saying it would be unsafe for the child. This was deemed an urgent matter and the child was ordered returned to the mother.

In an unreported decision from the Saskatchewan Court of Queen’s Bench from March 24, 2020, Justice Brown considered a case where a father was withholding the child from the mother under the guise that, since schools were closed down, the summer break had started such that they shared parenting equally. The mother applied to have the child returned to her care. This was determined to be an urgent circumstance and the child was ordered returned to the mother.

Amirzada v Alemy, 2020 ONSC 1979, was a case where the mother applied to move from Toronto to Vancouver until the COVID-19 pandemic was over. The father had assaulted the mother recently and there was a restraining order in place. The court deemed this matter urgent, and ultimately ordered that the mother was not allowed to move due to the risks associated with travelling cross country, the unknown length of time the pandemic will last, and the father’s restricted access to the child.

Dire Financial Circumstances:

 

In Roberts v Roberts, 2020 ONSC 2341, an anaesthesiologist applied to reduce his spousal support payments to his ex-wife. In 2018, he earned $634,747, but he later suffered a heart attack and had to stop working. He was currently earning $104,400 per year on disability.  Given the extent of the drop in income, the Court concluded these were dire financial circumstances and scheduled the application to proceed.

An application for child support which had previously been deemed urgent and subsequently scheduled to be heard on an emergency basis was considered in Lafond v Blouin, 2020 ONSC 2396. While the decision did not indicate why the matter had previously been deemed urgent, the case involved a mother whose sole sources of income were social assistance and tax credits of around $12,000 per year.  There were two children involved.

In Mohamed v Osman, 2020 ONCJ 172, a woman from the United States brought an application for child support prior to COVID-19 shutting the courts down.  The Court made a temporary order providing that the father pay child support and adjourned the application until after the courts return to normal operation.  Of relevance here is that the father’s income was unknown, and the Court imputed it to $25,000, noting that it would have normally imputed income of $40,000 if we were not in the midst of COVID-19.  In making the temporary support order, the Court noted that the mother was supporting three children on her own without help from the father which was unacceptable.

In Scion v White, 2020 ONSC 1915, the father applied for relief regarding access, finances, and property. However, the Court determined that only the access issue was urgent and refused to hear the issues relating to finances and property.

Regarding family property, in order for a property issue to be urgent, there must be an imminent risk of irreparable harm, including unnecessary financial loss, if the application is not heard immediately (JW v CH, 2020 BCPC 52).

Any other Urgent Circumstances:

 

These cases have been described as “exigent” or “critical” in the case law. The Court will ask itself whether any harm or prejudice would result to one party if this matter is not heard immediately. In the vast majority of cases, the answer will be no.  Most matters will be able to wait until the Court is back in regular session.  The cases previously discussed, and those discussed below, provide an indication of what is urgent in the eyes of the Court.

In Thomas v Wohleber, 2020 ONSC 1965, the Ontario Superior Court laid out four factors which must be met in order for a matter to be considered urgent:

1. The concern must be immediate and cannot wait to be dealt with later;

2. The concern must significantly affect the health or safety or economic well-being of the parties or their children;

3. The concern must be tangible. It must be a real, proven concern, not something that is speculative; and

a) For example, you cannot simply say that you do not think the other parent will follow physical distancing protocols. Rather, you must have clear and specific evidence that they are not doing so.

b) In NJB v SF, 2020 BCPC 53, the B.C. Provincial Court dealt with a matter where the father had restricted all access to the mother. The father did not think the mother would take COVID-19 seriously, based largely on her history of mental health issues which lent themselves to conspiracy theories.  The Court found the father’s concern was only speculative and not born out by the evidence presented.

4. The concern must be clearly articulated and proven in the evidence put before the Court.

The case law shows there is a high standard to be met here. In KB v KK, 2020 SKQB 86, a father applied to the Saskatchewan Court of Queen’s Bench to place the children in his primary care, rather than the mother’s. The father had concerns with the mother’s parenting and that she was abusing drugs.  The Court determined that this was not an urgent matter and it was adjourned, largely because there was no evidence that the children were in any way at risk.

The KB v KK decision referenced an unreported Saskatchewan Queen’s Bench decision of March 25, 2020, in which Justice Brown explained that most matters will feel urgent to the parties involved, however, those matters which are currently being heard are those with importance in the context of the physical distancing and isolation reality we are presently living in. If the matter can wait until after the current pandemic is over, it is not urgent.

In a recent Saskatchewan decision, TDL v SDS, 2020 SKQB 97, the father, prior to COVID-19, applied to vary a judgment from 2014 regarding parenting of the children. The matter was adjourned after the Court largely restricted its services to emergencies only. The father then applied again for the matter to be heard on an urgent basis, part of which was that the mother was not obtaining and administering the requisite hormone therapies for their transgender child.  Since the child had not yet started hormone therapies for transition, the Court did not consider this to be urgent to the child’s health or wellbeing.

In Davis v Eby, 2020 ONSC 2011, an application was made by the mother to restrict the father’s access to supervised only due to safety concerns.  The child had been present in the father’s home when the father’s cousin overdosed on drugs.  There were also concerns that the father continued to have drug issues as he refused to submit to a drug sample per a court order.  This matter was deemed urgent and heard by the Court.

In Scion v White, 2020 ONSC 1915, the Ontario Superior Court noted that issues relating to access with children can only “potentially” be urgent if there is a complete denial of access. So, even if you are upset with a lack of access, the Court may only see it as urgent if there is a complete denial of access.

  • In Tessier v Rick, 2020 ONSC 1886, the father applied to enforce a court order for his access. The mother had been denying all access to the father, but her evidence was that the father was not observing COVID-19 safety protocols.  The Court saw this as an urgent matter, largely due to the apparent risks to the child and the child’s young age (3.5 years-old).
  • Likewise, in Le v Norris, 2020 ONSC 1932, the mother was withholding all access to the father for several reasons, one being COVID-19. The Court determined this matter was urgent and ordered that the father’s access be restored per the court order in place.  The Court noted that people should use basic common sense to follow court orders and respect physical distancing protocols at the same time.

For more information, please contact:

 Curtis P. Clavelle

306.933.1341

Email: [email protected]

Area of Expertise