The QSBC and Capital Gains Exemption problem

This is a paper that is focusing on The QSBC and Capital Gains Exemption problem. The paper also provides several problems to address in the assignment paper.

The QSBC and Capital Gains Exemption problem

ASSIGNMENT 2 – Chapter 13
Shareholder-Manager Remuneration and Tax Planning for the Owner-Manager
3 Problems x 10 points = 30 Points Total.

Assignment

Problem 1 – Tax On Split Income (TOSI) 10 Points
LauCo carries on an active business supplying parts to an auto parts manufacturer.  The sole shareholder of LauCo is Holdco.  The shareholders of Holdco are Parent A, Parent B, Child 1 and also Child 2.  Parent A, Parent B, Child 1 and Child 2 each owns a separate class of shares of Holdco.  Parent A is the founder of Opco’s business and is the controlling shareholder of Holdco.

·         Child 1 is age 23 and is a full-time graduate student at a university. Also, is away from home for most of the year either attending classes during the school term or working part-time as a research assistant during the summer.  Child 1 has never performed any functions for Holdco or Opco and has not made any other contribution to Holdco or Opco and its business.

·         Child 2 is age 16 and is a high school student.
·  LauCo pays a dividend to Holdco. Holdco declares and also distributes a dividend on the class of shares held by Child 1 and Child 2.
Please write an email to your tax client describing the implications of the 2018 TOSI rules and Kiddie Tax on the dividend income received by Child 1 and Child 2. Although income splitting is greatly restricted as a result of the expanded TOSI rules, there are some exceptions which still allow individuals to benefit from income splitting with family members. In your email, be sure to discuss the TOSI exclusions pertaining to “business”, “shares”, and also “ labour or reasonable return.”

The QSBC and Capital Gains Exemption problem

Problem 2: QSBC and Capital Gains Exemption – 10 Points
Part A: Firstly, describe the three tests to qualify as QSBC share status and identify the tax implications and tax planning considerations of qualifying for QSBC (consider passive income limitations).
Part B: Secondly, do problem 13-2. (“ Karen would like to know whether, if she sold her shares of Cyber Corp, she would be able to claim the capital gains exemption on the sale. If they do not qualify for the CGE then she wants to know if there is anything that can be done to qualify?”)

Problem 3: Tax Planning versus Tax Evasion: General Anti Avoidance Rule ITA 245.
10 Points
Canadian law has a long-standing and firmly held principle upholding an individual’s right to tax planning. This is known as the Westminster Principle. This principle states that a taxpayer is to arrange his or her affairs in such a way that results in the lowest amount of taxes payable.

The anti-avoidance provisions in the Income Tax Act are to prevent taxpayers from structuring a transaction solely to achieve a tax benefit. The GAAR can invalidate a transaction if the Court decides the transaction or a series of transaction were made with the sole purpose of achieving a tax benefit. Consequently, the application of GAAR by Canadian judges has led some taxpayers to question the extent to which tax minimization is possible. The Supreme Court of Canada has set out a three-part test to determine whether or not to apply the GAAR:

1.      Firstly, whether there is a tax benefit arising from a transaction;
2.      Secondly, whether the transaction is an avoidance transaction “arrange primarily for bona fide purposes other than to obtain the tax benefit”; and
3.      Thirdly, whether the avoidance transaction is abusive.

Required:

Please find a recent example of a Canadian GAAR ruling. Summarize the case using the definitions provided under ITA section 245. Also, the GAAR application logic in your textbook, and/or other reputable sources. (e.g., tax court rulings, common law, business ethics theories etc…). Additionally, please state your position in support or against the ruling with supporting reasoning. Be sure to reference all relevant citations.

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