Section 7 – Investments
Specific tax measures exist for some investment programs, which are generally designed to encourage investments in certain sectors but can also have impacts on AMT calculation (see point 12 of this section).
When making an investment decision, take account of future potential profitability, immediate tax savings obtained and inherent investment risk.
As with investments in corporate shares, an investor’s liability as a limited partner in a limited partnership is restricted to the amount invested. The taxpayer’s share of income and losses is included in income in the same manner as for other partnerships. However, the “amount at risk” rules restrict the deductions a limited partner may claim.
Taxpayers who purchase shares of labour-sponsored venture capital corporations (e.g. FSFTQ and Fondaction) benefit from the following federal and provincial tax credits:
|Labour-sponsored venture capital corporations7|
|Non-refundable tax credit||15%||15% or 20%8||20%|
|Annual maximum investments eligible for the credit||$5,000||$5,000||$10,000|
|Carryforward of unused credit||No||Yes||No|
Certain conditions apply to be eligible for the credit. In Quebec, investors must be less than 65 years old. Furthermore, shares are subject to a minimal holding period.
The shares issued may be transferred to an RRSP, which provides a 100% deduction in calculating income where all other conditions relating to this deduction are met (see Section VIII).
For Quebec purposes, interest incurred to acquire shares of the FSFTQ and Fondaction is not deductible because of the policy of these companies not to pay any dividends, which means that the shares are not acquired to earn income from a business or property. While the CRA has not yet indicated its position on this matter, it will most likely adopt a similar policy for the same reasons.
7 No credit is offered in Ontario.
8 The credit base rate is 15%. This rate is increased to 20% for shares issued by Fondaction before June 1, 2021.
Capital régional et coopératif Desjardins is a corporation whose mission is to raise venture capital for resource regions and the cooperative sector. To encourage individuals to purchase shares of this corporation, Quebec offers the following non-refundable tax credit:
|Capital régional et coopératif Desjardins|
|Tax credit||35%9 non-refundable|
|Maximum annual credit||$1,750 (max. investment of $5,000)|
|Credit carryforward||Credit carryforward to another year not permitted|
Since March 1, 2018, a new class of shares has been created and a non-refundable tax credit is available for the conversion of current shares into shares of the new class. The conversion period is from March 1, 2018 to February 28, 2021 and only investors who have owned the shares for at least seven years can claim this tax credit equivalent to 10% of the value of the converted shares, up to a maximum of $15,000 (maximum credit of $1,500).
These tax credits may be recovered by means of a special income tax if the shares are held for less than seven years. Capital régional et coopératif Desjardins shares are not an eligible investment for RRSP or RRIF purposes. The credit does not reduce the tax cost when calculating the capital gain on a disposition of such shares.
9 For shares acquired since March 1, 2018 (40% before that date).
Members and employees of a cooperative who purchase units in labour cooperatives and cooperatives whose main activities are production, processing or farming, as well as cooperatives that supply goods and services that make it possible for their customers to carry on a business are entitled to a deduction from their taxable income.
The following table summarizes the main features of this Quebec tax deduction:
|Cooperative investment plan|
|Deduction rate||125% of cost|
|Maximum deduction||30% of total income, five-years carryover|
|Minimum holding period||Five years, subject to certain exceptions (e.g. death)|
Cooperative investment plan titles are an eligible investment for RRSP purposes. If a taxpayer makes a contribution to a self-administered RRSP and the plan acquires, as the initial purchaser, eligible cooperative investment plan securities, it is the plan annuitant who is deemed to have made the investment and is therefore entitled to the aforementioned deduction.
A flow-through share is a share of a corporation that operates in the resource sector (oil, gas, mining) and that has renounced, in favour of investors, certain tax deductions resulting from certain of their activities.
Flow-through shares give a deduction for 100% of the cost thereof, provided they are used solely to finance high-risk expenditures such as exploration and development.
