46 minute read 3 Nov. 2022
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TaxMatters@EY – November 2022

By EY Canada

Multidisciplinary professional services organization

46 minute read 3 Nov. 2022
TaxMatters@EY is a monthly Canadian summary to help you get up to date on recent tax news, case developments, publications and more. From personal and corporate tax issues to topical developments in legislation and jurisprudence, we bring you timely information to help you stay in the know.

Is your biggest tax obligation the one you can’t see?

Tax issues affect everybody. We’ve compiled news and information on timely tax topics to help you stay in the know. In this issue, we discuss:

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Chapter 1

Asking better year-end tax planning questions – part 1


Note: For more detail on topics such as personal tax for investors and for estate planning, see the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Candra Anttila, Maureen De Lisser and Alan Roth, Toronto

Have you ever found yourself looking for tax savings while completing your tax return in April? If so, you’ve probably realized that at that point there’s not much you can do to reduce your balance owing or increase your refund balance. By the time you prepare your tax return, you’re looking back and simply reporting on the year that has ended.

But don’t worry. As we approach the end of the year, there’s still some time left for forward-looking planning. You can approach year-end planning by asking yourself questions or going through a checklist. Following a framework for year-end tax planning, such as the one we suggest at the end of this article, can also be helpful.

Taking time out of your busy November and December to think about these questions can help you find better answers that may save you money on your 2022 tax bill and beyond.

Part 1 of “Asking better year-end tax planning questions” looks at the questions, topics and tax planning techniques that may apply to you each year. Part 2, which will appear in next month’s edition, will focus on questions and topics that are specific to the 2022 taxation year and recent personal tax changes, including new temporary immediate expensing rules for certain capital expenditures and various tax credit changes.

Are there any income-splitting techniques available to you?

You may be able to reduce your family’s overall tax burden by taking advantage of differences in your family members’ marginal income tax brackets using one or a combination of the following:

  • Income-splitting loans – You can loan funds to a family member at the prescribed interest rate of 3% (for loans made after September 30, 2022).1 The family member can invest the money and the investment income will not be attributed to you (i.e., treated as your income for tax purposes), as long as the interest for each calendar year is paid no later than January 30 of the following year.
  • Reasonable salaries to family members – If you have a business, consider employing your spouse or partner and/or your children to take advantage of income-splitting opportunities. Their salaries must be reasonable for the work they perform.2 However, other income-splitting opportunities involving your business may be limited (see below re: income-splitting private corporation business earnings).
  • Spousal RRSPs – In addition to splitting income in retirement years, spousal RRSPs may be used to split income before retirement. The higher-income spouse or partner can get the benefit of making contributions to a spousal plan at a high tax rate and, after a three-year non-contribution period, the lower- or no-income spouse can withdraw funds and pay little or no tax.
  • Pension income splitting – If you are receiving certain eligible types of pension income in 2022, you may be able to elect to transfer up to one half of your eligible pension income to your spouse or common-law partner, or vice versa. Pension income splitting can produce significant tax savings for some couples. However, the magnitude of the savings will depend on a number of factors.3

Have you paid your 2022 tax-deductible or tax-creditable expenses yet?

  • Tax-deductible expenses – A variety of expenses, including interest and child-care costs, can only be claimed as deductions in a tax return if the amounts are paid by the end of the calendar year.
  • Expenditures that give rise to tax credits – Charitable donations, political contributions, medical expenses, home accessibility renovation expenses, digital news subscription expenses, and tuition fees must be paid in the year (or, in the case of medical expenses, in any 12-month period ending in the year) in order to be creditable. Note also that for 2022 and later years, the annual limit on qualifying expenditures (i.e., home accessibility renovation expenses) that may be claimed under the home accessibility tax credit has increased to $20,000 (up from the previous limit of $10,000).
  • Consider whether deductions or credits may be worth more to you this year or next year – If you can control the timing of deductions or credits, consider any expected changes in your income level and tax bracket or marginal personal income tax rate. Deductions will be worth more when you are subject to a higher marginal rate. In addition, your income level may affect the availability or value of certain tax credits (such as the medical expense credit and donation credit).4

Have you made any tax-deductible capital expenditures in the year?

To deduct all or a portion of the cost of certain capital property used in the course of earning income from a business or property in the year — such as computers, office furniture, and tools and machinery — the property must be acquired and available for use before the end of the year.

The amount deductible for the year depends on the capital cost allowance (CCA) class to which the property belongs. Also, the cost of certain property acquired after 2021 may be eligible for immediate expensing, rather than subject to a declining-balance rate of depreciation under the applicable CCA class.

For more information on the immediate expensing rules, see EY Tax Alert 2022 Issue No. 30, Temporary expansion of immediate expensing incentive. These rules will also be discussed in further detail in Part 2 of “Asking better year-end tax planning questions,” which will be included in next month’s edition of TaxMatters@EY.

Do you hold passive investments in your private corporation?

