Category: Domestic Tax

Executive summary

Canadian taxpayers who have already filed returns based on the proposed increase to the Capital Gains Inclusion Rate (CGIR) should be able to amend their returns after the federal government delayed the increase until 2026. The ongoing political uncertainty in the country means Canadians considering dispositions of capital property in 2026 and beyond should account for the possibility of no increase.

The federal government delayed its proposed increase to the Capital Gains Inclusion Rate (CGIR) to on or after Jan. 1, 2026, after initially applying to dispositions occurring on or after June 25, 2024.

The Canada Revenue Agency (CRA) has announced that:

• It will grant relief from late-filing penalties and interest to impacted individuals and trusts who file by June 2, 2025, and May 1, 2025, respectively.
• Corporations who filed using the increased CGIR will have reassessments issued to adjust the inclusion rate.

Taxpayers can also request amendments to their assessment. All taxpayers should track capital gains and losses according to the new Jan. 1, 2026, effective date to ease compliance.

The CGIR determines the portion of income from the sale of capital property—including shares, land, buildings, and equipment—that is included in a taxpayer’s income.

Initially proposed in last year’s federal budget, the CGIR was set to rise from 50% to 66.67%. Individuals and some types of trusts would continue to be eligible for the one-half inclusion rate on their first $250,000 of net capital gains in a year.

Related amendments

The increased CGIR was accompanied by several related or consequential amendments, such as an increase in the withholding tax rate for dispositions of taxable Canadian property by non-residents.

While the Department of Finance has not yet clarified how most proposed amendments will be impacted, it did state the increase of the Lifetime Capital Gains Exemption from $1,016,836 to $1.25 million will still be effective June 25, 2024, and the Canadian Entrepreneurs’ Incentive will still be introduced as of the 2025 taxation year. Neither of these amendments are currently law.

Political uncertainty complicates increase’s future

Canada’s ongoing political uncertainty in the wake of Trudeau’s resignation left proposed legislation like the increased CGIR unresolved.

A new Liberal leader, who would become prime minister, is expected to be announced on March 9. The future of the increase is not certain under a new Liberal prime minister—and, should an early election be triggered and a new party takes over, a new administration may have its own vision for the CGIR.

In the interim, those considering dispositions of capital property which will occur in 2026 onward should account for the possibility of no increased CGIR.

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This article was written by Cassandra Knapman and originally appeared on 2025-01-31. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2025/canada-delays-capital-gains-tax-increase-to-2026.html

RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

Executive summary:

Recent revisions introduced in the Federal Budget 2024, particularly the increase in the capital gains inclusion rate (CGIR) from 50% to 66.67%, have introduced new changes to taxpayers utilizing employee stock option plans (ESOP). These changes impact employees by introducing a new deduction framework under paragraphs 110(1)(d.4) and section 38.01, creating potential for significant tax benefits or, in some cases, tax pitfalls. Detailed scenarios below illustrate how the new rules interact to affect the taxation of ESOPs and capital gains. Despite the increased complexity of the revised framework, taxpayers can take advantage of these changes through proactive and strategic tax planning.

Employee stock option plans (ESOPs) are widely regarded as an effective tool for remunerating and incentivizing employees, particularly in fostering long-term alignment with corporate goals. From a tax perspective, ESOPs have historically provided distinct advantages for employees, including the ability to claim deductions on taxable benefits arising from stock option exercises and, in some cases, to defer tax liabilities to a future date.

However, recent changes introduced in the Federal Budget 2024, particularly the increase in the capital gains inclusion rate (CGIR) from 50% to 66.67%, have introduced new complexities and challenges for taxpayers utilizing ESOPs. Of particular concern is the overlap between the deferral of stock option benefits for Canadian-controlled private corporation (CCPC) ESOPs and the realization of capital gains in the same year, which may make it difficult to optimally utilize the $250,000 annual deduction limit, turning what is often seen as a beneficial rule into an unexpected trap. These amendments alter the tax landscape for employees and introduce new considerations for tax planning. For individual taxpayers, the decision to delay certain dispositions or exercises can create possible tax savings or, in some cases, tax pitfalls.

It is important to note, however, that Prime Minister Justin Trudeau announced his resignation, pending selection of a new Liberal Party leader, and requested that Parliament be prorogued until March 24. As a result, it is possible that the proposed amendments discussed below may not be passed.

Taxation of ESOPs: Existing rules and new regime

Under the current rules, when an employee exercises a stock option, the difference between the stock’s Fair Market Value (FMV) and its exercise price (stock option benefit) is included in the employee’s income as a taxable benefit. For employees of CCPCs, taxation of the stock option benefit is deferred until the shares are ultimately disposed of or exchanged. This deferral provides an advantage by allowing employees to delay the income recognition and the associated tax liability.

Historically, the taxation of ESOPs in Canada mirrored the taxation of capital gains, with employees being eligible to claim a stock option deduction equal to 50% of the stock option benefit. This effectively reduced the net income inclusion of the stock option benefit to 50%.

Changes effective June 25, 2024

Effective June 25, 2024, the CGIR has increased from 50% to 66.67%. Additionally, the stock option benefit deduction under paragraphs 110(1)(d) to (d.3) has been reduced from 50% of the taxable benefit to 33.33%, aligning the net stock option benefit with the new CGIR. Individual taxpayers will be able to maintain the 50% CGIR on their first $250,000 of capital gains annually, which must be shared with any stock option benefits for the year. This provision provides an avenue for individual taxpayers to manage their taxable income more efficiently while still adhering to the revised rules.

