This document has been updated on October 24th, 2017 and reflects the state of the Law, including draft amendments, at that date.


Investment Programs

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.

Limited Partnerships

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.

Labour-Sponsored Venture Capital Corporations

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 corporations6
Federal Quebec New Brunswick
Non-refundable tax credit 15% 15% or 20%7 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 (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.


6 No credit is offered in Ontario.
7 The credit base rate is 15%. This rate is increased to 20% for shares issued by Fondaction before June 1, 2018.

Capital régional et coopératif Desjardins

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 40% non-refundable
Maximum annual credit $2,000 (max. investment of $5,000)
Credit carryforward Credit carryforward to another year not permitted

The tax credit 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.

 

Cooperative Investment Plan

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-year 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.

Flow-Through Shares

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.

Federal

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, 2018.

Quebec

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

Ontario grants a refundable tax credit for costs incurred in Ontario.

Summary

The following table summarizes the principal federal, Quebec and Ontario measures for flow-through shares:

Federal Quebec Ontario
Basic deduction
  • Exploration expenses in Canada
100% 100% 100%
Additional deductions
  • Mining exploration expenses incurred in Quebec
10%
  • Surface exploration expenses or oil and gas exploration expenses incurred in Quebec
10%
  • Issuance expenses
100%8
Tax credit 15% non-refundable 5% refundable

8 Maximum of 12% of issue proceeds.

Small Business Investor Tax Credit

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.9 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.


9 For additional information, refer to http://www2.gnb.ca/content/gnb/en/departments/finance/taxes/credit.html.

Mutual Funds

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, 2017, Mr. George and Mr. Lake each acquired an interest in ABC Fund for a unit cost of $1,000. During 2017, ABC Fund earned $300 per unit that will be distributed at the end of the year. On December 8, 2017, 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 2017 on the sale of his unit. Mr. Lake sold his interest on January 15, 2018 when the FMV of his unit was $800. He will have to include the $300 distribution in income in his 2017 tax return. In 2018, 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

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.

Income Trust and Publicly-Traded Partnership

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.