Tax Lesson 18 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Corporate Attribution Corporate attribution will apply if all of the following conditions are met: An individual transfers or lends money to a corporation. Note: buying shares from a corporation (i.e., treasury shares) counts as a transfer A designated person (i.e., a spouse or related minor or minor niece or nephew) is a specified shareholder of the corporation. A specified shareholder is a shareholder who owns 10% or more of any class of shares of the corporation; and One of the main purposes of the transfer or loan was to reduce the transferor’s income and benefit a designated person (i.e., an attempt to income split using the corporation) Corporate attribution will not apply if the corporation is a small business corporation throughout the year. This is another benefit of being a SBC If corporate attribution applies, the taxpayer who transfers or lends money to a corporation must include in his/her income (and pay tax on) an amount of fictitious income computed as follows: Prescribed interest rate x FMV of the amount transferred or lent

Corporate Attribution (cont) Note: if the taxpayer is already including an amount in his/her income from the amount transferred or lent to the corporation (for example taxable dividends on shares purchased or interest income on money lent) then the amount already included in income can be subtracted from the fictitious income inclusion computed under the corporate attribution rules Corporate attribution is bad (and you should try to avoid it) since if it applies it forces the taxpayer to pay tax on fictitious income, i.e., income that they are not getting

Example Problem Attribution Jen incorporated Jen Co. in Ontario in January 2005 and she owns all of the common shares. Jen’s spouse, Mervin, owns 100% of the non-voting preferred shares. Jen is in the top tax bracket and Mervin earns very little income. On January 1, 2016 Jen lent $75,000 to Jen Co. and lent another $25,000 to Mervin. Both loans are non-interest bearing and Jen is hoping that the loans can help increase Mervin’s taxable income. Mervin invested the $25,000 in GICs and in 2016 he earned $750 in interest income. During the year 83% of Jen Co.’s assets, based on fair market value, were used in an active business carried on in Canada and 17% of the company’s assets were investment assets invested in public company shares. You can assume that the prescribed interest rate for all periods is 2%. Describe any negative tax consequences from the two loans made in 2016.