Introduction of paragraph 110(1)(d.4)

To accommodate the $250,000 annual limit, paragraph 110(1)(d.4) has been proposed. This provision enables an additional deduction equal to 1/6^th of the stock option benefit up to $250,000, provided a deduction is claimed under any of paragraphs 110(1)(d) to (d.3). In effect, this allows taxpayers to claim a cumulative deduction equal to 50% on the first $250,000 of stock option benefit (33.33% under paragraphs 110(1)(d), (d.1), (d.2) or (d.3) and 1/6^th under paragraph 110(1)(d.4)). Additionally, new section 38.01 has been introduced, allowing for a deduction of 1/6^th of the capital gain for the first $250,000 capital gains annually. However, this deduction is ground down by six times the deduction taken under paragraph 110(1)(d.4). These new paragraphs collectively ensure that taxpayers can achieve a reduced CGIR of 50% for the first $250,000 of combined stock option benefits and capital gains.

Example

The following example models how these deductions interact.

A taxpayer has an ESOP with a public corporation that was issued out-of-the-money for 50,000 shares. The taxpayer has $200,000 of other capital gains realized on the disposition of marketable securities. Consider the following three scenarios (all exercises occur on or after June 25, 2024):

• Scenario I: The ESOP has an exercise price of $10. The taxpayer exercised the option while the FMV of the shares was $20. At the time of sale, the FMV of the shares was $25.
• Scenario II: The ESOP has an exercise price of $10. The taxpayer exercised the option while the FMV of the shares was $12. At the time of sale, the FMV of the shares was $18.
• Scenario III: The ESOP has an exercise price of $10. The taxpayer exercised the option while the FMV of the shares was $10.50. At the time of sale, the FMV of the shares was $11.

Particulars		Scenario I	Scenario II	Scenario III
Calculation of employment benefit
FMV on exercise	(A)	$ 20.00	$ 12.00	$ 10.50
Option price	(B)	$ 10.00	$ 10.00	$ 10.00
Stock option benefit per share	(C) = (A) – (B)	$ 10.00	$ 2.00	$ 0.50
No. of shares	(D)	50,000	50,000	50,000
Total option benefit	(E) = (C) x (D)	$ 500,000.00	$ 100,000.00	$ 25,000.00
Stock option deduction under 110(1)(d)(1)	(F) = (E) x 1/3	$ 166,666.67	$ 33,333.33	$ 8,333.33
Taxable employment benefit	(G) = (E) – (F)	$ 333,333.33	$ 66,666.67	$ 16,666.67
Calculation of taxable capital gains
Proceeds of Disposition	(H)	$ 25.00	$ 18.00	$ 11.00
FMV on exercise	(I)	$ 20.00	$ 12.00	$ 10.50
Capital gain per share	(J) = (H) – (I)	$ 5.00	$ 6.00	$ 0.50
No. of shares	(K)	50,000	50,000	50,000
Capital gain on ESOP shares	(L) = (J) x (K)	$ 250,000.00	$ 300,000.00	$ 25,000.00
Unrelated capital gains – assumed	(M)	$ 200,000.00	$ 200,000.00	$ 200,000.00
Total capital gains	(N) = (L) + (M)	$ 450,000.00	$ 500,000.00	$ 225,000.00
Total taxable capital gains	(O) = (N) x 2/3	$ 300,000.00	$ 333,333.33	$ 150,000.00
Calculation of new 110(1)(d.4) deduction
3 x deduction under 110(1)(d) or (d.1)	(P) = (F) x 3	$ 500,000.00	$ 100,000.00	$ 25,000.00
1.5 x Amount deducted under (d.01)	(Q)	$ 0	$ 0	$ 0
Lesser of $250,000 and difference of the above	(R) = Lower of 250k & (P) – (Q)	$ 250,000.00	$ 100,000.00	$ 25,000.00
110(1)(d.4) deduction	(S) = (R) x 1/6	$ 41,666.67	$ 16,666.67	$ 4,166.67
Calculation of CG reduction under 38.01
250,000 – 6 x 110(1)(d.4) deduction	(T) = $250,000 – ((S) x 6)	$ –	$ 150,000.00	$ 225,000.00
1.5 x taxable capital gains	(U) = (O) x 1.5	$ 450,000.00	$ 500,000.00	$ 225,000.00
38.01 deduction – 1/6 times the lesser of the above	(V) = 1/6 ( lower of (T) & (U))	$ –	$ 25,000.00	$ 37,500.00
Total net stock option income inclusion	(W) = (G) – (S)	$ 291,666.67	$ 50,000.00	$ 12,500.00
Total taxable capital gains	(X) = (O) – (V)	$ 300,000.00	$ 308,333.33	$ 112,500.00

Implications for CCPC ESOPs

Notably, the stock option benefit deferral for CCPC ESOPs under subsection 7(1.1) can inadvertently create difficulties in optimally utilizing the $250,000 annual limit. Since the deferral delays the income recognition of the stock option benefit to the year the individual disposes of the shares, both the stock option benefit and the associated capital gain are realized in the same year. This overlap necessitates careful planning, as the combined income inclusions may exceed the $250,000 threshold, reducing the effectiveness of the deductions under paragraph 110(1)(d.4) and section 38.01. In contrast, taxpayers holding shares outside a CCPC ESOP may have more flexibility in timing their stock option exercises and capital gains realizations.