A Canadian-controlled private corporation’s (CCPC’s) access to the small business deduction and, accordingly, the small business tax rate,5 may be limited by the amount of passive investment income earned in the preceding year. Consult your tax advisor for possible strategies to mitigate the adverse impact of these rules.

For example, if you are considering realizing accrued gains in the corporation’s investment portfolio before its 2022 taxation year end and the company is likely to cross the $50,000 income threshold by doing so, consider deferring the gains to the following year so that the 2023 taxation year is not impacted. You may also consider the pros and cons of holding a portion or all of the portfolio personally instead of in the company.

The impact of these rules on CCPCs subject to taxation in Ontario or New Brunswick is smaller because both provinces have confirmed they are not adopting them for purposes of their respective provincial small business deductions.

For more information, see TaxMatters@EY, May 2018 “Federal budget simplifies passive investment income proposals.

Do you income-split private corporation business earnings with adult family members?

Income tax rules may limit income splitting opportunities with certain adult family members through the use of private corporations.

For example, a business is operated through a private corporation, and an adult family member in a low income tax bracket subscribes for shares in the corporation. A portion of the business’s earnings is distributed to the family member by paying dividends. These rules apply the highest marginal personal income tax rate (the tax on split income, federal rate of 33% for 2022) to the dividend income received unless the family member meets one of the legislated exceptions to the application of this tax. For example, if the adult family member is actively engaged in the business on a regular basis by working an average of at least 20 hours per week during the year (or in any five previous, not necessarily consecutive, years), the tax on split income may not apply.

Consult with your tax advisor to learn more about how these rules might apply in your specific circumstances.

For more information about these rules, see “The revised tax on split income rules” (Appendix E) in the latest version of Managing Your Personal Taxes: a Canadian Perspective, TaxMatters@EY, February 2020, “Tax on split income: CRA provides clarifications on the excluded shares exception,” and TaxMatters@EY November 2020, “Tax on split income: The excluded business exception.”

Have you maximized your tax-sheltered investments by contributing to a TFSA or an RRSP?

  • Tax-free savings account (TFSA) – Make your contribution for 2022 and catch up on prior non-contributory years. You won’t get a deduction for the contribution, but you will benefit from tax-free earnings on invested funds. Also, to maximize tax-free earnings, consider making your 2023 contribution in January.
  • TFSA withdrawals and recontributions – TFSA withdrawals are tax-free and any funds withdrawn in the year are added to your contribution room in the following year. But if you have made the maximum amount of TFSA contributions each year6 and withdraw an amount in the year, recontributions made in the same year may result in an overcontribution, which would be subject to a penalty tax. If you have no available contribution room and are planning to withdraw an amount from your TFSA, consider doing so before the end of 2022, so that it’s possible to recontribute in 2023 without affecting your 2023 contribution limit. For more information about the adverse consequences of overcontributing to your TFSA, see TaxMatters@EY, October 2021, “TFSAs: inability to rectify unintended overcontribution may lead to penalties,” and TaxMatters@EY, October 2017, “TFSAs: CRA compliance initiative continues.”
  • Registered retirement savings plan (RRSP) – The earlier you contribute, the more time your investments have to grow. So consider making your 2023 contribution in early 2023 to maximize the tax-deferred growth. If your income is low in 2022, but you expect to be in a higher bracket in 2023 or beyond, consider contributing to your RRSP as early as possible, but holding off on taking the deduction until a future year when you will be in a higher tax bracket. If you turn, or have turned, 71 years old in 2022, you must make any final contributions to your RRSP on or before December 31, 2022 to obtain a tax deduction on your 2022 personal tax return.

    In addition, you need to close your RRSP by the end of the year. You can choose to close your RRSP by withdrawing the funds, which would be subject to full taxation in the year withdrawn, or transferring the funds to a registered retirement income fund (RRIF) or purchasing an annuity, either of which will allow for some continued tax deferral.

    If you have any remaining unused RRSP deduction room after your final RRSP contribution and your spouse or common-law partner is younger, you may continue to contribute to a spousal or common-law partner RRSP until the end of the year in which your spouse or common-law partner turns 71.

    For additional tax planning tips relating to RRSPs, see the Retirement Planning chapter in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Are you considering making an RRSP withdrawal under the Home Buyers’ Plan?

If you’re a first-time home buyer,7 the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,0008 from your RRSP to finance the purchase of a home. No tax is withheld on RRSP withdrawals made under this plan. If you withdraw funds from your RRSP under the HBP, you must acquire a home by October 1 of the year following the year of withdrawal, and you must repay the withdrawn funds to your RRSP over a period of up to 15 years, starting in the second calendar year after withdrawal. Therefore, if possible, consider waiting until after the end of the year before making a withdrawal under the HBP to extend both the home purchase and repayment deadlines by one year.

The 2022 federal budget introduced a new type of registered account intended to help individuals save for a down payment on their first home.9 These accounts, referred to as tax-free first home savings accounts (FHSAs), will be made available some time in 2023.

It’s important to note that when you purchase a home, you will have to choose between withdrawing from your FHSA and making a withdrawal under the HBP; you cannot use both for the same qualifying purchase.

