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The bottom line For years after 2004, you re going to have to demonstrate to the tax collector why you have a reasonable expectation of pro t over the long run in order to claim a deduction for losses
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TO MAKE A LONG STORY SHORT:
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Non-capital losses from your business can be carried back three years or forward twenty years to offset taxable income in those years Never use losses to reduce your income below the taxable threshold set by your basic personal tax credit, and consider saving the losses if you can use them in the next few years to offset dollars taxed at a higher rate Proposed changes to our tax law introduced on October 31, 2003 will require you to demonstrate that you have a reasonable expectation of pro t from your business over the long run, or else your losses could be denied
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Tim s Tip 48: Avoid tax on loans from your company through a strategy involving your spouse and the bank
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I ve noticed that duct tape is like The Force It has a light side, a dark side, and holds the universe together What duct tape is to the universe, two recent Supreme Court of Canada decisions are to taxpayers I m referring to the decisions in Mathew and Canada Trustco Mortgage Co, where the Supreme Court set out the ground rules in the event that the CRA tries to shut down a tax strategy under the general anti-avoidance rule (GAAR) in our tax law (see Tip 9) Since those decisions, there have been other court decisions on the issue of GAAR, most of which taxpayers have won Speci cally, a recent case, Overs v The Queen (2006), provides an interesting planning opportunity for business owners You see, subsection 15(2) of our tax law will generally tax a shareholder on any amounts borrowed from his or her corporation (with few exceptions) One way to escape this tax is to repay the loan by the end of the scal year following the scal
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1 0 1 Ta x S e c r e t s F o r C a n a d i a n s
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year in which you received the loan The problem Most shareholders don t have the cash to pay back these typically large loans
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The Strategy
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The Overs case sheds light on a strategy that worked for Mr Overs and may work for you, too In the case, Mr Overs had borrowed $23 million from his corporation, THL, and had to repay the amount, or face tax on it The plan he implemented had four steps First, his wife borrowed $23 million from the bank Second, she purchased from her husband $23 million worth of his shares in THL using the borrowed money Third, Mr Overs used the $23 million to pay back the loan he owed to THL, thereby avoiding the requirement to pay tax on the $23 million loan Finally, Mr Overs claimed a deduction for the interest costs and other fees paid by his wife on the loan from the bank Now for some details The bank was willing to lend Mrs Overs the money because THL ended up with the $23 million in cash, which it pledged as security for the loan to her When Mr Overs sold THL shares to his wife, the sale was considered to have taken place at his adjusted cost base, not fair market value, because transfers between spouse are always treated this way unless you elect otherwise The result No tax to pay on the sale Finally, Mrs Overs had paid over $225,000 in interest costs and guarantee fees related to the loan Yet, Mr Overs was able to deduct these amounts Why Since the sale of his THL shares to his wife did not take place at fair market value, the attribution rules in our tax law (see Tip 10) apply to tax Mr Overs on any income his wife receives on the shares, but also attributes back to him any losses she may incur, which included the interest and other fees related to the loan Not only did Mr Overs avoid tax on the $23 million shareholder loan, but he received a deduction for the costs his wife incurred to get him out of trouble Not a bad deal Mr Overs won his case in court, and GAAR did not apply to prevent use of this strategy in his case But, don t try this at home yourself Tax laws can change, so get a tax pro involved before you try the same
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