Key takeaway

The introduction of a new deduction framework for ESOPs under the revised capital gains regime reflects an effort to balance the increased CGIR with targeted relief for individual taxpayers. While the changes introduce new complexities, they also present opportunities for strategic tax planning, particularly for taxpayers able to optimize their use of the $250,000 annual limit.

By understanding the nuances of paragraphs 110(1)(d.4) and section 38.01, and leveraging these provisions effectively, taxpayers can navigate the revised rules while minimizing their overall tax liability. As the tax landscape continues to evolve, proactive planning and adherence to best practices will be key to ensuring compliance and maximizing benefits under the new regime.

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This article was written by Chetna Thapar, Daniel Mahne and originally appeared on 2025-01-21. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2025/navigating-the-new-esops-deduction-under-the-revised-capital-gains-regime.html

RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

Executive summary

Simplify your tax filing process with the compiled key deadlines for middle-market taxpayers. This article is your solution for tracking important tax dates. Timely filing and payment can help you avoid delays in refunds, benefits, or credits, and can prevent late filing or payment penalties and interest.

With the approaching tax season, a taxpayer may have to file numerous returns and forms to ensure tax compliance. In addition, keeping track of the annual tax filing and payment deadlines is increasingly difficult with the changing tax and political landscape. This article summarizes the key tax filing and payment deadlines for 2025 for middle-market taxpayers.

Where the taxpayer omits filing and payment, late files and remits, additional penalties and/or interest may start to accrue, adding an additional cost burden on the taxpayer.

Return/ Form Type	Taxpayer Type	Due date of filing or payment
T1 Returns	Self-employed individuals or those whose spouses or common-law partners are self-employed	Return due on June 15, 2025* Tax owing due on April 30, 2025
	Other individuals	Return due on April 30, 2025 Tax owing due on April 30, 2025
	Deceased individuals where the date of death is before November 1, 2024	Return due on: For self-employed individuals: June 15, 2025* For others: April 30, 2025 Tax owing due on April 30, 2025
	Deceased individuals where the date of death is on or after November 1, 2024	Return due six months after the date of death Tax owing due six months after the date of death
	Non-resident individuals with a Canadian filing obligation (Section 216/217 returns)	Return due on June 30, 2025 Tax owing in excess of withheld amounts due on April 30, 2025
T2 Corporate Tax returns	For corporations having a December 31, 2024, calendar year-end	Return due on June 30, 2025 Tax owing due: For CCPCs claiming Small business deduction (SBD) with taxable income (including all associated corporations) less than the small business limit: 3 months after year-end For all other corporations: 2 months after year-end
	For corporations having a non-calendar year-end	Return due no later than six months after the end of the corporation’s taxation year Tax owing due: For CCPCs claiming SBD with taxable income (including all associated corporations) less than the small business limit: 3 months after year-end For other corporations: 2 months after year-end
T3 Trust returns	Inter-vivos trusts (required to have a calendar year-end)	Return due 90 days after the trust’s year-end on March 31, 2025
	Testamentary trusts and Non-resident trusts with a filing obligation in Canada (not required to have a calendar year-end)	Return due no later than 90 days after the trust’s year-end date
T4, T4A-NR, T5	–	Due on Feb 28, 2025
NR4 Non-Resident information returns	For an estate or trust	Return due 90 days after the trust’s year-end on March 31, 2025
	Other taxpayers	Return due on March 31, 2025
T5013 Partnership returns	Where partners are either individuals, trusts, professional corporations or a combination thereof; and Partnerships that are tax shelters	Return due on March 31, 2025
	Where partners are corporate partners (not including professional corporations)	Return due five months after the end of the taxation year of the partnership
	All other cases	Earlier of: March 31 after the calendar year in which the fiscal period of the partnership ended; The day that is five months after the end of the partnership’s fiscal period
T1134 Information return relating to foreign affiliates	For individuals and other taxpayers having December 31, 2024 as year-end	Return due on October 31, 2025
	For other taxpayers with a taxation year beginning in 2024	Return due no later than 10 months after the year-end
T1135 Foreign income verification statement	Self-employed individuals or those whose spouses or common-law partners are self-employed	Return due on June 15, 2025*
	Other individuals	Return due on April 30, 2025
	For corporations having a December 31, 2024 calendar year-end	Return due on June 30, 2025
	For corporations with a non-calendar year-end	Return due no later than six months after the end of the corporation’s taxation year
	Partnerships where partners are either individuals, trusts, professional corporations, or a combination thereof; and Partnerships that are tax shelters	Return due on March 31, 2025
	Partnerships where partners are corporate partners (not including professional corporations)	Return due five months after the end of the taxation year of the partnership
	All other partnerships	Earlier of: March 31 after the calendar year in which the fiscal period of the partnership ended; The day that is five months after the end of the partnership’s fiscal period
	Inter-vivos trusts with December 31, 2024 year-end	Return due on or before March 31, 2025
	Testamentary trusts	Return due no later than 90 days after the trust’s year-end date
T106 Information return of non-arm’s length transactions with non-residents	Self-employed individuals or those whose spouses or common-law partners are self-employed	Return due on June 15, 2025*
	Other individuals	Return due on April 30, 2025
	For corporations having a December 31, 2024, calendar year-end	Return due on June 30, 2025
	For other corporations	Return due no later than six months after the end of the corporation’s taxation year
	Partnerships where partners are either individuals, trusts, professional corporations or a combination thereof; and Partnerships that are tax shelters	Return due on March 31, 2025
	Partnerships where partners are corporate partners (not including professional corporations)	Return due five months after the end of the taxation year of the partnership
	All other partnerships	Earlier of: March 31 after the calendar year in which the fiscal period of the partnership ended; The day that is five months after the end of the partnership’s fiscal period
	Inter-vivos trusts with December 31, 2024, year-end	Return due on or before March 31, 2025
	Testamentary trusts and Non-resident trusts with a filing obligation in Canada	Return due no later than 90 days after the trust’s year-end date
UHT-2900 Underused Housing Tax Return and Election form	Certain taxpayers owning a residential property in Canada	Return for 2024 calendar year due on April 30, 2025 Tax owing due on April 30, 2025
Form T661 Scientific research and experimental development (SR&ED)	Self-employed individuals	Form due no later than 12 months after the filing due date of T1
	Corporations (except for non-profit SR&ED corporations)	Form due no later than 12 months after the filing due date of T2 or 18 months from the end of the taxation year
	Non-profit SR&ED corporations	Form due no later than six months after the end of the corporation’s taxation year
	Partnerships	Form due no later than 12 months after the earliest of all filing due dates for each member’s income tax return deadline for the tax year in which the partnership’s fiscal period ends.
	Trusts	Form due no later than 12 months after the filing due date of T3
RC312 Reportable Transaction and Notifiable Transaction Information return	Every person or entity for whom a tax benefit results from the reportable transactions or the person who enters into the reportable transaction on behalf of that person	Information return due 90 days from the earlier of: When the transaction is entered into; When the person is contractually obligated to enter the transaction
RC313 Reportable uncertain tax treatment (RUTT) Information return	For corporations having December 31, 2024, year-end that are required to disclose RUTT	Information return due no later than June 30, 2025
	For corporations with a non-calendar year-end that are required to disclose RUTT	Information return due no later than six months after the end of the taxation year
Schedule 130 (or information to be contained therein) for entities having interest and financing expenses or interest and financing revenues under EIFEL	For corporations having December 31, 2024, year-end	Information return due on June 30, 2025
	For corporations with non-calendar year-end	Information return due within 6 months after the end of the corporation’s taxation year
	Trusts	Information return due within 90 days after the trust’s tax year-end.
	Partnerships where partners are either trusts, professional corporations or a combination thereof including tax-shelter partnerships	Information return due on March 31, 2025
	Partnerships where partners are corporate partners (not including professional corporations)	Information return due five months after the after the end of the partnership’s fiscal period
	All other partnerships	Earlier of: March 31 after the calendar year in which the fiscal period of the partnership ended; The day that is five months after the end of the partnership’s fiscal period
Digital Services Tax	Foreign or domestic businesses that meet the filing requirement for any one of the 2022, 2023, or 2024 calendar years	Return due on June 30, 2025
GloBE Information return (GIR) for Global Minimum Tax (GMT)	If the Ultimate parent entity (UPE) or designated filing entity files GIR outside Canada and that jurisdiction has a qualifying competent authority agreement with Canada	Return is not required to be filed in Canada. Each Canadian entity of the multinational enterprise (MNE) group must notify the CRA of the identity and jurisdiction of the filing entity.
	If the UPE or designated entity is located in Canada or there is no qualifying competent authority agreement with the relevant foreign jurisdiction	If it is the first year in which the MNE group is subject to GMT: Return must be filed within 18 months from the end of the taxation year For other years: Return must be filed within 15 months from the end of the taxation year

