2019 Federal Budget Highlights
MARCH 19, 2019
The 2019 federal budget introduced spending initiatives for certain areas of the economy but not any significant tax changes. The most significant tax measures to take note of are:
Personal Tax Measures
Stock Option Limitations
The government has proposed limits to stock option benefits. Currently, it is possible for employees to pay tax at capital gains rates on employment stock options when certain conditions apply. The government is proposing to limit this deduction for employees of large, long-established, mature firms to $200,000 per year based on the fair market value of the underlying shares. More details will be released by this summer. Finance has said that they do not intend to limit employee stock options for startups and rapidly growing Canadian businesses.
Home Buyer’s Plan Withdrawal Limit Increase
The maximum which can be borrowed from your RRSP to purchase a first home increases from $25,000 to $35,000. In addition, the “first-time home owner” requirement is removed for individuals that separate and live apart due to a breakdown of a marriage or common-law relationship.
Canada Training Credit
An amount of $250 per year is accumulated (up to a $5,000 lifetime maximum) for Canadian resident individuals between the ages of 25 and 65 that have annual earnings of between, approximately $10k and $148k. The amount accumulated can then be claimed as a refundable tax credit in the year that an eligible training course is taken, to a maximum of 50% of the cost of the eligible training course.
Digital News Subscriptions
A new non-refundable tax credit of up to $500 for subscriptions paid in a year to a qualifying Canadian journalist organization – a tax savings of $75 per year. This credit is available for the years after 2019 and before 2025.
Corporate Tax Measures
Limits on Refundable SR&ED Credit Removed
Currently a private corporation with prior year taxable income over $800,000 is no longer eligible for the refundable 35% SR&ED credit and the corporation still remains eligible for the 15% non-refundable tax credit. Effective for tax years ending on or after March 19, 2019, the 35% refundable credit will not be limited by prior year taxable income. There is still a grind where capital exceeds $10M.
Enhanced Zero-Emission Vehicle Depreciation
For vehicles purchased by a corporation for use in business activities, there is a 100% write off of the cost (to a maximum of $55,000) in the year of acquisition. This treatment is available for purchases between March 19, 2019 and January 1, 2024. A significant increase in the write off compared to the typical 30% which was capped at a cost of $30,000.
Some of the Additional Spending Proposals that Affect Small Business
Futurpreneur Canada is a national not-for-profit organization that provides young entrepreneurs with mentorship, learning resources and start-up financing to help them bring their business ideas to market. To increase entrepreneurship, Budget 2019 proposes to provide Futurpreneur Canada $38 million over five years, starting in 2019–2020.
There are new EI training support benefits measured to help employees improve their job related skills. As a reflection of the Government’s commitment to making this new benefit work for employers as well as employees, Budget 2019 proposes to introduce an EI Small Business Premium Rebate. Starting in 2020, any business that pays employer EI premiums equal to or less than $20,000 per year, would be eligible for a rebate to offset the upward pressure on EI premiums resulting from the introduction of the new EI Training Support Benefit.
Improved Rental Options
To provide more affordable rental options for middle class Canadians, Budget 2019 proposes to provide an additional $10 billion over nine years in financing through the Rental Construction Financing Initiative, extending the program until 2027–2028.
Increase support for Canada Revenue Agency
The budget announced increased funding for CRA including:
- an additional $150.8 million to combat tax evasion and aggressive tax avoidance through hiring additional auditors, creating a new data quality examination team to ensure proper withholding, remitting and reporting of income earned by non-residents, and extending programs aimed at offshore non-compliance.
- an additional $50 million to create four new dedicated residential and commercial real estate audit teams in high-risk regions, notably in British Columbia and Ontario to increase the scrutiny of claiming principal residence deductions and capital gains on the flipping of real estate transactions as well as other real estate related transactions.
Case Study: Simplifying a Complex Situation to Determine Asset Base Longevity During Retirement
FEBRUARY 28, 2019
Our client was managing several private company entities that were interrelated (one of which was an operating company), their personal investment portfolios (registered and non-registered accounts), a few personal use properties, business and personal loans. Given the complexity of their financial circumstances, it made it difficult for our client to understand the bigger picture and have clarity on whether their asset base would be sustainable during retirement.
Our first step was to have a clear understanding of our client’s personal and financial goals. We discussed their lifestyle expenditure needs and important lifestyle events, including what their plans were for living arrangements and the succession of their operating business.
Following our discussions and a comprehensive analysis of our client’s financial position, it was decided that it would be beneficial for our client to sell one of their rarely used personal properties, and move into another property that they owned as soon as possible. By doing so, they would be able to pay off their personal debt and also reduce ongoing upkeep expenses. It was also concluded that in 10 years’ time our client would likely be at an age where it’d be appropriate to sell their operating business and to downsize their home. These conclusions were vital to us as it formed the foundation of our financial plan.
We prepared a plan using tax effective strategies and various assumptions. Key assumptions included lifespan, rate of return, allocation of net sale proceeds, business income, and changes to expenditure level in conjunction with lifestyle events. Our plan involved a comparison of two scenarios with regards to lifestyle expenses – actual expenses versus an additional 20% – to provide meaningful information about how a single change to the assumptions can impact the longevity of our client’s asset base.
The plan that we presented to our client included reporting that consolidated their business and personal assets and liabilities, which made it easier to review how their total asset base sustained over time in each scenario.
This process allowed our client to have:
§ Clarity around the benefits of selling one of their personal use properties immediately,
§ Comfort with the strength of their financial position during their retirement, and
§ An understanding of the most important variables in their financial future
Client Jane Roos Named One of Canada’s Most Powerful Women
by Women’s Executive Network
DECEMBER 3, 2018
Jane Roos, one of our many great clients in the non-profit space, was recently named a Women’s Executive Network 2018 Canada's Most Powerful Women: Top 100 Award Winner for her great work as CAN Fund Founder and Owner!
Jane founded CAN Fund in 2003 in order to support great Canadian athletes and fill the funding gap in order to allow Canadian's to train and compete at the highest level. CAN Fund has supported an incredible 80% of the athletes representing Canada at each Olympic Games since Athens 2004 through to the recent Games in South Korea.
Jane herself was a promising track athlete before a car accident ended her career at 19 years old - she has turned this life lesson into helping Canadian athletes, seeing a need for elite Canadian athletes to have the financial support in order to compete successfully on the world stage. CAN Fund has raised over $21 million dollars to date.
Her voice has been a difference maker for Canadian athletes for the past 15 years, and we thanks her for her incredible contributions to Canadian sport.
To read the full release visit http://canadianathletesnow.ca/wp-content/uploads/2018/11/WXN-Press-Release-Updated.pdf
Visit the CAN Fund website at http://canadianathletesnow.ca/
Potential US Sales Tax Changes Ahead
Please click here for the pdf version.
Canadian businesses that sell into the US will need to take into account the decision by the Supreme Court on June 21st which looks to close a US sales tax loophole related to online merchants.
Since a 1992 decision by the Supreme Court, individual states were barred from requiring businesses to collect sales tax unless they have a substantial connection to the state (for example, a physical office location in the state). The decision in South Dakota v. Wayfair Inc. on June 21st overturned this to allow that states can require collection of sales tax by retailers that do not have a physical presence in the state.
Who does this effect?
Generally, sales tax in the US is a tax on the end consumer. The impact of these changes would not be on wholesalers selling to other companies for resale, but to the retailers selling to end consumers.
Sales tax in the US is also generally only on goods sold and most services are exempt from sales tax collection. The specifics of what items attract sales tax can vary by jurisdiction so applicability of sales tax will depend on the specific facts for your situation.
What does this mean?
It means that each US state can broaden the legislation on who must register and collect sales tax, in ways they have not been able to previously. As an example, a state could now require any retailer who sells into a state, to charge sales tax, regardless of the sellers physical location.
As each state may craft their own rules, it will be important for any seller to understand the rules for each and every state with which they have any business connections in order to understand if there is a sales tax registration and collection requirement.
When does the change happen?
With the ruling, actual changes are likely to happen over time as each state decides whether, and how, to broaden their own individual rules. Though a number of states such as North Dakota and South Dakota have introduced changes, many more are likely to follow in the coming weeks and months so it is important to keep informed for any states in which your company may have business connections.
Give the Liberals Credit for Listening
FEBRUARY 28, 2018
By Jeff McRae, C. Dir, CPA, CA
For a link to this article on Linkedin click here.
Its been a painful 8 month process as a result of the Liberals attack on successful entrepreneurs. The original proposals were designed to eliminate virtually all tax planning for those who succeeded in growing a successful business.
During the fall we and many others met with many Liberal MPs who seemed sincerely upset that their government was attacking one of the main engines of our economy. In the end, the willingness of individual MPs to push for a more reasoned approach carried the day.