For more information, see TaxMatters@EY: Family Wealth Edition, October 2022, “What’s new for first-time home buyers?”. These new savings accounts will also be discussed in further detail in Part 2 of “Asking better year-end tax planning questions,” which will be included in next month’s edition of TaxMatters@EY.

Have you maximized your education savings by contributing to an RESP for your child or grandchild?

  • Contributions – Make registered education savings plan (RESP) contributions for your child or grandchild before the end of the year. With a contribution of $2,500 per child under age 18, the federal government will contribute a grant (CESG) of $500 annually up to a lifetime maximum of $7,200 per beneficiary.
  • Non-contributory years – If you have prior non-contributory years, the annual grant can be as much as $1,000 in respect of a $5,000 contribution.10

Is there a way to reduce or eliminate your non-deductible interest?

Interest on funds borrowed for personal purposes is not deductible. Where possible, consider using available cash to repay personal debt before repaying loans for investment or business purposes on which interest may be deductible.

Have you reviewed your investment portfolio?

Accrued losses to use against realized gains – While taxes should not drive your investment decisions, it may make sense to sell loss securities to offset capital gains realized earlier in the year. If the losses realized exceed gains realized in the year, they can be carried back and claimed against net gains in the preceding three years. Note that the last stock trading date for settlement of a securities trade in 2022 is Wednesday, December 28, 2022 for securities listed on Canadian or US stock exchanges.

Just remember to be careful of the superficial loss rules, which may apply to deny a capital loss on the disposition of a security. These rules may apply if you, your spouse or common-law partner, a company either of you controls, or an affiliated partnership or trust (such as your RRSP, RRIF, TFSA or RESP) acquires the same or an identical security within the period beginning 30 days before and ending 30 days after the disposition, and the security is still owned at the end of that period.

Realized losses to carry forward – If you have capital loss carryforwards from prior years, you might consider cashing in on some of the winners in your portfolio. As noted above, be aware of the December 28, 2022 deadline for selling securities listed on a Canadian or US stock exchange to ensure that the trade is settled in 2022. Or consider transferring qualified securities with accrued gains to your TFSA or RRSP (up to your contribution limit). The resulting capital gain will be offset by available capital losses, and you will benefit from tax-free (TFSA) or tax-deferred (RRSP) future earnings on these securities.

Donation of securities with accrued gains – You may also want to consider donating publicly traded securities (e.g., stocks, bonds, Canadian mutual fund units or shares) with accrued gains to a charitable organization or foundation. If you do, the resulting capital gain will not be subject to tax and you will also receive a donation receipt equal to the fair market value of the donated securities.

Can you improve the cash flow impact of your income taxes?

Make sure you filed your prior-year return – If you didn’t file your 2021 personal income tax return because you didn’t owe any taxes, you may be missing out on certain refundable tax credits and benefits to which you may be entitled, such as the GST/HST credit and climate action incentive payments. You must reside in Alberta, Ontario, Manitoba or Saskatchewan to be eligible for climate action incentive payments, the payment of which does not depend on income level.11

Request reduced source deductions – If you regularly receive tax refunds because of deductible RRSP contributions, child-care costs or spousal support payments, consider requesting CRA authorization to allow your employer to reduce the tax withheld from your salary (Form T1213). Although it won’t help for your 2022 taxes, in 2023 you’ll receive the tax benefit of those deductions all year instead of waiting until after your 2023 tax return is filed.

Determine requirement to make a December 15 instalment payment – If you expect your 2022 final tax liability to be significantly lower than your 2021 liability (for example, due to lower income from a particular source, losses realized in 2022 or additional deductions available in 2022) you may have already paid enough in instalments. You are not required to follow the CRA’s suggested schedule and are entitled to base your instalments on your expected 2022 liability. However, if you underestimate your 2022 balance and your instalments end up being insufficient, or the first two instalments (due in March and June) were too low, you will be faced with interest and possibly a penalty.12

Have you thought about estate planning?

Review your will – You should review and update your will periodically to ensure that it reflects changes in your family status and financial situation, as well as changes in the law.

Consider your life insurance needs – Life insurance is an important tool to provide for the payment of various debts (including taxes) that may be payable as a result of your death, as well as to provide your dependants with money to replace your earnings. Review your coverage to ensure that it remains appropriate for your financial situation.

Consider an estate freeze to manage tax on death and/or probate fees – An estate freeze is the primary tool used to manage the amount of tax that may arise on death and involves locking in (i.e., “freezing”) the value of a business, investments or other assets and transferring the future growth of those assets to family members. Consider the impact of the tax rules for testamentary trusts, graduated rate estates and charitable planned giving, and the impact of the tax on split income rules (see above – Do you income-split private corporation business earnings with adult family members?) on income-splitting strategies using estate freezes.

For example, an estate freeze is set up where parents transfer the future growth in value of a business to the next generation. Dividends paid in 2018 or later years to an adult child may be subject to the highest marginal personal income tax rate under these rules unless the individual meets one of the legislated exceptions to the application of this tax.