* As per the Canada Revenue Agency (CRA) guidance, when a due date falls on a Saturday, Sunday, or public holiday recognized by the CRA, the return is considered filed and the payment is considered to be made on time if the CRA receives the filing, or if the payment or filing is postmarked, on or before the next business day. Therefore, in these instances, as the due date falls on a weekend or a federal holiday, the filing or payment deadline is the first working day following.

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This article was written by Chetna Thapar, Farryn Cohn and originally appeared on 2025-01-21. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2025/2025-tax-filing-payment-dates-canadian-middle-market-taxpayers.html

RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

An August 20, 2024, Tax Court of Canada case reviewed whether a corporation could claim ITCs of $8,874 related to the purchase of two vehicles that were used by the corporation. One vehicle was purchased by the shareholder and the other was purchased by the shareholder and his spouse.

Taxpayer loses

To be eligible for an ITC, the corporation must meet all of the following conditions:

1. the corporation must have acquired the vehicles;
2. the GST/HST in respect of the vehicles must be payable or must have been paid by the corporation; and
3. the vehicles must have been acquired in the course of the corporation’s commercial activities.

The Court found no evidence that the corporation acquired either vehicle; the corporation’s name was not on the sales agreements, bill of sales, vehicle registrations, or proof of insurance. In addition, there was no evidence of any trust, agency or assignment agreement. As such, criterion (a) was not met.

The Court also found that the corporation was not liable to pay consideration under the purchase agreement for either vehicle; therefore, GST/HST was not payable by the corporation. As such, criterion (b) was not met.

While the corporation argued that the vehicles were used or available for use by the corporation, the vehicles were not actually acquired in the course of the corporation’s commercial activities. As such, criterion (c) was not met.

While only failing one of the above criteria would be fatal to the claim, the corporation failed all three. The ITC was appropriately denied.

Care should be afforded to acquire assets in the proper entity such that GST/HST can be recovered as an input tax credit, if appropriate.