With yesterday's budget its fair to say that the government backed off on the worst of the changes and found a middle ground that most entrepreneurs can live with. Entrepreneurs will lose the following tax planning opportunities:
a) Most income splitting with spouses prior to age 65 and with their children. However, some opportunities remain.
b) For entrepreneurs who have built up in excess of $50,000 a year of passive income (income from sources other than their active business - so generally, interest, dividends and capital gains) their small business deduction is ground down. This means that they will need to pay 26% tax on the active income their company earns rather than the current 15%.
c) Complex rules have been introduced that will mean that some tax will likely be paid earlier than previously. Dividends paid to shareholders come as either eligible or ineligible dividends. The ineligible dividends are taxes at rates approximately 8% higher then eligible dividends. Most of our clients receive dividends from both these pools. The rules will result in the ineligible pool being paid earlier then it would be otherwise - so the more expensive dividends will in many situations be declared earlier then they would have been prior to the budget. However, the total split between eligible and ineligible will be unchanged.
Overall, we are pleased that common sense prevailed. It was a scary period and the government risked a major flight of capital and successful entrepreneurs with the earlier proposals. We appreciate a more balanced approach.
GST Input Tax Credit Eligibility
MARCH 6, 2018
Please click here for the pdf version.
For businesses that claim GST input tax credits, there are some general rules that are useful for bookkeepers to keep in mind in order to avoid claiming too much and a potential future adjustment. Here are some general guidelines to keep in mind.
Not all input tax credits (ITCs) are created equal as there are a number of specific rules which registrants must consider when calculating how much of a tax credit may be claimed. The items described below are generally applicable to for-profit operations.
The percentage of ITCs which may be claimed on regular operating expenses will depend on the use of the expense in commercial activities. Expenses which may be incurred for commercial and non- commercial use (such as exempt activities) must be reviewed to determine what portion of the use relates to commercial activity, as the amount which can be claimed will be as follows:
An example would be sales tax paid for hydro on a building which is 60% commercial space and 40% residential rental space – only 60% of the sales tax paid on the hydro can be claimed as an ITC.
Meals & Entertainment
The amount of GST ITC that can be claimed on reasonable meal and entertainment expenses is similar to the deductible portion for income tax purposes. Generally, the claim can only be for 50% of the sales tax amount paid.
GST ITCs paid in respect of a membership or right to acquire a membership to a club, where the main purpose of the club is to provide dining, recreational or sporting facilities, cannot be claimed. The most common example would be a golf course membership.
Capital Personal Property (Other Than Passenger Vehicles/Aircraft)
For capital personal property items (computers, furniture, equipment), a full ITC may be claimed when the commercial use is over 50%. If commercial use is less than 50%, then no ITC can be claimed at all.
Capital Personal Property of Passenger Vehicles/Aircraft
There are a number of factors for consideration with regards to claiming ITCs on passenger vehicles owned by a corporation. One overriding factor is that, you cannot claim any ITC for the portion of the purchase price which exceeds $30,000 or if leasing the vehicle, the tax paid on monthly lease payments exceeding $800 per month.
For what portion of the ITC can be claimed:
The fraction noted is generally related to the GST rate in place over the full cost – for example, in Ontario the fraction is 13/113 currently.
2018 Federal Budget Highlights
FEBRUARY 27, 2018
Please click here for the pdf version.
Finance Minister Bill Morneau presented the highly anticipated 2018 Federal Budget this afternoon. Fortunately, there were no significant changes to investment income as there were no changes to capital gains rates, stock options, or the overall passive income tax rate.
Changes to investment income earned in a corporation
None of the anticipated changes that were originally included in the July 2017 proposal relating to investment income earned in a corporation were introduced. Instead, the government introduced these two measures. The new measures below are effective for tax years beginning after 2018.
Investment income impact on small business limit
The budget introduces a reduction in the small business limit for corporations, and its associated corporations, that earn passive investment income in excess of $50,000. For every $1 of investment income earned over $50,000, the small business deduction limit is reduced by $5. Once the corporation, and its associated corporations, earn $150,000 of passive investment income, no income will be taxed at the small business rate.
Passive investment income includes taxable dividends but does not include any capital gains from the sale of assets used in the active business or incidental income. An example of how this grind works is shown here:
Note: Assumes that the corporation has less than $10 million of taxable capital.
There is no change in tax rates to venture capitalists and angel investors. For example - ABC Co. (a Canadian private corporation) runs an active business and uses the profits from that business to invest in shares of another Canadian active corporation. The capital gains realized on the sale of these shares will not impact ABC Co.’s small business deduction.
Refundable taxes changes
Prior to the budget, taxes paid by a corporation on investment income had a portion that was refundable to the corporation when dividends were paid. These dividends did not necessarily have to relate to the investment income that was earned. As a result, the corporation would get their refund of 38.33% on every dollar of dividend that was paid out. The taxpayer could receive this as an eligible dividend and could pay tax at the preferred rate of 39.34% as opposed to paying an ineligible dividend at the tax rate of 46.65%. These are the rates at the highest marginal tax rate. Under the new rules, the dividend has to be an ineligible dividend. An exception to this new rule is for eligible portfolio dividends. These can still flow through to individual shareholders.
 Dividends from non-connected corporations
 Table per 2018 “Tax Measures – Supplementary Information” issued February 27, 2018
Passive Rule Changes and the Upcoming Budget
JANUARY 19, 2018
After speaking with six Liberal MPs over the past couple of months, RMT had the opportunity to reach out to Deputy Director of Tax Policy Elliot Hughes regarding passive rule changes and the upcoming budget. See the letter summarizing our positions moving forward below, and feel free to reach out to us by clicking here.
Mr. Elliot Hughes
Depute Director of Tax Policy
Office of the Minister of Finance
Dear Mr. Hughes,
Re: Follow Up Request from Constituent Regarding Small Business Tax Changes
It was a pleasure speaking with you last month with Howard Brown.
As a constituent of Minister Morneau, I want to thank you for taking the time to hear our perspective on the small business tax changes.
My colleagues Michelle Koscec and Tony Rosso and I appreciated meeting with six Liberal MPs over the past couple of months. We met with MPs Rob Oliphant, Francesco Sorbara, Marco Mendecino, Julie Dzerowicz, Paul Lefevre and James Maloney to discuss the tax changes. We heard their support for entrepreneurs and an understanding of the issues with the government's proposals.
As we approach the 2018 budget announcement, this may be our final chance to have our voice heard.
We would appreciate your efforts to ensure the final change to the taxation of passive income promotes entrepreneurship.
Summary of where we are
1. In July, the government proposed changes to all of the key cornerstones of entrepreneurial tax planning with the objective of eliminating all tax benefits that successful entrepreneurs have over employees.
2. In October, the government dropped the capital gains issue realizing that it needs some more time to think the implications through carefully. This issue is one that warrants Finance's attention and there are loopholes that a very small number of entrepreneurs use that should be closed.
3. The government introduced legislation effective January 1, 2018 to eliminate most income sprinkling. A carve out was made to allow spouses over age 65 to continue to benefit from sprinkling.
We are awaiting the government's decision on passive rule changes. These are rules designed to force successful entrepreneurs to pay out any profits not required in the business and pay immediate 53% tax consistent with an employee earning in excess of $225,000. If the entrepreneur does not do that the investment income will be taxed at roughly 70%.
Entrepreneurs deserve to be treated differently than employees for two central reasons:
1. As entrepreneurs they face tax burdens that employees do not face.
We walked you through an illustration of one of our clients who has paid millions in corporate tax, CPP, EI, Workers Comp, EHT and other tax costs before being able to take any money out of the company. It should be evident that an entrepreneur's tax situation has significant disadvantages as well as some advantages.
2. Entrepreneurship should be encouraged.
If entrepreneurship is not encouraged, then the result will be that some of our entrepreneurs will go to jurisdictions that have more favourable treatment for successful entrepreneurs. It is the best entrepreneurs who are the most mobile and compete most on the world stage. We need to retain those stars.
How you can help
We need your voice to make the above points to Minister Morneau as it appears he is determined to move forward with destroying all the benefits that entrepreneurs currently have.
A compromise could be reached - but it must be a compromise that doesn't put the star entrepreneurs in the same position as the T4 employee.
The government is proclaiming that only a small percentage of entrepreneurs are affected but that misses the key point. Even if only 20,000 entrepreneurs are impacted my belief is that among those 20,000 are many of the most important entrepreneurs.
Paul Lefebvre offered an excellent compromise. He suggested that once an entrepreneur had built a certain level of capital then he would no longer access the small business rate. At that point his deferral opportunity would fall from 38% to 26% eliminating one third of the deferral opportunity.
Other compromises are also possible - although frankly they seem unnecessary.
We have tax integration in Canada - and giving entrepreneurs the advantage of deferral of some tax is a reasonable ay to meet the objectives described above.
The combination of eliminating most income sprinkling and eliminating the small business deduction for successful entrepreneurs would have seemed like a huge downside for entrepreneurs a year ago. Now I view it as a compromise that should allow the Finance department to feel pleased that it has met its objective.
