The government's draft legislation makes changes to a notice of ways of means tabled in June regarding the capital gains inclusion rate.berean/iStockPhoto / Getty Images
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Draft legislation released this week offers relief to business owners worried about managing their capital dividend accounts (CDAs) this year after changes to the capital gains inclusion rate, and also addresses issues around loss carrybacks in estate planning.
The Department of Finance released draft legislation on Monday that clears up a potential problem for private corporations calculating gains for their CDAs.
The non-taxable portion of capital gains for a Canadian-controlled private corporation is added to the company’s CDA balance, which can generally be paid tax-free to shareholders.
With changes announced in the federal budget, the capital gains inclusion rate for corporations increased from 50 per cent to 67 per cent on June 25.
For CDA additions this year, many expected the rate would be 50 per cent for capital gains before June 25 and 33 per cent for gains realized after. However, that’s not how it worked in the notice of ways and means the Liberal government tabled on June 10.
Those rules introduced a complex “blended” formula to calculate the inclusion rate if a corporation realized gains this year both before and after June 25.
This created problems for business owners who wanted to pay out their capital dividend on a pre-June 25 sale, which was taxable at 50 per cent, before they generated more gains from a second disposition after June 25 at the higher rate.
“If you’d done that before the second capital gain was realized, you wouldn’t have a sufficient CDA balance to support the capital dividend being claimed,” says Brian Ernewein, senior advisor at KPMG in Canada’s national tax centre.
A number of tax experts identified the problem and the potential penalties that could result from distributing capital dividends above the amount available in a CDA.
“What the department has done in the legislation is essentially turn off that blending rule so that you can indeed pay out the 50 per cent exempt gain before any further gains are realized,” Mr. Ernewein says.
For capital gains realized before June 25 this year, 50 per cent of the gain is added to the corporation’s CDA; for gains realized after June 25, 33 per cent is added.
The other change Mr. Ernewein noted relates to the loss carryback provision in estate planning – when an estate carries back a capital loss to offset a capital gain realized by the deceased.
When a private company owner dies, their shares in the company are deemed disposed at fair value. But when the company is wound up, estate beneficiaries are taxed on the dividend distribution.
One way to avoid this double tax is to have the company buy back the shares, triggering a deemed dividend that results in a capital loss to the estate. That loss can be offset against the deceased’s capital gain, Mr. Ernewein says.
But executors have to do this within one year of the shareholder’s death. The draft legislation would extend that to three years, allowing more time for planning.
Sometimes the estate has to go to probate or there are disputes among beneficiaries, Mr. Ernewein says. “The flexibility that this additional 24 months gives can be important in a lot of circumstances.”
The short timeline has always been an issue, he says, but the higher capital gains inclusion rate makes it more significant, “and giving two extra years for planning will help mitigate that.”
The legislative proposals are out for consultation until Sept. 3, with legislation to enact the measures expected to be tabled in Parliament this fall.
Those proposals also include tweaks to the new Canadian Entrepreneur Incentive – adjustments that business groups says don’t go far enough, the Globe’s Mark Rendell reports.
And the Liberals proposed changes to bare trust reporting rules. As Rob Carrick writes, fewer individuals will need to report to the CRA, hopefully avoiding the confusion we saw at filing time this year.
– Mark Burgess, Globe Advisor assistant editor
Must-reads from Globe Advisor this week
Private market funds are proliferating but adoption may be slow
More private market investment funds are now catering to retail investors, but is the push from asset managers catching on? Jeff Shell, head of alternatives at BMO Global Asset Management, says there’s been “an educational process” to help advisors understand the funds and how they fit into portfolios. “In many cases, we were seeing advisors first buying for themselves so they can experience what their clients will,” he says. “Advisor uptake has become one of the key leading indicators that we use to assess the appeal of new product launches.” Joel Schlesinger reports.
Six dividend stocks with rate-cut tailwinds
Canadian dividend stocks that may have struggled when interest rates were rising now have the wind at their backs. With rate cuts underway, and more expected next month, bond proxies such as real estate investment trusts have started recovering, and falling rates can help other dividend payers, too. Three fund managers provided their top dividend picks.
Seller’s market for advisor books of business persists as many still put off retirement
Despite high borrowing costs and an aging cohort of advisors, the market for advisors’ books of business remains tilted in favour of sellers. George Hartman, president and chief executive officer of Market Logics Inc. in Toronto, says it’s a simple case of supply and demand: “I would say I get 40 times the number of people looking to buy a book than I do looking to sell.” As Daniel Reale-Chin reports, growing practices, easier financing and later retirements have all contributed to a glut of buyers.
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Why humanizing AI can backfire and lead to worse returns
The term “robo-adviser” might one day live up to its name, and it turns out that might not be great for investors. A new study reveals a possible future paradox: By making AI-driven investment advice appear more human in how it’s delivered, investors might end up with worse returns. Preet Banerjee reports.
Former RBC CFO Nadine Ahn sues bank for nearly $50-million, claiming wrongful termination, ‘reputational harm’
Former Royal Bank of Canada chief financial officer Nadine Ahn is suing the bank for nearly $50-million, claiming that RBC wrongfully terminated her employment four months ago after an internal investigation allegedly found she had an undisclosed personal relationship with a colleague that led to preferential treatment. James Bradshaw reports.
We must do something about conflict of interest in investment management
There used to be a clear distinction in the investment management world between different types of client-advisor relationships. Firms offering discretionary investment management were often referred to as investment counselling firms. Ones that took decisions from clients were known as brokerages. But over the last 20 years, the line between these two distinct investment approaches has blurred as discretionary relationships have grown increasingly popular across the board. But fiduciary standards haven’t fully caught up with this shift, write Andrew Auerbach and Jean Blacklock.
– Globe Advisor Staff