A March 30, 2023, Tax Court of Canada case reiterated the importance of the trustee of a trust properly understanding the terms of the trust. In this case, the trust had paid $100,000 to two beneficiaries, both under age 18, from capital gains eligible for the capital gains exemption. However, the terms of the trust prohibited payments to beneficiaries under age 18.

Taxpayer loses

The Court ruled that amounts paid in violation of the trust terms were not payable for income tax purposes and were therefore neither income to the beneficiaries nor deductible from the trust’s income

If acting as a trustee of a trust, ensure to fully understand the terms of the trust to avoid a surprising tax consequence.

 

Executive summary:

The Bank of Canada has reduced the prime rate for the fifth consecutive time, bringing it down to 3.25% in December 2024. Correspondingly, the Canada Revenue Agency (CRA) has adjusted the prescribed interest rates for Q1 2025. These changes have significant tax implications for various financial strategies, including income splitting, shareholder loans, and capital investments.

Key Points:

1. Prescribed Rate Loans: Lower prescribed rates make income splitting strategies more attractive, as loans carrying these rates can help avoid adverse tax implications due to attribution rules.
2. Modifying Existing Loans: Taxpayers with existing prescribed rate loans at higher rates may consider restructuring to take advantage of the new lower rates but must consider potential tax costs from liquidating investments.
3. Family Trusts vs. Direct Loans: New amendments to the Alternative Minimum tax (AMT) make family trusts less favorable due to higher tax burdens, shifting preference towards direct loans to family members.
4. Shareholder and Employee Loans: Lower interest rates reduce the taxable benefits of shareholder and employee loans, making them more appealing for personal and housing needs.
5. Capital Investment: Decreasing interest rates are expected to boost capital investments, with several tax incentives available for zero-emission vehicles and productivity-enhancing assets.
6. Interest Denial Regimes: Companies must consider new rules under the Excessive Interest and Financing Expense Limitation (EIFEL) regime, which could limit the deductibility of interest expenses.

Despite the current trend of decreasing interest rates, future fluctuations remain uncertain. Taxpayers should stay informed and adapt their tax planning strategies accordingly to optimize benefits.

Prescribed interest rates fall yet again in January 2025: Key tax considerations

The Bank of Canada has cut prime rate for the fifth consecutive time, from a high of five per cent back in April 2024 to 3.25% in December 2024. Consistent with decreasing interest rates, the CRA prescribed interest rate has decreased yet again starting Q1 2025, as follows:

Income tax situation	Interest rate
Overdue taxes, Canada Pension Plan contributions and employment insurance premiums	8%
Corporate taxpayer overpayments	4%
Non-corporate taxpayer overpayments	6%
Rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans	4%
Corporate taxpayers’ pertinent loans or indebtedness (PLOI)	7.78%

In a decreasing interest environment, there are tax consequences that may require taxpayers to reconsider some tax planning previously put in place.

Prescribed rate loans

A common way to avoid adverse tax implications on income splitting strategies is to utilize a loan that carries the prescribed interest rate, oftentimes referred to as a “prescribed rate loan”. Absent a prescribed rate loan, many income splitting strategies can fail due to the application of the attribution rules, which can shift income earned in the hands of the debtor back to the creditor, defeating the intention of the tax strategy. In general, if a loan to a family member or family trust carries the prescribed rate of interest applicable in the fiscal quarter the loan was entered into, the debtor can use those funds to invest in income-earning portfolios and avoid attribution. The loan can be made individually between family members directly but can also be made to a family trust to earn investment income to be subsequently allocated to beneficiaries.

This type of planning becomes more attractive as interest rates decrease, since a prescribed rate loan carries the prescribed rate of interest applicable in the fiscal quarter the loan arises indefinitely. This is ideal, because the interest payable is taxable to the recipient, who is typically a high-income earner (and paying tax at the highest marginal tax rate) that is intending to split income with their family.

Modifying an existing prescribed rate loan

Taxpayers with prescribed rate loan structures in place already may be stuck with a loan carrying a higher rate of interest. As a result, taxpayers may want to consider dismantling their current structure and take advantage of the lower prescribed rate starting Q1 2025. The rules for doing so can be strict, and typically amending the interest rate on the existing loan is insufficient to lock in the new interest rate. Instead, the debtor would need to liquidate their investments, incur the relevant tax implications due to the sale, repay the existing loan, and introduce a new loan carrying the new prescribed rate. Taxpayers considering this would need to model the triggered tax costs associated with liquidation against the possible tax benefits from re-establishing a new loan.

Utilizing a family trust versus direct loans

With new legislative amendments to Alternative Minimum Tax (AMT) effective Jan. 1, 2024, family trust structures are becoming more costly. AMT is, generally, a parallel tax calculation applicable to certain individuals, estates and trusts that is computed using special rules that do not often coincide with typical Canadian tax rules. While AMT can be recoverable in future years, family trusts are not typically structured in a way to be able to recover the tax, and as a result AMT can often be seen as a permanent tax.

The main issue with using a family trust in 2024 is that many expenses, such as interest expense and other carrying charges, are only 50% deductible for AMT purposes. Unlike individuals, family trusts do not benefit from a minimum AMT exemption amount, which increases the likelihood of AMT applying to a trust’s income. While certain tax planning can be considered to minimize AMT, the tradeoff may be paying ordinary income tax at the trust level at the highest marginal rates, which would generally negate the benefit of using a trust.