Please do what you can and let us know if we can be of assistance in any way.
Yours very truly,
ROSENSWIG McRAE THORPE LLP
Jeff McRae, C. Dir, CPA, CA
Hon. Bill Morneau MP, Minister of Finance
Rob Oliphant MP (Don Valley West)
Francesco Sorbara MP (Vaughan)
Marco Mendicino MP (Eglinton-Lawrence)
Julie Dzerowicz MP (Davenport)
Paul Lefebvre MP (Sudbury)
James Maloney MP (Etobicoke-Lakeshore)
Rt. Hon. Justin Trudeau MP, Prime Minister
Carol Wilding, President and CEO, Chartered Professional Accountants Ontario
Howard Brown, President Brown & Cohen Communications & Public Affairs Inc.
Michelle Koscec, Partner, Rosenswig McRae Thorpe LLP
Tony Rosso, Partner, Rosenswig McRae Thorpe LLP
Change in the WIP Rules
JANUARY 2, 2018
By Amrita Siva, CPA, CA
On September 8th, 2017, in a whirlwind of various legislative proposals released by the government, the government released its proposal for the future of “Billed-basis Accounting”. Currently, professional practices only include in income billed amounts. Their work in progress, or “WIP”, for short, would be excluded until the clients were actually billed. Effective January 1, 2024, this will no longer be the case and professional practices will have to include WIP into their income, in the year that the work is performed, not when the invoice has been billed.
Who is affected?
This impacts the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor.
What is the transition period?
The transition period commences the first tax year that begins after March 21st, 2017.
The income inclusion for each year in the transition period is the value of the WIP (defined below) at the end of that given year based on the following:
· Year 1 – 20% of the WIP at the end of the year
· Year 2 – 40% of the WIP at the end of the year
· Year 3 – 60% of the WIP at the end of the year
· Year 4 – 80% of the WIP at the end of the year
· Year 5 and onwards – 100% of the WIP at the end of the year
If your year end is December 31st – the transition commences for the 2018 year end. For the 2018 year end you would include 20% of the WIP in your income. It continues until in 2022 (Year 5 in this example) you are including 100% and you will continue to do so in the years after.
This transition period is available for those that chose NOT to include WIP in the last tax year that began before March 22, 2017.
What is the value of the WIP?
WIP is valued at the lower of cost and fair market value. While the government has not released any new information on how they define “cost” in this situation, they did issue guidance in 1989 where they defined cost as follows:
· The cost of WIP means the total of the laid-down cost of materials, the cost of direct labour (including benefits) and the applicable share of overhead expense properly chargeable to production;
· Either direct costing (allocates variable overheads to inventory) or absorption costing (allocates variable and fixed overheads to inventory) are acceptable but the method used should be the one that gives the truer picture of the taxpayer’s income;
· Prime cost, a method where no overhead is allocated, is unacceptable;
· A taxpayer is not required to include in WIP any fixed or indirect overhead costs, such as rental, secretarial and general office expenses, or any imputation of the cost of the partner’s or proprietor’s time.
While this provides a start in computing the cost, it is not a binding definition nor is it a complete one. There is a lot of flexibility in how cost is determined and we are hoping that the government releases further clarification on its definition of cost prior to the transition period.
Utilization of Key Performance Indicators (KPI) As A Measure of Success
DECEMBER 15, 2017
There are many challenges to managing a business in an ever-changing and competitive marketplace. Monitoring the company’s performance and progress is a key aspect of management. Many businesses use key performance indicators to measure and understand the success of their operations and to compare results against historical/industry data in order to make sound financial decisions and ensuring organizational goals are being achieved. Following are some KPIs:
· Profitability: to assess a business’s ability to generate earnings compared to its expenes and other relevant costs. Some metrics are:
· Return on Equity (ROE) = net income divided by shareholder’s capital. This metric measures the corporation’s profitability relative to the money shareholders have invested. Higher ROE represents an increase in the company’s ability to generate profit without the need of additional capital
· Earnings before interest, tax, depreciation and amortization (EBITDA). This metric is used to analyze and compare profitability between companies and industries
· Other metrics include gross profit, return of investment, return on sales, etc.
· Cash Flow: evaluate the ability to fund operations and meet financial obligations. Example of this is:
· Operating cash flow = earning before interest and taxes (EBIT) + depreciation – taxes +/- change in working capital. Working capital is current assets over current liabilities. This ratio measure the number of times a company can pay off current debts with cash generated from ongoing, regular (core) business activities in the same time period.
· Liquidity: measures the ability of the company to meet its short term obligations. Most common metrics include:
· Current Ratio = current assets over current liabilities. The higher the ratio, the more capable the company is in paying its obligation.
· Quick Ratio = (cash + marketable securities + accounts receivable) over current liabilities. The higher the ratio, the better the company’s liquidity position
· Solvency: measures the ability of the company to meet its long term debts. Some metrics include:
· Equity Ratio = shareholders’ equity over total assets. This measures how much shareholders would receive in the event of liquidation. Higher ratio represents the shareholders are more likely to receive some assets during the liquidation.
· Debt to Equity Ratio = total liabilities over shareholders’ equity. This ratio measures the company’s financial leverage. Lower ratio signifies less risk to the lender and more ability to repay the loan.
· Efficiency: analyze how well a company uses its assets and liabilities internally. It includes:
· Asset Turnover Ratio = sales over average total assets. This measures the efficiency of a company’s use of its assets in generating sales revenue. Company with low profit margin will tend to have high asset turnover. The higher the ratio, the better the company is performing.
At the initial stage, it is important for businesses to establish their KPI targets and goals and choosing the proper KPIs to evaluate performance. These targets will be utilized as a benchmark to compare against actuals and to identify potential problems and opportunities.
Income Sprinkling Update
DECEMBER 14, 2017
By Amrita Siva, CPA, CA
Yesterday morning, the Senate released a statement that recommended that the Liberal government abandon its new small business tax proposal, or at a minimum delay it until 2019, so that a more detailed study of its impact could be conducted.
Yesterday afternoon, the Finance Minister plunged ahead with his proposals and released further details on dividend sprinkling shares. He also announced that the passive income rules will be released and effective after the 2018 Federal Budget.
While the changes come into affect January 1, 2018, the government has given businesses until December 31, 2018 to adjust to these changes before filing their 2018 taxes. The announcement yesterday afternoon was made to clarify the situation around when an individual could receive a dividend from a private corporation and have it taxed at his/her marginal tax rate.
Income received by those aged 25 and older will be subject to a “reasonable return” test if none of the new specific exclusions apply. Any income that exceeds a “reasonable return” will be taxed at the highest marginal tax rate. A reasonable return will consider what the individual has contributed (labour contributions, capital contributions, risks assumed, previous amounts received and other factors. The government has specifically listed as a contribution “other relevant factors” but has not defined this.). It will also consider what other family members have contributed to the business in comparison.
Additionally, there will be no additional tax (beyond what they would normally pay) for those that are using their lifetime capital gains exemption on eligible capital gains.
The following people are not subject to this “reasonable return” test:
1) The spouse of a business owner where the business owner is aged 65 or over and the business owner has contributed meaningfully to the business;
2) Adults aged 18 and over who have made a substantial labour contribution (average of 20 hours per week) during the year or during any of the past five years. The government has said that the 5 years do not have to be continuous, or after 2017. Therefore, the rules are currently very broad regarding when specifically or within what time period, if any, the five years pertains to.;
3) Adults aged 25 and over who own 10% or more (votes and value) of a corporation that earns less than 90% of its income from the provision of services and is not a professional corporation.
Those between the ages of 18 and 24 who have contributed to the family business with their own capital will also be subject to the “reasonable return” test on that related income. However, if it is an unrelated business, they will be allowed a government regulated rate of return on the capital contributed to the business.
The changes do not generally impact our current thinking for year end planning. If you are wondering how this will affect you and your business, feel free to contact us.
CRA Calls Can be Scary. Fake CRA Calls Can be Even Scarier.
DECEMBER 11, 2017
By Joseph Handcock, CPA, CA
Many people fear getting a call from Canada Revenue Agency (CRA), worried that it means they are in trouble with the tax man. When that supposed call comes threatening to have the RCMP come to the door and throw you in jail, a real fear can set in.
There is a growing number of scammers that apply these tactics. They want to throw you off by the threats, so you provide them with what they want – personal information or immediate payment (through gift cards for example).
If you ever receive a call you find suspicious, do not provide any personal information. Hang up, then get the facts directly from CRA by either calling directly at 1-800-959-8281, or checking your “My Account” or “My Business Account” online.
