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The TaxLetter: Tax Planning In A Down Economy – COVID-19 Tax Tips – Tax – Canada – Mondaq News Alerts

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Back in early February, before we all went into lock-down due to
Covid, I wrote about implementing a refreeze in a down economy. Who
knew back then that the economy would continue to drop like it did.
So it made me consider what other tax planning strategies to
consider, in addition to a refreeze, while our economy is still
down (if you haven’t read my February article, consider doing
so).

Triggering losses

I think it would be a safe bet to say that your investments
might have taken a hit in the last few months. So you may want to
consider which of your losers you might want to cut loose. By
triggering the loss in 2020, you can carry it back three years to
offset against any capital gains in previous years, or you can
carry forward the capital loss indefinitely to offset against
future gains. Note: If you are lucky enough to have gains in 2020,
you have to first use the losses against current year gains.

NOTE: Beware of the superficial loss rules when
triggering a loss. If you’re selling on the market to take a
loss, and you buy back an identical investment within 30 days
before or after the sale, the loss will be denied. Although these
rules are designed to counter artificial losses, they could apply
inadvertently – for example if you sell, then change your mind and
buy in again, maybe after the stock has dropped further. The rules
will also apply if your spouse buys back in within the 30-day
period (or a controlled company), but not if a child or parent
reinvests. The rules apply not only to stocks, but to mutual funds
as well. But they only apply if you repurchase an identical asset.
So if you sell Bank A and buy Bank B, you’re OK.

Note 2: When assessing whether you’re in a
loss position, don’t forget that capital gains are calculated
in Canadian dollars – so currency fluctuations can be a key
consideration. If the Canadian dollar has appreciated against the
currency there will tend to be losses.

Crystallizing gains

On the flip side, instead of triggering losses, you may want to
also look at triggering a capital gain. There has been much
speculation about whether the CRA will increase the capital gains
inclusion rate (currently at 50 per cent) in the 2020 Federal
Budget. Before Covid, the concern was due to the political climate
(i.e. the Liberals had a minority government and the NDPs had
campaigned on increasing taxes). The 2020 Budget was delayed with
the onset of Covid; and now the speculation is that perhaps the
government might increase the capital gains inclusion rate as a way
to raise money to fund the various government relief measures
released as a result of Covid. So if you anticipate a liquidity
event in 2020, you may want to consider crystallizing your capital
gain prior to the release of the 2020 Federal Budget, just in case.
And if you are not sure if there will be a liquidity event or not,
you can consider a strategy that would put the pieces in place to
trigger a gain, but still defer that decision until after the
Budget is released (you should reach out to your tax advisor to
discuss possible strategies). As to when the 2020 Federal Budget is
going to be released, your guess is as good as mine. So you should
have these discussions with your tax advisor sooner than later.

Capital Dividend Clean UP

If you hold your investments in a corporation, and are thinking
of triggering losses as discussed above, then the first thing to do
is to first check your corporation’s capital dividend account
(CDA) balance. What is a CDA? Well, as you know, only 50 per cent
of a capital gain is subject to tax. So when your corporation
realizes a capital gain, it only pays tax on 50 per cent of the
gain. The other 50% “tax-free” portion of the capital
gain is added to the corporation’s CDA. A tax-free capital
dividend can then be paid out of the corporation to you, the
shareholder (as long as you are a Canadian resident). However, if
the corporation realizes a capital loss as part of a loss selling
strategy, those losses will grind down the CDA balance and you will
lose the ability to take money out tax-free. So it is very
important to make sure you clear out your CDA by declaring a
taxfree capital dividend to you before you trigger any losses.

And if you don’t have any cash to pay the capital dividend,
the corporation can satisfy the capital dividend with a demand
promissory note so you can always pull that amount out tax-free in
the future.

Income Splitting opportunities

The Tax Act is full of various rules to prevent you from trying
to sprinkle income to lowtax family members (known as income
splitting). The “attribution rules” for example, would
apply where you transfer property or funds to your spouse
(including common law spouse) minor children, minor grandchildren
or minor nieces/nephews (“Family Members”), unless you
fall under certain exceptions. But in down economies, these
exceptions to the attribution rules generally get spotlighted.

One of these exceptions is the prescribed rate loan strategy. As
I have discussed in previous articles, you can avoid the
attribution rules if you, the higher income family member, loan
funds to the low-income Family Members, provided that they pay you
interest at the “prescribed rate” in effect at the time
the loan is made. Moreover, the interest on this loan has to be
paid by no later than January 30 each year. If you miss even one
January 30 deadline, the attribution rules will apply forevermore.
The prescribed rate has been at 2 per cent for the last little
while, but it is going down to 1% on July 1st, 2020 – so the
opportunity to income split through a prescribed loan will become a
lot more attractive.

If you don’t have cash to loan to your Family Member,
consider doing a loan “in kind”. For example, if you have
a securities portfolio in your name, transfer the portfolio to your
low-income spouse and have your spouse issue a demand promissory
note reflecting the prescribed interest rate for an amount equal to
the fair market value of the portfolio at the time of the transfer.
However, this transfer may be subject to capital gains tax by you,
the transferor, as the transfer would have to be made at the
portfolio’s fair market value. But if your portfolio has gone
down in value, then now is time to make that transfer.