Consequently, direct prescribed rate loans to family members may become more attractive than loans made to family trusts, on the AMT front. Individual taxpayers do have an AMT exemption amount of approximately $173,000 starting in 2024, which means less AMT exposure as a result.

Other loans

Shareholder loans

Certain loans made by a corporation to a non-corporate shareholder can be included in the shareholder’s income in the year in which the loan was made. There are some exceptions to this rule, such as if the loan is repaid within one year after the end of the taxation year in which the loan was made. In situations where the entire amount of a loan is not included in income for a taxpayer, if interest charged on a shareholder loan is less than the prescribed interest rate, a taxable benefit would arise based on the time the loan was outstanding and the delta in interest rates.

Declining interest rates equates to a smaller deemed interest inclusion for shareholder loans. As a result, shareholders can consider temporarily entering into these loans for personal needs.

Employee loans

Similar to shareholder loans, certain employee loans can also create a deemed taxable benefit based on the prescribed rate of interest. Most commonly, this can be applicable when an employer offers their employee a loan to purchase a home. However, unlike other types of loans, employee loans have an automatic five-year “refresh”, which deems a new loan to arise at that time for tax purposes. This diminishes the value of entering into a loan when interest rates are low, since the prescribed interest rate will only last five years for purposes of computing the deemed employee benefit. That being said, locking in a lower interest rate for five years can still be valuable, and taxpayers can try and structure their employee loans to be in place when the prescribed interest rate falls in Q1 2025.

Capital investment

Typically, lower interest rates are coupled with increased capital investment. There are many tax incentives to further encourage capital investment that are expected to be available during 2025. For example:

1. Zero emission vehicles and automotive equipment are afforded a 75% first-year deduction if acquired and available for use before 2026.
2. Draft legislation, introduced in the 2024 Federal Budget, will permit a 100% first-year deduction for “productivity-enhancing assets”, including assets such as data network infrastructure equipment.

Interest denial regimes

As companies consider making more capital investment, it is important to consider the application of interest denial regimes for tax purposes. Canada has introduced new rules under the Excessive Interest and Financing Expense Limitation (EIFEL) regime, which applies to deny interest expense deducted to the extent it exceeds a certain percentage of tax-EBITDA. Alongside various interest denial regimes from other jurisdictions, such as section 163(j) of the Internal Revenue Code in the United States (which is currently at risk of facing amendments in light of the upcoming second Trump administration), this can severely diminish the value of debt financing. It is important to keep any limits in mind before considering any type of planning.

Interest rates are still in flux

Despite the trend showing that interest rates are decreasing, it is impossible to know what Q2 2025 and beyond has in store for interest rates. No matter what the future holds, tax implications closely follow the economics, and keeping a keen eye on how prescribed rates fluctuate can help taxpayers optimize their tax planning.

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This article was written by Daniel Mahne and originally appeared on 2024-12-18. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/services/business-tax-insights/prescribed-interest-rates-fall-yet-again-in-january-2025.html

RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

Executive summary

After a mid-day shake up in the cabinet, the federal government released Canada’s 2024 fall economic statement (2024 Statement) on Dec. 16, 2024. The key tax measures to be considered by middle market taxpayers are outlined in this article.

With a cost that is expected to push its deficit target by more than $20 billion to $61.9 billion, many of the government’s new initiatives are incentives meant to encourage investment and productivity in Canada. The 2024 statement proposes to reform of the scientific research and experimental development (SR&ED) program, allow companies to write off the value of investments immediately by extending the accelerated investment and expand the transactions which qualify for the capitals gain rollover on business investment. Additionally, rising trade concerns were addressed.

The 2024 statement affirms the government’s intention to proceed with previously announced tax measures, including further amendments to the alternative minimum tax (AMT) and introduction of the Canadian entrepreneurs’ incentive. The government also provided additional details on previously proposed clean economy tax credits.

Personal tax

The government continued as part of this statement to address inflation and the rising costs of everyday life.

Capital gains rollover on business investments

The Income Tax Act (ITA) allows individuals to defer capital gains taxation realized on a qualifying disposition of eligible small business corporation (ESBC) shares. Under the current rules, this deferral applies to the extent that the proceeds of disposition are used to acquire replacement ESBC shares within the year of disposition, or up to 120 days following that year.

Effective for transactions on or after Jan. 1, 2025, the 2024 Statement proposes to expand the relevant period to acquire replacement shares to include the entire year of disposition and the entire following calendar year.

The types of shares which qualify for this rollover will also be expanded. Currently, the shares must be common shares issued by an ESBC to an individual where the total carrying value of the assets of the ESBC and related corporations does not exceed $50M immediately before and immediately after the share was issued. Under the proposal, both common and preferred shares will qualify. Furthermore, the limit of the carrying value of the assets of the ESBC and related corporations will be increased to $100 million.

This expanded rollover will help small businesses access capital through the deferral of capital gains taxation for its investors.

Confirming the GST/HST holiday tax break

The Tax Break for All Canadians Act, which recently received Royal Assent, provides a two-month goods and services tax/harmonized sales tax (GST/HST) break for holiday essentials, like groceries, restaurant meals, drinks, snacks, children’s clothing and gifts. This initiative aims to provide significant tax relief to Canadians on a variety of goods during the eligible period.