Be aware that the real CRA:
- will never ask for personal information through clicking on a link, through an email or text message
- will never request payment by gift card or prepaid credit card and CRA does not send emails containing Interac e-transfer payments or refund details
CRA is very aware of these and other scams, and have outlined how to recognize these frauds:
You may wish to also advise the Canadian Anti-Fraud Centre which is the government department that looks to shut these schemes down:
How to Avoid Common Pitfalls When Operating a
Mortgage Investment Corporation
DECEMBER 5, 2017
RMT Manager Yale Ren has been in the just released winter edition of Private Matter Today. Read the article below or click here to view the full magazine.
RMT in the Financial Post
About that small biz tax cut by Ontario — chances are your taxes are actually about to go up
DECEMBER 1, 2017
Both the Federal and Ontario government has made a great deal of noise about helping entrepreneurs by reducing the corporate tax rate. What they didn’t mention was:
- the dividend tax rate has gone up so that the owner is no better off once the money is paid out by way of dividend to the owner
- historic retained earnings are also subject to higher rate
RMT Managing Partner Jeff McRae spoke with the National Post’s Jesse Snyder about the impact of proposed small business tax cuts. See the full article below or click here for the Financial Post link.
OTTAWA — Business owners will face higher taxes on retained earnings after Ontario lowers its small business rate, following a similar move in Ottawa that has led to higher taxes on some corporate dividends, according to analysts.
On Nov. 14 Ontario announced it would reduce its small business tax rate from 4.5 per cent to 3.5 per cent to counteract its recent minimum wage hike, one month after Ottawa made a similar cut.
The tax cuts were widely welcomed by the business community, but experts say the changes come at a lesser-known cost: an increase in the personal income tax rate on so-called “non-eligible” dividends paid out by Canadian controlled private corporations (CCPCs).
“It effectively means that your total rates will be going up,” said David Malach, a tax litigation lawyer at Aird & Berlis LLP in Toronto.
In its fall economic statement, Ontario also said that its tax credit on non-eligible dividends would be reduced alongside the reduction in its small business tax rate, effectively raising overall tax rates on those dividends by one per cent.
The Ontario finance department said Wednesday it would be lowering the tax credit “in effect, over-refund corporate tax.”
Ottawa’s changes mean that tax rates on non-eligible dividends for a person in Ontario earning $50,000 will now increase from 17.4 per cent to 19.3 per cent, according to an estimate by Allan Lanthier, a former chair of the Canadian Tax Foundation and now-retired partner at Ernst & Young. For Ontarians in the highest income tax bracket, taxes on non-eligible dividends will rise from 45.3 per cent to 46.8 per cent.
Ontario’s plan to reduce its small business tax rate will further increase taxes on non-eligible dividends, experts say. Already, taxes on non-eligible dividends for the highest tax bracket will rise in every province between 2017 and 2019, according to accounting firm EY, due to the reduction in overall corporate rates.
The adjustment is a result of a concept in tax policy called “integration,” which effectively aims to create a balance between personal and corporate taxes on an aggregate basis.
“This isn’t a surprise to us—we’ve been down this road before,” said Jack Mintz, a tax expert at the University of Calgary’s School of Public Policy. “When there has historically been a reduction in the small business rate, it does then require an adjustment in the dividend tax credit.”
Tax professionals interviewed by the Financial Post agree that the balance has been tipped in recent years toward personal tax rates, in turn disadvantaging corporations — a phenomenon known as “under-integration.”
“There is a bit of unfairness right now in that we don’t have perfect integration in that sense,” Malach said.
The federal government’s tax hike on the dividends was first mentioned in the footnote of a document released Oct. 16, the day the Trudeau Liberals announced the small business tax reduction from 10.5 per cent to nine per cent in 2019. The footnote said there would have to be an “adjustment” in non-eligible dividends. In a later document dated Oct. 24, it released more details about the impact of the changes, which resulted in a roughly one-to- two-per cent increase on non-eligible dividend rates.
Finance Minister Bill Morneau’s decision to reduce the small business rate was widely viewed as an attempt to appease CCPC owners, some of whom were deeply opposed to the minister’s proposed tax changes on private corporations.
“We will make sure this small business rate is effective in encouraging businesses to grow, buy new equipment and hire more workers,” Morneau said in a written statement when he announced the corporate tax reduction.
Jeff McRae, a managing partner at Rosenswig McRae Thorpe LLP in Toronto, said the dividend change will impact smaller businesses earning less than $500,000 annually, because they are eligible for the lower small business tax rate, and therefore pay the higher, or “non-eligible,” rate on dividends.
He said the change will be felt most acutely by business owners that are nearing the end of their careers, and will soon begin pulling money out of their CCPCs. Such business owners will have paid the higher corporate tax rate over the life of their CCPC, but will now also be exposed to the higher non-eligible dividend rate.
“The downside is all of your old retained earnings, all of the money you’ve built up over the years in your company, will all get taxed at the new, higher personal rate,” McRae said.
However, Dan Kelly, the president and CEO of the Canadian Federation of Independent Business, said his organization still supports the small business tax reduction, saying on the whole it will benefit most of its members. The CFIB says the corporate reduction will loosen up hundreds of millions in available revenue for small businesses.
The CFIB has been deeply critical of the other changes proposed by Ottawa, particularly a higher tax rate on some passive investments inside CCPCs.
“Of the many concerns we have about tax changes, this one is quite low down the list,” Kelly said.
The Conservative government promised to lower the small business tax rate in 2015 from 11 per cent to nine per cent over four years. In March 2016 the Liberals froze the rate at 10.5 per cent, before pledging to follow through on the cut to nine per cent in October.
The small business tax rate was also reduced in 2007 from 12 per cent to 11 per cent. In each case, tax rates on dividends were raised in order to integrate personal and corporate taxes.
Personal tax rates on dividends have risen sharply in recent years. In 1989, the highest rate on dividends was 32 per cent, while personal income tax rates were around 46 per cent. The highest rates on dividends stayed around that level until 2007, when they began increasing steadily to just over 48 per cent today. Personal tax rates for top-bracket earners, meanwhile, are currently just under 54 per cent.
Taxing the Successful Entrepreneur
NOVEMBER 15, 2017
As most of you know, the proposed changes in tax rules are geared toward taking away the benefits that entrepreneurs have under the existing tax system. What is generally lost in the discussion is the costs that entrepreneurs face. At RMT we are meeting with as many MPs as possible to ensure that they understand these costs and don’t misunderstand fairness given the Minister’s erroneous labelling of the tax increases as an attempt to restore “fairness”.
We believe that you will find the following presentation interesting – especially the incredible story of one of our entrepreneurs and the amount that he has contributed to the Canadian tax system well ahead of being able to draw any money from his growing business. The client is a star – and the use of the word “fairness” in taking more tax from him is a serious mistake.
Lets encourage entrepreneurship in Canada!
Please click on the slide below to scroll through the presentation, or click here for the stacked version.
Letter To The Ministry Of Finance
NOVEMBER 10, 2017
Dear Minister Sousa:
While recently listening to your speech at the Toronto Board of Trade event, I was impressed with your passion for success in Ontario and your commitment to balancing the many challenges that face the Province. We live in a great place and I appreciate a government that attempts to find solutions to the challenges of meeting the needs of a diverse population.
My particular area of interest is entrepreneurs and entrepreneurship. I listened to your comments on Tuesday relating to Ontario’s competitive position with the U.S. and our favourable tax treatment for business. I agree with you that even with the possible changes from the Trump administration, Canada and Ontario should remain tax competitive. Together with our skilled workforce and transportation system we are very well positioned.
However, there is a major cloud on the tax horizon with your federal counterparts. Their attack on the two major advantages for successful entrepreneurs – income splitting and tax deferral for profits not required for reinvestment – is a serious problem. Once entrepreneurs become successful these two tools are the major advantages that entrepreneurs have. After years of taking risk, paying for their employees CPP, EI, Worker Comp and EHT they finally get the benefit of income splitting and deferral if they happen to succeed.
I implore you to discourage your Federal counterparts from making these changes. I have spoken to several of our most successful entrepreneurs and they are extremely unhappy regarding some of the tax strategies the Federal Liberals plan to change that apply to successful entrepreneurs. These are business owners who employ a substantial number of people who have the mobility to set up shop in the U.S. where many of their customers reside.
I worry that the Federal Government has locked themselves into a position by mistakenly saying this is about fairness, while not taking into account the risks and tax costs associated with entrepreneurship.
I hope that you will join in asking the Federal Government to change course and withhold their proposed changes, which are very discouraging for entrepreneurs in this province.
I look forward to your response.
Yours very truly,
ROSENSWIG MCRAE THORPE LLP
Jeff McRae, C. Dir, CPA, CA
NOVEMBER 7, 2017
Today Ontario Finance Minister Charles Sousa spoke to the Toronto Region Board of Trade and indicated that he is "of course" very concerned about NAFTA. He was asked about the impact of reduced US taxes and how they might encourage entrepreneurs to move businesses south of the border.
