CHAPTER 08 Tax Considerations
Income from Shares Taxable dividends received by a Canadian resident corporation from a “taxable Canadian corporation” are generally fully deductible to the recipient corporation (subject to the anti-avoidance rules in subsection 55(2) of the Tax Act), permitting dividends to pass up through a chain of taxable Canadian corporations without taxation. A taxable Canadian corporation is generally a Canadian resident corporation incorporated in Canada that is not exempt under the Tax Act by reason of special rules applicable in limited circumstances (e.g., Crown corporations, pension corporations). In general terms, subsection 55(2) may apply to deem a dividend received by a Canadian resident corporation from a “taxable Canadian corporation” to be a capital gain in certain circumstances. Subsection 55(2) will generally not apply where the dividend is paid out of “safe income on hand” (generally, the after-tax retained earnings attributable to the share on which the dividend was paid) or where a deemed dividend is paid in the course of certain qualifying reorganizations. Dividends received by an individual are taxable, subject to the dividend tax credit, which reduces the effective rate of taxation on dividends paid by a taxable Canadian corporation and is intended to compensate (partially) for underlying corporate tax paid by the dividend payer. The dividend tax credit for certain “eligible dividends” more fully compensates individual shareholders for the underlying corporate tax paid. Dividends received by a Canadian resident corporation from a non-resident corporation are included in income, subject to certain deductions permitted under the Canadian foreign affiliate rules and subject to the foreign tax credit rules. The foreign affiliate rules are complex, but, in general terms, provide that earnings from an active business carried on by a foreign affiliate in a jurisdiction with which Canada has a tax treaty, or in a non-treaty jurisdiction that has agreed to exchange tax
information with Canada, may be repatriated to Canada free of Canadian tax. Canada currently has 23 tax information exchange agreements in force, with several others either signed but not yet in force or in the course of being negotiated. Conversely, under the foreign affiliate rules, Canadian residents are required to include their share of the “foreign accrual property income” (passive income or income deemed to be passive) of a controlled foreign affiliate whether or not distributed to the Canadian resident. Canadian residents are also required to include, in certain circumstances, an amount of deemed income in respect of an interest in any “offshore investment fund property.” A shareholder of a Canadian private corporation, whether resident or non-resident in Canada, is generally entitled to the return of share capital free of Canadian tax (including Canadian withholding tax). This is an important planning point for non-residents acquiring shares of a Canadian private corporation, since capital may be returned without first distributing earnings and profits by way of dividends that would be subject to non- resident withholding tax. Depreciation Taxpayers are permitted deductions (“capital cost allowance”) at prescribed rates in respect of depreciable property used in a business, including machinery and equipment, buildings and intangible property. Land is not eligible for tax depreciation. Capital cost allowance is generally computed by reference to the aggregate undepreciated capital cost of various asset classes and not the undepreciated capital cost of each individual asset.
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