For details, see Chapter 12, Estate Planning, in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Consider a succession plan for your business – A succession plan involves devising a strategy to ensure that the benefit of your business assets passes to the right people at the right time.

These questions may seem familiar, but as tax rules become more complex, it becomes more important to think of the bigger tax picture continuously throughout the year, as well as from year to year as your personal circumstances change. Start a conversation with your tax advisor to find better answers.

  Year-end tax to-do list

Before December 31, 2022:
  • Make 2022 TFSA contribution.
  • Make 2022 RESP contribution.
  • Make final RRSP contribution if you are 71 years old at the end of the year, and wind-up your RRSP by choosing to withdraw the funds, transfer the assets to a RRIF or purchase an annuity.
  • Pay tax-deductible or tax-creditable expenses.
  • Advise employer in writing if eligible for reduced automobile benefit.
  • Request CRA authorization to decrease tax withheld from salary in 2023.
  • Review your investment portfolio for potential dispositions to realize gains or losses in 2022 (note the last day for settlement of a trade in 2022 is December 28 on both Canadian and US stock exchanges).
  • Make capital acquisitions for business.
  • Evaluate owner-manager remuneration strategy (for more information see TaxMatters@EY, December 2021 “Year-end remuneration planning”).
  • Consider allowable income-splitting strategies.
Early 2023:
  • Interest on income splitting loans must be paid on or before January 30.
  • Make 2022 RRSP contribution (if not already made) by March 1.
  • Make 2023 RRSP contribution.
  • Make 2023 TFSA contribution.
  • Make 2023 RESP contribution.
A framework for year-end tax planning

There are two benefits to doing year-end tax planning while there is enough time left in the year to do it well.

First, you’re more likely to avoid surprises next April that can be both financially and emotionally stressful. Second, if done from the wide-angle perspective of comprehensive financial and estate planning, year-end tax planning can help you understand whether you’re doing the right things in the right way, not just to minimize income taxes, but also to make it that much easier to achieve your longer-term financial goals.

Consider how you can approach current year-end planning with an eye to the future. By assessing any major step taken today for its effect on the tax, financial and estate planning in the next stage(s) of your life, you may preclude choices that will reduce planning flexibility and could increase taxable income in the future.

You should also determine if there will be any significant change in the amount and/or composition of your income next year. Among other things, changes in your personal life (such as changes in your marital or parental status) need to be considered. This information could prove to be important when selecting and designing particular tax planning steps.

Planning with income

You should understand the composition of your employment, business or professional income (salary, bonus, options, self-employment income, etc.), how each component is taxed in the current or future years and the extent to which you can control the timing and amount of each type of income.

Taxes are only one of the factors to be considered in deciding whether to do some loss planning in your portfolio. But there may be capital losses that can be triggered and/or used to offset gains. You should also understand the composition of your investment income (i.e., interest, dividends and capital gains) and the extent to which you can control the timing, amount and character of each item.

Another tax planning issue associated with investing is “asset location,” meaning selecting the right investments to hold in taxable versus tax-deferred accounts, respectively. Even some minor tweaking here could create significant benefits down the road.

Planning with deductions and credits

On the other side of the ledger from income are deductions. Here again, you should understand what deductions you are entitled to and the extent to which you can control the timing of those deductions. If you can benefit from a deduction or credit this year, make sure you pay the amount before year end (or in the case of RRSP contributions, no later than March 1, 2023). Or, if you expect to be in a higher tax bracket next year, consider deferring deductions until next year, when they will be worth more.

Consider reviewing and re-assessing the tax and financial implications of your major deductions and credits. For example, can you plan to minimize non-deductible interest expense or replace it with deductible interest expense? Or can you plan your usual charitable contributions to maximize their tax benefit? If you will incur significant medical expenses in 2023, will you be able to use all the credits? (If not, consider other options such as choosing a different 12-month period ending in the year for computing medical expenses, or having your spouse claim the credit).

Also, if you’re thinking about making a gift to an adult child, it pays to do your homework. In Canada, gifts to adult children are generally received tax free, but there may be tax implications for the parent. For example, the gift of a capital property may trigger a taxable capital gain for the parent. See “It’s better to give than to receive: tax-free gifts to adult children” in the November 2017 issue of TaxMatters@EY.

Estate planning

Your estate plan should start as soon as you begin to accumulate your estate. It should protect your assets and provide tax-efficient income before and after your retirement, as well as a tax-efficient transfer of your wealth to the next generation.

Your will is a key part of your estate plan. You and your spouse or partner should each have a will and keep it current to reflect changes in your family status and financial situation as well as changes in the law.

Remember that the tax on split income rules may limit income-splitting strategies using estate freezes. It’s generally a good idea to review your estate planning goals and wills on a regular basis, especially in light of these rules.

These suggestions for year-end tax planning should help you set the agenda for a comprehensive discussion with your tax advisor this year and in years to come.

For more information, see Part 2 of "Asking better year-end tax planning questions".