His response was that Ontario's tax rates compare favourably to the US and therefore businesses were incented to stay put. While the Minister is correct today, he failed to address the massive change in tax rules that is about to hit if the Federal Liberals make the passive investment rule changes. Once that happens successful entrepreneurs will be forced to withdraw any profits not required for working capital or capital additions at a 53% tax rate. At that point Ontario and Canada's advantage is gone.
Hopefully sanity prevails and we don't discourage success in Canada. Let's stick with a system that is balancing taxes and incentives in an appropriate way and is helping encourage entrepreneurship in Ontario.
OCTOBER 29, 2017
New standards for Review Engagements will be effective for financial statements with periods ending on or after December 14, 2017. This year as you and your staff prepare and work with us through the Review engagement process you may notice different types of questions being asked, more questions asked in certain areas and less in others. Below are some of the key changes that you will notice.
Highlights of Key Changes
The new report will be longer and will look similar to an audit report which more clearly defines the responsibilities of management and practitioners.
The review report will conclude on whether anything has come to the attention of the practitioners that causes them to believe that the financial statement is not prepared, in all material respects, in accordance with the accounting basis used. In the existing standards, the report provides negative assurance meaning that the practitioners conclude that nothing has come to their attention that the financial statements are materially misstated.
UNDERSTANDING THE ENTITY
The new standards require a deeper understanding of your business, in particular the areas that affect financial reporting and results and the internal controls that surround them. Similar to the existing standards, there is no responsibility to evaluate the design of the controls to determine whether they have been implemented or to determine the effectiveness.
FRAUD AND NON-COMPLIANCE WITH LAWS AND REGULATIONS
The new standards require more inquiry to fraud and non-compliance with laws and regulations.
Though the concept is not new, the standards now specifically require materiality to be determined.
In summary, the goal of the new standards is still to provide the same level of assurance as before but with more clarity and transparency.
OCTOBER 23, 2017
Last week the Finance Department announced changes to the proposed legislation in response to 21,000 submissions including those from our firm, our clients, and many other similarly concerned taxpayers. Although some progress has been made we remain very concerned with the government direction of eliminating the tax benefits that entrepreneurs realize in exchange for the tax costs and risks they take on.
The revised rules will introduce a reasonableness test for payments to adult family members, which will be more stringent for those aged 18-24. The revised rules are expected to allow income to be split with adult children who currently or previously contributed to the business through labour, capital, equity, or financial contribution. These new rules will significantly impact many successful entrepreneurs.
Dividend planning for 2017 for low income family members should be carefully considered and potentially increased.
Related revised draft legislation is expected this fall with an effective date of January 1, 2018.
Lifetime Capital Gains Exemption
Based on the feedback received and identified potential unintended consequences, the government is not moving forward with any changes that limit access to the Lifetime Capital Gains Exemption. This will allow trusts and other structures used for intergenerational transfers to continue to work effectively.
Passive Income In Canadian Controlled Private Corporations
This is a crucial area as proposed changes will almost double tax on passive income that doesn’t qualify under an exception. Rates of tax will approach 75%!
The government advised that legislation would ensure all passive assets held by corporations before the change would be grandfathered, and would not fall under the new rules. There would also be a $50,000 annual passive income exemption so that, in the government’s view, a company would be able to have about $1M of passive investments and not be impacted by the proposed change.
Finance has also indicated that special rules will be developed to ensure that venture capital investments do not face the same disadvantages that they are proposing for other passive investments.
Finance’s release of information related to passive investing is so full of holes that it is impossible to have much certainty. For example it is clear that existing investment should realize no change to current tax rules. However what happens when those investments are sold and the funds reinvested is very unclear.
We are considering whether or not investment portfolios should be maximized and reoriented before the budget date.
The government noted that draft legislation would be introduced with the 2018 budget, and be effective at budget date. The exact impact of the changes, and how the exemption would work will not be clear until the draft legislation can be reviewed.
Converting Income into Capital Gains
The rules targeting so called “surplus stripping” will not be moving forward with the legislation. The government did note a desire “to develop proposals to better accommodate intergenerational transfers of businesses while protecting fairness of the tax system”. The government will consult with business, and may introduce revised legislation on the issue in the future.
Aside from these announced changes, the government also took the opportunity to announce their intent to reduce the small business federal corporate tax rate from the 10.5% current rate to 10% effective January 1, 2018 and 9% effective January 1, 2019. For a company with taxable income of $500,000, this would result in savings of a meagre $7,500 when fully implemented.
The government was also clear that although the consultation period is over, they are still soliciting and hearing feedback – so please let your voice be heard by contacting your local MP or e-mailing the Department at email@example.com.
At Rosenswig McRae Thorpe LLP, we have attended a number of meetings with MPs and we would be happy to attend any meetings with your local members.
OCTOBER 3, 2017
We have been overwhelmed with the thoughtful responses our clients have prepared in response to the Liberal governments attack on entrepreneurs and will be releasing a series of those responses in the coming weeks. Here is an example of a letter written to our clients MP and the Minister of Finance:
Dear Minister Morneau,
I’ve been a committed Liberal for a long time, worked for Carolyn Bennett during elections for the two decades I lived in St. Paul’s riding, and I'm a monthly Liberal Party financial supporter.
I’m writing to add my voice of concern and consternation about your quest to seemingly want to undo a tax system that has supported and incented successful Canadian small business entrepreneurs like me.
In 1989 when I was 48 years old I started my own custom publishing business.
Over twenty-five years that small business grew successfully into a profitable marketing communications agency and ended up employing 140 people. Over the intervening years, I was rewarded for my early and ongoing risk with dividends and smart tax saving strategies. It made the challenge and quest worthwhile.
I was also proud that hundreds of Canadians besides myself benefited financially through employment at my company —and how millions of payroll dollars paid by our income tax dollars that enriched our economy, along with all the corporate taxes that my company paid. Definitely a win-win for our country and lots of middle class Canadians.
I have no problem if my/your Government eliminates tax loopholes and imposes hard-fisted treatment on tax cheats. However, I think it’s grossly unfair nd completely misguided for this Liberal government to supposedly fix or dismantle a small business taxation system that’s not fundamentally broken.
I remain a strong Liberal and I’m very pleased with your Government’s record to date. Please don’t screw it up.
SEPTEMBER 24, 2017
On September 8, 2017, the Ministry of Finance continued the onslaught started earlier this summer by releasing additional draft changes to legislation with part of the focus being on the Excise Tax Act which governs GST/HST.
Under the proposed legislation certain limited partnership cash distributions may be subject to GST/HST.
The government is proposing to tax cash distributions made from an investment partnership to a general partner if the general partner is rendering “management or administrative services”. The general partner would collect HST from the limited partnership. The limited partner is not able to claim the HST paid back from the government because it is not allowed to register for HST because it is an investment partnership.
The amount of HST charged would not depend on the cash distributed to the general partner but the fair value of the services performed. Therefore, it is possible for a small cash distribution to be made but have significant HST charged if the fair market value of the services is substantial.
A general partner that is performing activities in capacity as a general partner is not considered to be making a supply to the partnership provided such activities were not “otherwise than in the course of the partnership’s activities” and as such, no GST/HST applied to distributions compensating the general partner for those activities.
Who May Be Impacted
In order to be impacted by these rules a partnership has to be classified as an investment partnership. The government has provided a very broad definition of investment partnership. Generally, it is a partnership that holds investments and not a partnership that’s primary goal is directly acquiring and managing real estate properties, would fall under this definition. Therefore a partnership that holds REIT may fall under this definition but a partnership that directly holds the real estate may not.
However, it is good reason to review all partnership arrangements carefully to see if the partnership may be affected.
Comments on the proposals may be made until October 10, 2017 after which the legislation would move forward, but be aware that the effective date in the legislation is announcement day, September 8, 2017. Given the effective date, it is possible CRA may start to administer based on the proposed legislation.
SEPTEMBER 14, 2017
We have been overwhelmed with the thoughtful responses our clients have prepared in response to the Liberal governments attack on entrepreneurs and will be releasing a series of those responses in the coming weeks. Here is an example of a letter written to our clients MP and the Minister of Finance:
Dear Finance Minister,
I am writing on behalf of myself and my co-founder.
We are now a respected small business with 8 partners, 35 employees and 100’s of clients in Canada and across North America. But when we started in 2001 we financed our business by mortgaging our homes. It was a big risk but we took it. We worked hard (70+ hour weeks) and in the early years we wouldn’t have survived if our spouses didn’t work. But we persevered and eventually achieved success, growing our business several 1000% and creating employment for over 40 people. And we pay a lot of money each month into EI and CPP and payroll tax – money that wouldn’t be generated if we hadn’t founded our business. We’ve never asked for help. We’ve never looked for government funding or grants. And if we had failed we wouldn’t have had access to EI or support.
