Waters & Meredith

Serving Niagara..

Client Information Newsletter: 3rd Quarter 2002

CONTENTS

  • Borrowing From Your Corporation
  • Capital Losses
  • Reasonableness of Owner-Manager Remuneration
  • Spousal Loans
  • Trust Units as Investments
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    BORROWING FROM YOUR CORPORATION

    1. It is fairly common for owner-managers of corporations to borrow money from their corporations.


    2. Under the "shareholder loan" rule, a shareholder of a corporation who borrows money from the corporation must include the amount of indebtedness in income. The rule does not apply if he or she falls within one of the exceptions noted below:

      Exception #1 - the rule does not apply if the loan or debt is repaid to the corporation within one year after the end of the corporation's taxation year in which the loan was made or the debt arose. Therefore, in some cases, the loan does not have to be repaid for almost two years. The repayment cannot be part of a series of loans and repayments.

      Exception #2 - a second exception applies to a debt that arises or a loan that is made in the ordinary course of the corporation's business, as long as bona fide arrangements are made, at the time the debt arises or the loan is made, for repayment within a reasonable time.

      Exception #3 - the most significant exception to the shareholder loan rule can apply if the loan is made to:

      (a) an employee of the corporation who is not a "specified employee". A specified employee is an employee who does not deal at arm's length with the corporation or who owns more than 10% of the shares in any class in the corporation;

      (b) an employee or the spouse of an employee to enable that person to acquire a home;

      (c) an employee in order to acquire newly issued shares in the corporation or in a related corporation; or

      (d) an employee in order to acquire a motor vehicle to be used in the performance of the duties of the employee's office or employment.

      Exception #3 applies only if:

      (a) the employee or spouse received the loan because of the employee's employment and not because of any person's shareholdings, and

      (b) when the loan was made, bona fide arrangements were made for the repayment of the loan within a reasonable period of time.

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    CAPITAL LOSSES

    1. All mutual fund and stock holdings should be reviewed for potential capital losses.


    2. If a capital loss is incurred in 2002, it may be carried back to reduce or eliminate capital gains in 1999, 2000 and 2001.


    3. Capital losses may be taken in 2002 to reposition investments (ie) taking a loss on one bank stock and buying a different bank stock.


    4. If a loss is taken on a stock, it cannot be repurchased by the taxpayer, the taxpayer's spouse or a corporation controlled by the taxpayer or the spouse, until 31 days later, to have the loss deductible.


    5. 50% of capital losses are deductible, but only from capital gains.


    6. If one transfers a stock with a capital loss into their RRSP, the loss is not deductible.

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    REASONABLENESS OF OWNER-MANAGER REMUNERATION

    1. On January 18, 2002, the CCRA issued a bulletin which confirmed that CCRA reserves the right to challenge the reasonableness of intercorporate management fees.


    2. Generally speaking, CCRA will not challenge the reasonableness of owner-managed remuneration if it is paid directly to individuals resident in Canada who are active shareholder managers of a Canadian-controlled private corporation.


    3. The key is that the Canadian resident recipients must be active in the operating business and must contribute to the income-producing activities from which the remuneration is paid.


    4. Regardless of the corporate structure, remuneration must be paid directly to the owner-manager in order to remain within CCRA's current assessing practice on the reasonableness of owner-manager remuneration.


    5. If a salary or bonus is disallowed to a corporation but taxed to the individual, there is double taxation.

    SPOUSAL LOANS

    1. Where one spouse has liquid assets (cash) and the other does not, a loan bearing interest at the prescribed rate might achieve income splitting and tax savings. The spouse then invests the borrowed funds.


    2. The prescribed rate for such loans is 3% for the third quarter of 2002.


    3. This will also work with minor children.


    4. Interest must be paid by January 30th of the following year or there is tax to the lender on the profit on the investment.

    TRUST UNITS AS INVESTMENTS

    1. With interest rates low, trust units appear to be an alternative, to achieve a greater return on investments.


    2. Returns on trust units are not guaranteed.


    3. Some trust units have reduced the payouts, so the value of the units has dropped.


    4. The payout often includes a return of capital.


    5. If you are considering this type of investment, ensure you understand your risks.

    We welcome comments you may have on this newsletter as well as suggestions for future topics.

    The information herein is provided for your general information and action should not be taken on the basis of this newsletter, but only on the advice of your own individual advisor, applying this advice to your individual situation. Please call if you have any questions.

    Waters & Meredith
    Chartered Accountants
    Telephone: 905-356-4324
    Fax: 905-356-0964
    E-mail: wm@watersmeredith.com

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