The tax cost is nil, regardless of the price paid when they were acquired. Therefore, subject to the specific rule applicable to donations (see Section II), dispositions give rise to a capital gain taxable at 50% even if the proceeds of disposition are less than the original purchase price.
Individuals who invest in flow-through shares can claim a non-refundable tax credit on certain mining exploration expenses. This temporary credit applies to flow-through share agreements entered into before April 1, 2019.
In Quebec, flow-through shares provide an additional deduction for exploration expenses incurred in the province. The capital gain realized on the sale of shares may be exempt up to the amount of the share purchase price, provided all of the other conditions are met.
If a portion of the amount invested is used to cover issue costs, such as underwriters’ commissions, legal and accounting fees, and printing costs, such amounts are deductible by the investor to the extent the expenses are allocated to him/her.
Ontario grants a refundable tax credit for costs incurred in Ontario.
The following table summarizes the principal federal, Quebec and Ontario measures for flow-through shares:
|Tax credit||15% non-refundable||5% refundable|
10 Maximum of 12% of issue proceeds.
In New Brunswick, an individual who is 19 years of age or older who invests in an eligible small business in the province may be entitled to a non-refundable tax credit of 50%, up to $125,000 per year for annual investments up to $250,000 per investor.11 Any unused credit may be carried forward seven or back three years. Investors must hold their shares for four years following the purchase; otherwise, the tax credit must be refunded.
11 For additional information, refer to http://www2.gnb.ca/content/gnb/en/departments/finance/taxes/credit.html.
Mutual funds are funds which are managed by professionals whereby a large number of investors pool their funds in a type of investment or in a particular sector. If the fund is a trust, investors buy units. If it is a corporation, they purchase shares.
Income from the fund is paid annually to investors or reinvested on their behalf. In the case of trusts, this income, which is taxable to the holders, generally retains its nature, whether it constitutes interest, dividends or net capital gains. If the fund is incorporated, distributions will be in the form of dividends. A new tax cost must be calculated each time other units are purchased or distributions are reinvested. When an investor disposes of units, he/she has to recognize a capital gain or loss.
Most mutual funds allocate their income annually to registered owners around December 31 of the particular year. Taxpayers who acquire their units just before the allocation is made will therefore generally have to pay income tax on that income even if it was earned by the fund before they acquired their units.
Example: On January 2, 2018, Mr. George and Mr. Lake each acquired an interest in ABC Fund for a unit cost of $1,000. During 2018, ABC Fund earned $300 per unit that will be distributed at the end of the year. On December 8, 2018, Mr. George sells his ABC Fund unit for $1,100. Mr. George will not have to include anything in income in respect of the Fund’s distribution because he sold his interest before the income was allocated. However, he will have to report a capital gain of $100 in 2018 on the sale of his unit. Mr. Lake sold his interest on January 15, 2019 when the FMV of his unit was $800. He will have to include the $300 distribution in income in his 2018 tax return. In 2019, he will have to report a capital loss of $200 on the sale of his interest.
It is generally preferable to purchase mutual fund units after the end of the year and to sell such units before the end of the year in order to limit taxable distributions.
Segregated funds are annuity contracts that reflect the value of the mutual fund from which they originate. There is often a life insurance contract associated with the fund guaranteeing the capital after a certain number of years (e.g. ten years). Like mutual funds, income and gains attributed to the beneficiary retain their nature. Unlike mutual funds, however, segregated funds can attribute capital losses to the holder.
Distributions from an income trust (other than a real estate investment trust) or from a publicly-traded partnership are generally taxable in the same manner as eligible dividends paid by Canadian corporations (see point 5 of this section). Distributions paid by a real estate investment trust generally benefit from a different tax treatment since a part of these distributions could be non-taxable capital that reduces the tax cost of shares held by the investor.
This document has been updated on August 31st, 2018 and reflects the state of the Law, including draft amendments, at that date.