We had difficult times in the early days and hit many thresholds where we struggled deciding whether to continue. If the restrictions you’re proposing had existed when we started, we may not have even gone forward. We took risks in search of long-term success. Your proposed legislation discourages risk taking and entrepreneurship. If you strip out the returns that entrepreneurs can realize, fewer of them will be willing to take the risk to start their businesses and will stay in the security and comfort of being an employee. And employees don’t drive growth – entrepreneurs do!
Canada is just beginning to experience an entrepreneurial renaissance. If your intention is to treat entrepreneurs like employees, you’ll suppress the burgeoning economic momentum that is just beginning to take hold in Canada. That willingness to take risk and create jobs should be rewarded so that we have a better future.
SEPTEMBER 8, 2017
We have been overwhelmed with the thoughtful responses our clients have prepared in response to the Liberal governments attack on entrepreneurs and will be releasing a series of those responses in the coming weeks. Here is an example of a letter written to our clients MP and the Minister of Finance:
Dear Minister Morneau,
I write to you as a small business owner on a matter of great concern, the proposed changes to tax planning options for entrepreneurs. Your department’s stated objective of eliminating all tax advantages that currently accrue to entrepreneurs is simply wrong and will result in serious damage to the small business and entrepreneurial community in this country.
I own and operate an advertising agency that serves the not-for-profit sector exclusively. We help our charitable clients raise more money and recruit more donors and volunteers. We do our best to keep our prices down, recognizing the important work that our clients do. We are profit-making but not excessively so. I employ almost 40 staff, for whom I pay CPP, Employment Insurance and Ontario's health tax in addition to their salaries. I pay regular income taxes on the salary I draw from the business.
I also use some of the tax planning options that are currently available to entrepreneurs. I do so to provide for my eventual retirement as I have no pension entitlements. The most salient difference between my employees, indeed all employees, and I is the economic risks that I have taken personally to found and run a small business. Even today, the bank requires my personal guarantee on any financing associated with my business. The future of my family and I depends on the success of our business, and that is always far from a sure thing.
Entrepreneurs like me don’t have the security of a pension or the protection of a union, but your department wants to characterize the few modest tax planning options I have access to as “tax loopholes” and seeks to do away with them. That is a shame. I believe you and your government should be encouraging entrepreneurs and small-business operators and recognizing the fundamental differences between those who enjoy the security of a steady pay cheque and those of us who risk everything to build something worthwhile, a business that accomplishes something while employing others.
Please don’t allow your jealous bureaucrats to destroy the future prospects of Canada’s entrepreneurs.
SEPTEMBER 6, 2017
I’m writing to you with respect to the proposed tax changes which will negatively impact many Canadian entrepreneurs and small businesses. I began my career as an entrepreneur, and for the first 20 years of my working life ran a privately-held small business that had about 75 employees. As a result, I’m well-aware of the commitment, risks, frustrations and rewards associated with running a small business in Canada. The second stage of my career was as an employee of a multi-national corporation. As a result, I am also well aware of those same items as they pertain to being an employee. In my experience there are significant differences between the two worlds – most having to do with risk and reward.
As an entrepreneur and owner of a growing business, I can well remember looking at my personal tax bill and noting that I got less for my overall tax paid than my employees did. It was frustrating to think that I was creating employment for many people directly and indirectly, and yet there was little recognition of the risks my family and I were taking to provide the platform for this. The only way to level the playing field was through careful tax planning. As an employee I did my job well, growing a business in the corporate world. I was unable to take advantage of some of the tax planning that I had done in my small-business life, but was not concerned because the personal risks I took were lower and not as fundamental, and the systemic advantages that are available to employees were available to me.
When I read Minister Morneau’s article in the Globe and Mail yesterday, I must say that I was taken aback by its populist tone and irritated by Mr. Morneau’s statement that his business background puts him in the position to understand what it takes to run a business. I think this is only partly true. I would respectfully submit that when he assumed control of his family business it was well past the stage where he would have had to undertake many of the personal risks that most entrepreneurs and small business owners shoulder. This takes nothing away from his outstanding success in growing that business to what it has become. It’s just that I don’t think he can claim to truly understand what it takes to run most of the businesses that the proposed changes will impact.
A colleague of mine, who heads an accounting firm focused on small business, has written a thoughtful letter to Minister Morneau which illustrates far better than I can the impact of the proposed changes. You can find it directly below this article.
It’s all about balance. These changes will remove some of things that level the playing field and make taking the risks associated with starting and growing a small business worthwhile. Don’t we want to encourage people to start and build businesses in Canada? I think we do. Do you? If so, please pay attention to what’s happening with respect to these proposed changes and to the reaction that’s being generated by them. If we want to introduce more fairness into our tax system, let’s be brave and rethink the model totally rather than unfairly singling out a diverse group.
August 31, 2017
Your department has created a plan that is the death of tax planning for entrepreneurs. Rather than commenting on the details, we wish to provide our view of the bigger picture. Please reflect on the importance of entrepreneurs and don't equate the entrepreneur's tax regime with the significantly different landscape of an employee.
I am writing on behalf of my partners at Rosenswig McRae Thorpe Chartered Professional Accountants. Formed in 1980, we are a respected accounting firm with 4 partners, 25 employees and more than 200 clients-most of whom are entrepreneurs. Our clients represent a diverse group of entrepreneurs who have taken risks to grow and expand their businesses. A number of our clients have been cited on lists recognizing top entrepreneurs in Canada.
These clients will be impacted negatively in a significant way if you proceed with your current plan-and in my conversations, many have indicated a high level of anger and frustration. I estimate that these clients alone employ more than 3,000 Canadians. In addition to personal and corporate income tax, they have contributed more than $75 million in payroll taxes over the past five years.
We believe that a complete rethinking of your department's policy direction is needed. Your big picture objective of eliminating all tax advantages that currently accrue to entrepreneurs is simply wrong and will result in serious damage to the small business and entrepreneurial community in this country.
Your plan states that the government's intention is to "help businesses grow, create jobs and support communities." However, the result of the plan will be to eliminate virtually all broad based tax-planning strategies for entrepreneurs while creating outrageously high tax rates for estates.
We think that the current tax system-while not perfect-has worked well for Canadians and has helped create a thriving small business sector. We have many entrepreneurial clients who have left the comfort of secure jobs with fixed salaries and less risk in exchange for the risks and returns available to entrepreneurs. We know that many of these individuals have been prepared to take entrepreneurial risk in exchange for the opportunity to win financially and to gain tax benefits that are not available to those who don’t take such risks.
Given the importance of entrepreneurs to Canadian society, we were deeply dismayed and disappointed by your comparison of entrepreneurs to employees. The suggestion that the changes you are proposing create a "fairer" tax system and that you are closing loopholes discounts the realities facing entrepreneurs. Although entrepreneurs enjoy some benefits, they also face significant costs and downsides not shared by employees. Among these:
1. Contribution to government programs
Employers fund 50% of CPP, 60% of Employment Insurance and 100% of Ontario's health tax. These contributions are made irrespective of the profitability of a company. For many employers, the cost of these plans exceeds the profits of their companies. This is a significant additional form of taxation that is borne by employers.
2. Administration of tax collection
Entrepreneurs establish and administer the collection of various government taxes at their own expense. The cost of this administration is not insignificant for small business owners.
Most importantly, entrepreneurs take risk with uncertain returns-and these risks are what create opportunities for both the entrepreneurs and their employees. In many cases those risks include taking on personal debt or contributing their after-tax dollars to support their businesses. In all cases they involve relinquishing the security of paid statutory and other holidays, benefits and fixed hours. That risk-taking spirit is what drives our economy.
4. Payment of tax prior to receipt of cash
In general, employees pay tax when they receive their pay cheques; however, employers are responsible for paying tax based on accrual accounting. As a result, most corporations are paying tax well before they have received the associated revenue.
Over the last decade, the tax benefits of corporate structures have already been tightened to reduce the advantages available to entrepreneurs. Among the significant changes:
(a) The introduction of a higher tax rate on dividends that come from income taxed at favourable small business tax rates. This has significantly reduced the benefit of the small business deduction; and
(b) The elimination of the ability for professionals to defer taxation of revenue not yet invoiced.
The proposed legislation discourages risk taking and entrepreneurship. It appears to be drafted from the perspective of employees who resent perceived advantages for entrepreneurs. Those employees, however, take advantage of government pensions, employer paid benefits, CPP, EI, EHT and other benefits. A wiser approach would recognize that those who create employment and opportunity should be incented and also treated with respect.
Creating a tax system that rewards entrepreneurs with some deferral and income-splitting opportunities was smart economic policy. Your government and previous governments have already restricted these policies in significant ways. Calling these benefits loopholes is a mistake and ignores the reality that entrepreneurs contribute and take risks in a materially different way than employees. That willingness to take risk and create jobs should be rewarded so that we have a better future in Canada.
If your intention is to treat entrepreneurs identically to employees, then we think you should also address the numerous costs of entrepreneurship noted in this letter. As just one example, shouldn’t the entrepreneur have payroll taxes treated as credits against tax payable?