  • Show article references# 
    1. Loans made during the first two quarters of 2022 were subject to a prescribed rate of 1%. For loans made during the third and fourth quarters of 2022, the prescribed rate was increased to 2% and 3%, respectively. For more information on prescribed rate loan planning, see TaxMatters@EY, June 2022, “Review prescribed rate loan strategy before July 1, 2022.
    2. For example, salaries comparable to what arm’s-length employees would be paid in a similar capacity.
    3. For more information on spousal RRSPs and pension income splitting, see TaxMatters@EY, April 2021, “Considering splitting your retirement income? Keep these considerations in mind.
    4. This is because the medical expense credit is subject to a net income threshold. Specifically, for 2022, the credit is available for eligible medical expenses in excess of the lesser of $2,479 and 3% of the individual’s net income. In the case of the donation tax credit, the maximum claim for donations is limited to 75% of an individual’s net income for the year (donations in excess of this threshold may, however, be carried forward), and higher-income donors are able to claim a 33% federal tax credit on the portion of donations above $200 made from taxable income that is subject to the federal 33% marginal personal income tax rate.
    5. The small business deduction applies to the first $500,000 of active business income earned by a CCPC in the taxation year. This limit must be shared with a CCPC’s associated companies. The provinces and territories also have their own small business tax rates, with most jurisdictions also applying a $500,000 active business income limit. The federal small business rate is 9% in 2022. The federal general corporate rate is 15%. See EY’s tax calculators and rates.
    6. The maximum contribution limit was $6,000 in each of 2022, 2021, 2020 and 2019, $5,500 in each of 2016, 2017 and 2018, $10,000 in 2015, $5,500 in each of 2013 and 2014, and $5,000 for each of 2009 to 2012.
    7. You are considered a first-time home buyer if you or your spouse or partner have not owned a home that you lived in as your principal residence in any of the five calendar years beginning before the time of withdrawal.
    8. The withdrawal limit was increased from $25,000 to $35,000 for 2019 and later years in respect of amounts withdrawn after March 19, 2019. The amendments also permit an individual to re-qualify, in certain circumstances and subject to certain conditions, for the HBP following the breakdown of a marriage or common-law partnership even if they do not otherwise qualify as a first-time homebuyer. These amendments are effective with respect to withdrawals made after 2019.
    9. Draft legislation for the tax-free first home savings accounts was released by the Department of Finance on August 9, 2022. The legislation is expected to be enacted before the end of 2022.
    10. For more information, see TaxMatters@EY, November 2019, “Boost education savings by making year-end RESP contribution.
    11. Beginning in July 2022, climate action incentive payments are made quarterly by the government through the benefit system, rather than paid as a refundable tax credit on the filing of your personal income tax return. However, to be eligible, you must file your personal income tax return for the tax year preceding the benefit year.
    12. Under the current-year option for paying instalments based on estimated taxes payable for the year, the instalments are required to be paid in four equal instalments in March, June, September and December. Therefore, if you decide to change to the current-year option late in the year, it’s important to ensure your March and June instalments remain sufficient (i.e., equal to ¼ of your estimated taxes for the year) to avoid interest charges. It should also be noted that the prescribed interest rate that applies to insufficient instalments has increased from 5% in the first and second quarters of 2022 to 6% in the third quarter and 7% in the fourth quarter of 2022.


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Chapter 2

Introduction of the “substantive CCPC” concept


Michelle Fineberg and Matthew Mammola, Toronto

The 2022 federal budget introduced the concept of a “substantive CCPC” with the intention to restrict a Canadian-controlled private corporation (CCPC) from artificially losing its CCPC status prior to realizing a substantial amount of passive income that would otherwise be subject to the refundable portion of Part I tax.

These rules will typically apply to taxation years that end on or after April 7, 2022. To accommodate genuine commercial transactions, there is a limited grandfathering rule that will apply, such that the proposed measures will not impact transactions that were entered into pursuant to a written purchase and sale agreement with an arm’s-length purchaser prior to April 7, 2022. This exception will only be available for transactions that close before the end of 2022.

On August 9, 2022, the federal government released draft legislative proposals which, among other items, addressed measures announced in the 2022 federal budget.1


Broadly speaking, a CCPC is defined in the Income Tax Act (the Act) as a private corporation that is a Canadian corporation other than a public corporation, or a corporation controlled by nonresident person(s) or public corporation(s).2

Corporations that are CCPCs throughout a taxation year are required to pay the refundable portion of Part I tax on their passive income — such as interest, dividends, royalties and taxable capital gains — for the taxation year.3

The refundable additional Part I tax on investment income earned by a CCPC is 10.67%. Therefore, the resulting federal rate applicable to investment income earned by a CCPC is 38.67% (i.e., 38% basic corporate income tax rate, less 10% federal tax abatement, plus 10.67% refundable additional Part I tax).

