CHAPTER 08 Tax Considerations
Partnerships Although partnerships are not taxpayers as such under the Tax Act, a partnership is required to compute its income as though it were a taxpayer resident in Canada. Each member of the partnership is required to include in its income the member’s allocable share of the income, gain or loss of the partnership. Special rules apply to limited partners that may, in certain circumstances, restrict their ability to claim losses of a limited partnership allocated to them. Trusts Unlike partnerships, trusts resident in Canada are taxable entities under the Tax Act. However, certain trusts, including personal trusts and mutual fund trusts, may be eligible for an offsetting deduction in respect of amounts distributed to beneficiaries. The effect of such rules is to reduce (or eliminate) tax at the trust level. Such distributions are generally taxable in the hands of the beneficiaries. As previously noted, the Tax Act may deem non-resident trusts to be resident in Canada in certain circumstances. SPECIFIED INVESTMENT FLOW-THROUGHS The Tax Act contains rules related to the taxation of certain publicly traded trusts and partnerships referred to as specified investment flow-through entities (SIFTs). Under the SIFT rules, SIFTs and their unitholders are taxed in a manner similar to corporations and their shareholders. Certain real estate investment trusts (REITs) are exempt from SIFT taxation. Certain cross-border income trusts that invest in non-Canadian assets may also be exempt from SIFT taxation.
GENERAL ANTI-AVOIDANCE RULE The Tax Act contains a broadly worded anti-
avoidance rule (GAAR) to prevent “abusive avoidance transactions.” The rule supplements specific anti- avoidance rules in the Tax Act. The GAAR is not intended to apply to a transaction that is undertaken primarily for bona fide purposes other than to obtain a tax benefit or that does not result in an abusive tax avoidance. If the GAAR applies, the CRA may redetermine the tax consequences of a transaction or series of transactions, resulting in tax liability for one or more participants in the transaction(s). The 2023 Canadian federal budget proposed a number of amendments to the GAAR. If adopted, such amendments will reduce the threshold for an avoidance transaction from a “primary purposes” test to a “one of the main purposes” test, introduce a 25% penalty on the value of the tax benefit resulting from the transactions that are subject to the GAAR and extend the normal reassessment period by three years for GAAR reassessments. Québec tax laws contain a similar general anti- avoidance rule (Québec GAAR) and impose a penalty equal to 50% of the tax assessed under the Québec GAAR unless the company has met specific reporting requirements in respect of the transaction at issue or can establish a due diligence defence. When a Québec GAAR penalty has been imposed on a company or on one of its associates, the company will be registered for five years in the register of enterprises ineligible for public contracts (RENA).
When a Québec GAAR penalty has been imposed on a company or on one of its associates, the company will be registered for five years in the register of enterprises ineligible for public contracts (RENA).
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