You may think that tweaking the tax system to take more dollars from entrepreneurs will help you meet your overall objectives. But in fact targeting Canadian entrepreneurs by eliminating virtually all their tax benefits will be a terrible mistake for our economy and our country.
Yours very truly,
ROSENSWIG McRAE THORPE LLP
Jeff McRae, CPA,CA
July 20, 2017
The 2017 Federal Budget suggested possible changes to legislation affecting common tax planning techniques for entrepreneurs. This week the Finance Department introduced proposed legislation and announced it was starting consultations with the public. Although early in the legislative process and any final legislation may be different than what has been proposed, the proposed legislation would yield significant changes for owners of private corporations.
Reduced Income Sprinkling
Application of Split Income Tax
There are split income tax rules currently in place (referred to as the “kiddie tax” rule as they currently are in place only for minors) which have the impact of split income being taxed at the highest marginal rate and not the effective rate of the individual reporting the income.
Under the proposed rules:
– The application of the split income tax is being expanded to
o remove the age barrier (the tax could apply to adults as well as minors)
o at any time during the year an adult receives income derived from the business of a related, Canadian resident, individual
– The types of income to be classified as “split income” has been expanded to include income such as capital gains from certain property after 2017 where that property earned income to which split income applied, and compounding income for recipients under 25 (income from monies on which split income tax was paid)
A simple example would be an adult child receiving a dividend on shares of a corporation owned by the child’s parent.
There is a reasonability test whereby, if the payment received is reasonable compensation that would have been paid to someone who was at arm’s length, then the amount would not have the split income tax apply. This is to allow for family who are actively involved in the business to be reasonably compensated.
Constrain multiplication of the capital gains exemption
The impact of these changes is to prevent multiple family members to access their lifetime capital gains exemption.
On dispositions after 2017 (though there are transitional rules to be aware of):
– in order to claim a capital gains exemption, the individual would have to be the age of 18 or older at the end of the year
– the exemption is not available to the extent the taxable capital gain would be included in split income per above and
– No exemption would be available related to gains accrued during the time property was held by a trust, subject to certain exceptions (spousal or common law trusts, employee share ownership trusts)
The proposals also include anti-avoidance rules to prevent taxpayers from removing corporate surplus in the form of capital gains by converting certain gains realized between non-arm’s length parties to deemed dividends.
The Finance Department provided comment on their intention to increase the tax rate payable by private corporations on after tax funds of active business which are not reinvested in the active business, but instead into passive investments. There are various potential approaches noted which are quite complex, though all work to increase this tax rate.
The consultation period provided by the government is scheduled to close in early October. If you would like to provide your views directly to the government, you can do so by e-mailing to firstname.lastname@example.org.
May 5, 2017
Canada has a tax system whereby individuals can pay up to 53% tax but corporations in Ontario pay 26.5% and in some cases as low as 15.5%. If structured correctly, lawyers can receive their partnership income inside a corporation thereby reducing their immediate tax by 27%.
As long as the money is left inside the corporation, there is no additional tax. Once the money is withdrawn, additional tax must be paid.
Another benefit to incorporation is having the opportunity to pay personal tax on the partnership income when you are in a lower tax bracket – possibly when you are retired. Therefore, instead of paying tax at the top rates, you will pay tax on the income at the middle rates.
Let’s say that you make $500K a year, and need $200K pre-tax to live on. Therefore you have $300K pre-tax to invest. If you don’t incorporate, you will pay 53% tax on $300K and have $141K to invest. If you do incorporate, you will pay 26.5% tax on the $300k and have $221k to invest. That’s an additional 80k to invest!
Further, you remove the $300K from the corporation when you retire and are in a lower tax bracket. Therefore, instead of paying 53% tax, you pay 46% (income up to $150K is taxed at this rate). This is a true tax savings of 7%.
March 22, 2017
After a stressful month of worry it turns out….. no change to capital gains tax!
Tax Planning Using Private Corporations
The budget highlighted a number of private company structures that will be reviewed by the government over the next few months. It did not specifically address any changes to these structures. The strategies mentioned include;
Dividend sprinkling shares – These are shares often held by low-income family members and are used to get dividends into their hands.
Holding a passive investment portfolio inside a private corporation – These are investment corporations.
Converting a private corporation’s regular income into capital gain – as only one-half of capital gains are included in income it results in reduced taxes where this can be accomplished compared to withdrawing money by way of salary or dividends
Closing Tax Loopholes
The budget proposes to make a few changes to strengthen the integrity of the tax system;
Prevent the avoidance/deferral of income tax through the use of offsetting derivative positions in straddle transactions. The government will expand the types of capital losses that will be denied if an unrealized capital gains position is also held.
Extend to RESPs and RDSPs anti-avoidance rules similar to the ones applicable in connection with TFSAs and RRSPs
Clarify the intended meaning of “factual control” under the Income Tax Act for the purpose of determining who has control of a corporation in order to prevent inappropriate access to supports such as the small business tax rate and the enhanced refundable 35-per-cent Scientific Research and Experimental Development Tax Credit for small businesses. The rule will now look at operational control of the corporation.
Increased CRA Activity
With additional funding from the government, there will be increased audit activity from CRA including;
Increased verification activity
Hiring additional auditors and specialists with a focus on the underground economy
Developing robust business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases
Improving the quality of investigative work that targets criminal tax evaders
To simplify credit claims, the Caregiver Credit, Infirm Dependant Credit and Family Caregiver Credit will be replaced with a single credit – Canada Caregiver Credit starting in 2017/
Tuition Tax Credits will be extended starting in 2017 to expand the range of courses eligible for this credit to include occupational skills courses that are undertaken at a post-secondary institution in Canada, and to allow the full amount of bursaries received for such courses to qualify for the scholarship exemption (where conditions are otherwise met).
Starting in 2017, individuals who require medical intervention in order to conceive a child are eligible to claim the same expenses that would generally be eligible for individuals on account of medical infertility.
The Public Transit tax credit eliminated effective June 30, 2017.
Measures effecting Lawyers and Accountants
WIP elections for professionals are being eliminated so that income is taxed on an accrual basis.
February 22, 2017
Internal controls are important to help safeguard businesses against errors, theft, and fraud. There are many simple controls that a lot of business owners already have in place (locking up petty cash and blank cheques, background and criminal checks on employees and frequently changing passwords on programs). However, when it comes to accounting, some owners think they are too small to be able to implement any simple yet smart and effective internal controls.
5 simple internal controls a business owner can put in place around financial information:
1. Owner signs all cheques and only with appropriate supporting documentation attached. Proper supporting documentation would include authorized purchase order, receiving report, supplier invoice. Once paid, the invoice should be stamped or initialed to avoid duplicate payments.
2. Mail should be collected by the owner or someone who has no accounting functions. Mail should be opened by the owner but if time is a scarce resource then at a minimum the owner should open the monthly bank statements. This way bank statements cannot be tampered with and cheques and payments are received directly by the owner. If deposits at the bank are done by a person other than the owner, the owner should also complete the deposit slip before passing it off.
3. Prepare budgets as this will help owners develop expectations. Variances between actual to budget should be investigated thoroughly.
4. Review T4s for proper payroll deductions. It’s a good time to also check that the T4s match to real people who have been employed and source deductions make sense.
5. Review bank reconciliations as well as accounts receivable and payable sub-ledgers on a regular basis. This will help identify errors and unusual transactions. Reviewing the sub-ledger will allow for timely investigation of old receivable and payables which may improve cashflow.
February 9, 2017
The new residential rental property rebate (NRRPR) related to a property in Ontario can be worth as much as $24,000 to the builder.
To be eligible for a rebate there must be an:
Eligible Rental Property
• Detached or semidetached single unit house
• Condominium unit
• A unit in a coop housing corporation
• A mobile home
• A floating home
• purchased newly constructed or substantially renovated housing from a builder;
• constructed, or hired someone else to build, housing or an addition to housing;
• substantially renovated, or hired someone else to substantially renovate, housing;
• converted a non-residential property into housing; or
• made an exempt lease or sublease of land to another person.
When you buy a new rental property in Ontario:
When purchasing a property for rental purposes, you cannot assign the rebate to the builder and must file the rebate for directly with CRA. This does mean the additional upfront cash outlay of HST and waiting for rebate from CRA. Consideration should be given to such cash flow implications.
Filing deadline and time to process:
Depending on the specific type of rebate being applied for, the timing for filing can vary, but is generally a two year period starting from the date of the sale closing. The form to be submitted is GST524 and the associated forms noted therein. Generally, it takes CRA approximately two months to provide the rebate however this period can be longer if additional questions arise from CRA.
February 3, 2017
The new housing rebate related to a property in Ontario can be worth as much as $30,000 to the purchaser.