For example, in Ontario, this would amount to a tax rate of 50.17% — i.e., federal rate of 38.67% plus Ontario’s general income tax rate of 11.5% — of which 30.67% may be refunded on the payment of taxable dividends,4 subject to certain restrictions around the types of dividends paid as compared to the available balances in the refundable dividend tax on hand pools (i.e., non-eligible refundable dividend tax on hand (NERDTOH)) versus eligible refundable dividend tax on hand (ERDTOH).5 In comparison, a private corporation that is not a CCPC throughout a taxation year would be subject to a tax rate of 26.5% on passive income earned for the year in Ontario.

For additional information on the combined federal and provincial/territorial income tax rates applicable to active business income and passive income earned by a corporation, refer to the EY’s Canadian corporate income tax rate cards for active business income and investment income. Where funds are retained in the corporation, there is a tax deferral benefit obtained by earning that income in a non-CCPC.

In light of the above, corporations have sought to lose their CCPC status prior to realizing passive income to avoid the refundable portion of Part I tax levied and to take advantage of the tax deferral benefit. One way to achieve this was by migrating a corporation to a foreign jurisdiction, typically one with preferential, if any, tax rates. The corporation would remain a resident of Canada for tax purposes, as mind and management would still reside in Canada. However, as the corporation would no longer be a Canadian corporation, it would no longer meet the definition of a CCPC. Absent any commercial reasons for undertaking this migration, the CCPC status may be viewed as being lost artificially to take advantage of a tax deferral benefit.

Under the current legislation, the CRA may challenge the manipulation of CCPC status pursuant to the General Anti-Avoidance Rule (GAAR). Nonetheless, the government has decided to move forward with targeted measures against such planning.

The proposals

A substantive CCPC is defined in the draft legislative proposals as a private corporation other than a CCPC that at any time in a taxation year is controlled, directly or indirectly in any manner whatever, by one or more Canadian-resident individuals, or would, if each share of the capital stock of a corporation that is owned by a Canadian-resident individual were owned by a particular individual, be controlled by the particular individual.6

For example, consider the situation where a public corporation, Pubco, is given a right to acquire the shares of a CCPC, Target. As a consequence of the application of special rules in the Act,7 the signing of a legally binding agreement of purchase and sale prior to the date of closing that provides the public corporation with the right to acquire shares of Target can trigger Target’s change in status prior to the closing of the transaction. Therefore, at this point, Target will lose its CCPC status,8 but will become a substantive CCPC. Once the right to acquire the shares is exercised, Target will become a corporation controlled by a public corporation and will cease to be a private corporation. Once this occurs, Target will no longer be a substantive CCPC and will be treated as a genuine non-CCPC.9

The proposed legislation also includes anti-avoidance provisions for taxpayers trying to circumvent the substantive CCPC classification.10

Passive income earned by a corporation that is a substantive CCPC at any time11 in a taxation year will be subject to the refundable portion of Part I tax in the same fashion as would a CCPC. The proposed legislation thereby removes the incentive for a corporation to artificially lose its CCPC status to benefit from a tax deferral on its investment income.

As there is no purpose test for the application of the new substantive CCPC definition, the new rules will have broad application, and as a result will impact legitimate third-party transactions. In certain transactions, there would be a gap in time between signing and closing of a purchase and sale agreement for a variety of business reasons.

Where the purchaser was a nonresident or a public corporation, as discussed above, the target entity would cease to be a CCPC on signing of the agreement. In such a scenario, the target entity may have been able to use paragraph 111(4)(e) of the Act12 to realize a gain on its capital property that would no longer be subject to the refundable portion of Part I tax.13 The tax attributes generated from the gain (i.e., the capital dividend account and safe income) would then be available to increase the cost base of the shares of the target entity.

There are some instances where paragraph 111(4)(e) of the Act may still be used — for example, where the target entity has a loss balance that may otherwise be restricted in its usage following a loss restriction event (i.e., an acquisition of control).14 The target entity could designate a capital property to trigger a capital gain prior to the loss restriction event occurring. To the extent the loss balance covers the amount of the gain, it can be applied against the gain, such that no taxes, including the refundable portion of Part I tax, would be owing. As a result of the designation, the target entity would have an increased tax cost in the asset(s) on which the designation is made.

For other purposes of the Act, substantive CCPCs are considered non-CCPCs. For example, the low-rate income pool (LRIP) regime will apply to substantive CCPCs, such that passive income earned would be added to the corporation’s LRIP.15 Similar to a non-CCPC, taxable dividends paid by a substantive CCPC would first need to be in the form of non-eligible dividends to the extent of the LRIP balance prior to paying eligible dividends. As well, the tax period of a substantive CCPC would become statute barred after four years rather than the three-year statute-barred window that would apply to CCPCs.


The proposed amendments may have significant implications on existing CCPCs as well as on corporations that have previously migrated to a foreign jurisdiction. For corporations that have previously migrated to a foreign jurisdiction, consideration should be given as to whether this structure should remain in place. For additional information on these proposals and their potential impacts, consult your EY tax advisor.