Business tax

EV supply chain investment tax credit

In the 2024 Federal Budget, the government announced a refundable Electric Vehicle (EV) supply chain investment tax credit equal to 10% of the capital cost of buildings involved within the EV supply chain to incentivize EV manufacturing. The 2024 Statement provides the relevant design and implementation details of the previously introduced investment tax credit, including:

• Eligible corporations: The EV supply chain investment tax credit would be available only to taxable Canadian corporations that invest directly in eligible property. 
• Machinery and equipment investment requirement: To be eligible, a corporation (either by itself or as part of a related group of companies) will be required to invest a minimum of $100 million in each of the relevant supply chain segments.

Clean electricity investment tax credit for provincial and territorial Crown corporations

The 2024 statement provides clarifications and an exception related to the previously proposed clean electricity investment tax credit including:

• Any financing provided by the Canada Infrastructure Bank will not reduce the cost of eligible property for the purpose of computing the clean electricity investment tax credit where the eligible property is acquired and becomes available for use on or after Dec. 16, 2024.
• Provincial and territorial Crown corporation claimants will have to issue public written statements committing to net-zero emissions by 2050 and detail how the credit will be passed on to ratepayers. They will also need to publicly report certain information related to their cost of service and the credit received both for the year and cumulatively.

Clean hydrogen investment tax credit—methane pyrolysis

The 2024 statement proposes to expand the clean hydrogen investment tax credit to include methane pyrolysis as an eligible hydrogen production pathway. With this expansion, eligible items will include pyrolysis reactors, heat exchangers, separation/purification and storage/compression equipment. The expansion of the credit applies to property acquired and becomes available for use on or after Dec. 16, 2024.

Canada carbon rebate for small businesses

In the 2024 Federal Budget, the government announced that the carbon pricing fuel charge proceeds will be returned to Canadian-controlled Private Corporations (CCPCs) with 1 to 499 employees for the 2019–2020 to 2023–2024 fuel charge years if the corporation filed their 2023 tax return by July 15, 2024. Furthermore, on Oct. 1, 2024, the government proposed that corporations who would have qualified without the filing deadline would receive the rebate if they filed their 2023 tax return after July 15, 2024, and on or before Dec. 31, 2024.

The 2024 statement outlines that the design elements and eligibility of the Canada carbon rebate for the 2024–2025 and later years will be modified. In particular:

• Cooperative corporations and credit unions will qualify for the credit.
• Small businesses that have less than 20 employees would qualify for a payment amount that is equivalent to having 20 employees.
• Larger businesses with over 300 employees and up to 500 employees will have their payments gradually reduced on a straight-line basis.

Extension of the accelerated investment incentive and immediate expensing measures

The accelerated investment incentive provides an enhanced first-year capital cost allowance for most depreciable capital property. The 2024 statement proposes to reinstate these incentives for a five-year period starting Jan. 1, 2025, effectively reversing the phase out that began in 2024.

SR&ED program

Following consultations held earlier this year, the government is proposing the following enhancements to the SR&ED program effective on or after Dec. 16, 2024:

1. Raise the annual expenditure limit from $3 million to $4.5 million for the enhanced 35% investment tax credit for CCPCs.
2. Increase the prior-year taxable capital phase-out thresholds for the enhanced credit from $10 million–$50 million to $15 million–$75 million.
3. Extend the enhanced refundable credit of 35% to Canadian public corporations, replacing the current 15% non-refundable tax credit.

The 2024 statement also proposes to restore the capital expenditure eligibility for SR&ED program deductions and investment tax credits, applicable to property acquired on or after Dec. 16, 2024.

Further SR&ED reforms, including updates to qualified expenses, as well as plans to implement a patent box regime to encourage intellectual property development will be detailed in the upcoming 2025 Federal Budget.

Tariff and trade measures

Tariffs on select products from China

Following surtaxes imposed on EVs, steel and aluminum products from China earlier this year, the 2024 Statement announced tariffs on select Chinese solar products and critical minerals for 2025 and additional tariffs on semiconductors and other materials beginning in 2026.

Amendments to the Export and Import Permits Act

The 2024 statement proposes legislative amendments to the Export and Import Permits Act, enabling the government to restrict the import or export of items to enhance supply chain security, or in response to actions by other countries that “harm Canada”.

Reciprocity in federal policies

The 2024 statement establishes reciprocity as a requirement in federal policies, including government procurement, investment tax incentives and grants, to protect Canadian businesses from “unfair foreign trade and economic practices”. Similarly, starting in spring of 2025, Canada will enforce its procurement trade obligations to limit access to federal procurement markets to those who provide reciprocal access to Canada.

Other measures

NPO reporting

The ITA provides an exemption from income tax for organizations that meet the definition of a Non-Profit Organization (NPO). Under the current rules, NPOs are required to file an annual information return if:

• its passive income in a fiscal year exceeds $10,000,
• its total assets at the end of the preceding fiscal period exceeds $200,000, or
• an information return was required to be filed for a preceding fiscal period.

The 2024 statement proposes changes to require NPOs with total gross revenues over $50,000 to also file the annual information return.

For those NPOs that do not meet the above thresholds for filing the annual information return, the government is proposing to introduce a new, short-form return which will require NPOs to submit basic information including:

• The NPO’s business number or trust number,
• The NPO’s name and mailing address,
• The names and addresses of the NPO’s directors, officers, trustees, or similar officials,
• A description of the NPO’s activities, including whether it conducts activities outside of Canada,
• The NPO’s total assets/liabilities and annual revenues, and
• Other prescribed information.

Both measures would apply to the 2026 and subsequent taxation years.

