Tax Planning for the Non-Specialized Advisor November 2020 Unlocking Liquidity for Losses of Corporate Capital Number 80 – Planning to Maximize the Capital Dividend Account – Part II
February 03, 2021
Minden Gross LLP
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Michael Goldberg, BComm, LLB, TEP, FEA, Partner, Steueranwalt, Minden Gross LLP, limit the possibility to MERITAS® law firms worldwide and founder of “Tax Talk with Michael Goldberg”, a quarterly conference call by Pay Future CDA about current, relevant and real-world situations for professional dividend advisors serving high net worth clients.
I recently posted a quick note on LinkedIn1 with a list of some recession planning CDA tools and strategies that consultants may want to consider to help their clients with dividends – during these troubled times. In that brief note, I also mentioned that I was hoping to write some of these ideas over Part III. This three-part series2 (the “Series”) is part of my tax effort ……………… 3 I have good intentions.
Specifically, the series is designed to encourage consultants to strategically plan some best corporate loss transactions so their clients can maximize the tax-free benefits of Practices. 3 the Capital Dividend Account (“CDA”). 3 As the series progresses, the discussion will move from a review of the most basic principles to more advanced planning through the search for concepts of capital. Part I of the series looked at profit and loss taxation in its most basic form, and also achieved and / or reviewed certain key aspects of the CDA relevant to the theme of the series, including capital losses …… 3 What I consider strategic CDA planning denotes. This Part II of the series will flesh out a number of other relevant CDA matters and introduce what I call the 4C strategy. COVID-19 Update Finally, Part III of the series reviews some strategies to improve CDA 4 strategic planning and some precautionary measures.
A negative NCG pool cannot limit the CDA dividends
Depending on when, a company’s net capital gains pool (“NCG Pool”) may be in negative balance. While the NCG pool is in negative balance, it is not possible to pay CDA dividends from the CDA from the NCG pool.
However, a negative NCG pool balance does not necessarily limit a company’s ability to declare CDA dividends. This is because each CDA pool is calculated and tracked separately from one another. When the CDA pools are aggregated, any particular CDA pool is treated as a negative balance with a zero balance
Because this concept is complex, some examples will illustrate it with a few changes for Mr. Wise and Holdco using the facts discussed in Part I of the series. Assume that Holdco and the investment advisor failed to consult you, its tax advisor, and liquidated all securities at a loss, realizing a capital loss of $ 1,000,000. Holdco’s NCG pool would be calculated as 50% of realized capital losses or a negative $ 500,000.
In addition to the original facts, assume that a Holdco life insurance policy worth $ 900,000 has matured and the total life insurance revenue of $ 900,000 can be added to the insurance pool. In this case, the total of the company’s CDA pools is $ 900,000 because the NCG pool balance, which would otherwise be negative at $ 500,000, is considered zero. As a result, based on Holdco’s facts, Holdco would have an available CDA balance from which to pay CDA dividends of $ 900,000.
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1 https://www.linkedin.com/posts/ magoldberg_tax-planning-in-recession-times-michael-activity-6685984129349234688-sivQ
2 Unless otherwise stated, the terms defined in this article have the meanings given in Part I of the series.
3 I often refer to the process of taking tax lemons (capital losses, for example) and turning them into something positive (such as maximizing the benefits of the CDA) to make tax soda.
4 Pursuant to Section 257 of the Income Tax Act (Canada) RSC 1985 Ch. 1 (5th Supp.), As amended (the “Act”), negative calculations will be treated as zero unless otherwise expressly stated. Unless otherwise stated, all legal references are to the law
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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