  • Show article references# 
    1. Interested parties were invited to provide comments on the draft legislative proposals by September 30, 2022. As such, the proposals described in this article may undergo further amendments before they are tabled in a bill. For additional information on the proposals, refer to EY Tax Alert 2022 Issue No. 37, Finance releases draft legislation for remaining 2022 budget measures.
    2. Subsection 125(7) of the Act.
    3. Section 123.3 of the Act.
    4. An amount totalling 30.67% of the investment income is added to the CCPC’s non-eligible refundable dividend tax on hand account. The additional refundable tax, as well as a portion of the regular Part I tax paid on the investment income, is refundable to the CCPC at a rate of 38.33% of taxable dividends (other than eligible dividends) paid in the year.
    5. Broadly speaking, NERDTOH generally includes refundable taxes paid by a CCPC under Part I of the Act on investment income, as well as Part IV tax paid for the taxation year less Part IV tax added to the private corporation’s ERDTOH account. ERDTOH is typically made up of refundable taxes paid under Part IV of the Act on eligible portfolio dividends received from non-connected corporations and Part IV tax paid by a private corporation on eligible or non-eligible intercorporate dividends received from connected corporations to the extent such dividends result in the paying corporation receiving a dividend refund from its own ERDTOH account. For more information on these rules, see “Federal budget proposes revised refundable tax regime for passive investment income” in the June 2018 issue of Tax Matters@EY.
    6. Definition of “substantive CCPC” in subsection 248(1) of the Act, as proposed in the August 9, 2022 draft legislation.
    7. Paragraph 251(5)(b) of the Act.
    8. Pursuant to subsection 249(3.1) of the Act, there will be a deemed year-end immediately before the change in status.
    9. Explanatory notes to the August 9, 2022 draft legislative proposals.
    10. Proposed subsection 248(42) of the Act.
    11. This is different than the definition of a CCPC, where a corporation is required to be a CCPC throughout an entire taxation year for certain provisions to apply.
    12. Paragraph 111(4)(e) of the Act allows certain taxpayers to use capital losses that would otherwise expire on a loss restriction event, such as an acquisition of control. A corporation may designate proceeds of disposition to trigger a capital gain on capital property that is eligible and owned immediately prior to the loss restriction event occurring. The designated proceeds of disposition must be an amount between the property’s adjusted cost base and fair market value. The property is then deemed to be reacquired at a cost equal to the elected proceeds of the disposition amount.
    13. The corporation would no longer be subject to the refundable portion of Part I tax as it was not a CCPC throughout the taxation year in which the taxation year end was triggered (under subsection 249(4) of the Act) by the loss restriction event (i.e., the taxation year beginning after the status change and ending immediately before the loss restriction event).
    14. A loss restriction event creates a barrier across which the ordinary carryforward or carryback of losses and other tax deductions is restricted. Generally speaking, non-capital losses carried forward can be deducted only if the business that the non-capital losses relate to is carried on with a reasonable expectation of profit throughout the taxation year in which the non-capital losses are sought to be used. In addition, generally, non-capital losses carried forward can be deducted only to the extent of income from the same or similar business. Net capital losses expire on a loss restriction event; thus, these losses cannot be carried forward or back following an acquisition of control.
    15. A corporation’s LRIP balance typically consists of income that has benefited from preferential tax rates. A non-CCPC can typically pay eligible dividends so long as it does not have a balance in its LRIP. If there’s a balance in its LRIP, non-eligible dividends would have to first be paid to clear this balance. An eligible dividend is taxed in the hands of the end individual shareholders at a lower personal tax rate than a non-eligible dividend. For further details on the combined federal and provincial/territorial income tax rates applicable to individuals, refer to EY’s Canadian personal tax calculator and personal tax rates cards.


(Chapter breaker)

Chapter 3

Tipping point: FCA finds that EI and CPP were due on restaurant tips collected electronically

Ristorante a Mano Limited v MNR, 2022 FCA 151

Gael Melville, Vancouver, and Winnie Szeto, Toronto

This case concerned a restaurant and its system for dealing with tips paid electronically by its customers. The CRA assessed the restaurant to treat the tips as giving rise to contributions or premiums under the Canada Pension Plan (CPP) and Employment Insurance (EI), respectively. Both the Tax Court of Canada (TCC) and Federal Court of Appeal (FCA) found that electronic tips were effectively income from the server’s employment and paid by the employer, and thus gave rise to CPP contributions and EI premiums.

Relevant statutory provisions

CPP and EI are contributory social security programs jointly administered by the CRA and Employment and Social Development Canada. Employers must deduct employee contributions and premiums from employees’ pay and remit them to the CRA, in addition to making employer contributions.

Under the CPP, an employer must make contributions for a year in which remuneration in respect of pensionable employment is paid to the employee.1 Similarly, under EI, an employer’s premium is calculated according to the employee’s insurable earnings, which in turn is based on amounts paid to the employee in respect of insurable employment.2

Background and facts

The employer maintained a somewhat complex system for administering its servers’ tips. The system took into account the fact that some customers settled their restaurant bills wholly in cash while others paid electronically. Servers retained all cash amounts.