NOTE: if you want to loan to any minor Family
Members, you should do so through a family trust, as minors cannot
legally borrow from you.

Defer RRSP Contributions

If your income / salary has gone down this year due to Covid,
you may want to consider deferring any RRSP contributions until
next year, especially if you expect to be in a lower tax bracket
for 2020. So hopefully, when you are back into the top bracket next
year, you can double up your RRSP contributions for 2021.

Originally Published by
The TaxLetter®
June 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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City Council approves ideas meant to stimulate the local economy – EverythingGP

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Photo by Curtis Galbraith

By Curtis Galbraith

City Hall

Aug 12, 2020 5:30 AM

City Council has decided how it wants to allocate some of the money in an economic recovery fund set up in response to the pandemic.

The biggest share, $450,000, will go into the Beautification & Patio Grant for businesses across the city. The grants would cover half the cost, up to $15,000, of adding a patio or improving signage, facades, or landscaping.

Mayor Bill Given says the city wants to stimulate the economy by having owners re-invest in their businesses.

“This new program is essentially modelled after our very successful Downtown Incentive Program. (It) led to the redevelopment of a lot of the facades on downtown businesses was also a matching grant program and for every $1 the city invested in that program; we saw about $4 in actual economic activity happen. So, we saw this as a really great opportunity for those property owners who are interested and willing to partner with the city in upgrading their businesses and improving the general appearance of the community and that is something that puts tradespeople to work immediately.”

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Economy

UK crashes into deepest recession of any major economy – CNN

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This crash in GDP in the April-June period is the worst since quarterly records began in 1955 and follows a 2.2% contraction in the first quarter. Industries most exposed to government lockdown measures to contain the coronavirus pandemic — services, production and construction — saw record drops.
Boris Johnson's dream of a 'Global Britain' is turning into a nightmare
“Today’s figures confirm that hard times are here,” UK finance minister Rishi Sunak said in a statement. “Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will. But while there are difficult choices to be made ahead, we will get through this, and I can assure people that nobody will be left without hope or opportunity.”
Compared with the end of 2019, UK economic output fell by a cumulative 22.1% in the first six months of 2020, a worse outcome than Germany, France and Italy, and double the 10.6% fall recorded in the United States, the Office for National Statistics said.
“The larger contraction primarily reflects how lockdown measures have been in place for a larger part of this period in the UK,” the ONS added.
Britain imposed a strict lockdown two weeks later than Italy, 10 days after Spain and a week after France, despite swelling coronavirus cases. That meant it took longer to get the spread of the virus under control, which prolonged the need for restrictions that kept many businesses closed.
For example, Italy allowed restaurants, cafes and hairdressers to reopen in the middle of May, whereas the United Kingdom waited until July 4 to do the same.
Could the United Kingdom become an emerging market?Could the United Kingdom become an emerging market?
An easing of some lockdown restrictions in June, including the reopening of nonessential shops, delivered an immediate boost to the economy, with GDP increasing 8.7% on the previous month, according to the ONS.
The UK economy is heavily reliant on services and household spending, both of which posted record declines in the second quarter, as consumers who were holed up at home spent less money and saved more. In addition, millions of workers were furloughed and many have now been laid off.
The UK economy has shed 730,000 jobs since the coronavirus pandemic shuttered businesses in March, with the young, the old and the self-employed bearing the brunt of the unemployment crisis.
Kallum Pickering, a senior economist at Berenberg, said the GDP figures do not bode well for the rest of the year.
“Typically, recession data are subject to heavy revisions,” he said in a research note. “Nevertheless, taken at face value, the bigger-than-expected contraction suggests some downside risk to our call of a 9.5% contraction in full year 2020.”

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U.K. economy officially in recession after 20.4 per cent Q2 slump – CTV News

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LONDON —
The U.K. economy has officially fallen into a recession after official figures showed it contracting by a record 20.4 per cent in the second quarter as a result of lockdown measures put in place to counter the coronavirus pandemic.

The slump recorded by the Office for National Statistics follows a 2.2 per cent quarterly contraction in the first three months of the year. As such, the U.K. economy is in a recession — commonly defined as two quarters of negative growth.

Unlike other countries, Britain’s statistics agency provides monthly figures to accompany the quarterly numbers and these show some hope that the economy is healing in the wake of the easing of some lockdown restrictions. In June, when shops selling non-essential goods were allowed to reopen, the British economy grew by a monthly rate of 8.7 per cent.

“The economy began to bounce back in June with shops reopening, factories beginning to ramp up production and house-building continuing to recover,” said statistician Jonathan Athow.

Despite this, he said the economy remains a sixth below its level in February, before the virus started to impact.

The British government hopes that the further easing of the economy over recent months, such as the reopening of the hospitality sector in July, will allow the economy to claw back further ground.

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