Intention to proceed with previously announced measures

Subject to amendments resulting from public consultations and legislative processes, the government intends to proceed with previously announced tax measures including but not limited to:

• Legislative proposals included in the notice of ways and means motion introduced on Sept. 23, 2024, related to capital gains and the lifetime capital gains exemption.
• Legislative and regulatory proposals released on Aug. 12, 2024, including but not limited to the following:
  • New measures
    • Canadian entrepreneurs’ incentive
    • Non-compliance with information requests
  • Amendments to existing measures
    • Alternative Minimum Tax (AMT)
    • Employee ownership trust tax exemption
    • Avoidance of tax debts
    • Interest deductibility limits
    • Substantive CCPCs
    • Global Minimum Tax Act
• Legislative amendments to implement the hybrid mismatch arrangements rules announced in the 2021 Federal Budget.

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This article was written by Jim Niazi, Benjamin Wilson, Mamtha Shree, Sigita Bersenas, Daniel Mahne, Cassandra Knapman, Danny Ladouceur, Clara Pham and originally appeared on 2024-12-17. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2024/fall-economic-statement-2024.html

RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

A July 22, 2024, Federal Court case found that CRA’s refusal to accept and provide tax refunds for corporate tax returns filed more than three years after the relevant year-end was reasonable. While a specific provision allows CRA to accept requests (at their discretion) for refunds after the three-year deadline for individuals, there is no parallel provision for corporations.

While no tax refund can be provided where corporate tax returns are not filed within three years of the fiscal year-end, CRA has discretion to re-appropriate the refund to another account of the taxpayer (e.g. the taxpayer’s GST/HST, payroll or income tax account). However, this re-appropriation is fully at CRA’s discretion, based on factors such as CRA error or delay, natural or man-made disasters, death, accident, serious illness, or emotional or mental distress.

Ensure that corporate tax returns are filed in a timely manner to avoid risking the loss of the tax refund.

Executive summary:

The House of Commons recently passed Bill C-78, the Tax Break for All Canadians Act, which proposes a temporary GST/HST holiday on certain items. This initiative, pending Senate approval, aims to provide significant tax relief to Canadians on a variety of goods during the eligible period, including children’s items, food and more. Read on to discover when the holiday will take effect, the eligible items, and key considerations for both consumers and businesses to maximize the tax break this season.

On Nov. 28, 2024, the House of Commons passed Bill C-78, titled the Tax Break for All Canadians Act, to temporarily relieve good and services tax/harmonized sales tax (GST/HST) on eligible supplies, such as children’s clothing, toys, games, books, food and beverages, made between Dec. 14, 2024 to Feb. 15, 2025 (eligible period). Note that the legislation is still in draft and pending Senate approval.

The tax relief provides that the eligible supplies will be considered zero-rated, which means that they will carry an applicable GST/HST rate of 0%. This is positive news for GST/HST registered businesses, as the GST/HST holiday will not affect their eligibility to claim input tax credits of GST/HST paid on expenses related to providing the eligible supplies.

Eligible supplies

Items eligible for the temporary zero-rating include:

• Most food and beverages for human consumption which would otherwise be taxable, such as snack items and other prepared foods, catering services (where performed and paid for during the eligible period), and beverages including beer, wine, sake and other low alcohol packaged beverages. However, food or beverages sold from a vending machine and spirits or other hard alcohol are excluded from the temporary zero-rating.
• Children’s toys and games if they are intended for children under 14 years old for learning or play. Most toys that are marketed as being for an age below 14 (for example, a toy recommended for children ages eight and up) would qualify.
• Children’s clothing, footwear, diapers and car seats
• Jigsaw puzzles for all ages
• Video game consoles, controllers and physical video games provided in a read-only tangible format (i.e., game cartridges)
• Christmas and similar decorative trees, including natural trees and artificial trees
• Physical books and printed material. Key exclusions comprise of colouring books, calendars, magazines and downloadable audiobooks (except physical audio recordings of printed books if 90% or more of the recording is a spoken reading of a printed book).

The above items qualify for GST/HST relief during the eligible period whether they are being purchased retail (B2C) or wholesale (B2B). Eligible supplies imported into Canada during the eligible period also qualify for the temporary GST/HST relief.

Timing of eligible supplies

In order to avail the benefit of the temporary GST/HST zero-rating, the eligible supplies made during the eligible period should meet the following conditions:

• All consideration for an eligible supply must be paid within the eligible period.
• The property must be delivered or made available to the recipient during the eligible period. For these purposes, delivery is deemed to be complete on the date the supplier either transfers the property to a common carrier retained on behalf of the recipient or sends the item by mail/courier.

If a deposit was paid before the eligible period, the eligible item supplied during the eligible period will still qualify for this GST/HST relief, provided the entire balance is paid and the item is delivered during the eligible period.

Key considerations for businesses ahead of the GST/HST tax holiday

While the timing of eligible supplies and related payment conditions appear to be straightforward for point-of-sale retailers, GST/HST registered suppliers issuing invoices with payment terms (e.g., 30 days from issuance of invoices) must verify whether payment will be due and received by Feb. 16, 2024, prior to applying the zero-rating on their products. Affected businesses will need to adjust their billing rates in the system, review payment terms, and address other related details.

While the tax holiday brings exciting savings for consumers, businesses making the eligible supplies need to delve into these intricacies, especially with the implementation date approaching soon.

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This article was written by Gautam Rishi and originally appeared on 2024-12-04. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2024/navigating-the-gst-hst-holiday-tax-break.html

RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.