2016 tax changes: VDP, PRE and More

(Originally published at this link)

Voluntary Disclosures

The Canada Revenue Agency appears to have made a major change in the way it handles federal voluntary disclosure files. This could result in taxpayers being taxed on income earned in years prior to the ten year period for which most financial institutions are able to provide complete statements, potentially exposing the taxpayer to large compound interest charges on the resulting tax liability and a T1135 penalty of $2,500 for each omission beyond the ten years.

Federal voluntary disclosure agents recently began contacting legal representatives to discuss this important change in respect of open files. Specifically, they have requested the following information:

1) Confirmation of the opening dates of each account(s);
2) Confirmation as to the source of the funds used to build the portfolio held in the account(s) and whether such funds have been subject to tax or are exempt from tax; and
3) In respect of account(s) opened prior to the ten year period for which bank statements are available, whether the taxpayer can estimate the amount of income earned in the portfolio from the time of the account opening to the earliest statement presented.

Where it is possible to estimate the income earned in periods prior to the earliest statement provided by the bank, it seems that the Canada Revenue Agency proposes to tax the additional income in each year.

Unsatisfactory answers to the request for information may lead the Canada Revenue Agency to conclude that the file is “incomplete” and, therefore, not eligible for voluntary disclosure treatment, but subject rather to the imposition of penalties and regular interest (completeness being one of the conditions of the program).

We are actively seeking greater clarification of these changes and their implications for taxpayers.

Principal Residence Exemption

On October 3, 2016, Canada’s Department of Finance announced changes to the rules governing the principal residence exemption. As widely reported in the press, the changes will limit the ability of persons who are non-residents of Canada in the year of purchase of a residence to claim the full exemption when they later sell it.

Other changes in this area will be more broadly felt by residents. Beginning in 2017, in order to exempt the gain on the sale of a principal residence from tax, a taxpayer must designate the home as his or her principal residence by filing the appropriate form claiming the exemption with his or her tax return for the year of sale. Previously, principal residence claims were accepted by the Canada Revenue Agency without the filing of a designation.

Individuals who reside in a home that is owned by a trust will be particularly affected by the new rules. Residences owned by most standard family trusts will no longer be eligible for the exemption from tax in respect of post-2016 increases in value.

Individuals who currently reside in a home owned by a trust must determine whether the trust falls within the narrow categories of trust that may continue to claim the exemption. If it does not, they must consider whether it is advisable to have the house distributed by the trust to the individual beneficiary before the end of the year. This will depend on many factors (including whether the transfer would be subject to municipal transfer duties).

If the home is retained in the trust beyond 2016, it may still be possible to benefit from the exemption, provided that it is distributed to the beneficiary who resided in it prior to the earlier of: (i) the sale of the residence, or (ii) the 21st anniversary of the trust. This beneficiary may then designate the property as his or her principal residence for all years that it was owned by the trust. However, if the beneficiary who ordinarily occupies the residence dies prior to the distribution out of the trust, it will not be possible to make the principal residence designation for years after 2016. There are other complications if the beneficiary becomes non-resident.

In cases where the residence will continue to be owned by a trust after 2016, it is advisable to obtain a valuation as at January 1, 2017, to protect the accrued gain up to that time.

Transfer Duties

The Quebec Budget 2016-2017 announced amendments to the imposition of transfer duties on transfers of immovables occurring after March 17, 2016. The proposed amendments are included in Bill 112 which was tabled before the National Assembly on November 15, 2016. Significantly, unregistered transfers of real estate will now be subject to transfer duties, which will be payable as of the date the real estate is transferred, whether on or off title. Transferees of unregistered transfers will be required to notify the municipality within 90 days of the transfer or pay a penalty of 50% of the transfer duties (in addition to the duties themselves).

Other proposed changes aim to prevent arm’s length sales of real estate to be structured through intermediary corporations in order to access an exemption.

Back to Back Loans

In October 2016, a Notice of Ways and Means Motion was tabled in Parliament to enact the back-to-back loan rules announced in the 2016 federal budget. Essentially, the new rules look through intermediary lending arrangements, involving the interposition of a third party lender between the corporation and the shareholder, and deem the corporation (ultimate funder) to have made a loan to the shareholder (intended borrower) equal to the amount that the shareholder owes the third party lender (intermediary lender). When certain conditions are met, there is deemed to be an outstanding shareholder loan subject to potential income inclusion and deemed interest benefit.

These new rules apply as of March 21, 2016 to loans and indebtedness newly contracted after that date, and also to indebtedness existing on March 22, 2016 on the amount that was then outstanding. All personal lending arrangements with third party lenders that include involvement by a shareholder’s corporation should be reviewed to determine if these new rules apply.

The material contained herein is necessarily of a general nature and cannot be regarded as legal advice. The members of our firm would be pleased to provide additional information. You may reach us at (514) 849-1188 or by e mail as follows:

Sydney Sweibel ssweibel@sweibelnovek.com
Barbara L. Novek bnovek@sweibelnovek.com
Denis A. Lapierre dlapierre@sweibelnovek.com
Konstantinos Voggas kvoggas@sweibelnovek.com
Carol Rabbat crabbat@sweibelnovek.com
Marcie Akerman makerman@sweibelnovek.com
Jennifer Leach jleach@sweibelnovek.com
Slava Sinigerska ssinigerska@sweibelnovek.com
Erica Stermer estermer@sweibelnovek.com
Ryan Rotchin rrotchin@sweibelnovek.com
Elisabeth Robichaud erobichaud@sweibelnovek.com
Pamela Cheung pcheung@sweibelnovek.com
Aviad Grunbaum agrunbaum@sweibelnovek.com

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