At the end of each shift, each server prepared a cash-out sheet showing the total electronic tips left through credit and debit card payments, as well as the cash amounts. The employer would retain a small percentage to redistribute to kitchen staff and to cover processing charges. The remaining amount of electronic tips, minus the cash, was referred to as the “due back” and was paid to the particular server by electronic transfer the following day. The servers would also make further cash “tip out” payments to support staff and managers at the end of their shifts.

The appeal centred solely on the treatment of the due-back amounts paid to servers and not on the cash tips or the tip-out payments.

The employer did not include the electronic tips in computing pensionable salary and wages for CPP purposes or insurable earnings for EI purposes for 2015, 2016 or 2017. The CRA assessed the employer on the basis that the due-backs were amounts the employer paid to the servers in respect of their employment. Therefore, the due-backs were contributory salary and wages for CPP purposes and insurable earnings for EI purposes.

The employer appealed to the TCC.

TCC judgment

The TCC reviewed the relevant case law and determined that the test to be applied was whether the employer had paid the tips to the servers.3 The term “paid” was to be construed liberally. Since the tips had been paid to the restaurant via electronic means, they had not previously been paid to, or been in the possession of, the servers. As a result, the due-backs constituted contributory salary and wages of an employee paid by the employer for CPP purposes and insurable earnings for EI purposes.

The employer appealed to the FCA.

FCA analysis

The two main questions the employer raised in its appeal were whether the due-backs were paid in respect of a server’s employment and whether the due-backs were paid by the employer. For the employer to succeed in its appeal, at least one of these questions would have to have been answered in the negative.

The employer argued that the due-backs were not paid in respect of a server’s employment because they simply represented the difference between the cash amounts and the electronic tips owed to servers. The due-backs were not calculated by reference to hours worked or sales the server made, but instead their amount depended simply on whether customers settled their bills by cash or by electronic means.

However, the FCA found that but for the servers’ employment with the employer, they would not have received the due-backs. The legislation does not require an amount to be calculated in a particular way — for example, by reference to hours worked — for it to be “in respect of” employment. The only requirement is that the amount was received in relation to, or in connection, with employment and, in the FCA’s view, the due-backs met that description.

The second question the employer raised turned on whether the due-backs were actually paid by the employer or whether, as the employer claimed, the employer was simply converting the electronic tips into cash and paying it to the employee. The FCA reviewed the relevant case law, focusing on the leading cases of Canadian Pacific and Lake City Casinos.4 In Canadian Pacific, the Supreme Court of Canada stated that the word “paid” can mean mere distribution by the employer. Similarly, in Lake City, the FCA stated that the word “paid” should be interpreted liberally. Specifically, the FCA stated that for the CRA to succeed, it had to demonstrate that the tips had come into the employer’s possession before being remitted to the employees.

The employer argued that there were two distinct groups of previous cases, which the employer referred to as the distribution cases and the conversion cases. In the distribution cases, the employers received the tips and then determined how they would be distributed among the employees. In contrast, the employers in the conversion cases did not take possession of any cash tips and merely exchanged any electronic tips for cash that was then paid over to the employee. While the employers in the distribution cases were liable to pay CPP contributions and EI premiums on the tips, those in the conversion cases were not. The employer argued that its case was a conversion case and so it was not required to pay CPP contributions or EI premiums in respect of the due-backs.

In its analysis, the FCA rejected the distinctions the employer drew between its case and the distribution cases. The employer had emphasized in its arguments that in its case, for example, tips were not pooled and the employer did not come into possession of cash tips.

However, the FCA reasoned that the distribution cases were not decided on the basis of those factors. According to the FCA, the TCC had correctly identified the relevant test as being whether the employer paid the tips to the server, with the word “paid” being liberally construed.

The FCA also found no error in the TCC’s application of the relevant test to the facts in the case. As indicated above, the TCC concluded that the employer paid the tips to the servers because the tips came into the employer’s possession first and were then distributed to the servers — that is, the tips were not previously in the servers’ possession.

Lessons learned

An increasing number of payments are made using electronic means rather than by cash, so employers need to be aware of the ramifications of any policy they put in place for administering tips among staff. In Ristorante a Mano, the FCA clearly stated that the word “paid” must be interpreted liberally, and in the employer’s case this resulted in the due-backs giving rise to CPP contributions and EI premiums. The FCA seemed unwilling to recognize the factors the employer considered to be relevant in distinguishing between distribution and conversion cases.

It remains to be seen whether the broad interpretation given to the word paid could cover situations where a tip is paid electronically to the employer and the full amount is returned to the server.

  • Show article references# 
    1. Subsection 9(1) of the Canada Pension Plan.
    2. Sections 67 and 68 of the Employment Insurance Act and subsection 2(1) of the Insurable Earnings and Collection of Premiums Regulations.
    3. Ristorante a Mano Limited v MNR, 2021 TCC 22.
    4. Canadian Pacific Ltd. v. Canada, [1986] 1 SCR 678 and Lake City Casinos Limited v. Minister of National Revenue, 2006 TCC 225 (aff’d by 2007 FCA 100).


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(Chapter breaker)

Chapter 4

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