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The Court of Quebec has recently delivered a significant judgment in the case of Neko Trade v RQ.
The decision provides important insights into Quebec’s income tax legislation.
The court ruled that a loan from a corporation to its owner-manager for home refinancing did not constitute a shareholder benefit.
Instead, it fell under Quebec’s equivalent of a provision known as the Employee Dwelling Exception.
Additionally, the court criticized Revenu Québec’s (RQ) aggressive decision to reassess the owner-manager on a statute-barred year concerning this loan.
The Employee Dwelling Exception can reduce a seller’s capital gains tax rate from 20% to 10% for the first £1 million of lifetime qualifying capital gains, offering potential tax savings up to £100,000.
Historically, this provision has been risky for shareholder-employees due to the ambiguity in the criteria, which require the loan to be granted to the shareholder-employee as an employee, not as a shareholder, and that bona fide arrangements be made for repayment within a reasonable time.
Neko Trade provides valuable guidance for shareholder-employees considering this option.
The Canada Revenue Agency (CRA) and RQ often challenge any transfer of value from a corporation to a shareholder that is not reported as salary, dividend, or another taxable transaction.
The tax code prescribes tax consequences for taxpayers receiving such “shareholder benefits,” which include loans from a corporation to an individual shareholder. However, it also creates several exceptions, including the Employee Dwelling Exception.
This exception applies to loans given to a shareholder-employee (or their spouse) to acquire a dwelling for their habitation, provided specific conditions are met.
Neko Trade involved a corporation (Neko) established in 2009 by Dimitry Korenblit, its sole employee and shareholder.
During an audit of Neko’s 2015-2017 taxation years, RQ reviewed a loan made by Neko to Mr Korenblit in 2011 to refinance his home.
Mr Korenblit and his spouse initially financed their family residence with a bank mortgage and a line of credit.
In 2011, following advice from an accountant, Mr Korenblit arranged a loan from Neko to replace this temporary financing.
The loan was disbursed in three tranches, and all payments were duly recorded over the years.
Mr Korenblit transferred the residence title to his wife to mitigate financial risks related to his business, and they took out another bank loan secured by the residence’s value.
RQ argued that the Loan was a “smoke screen” to conceal a shareholder benefit and that a “simple employee” would not have obtained such a loan.
They cited several factors, including deficiencies in the loan documentation and the lack of a hypothec on the residence.
The Court concluded that the Loan qualified for the Employee Dwelling Exception, citing eight key factors:
The Court emphasized that the Loan was not a “smoke screen” and that Mr Korenblit was transparent in his tax returns.
RQ’s argument that the Employee Dwelling Exception cannot apply to refinancing an already-acquired residence was rejected.
The Court found that RQ’s published position allowed for such refinancing if agreed upon at the time of the original acquisition.
The Court also addressed the short possession period of the residence, noting that the Employee Dwelling Exception does not prescribe a minimum ownership period and that the transfer of title did not negate the Exception’s applicability.
Neko Trade offers encouragement to taxpayers in disputes over shareholder benefits, highlighting the importance of strict compliance with loan terms, specifying market rates and terms, and maintaining accurate corporate records.
The decision contrasts with the Tax Court of Canada’s 2013 decision in Mast, emphasising the need for detailed and transparent handling of shareholder-employee loans.
If you have any queries about this article on Neko Trade v RQ, or Canadian tax matters in general, then please get in touch.
The Cyprus Tax Department has announced significant amendments to the tax treatment of health care plan premiums, effective from May 30, 2024.
These changes impact premiums paid by individuals for their own coverage and by employers for their employees, detailing deductions under Articles 9(1)(β) and 14(5) of the Cyprus Income Tax Law No. 118(I)/2002.
For health care plans offered by insurance companies or employers’ funds, the tax deduction will be granted as follows:
Individuals can receive a tax deduction for insurance premiums up to 1.5% or 2% (depending on the tax year) of their income from the following sources:
If the employer and employee each contribute 50% to cover the employee’s health plan, both can claim a deduction for the amount they have paid, subject to the previously mentioned restrictions.
The employer can claim a deduction for the full amount they contribute to the employee’s health plan, within the set limits.
The recent amendments to the tax treatment of health care plan premiums by the Cyprus Tax Department affect both individuals and employers.
These changes provide clear guidelines for deductions and discounts, ensuring equitable treatment and compliance for health care plans offered by insurance companies or employers’ funds.
If you have any queries about Cyprus Health Care Premium Tax Amendments, or tax matters in Cyprus more generally, then please get in touch.