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Between Myth and Reality

There are many myths about the obligations of taxpayers and the opportunities for tax planning. In this article, we will address some of these misconceptions.

Tax Havens

Some investors think that it is forbidden to hold assets in tax havens. This is not true!

As a resident, you are taxed on your worldwide income. Income earned on all assets held by a taxpayer should be added to their declaration, whether these assets are in Canada or abroad.

In order to identify taxpayers who hold assets abroad, those with assets of over $250,000 outside the country must complete Form T1135 each year. In the last budget, the Ministry of Finance announced that a simplified method for declaring foreign assets will be proposed when these totalled between $100,000 and $250,000.

Donations to Children

Some taxpayers believe it is not possible to give a sum of money to their children without tax consequences resulting. This is not true!

In Canada, tax on donations does not exist. Thus, for an adult child, a cash donation is tax neutral. The parent who would like to give away assets on which there is a gain must pay tax on the capital gain resulting from the transfer. For a donation, a taxpayer is deemed to have disposed of the property for a consideration equal to its market value.

In the case of a minor child, the tax rules are more complicated. In fact, the law states that the income generated by the assets transferred to the child shall be reassigned to the parent. Thus, although it is possible to transfer money to a child, any income earned on this capital remains taxable in the hands of the donor parent.

My Company Can Give Me a Loan

Another misconception: the holding company that I control can give me a loan without my having to pay tax. This is not true!

Those who hold assets through a corporation may be tempted to make a loan in order to use the cash for personal reasons and avoid paying themselves a dividend. Some taxpayers argue that the loan made to them bears interest and is secured by property, and that the holding company is not financially disadvantaged.

The Tax Act states that a loan to a shareholder of a corporation constitutes income in the year it was made, whether or not it bears interest or a security (mortgage) is involved. One can avoid the need to include the loan in their income if it is repaid before the end of the fiscal year following the one in which the loan was made.

This law covers persons related to the shareholder (including their spouse and children) and, in the case of more complex structures, other persons and entities.

Conclusion

The situations we've just addressed are just some examples of myths that persist in the minds of some taxpayers. Before completing a transaction, it is always recommended to consult a specialist to check for rules which could have negative repercussions on financial planning.

The author

Patric Saint-Onge

Patric Saint-Onge

CPA, CA, LL.M.Fisc., TEP, Tax Specialist.
Patric Saint-Onge has been a tax specialist for over 15 years. In 2002, he co-founded the firm Corriveau Saint-Onge Inc. which specializes in Canadian taxation.

Mr. Saint-Onge has worked on major tax cases, applying complex fiscal concepts throughout his career.

He has also been a speaker on numerous occasions for both industry professionals as well as the general public. Among others, the Institute of Chartered Accountants of Quebec has requested his services as a speaker. He has also been invited as an expert in taxation on several television and radio shows, and frequently collaborates with journalists covering the economy to help with articles on various topics.