To be eligible for a rebate there must be an:
• Detached or semidetached single unit house
• Condominium unit
• A unit in a coop housing corporation
•A mobile home
• A floating home
• Purchased a newly constructed home
• Purchased a new condo
• Built a house
• Contracted someone to build a house
• Substantially renovated a house or condominium
• Contracted someone to extensively renovate a home or condo
• Added a major addition to a home
• Rebuilt a home that was destroyed by fire
• Bought shares in a newly constructed cooperative housing project
• Converted a non-residential property into a home
The property must meet the Primary Residency Requirement:
To be eligible for the rebate, a new house or condo unit must be used as the primary place of residence by the purchaser or their immediate family (meaning people related by blood, marriage, common-law partnership, or adoption). Please note that here are a number of factors considered by the CRA when determining whether or not a house is a person’s primary residence which include , but are not limited to; whether it is a mailing address for the individual, used on ID such as a driver’s licence, and how long the home has been inhabited.
When you buy a new home in Ontario for you to live in:
Typically when purchasing a new home, the related HST rebate is assigned to the builder and no rebate application is made by the purchaser. If this is not the case, you will have to separately apply for the rebate.
Filing deadline and time to process:
The rebate form GST190 (and the related, applicable provincial form) must be filed within two years of a new home or condo closing or construction completion. When a property has been built, please ensure to keep all invoices as submission of information related to these costs are required with such a rebate. Though processing times can vary, rebates are typically received from the Canada Revenue Agency (CRA) within two months.
January 25, 2017
Our goal in this presentation is to focus on the following questions:
Impact of changes
Takeaways for Company’s business
To click on the full presentation, please click on the link below:
For more information, visit us on the web: http://www.rmtcpa.ca
January 20, 2017
We have listed some common taxable benefits to help you understand the tax implications.
*Unless contributed directly to the recipient’s RRSP
** If any of these items are reimbursed such that the employee receives cash, EI must also be deducted on the amount
*** Employer is responsible to calculate personal and business use for each benefit
Depending on the specific facts for each benefit, the tax consequences may change. Please contact us if you have any questions about taxable benefits.
If you wish to discuss about Taxable Benefits and/or Payments please contact us, and visit us on the web: http://www.rmtcpa.ca
December 13, 2016
Canadians need to be aware of U.S estate taxes. U.S estate taxes has a further reaching arm than most Canadians may think. Not only does it apply to U.S real property but also U.S. securities held in Canadian brokerage accounts and U.S mutual funds.
Who is responsible for U.S estate tax?
Canadians pay estate tax based on a ratio of the individuals U.S property over the individual’s total world-wide property. Canadian residents are allowed to benefit from the same unified credit as U.S residents based on the treaty. In 2016, the exemption at its highest allowable amount is $5,450,000 U.S.
As mentioned previously, Canadians only have to pay estate tax based on the ratio of the FMV of their U.S. situs assets over their world-wide estate assets as a whole.
By way of example for a Canadian who has U.S stock in a Canadian brokerage account.
A) Canadian died in 2016 and had a total net worth of $6,500,000;
• U.S stock is worth $2,500,000 and
• Canadian home and investments are worth $4,000,000
The Canadian resident will owe $127,385 of U.S estate tax on death. He may be eligible to reduce his Canadian tax for a portion of this amount.
There are a few ways of dealing with potential U.S estate tax. The first is to seek professional advice to quantify your exposure and develop a plan. Some things that may be suggested are:
1) Transferring your U.S stocks into a Canadian investment corporation solely controlled and owned by you
2) Buying life insurance to cover the liability
3) Financing any U.S real estate purchases with non-recourse debt.
Tax law is complicated and every situation is unique.
U.S estate tax rates and regulations
The graduated estate tax rates are as follows:
If you wish to discuss about U.S. Estate tax issues or estate planning strategies please contact us, and visit us on the web: http://www.rmtcpa.ca
December 8, 2016
1) Consider making your RRSP contribution before March 1st, 2017. Double check your RRSP contribution space with CRA. For every $10, you contribute, you save up to $5.30 of tax.
2) Consider making your charitable donations to a registered charity. Consider whether donating public accounting stocks with an accrued gain is better than donating cash. For every $10 you donate (after the first $200 of donations), you save $5 in tax.
3) Consider making an RESP contribution if you have children who plan on attending post secondary education. The investment income cumulates tax free and each child in entitled to a government grant contribution to the RESP.
4) Consider selling securities with a capital loss to offset capital gains realized during the year.
For every $100 in capital gains you shelter, you can save $27 in tax.
5) Considering making your final RRSP contribution if during the year you turned 71. If you are over 71 and still have unused RRSP contribution room, consider making the contribution to a spousal RRSP (if your spouse is younger than you).
6) Consider purchasing capital assets before year end, if you are self employed. If the asset is available for use before the end of the year, you can claim one-half of the usual tax amortization for the year.
7) Consider paying a salary or bonus from your corporation to yourself in December. Usually the payroll taxes for this is due by January 15th (this may be different depending on what your payroll filer).
8) Consider withdrawing funds from your RRSP if you have low income for the year.
9) Consider postponing purchasing interest bearing investments until January. Interest must be accrued annually on the anniversary date of the investment, unless the interest is paid more frequently. Therefore, instead of purchasing the investment in December 2016 and paying tax in 2017, consider making it in January 2017 and paying the tax in 2018.
November 24, 2016
There are many benefits to be gained from the creation and administration of a family trust, both from a tax and non-tax perspective. Talk to us if you have any questions about whether the creation of a trust is right for your family. Once your trust has been established, it is very important that the trust is properly maintained, or the benefits of having a trust could be at risk.
We recommend that the trustees do the following during the year:
• Meet on a regular basis (at least annually) to review the trust investments and the needs of the beneficiaries. Record such meetings in annual trustee minutes.
• Keep appropriate records of the trust’s disbursements. Retain bank statements for the trust, along with returned cheques.
• Make sure all payment of banking, accounting, legal and management fees, etc. are paid directly from the trust account rather than any of the trustees’ or beneficiaries’ personal accounts. This includes ensuring that the trust bank account is not guaranteed by any of the trustees’ or beneficiaries’ personal funds.
• Do not deposit money in the trust account discretionally.
• Make sure that the coin or money that was used to set up the trust stays stapled to the trust document for safe keeping.
We recommend that the trustees do the following in December:
• Pay all interest on any loans from family members. The interest must be paid by January 30th of the following year to avoid adverse tax results.
• Pay out income of the trust to the beneficiaries by December 31 of each year to avoid income being taxed in the trust at top personal rate. Record payments in a trust resolution.
• If income is not paid to the beneficiaries by December 31:
i. Ensure that a decision to pay out income to the beneficiaries is recorded in a trust resolution. The resolution has to be signed by December 31 of each year.
ii. Deliver a demand promissory note to the beneficiary, or, in the case of a minor, to the guardian of the beneficiary.
• Provide trust information to us at your earliest convenience to prepare the annual trust tax return. A trust return is due 90 days after the trust’s year end.
• Beneficiaries who have taxable income will be required to file tax returns. In the case of minors, the parent or guardian of that child must file a tax return.
Tax law is complicated and every situation is unique with its own set of circumstances.
If you wish to discuss any income tax or estate planning strategies please contact us, and visit us on the web: http://www.rmtcpa.ca
November 11, 2016
While all Canadians are proud of the accomplishments of our Olympic athletes, the performance awards the athletes receive are not awarded in recognition of service to the public and do not qualify as a prescribed prize. Therefore, Olympic athletes must include performance awards in their personal taxable income when received. However, the government allows amateur athletes to take advantage of tax deferral arrangements by creating amateur athletic trusts.
What is an Amateur Athletic Trust (AAT)?
An AAT is a form of inter-vivos trust where earnings attributable to the Amateur Athlete can be deposited without having to pay tax until the funds are withdrawn from the Trust. An international sports federation (ISF) may require certain amounts (appearance fees, prizes, or endorsements) to be held, controlled, and administered by a registered Canadian amateur athletic association (RCAAA) to preserve the athlete’s eligibility to compete in sporting events sanctioned by an ISF. In these cases, the RCAAA is the trustee and the athlete is the beneficiary.
Who can create an AAT?
In order to qualify as an Amateur Athlete for AAT purpose, the athlete must be a member of a RCAAA and be eligible to complete as a Canadian National team member in an international event sanctioned by an ISF.
What can be contributed to an AAT?
Endorsement income, prize money, or income from public appearances or speeches may be contributed to an AAT, if it is received in connection with the athlete’s participation in international sporting events.
How is an ATT taxed?
Amounts contributed to an AAT, are excluded from the income of the amateur athlete. Furthermore, no tax is payable by the trust, including investment income earned by the trust. Property in an AAT is included in the beneficiary’s income on distribution or, as with the existing rules, eight years after the last year in which the athlete was eligible to compete as a Canadian national team member. Property remaining in the trust at the end of the eight-year period is deemed to have been distributed to the beneficiary. The trustees need to file a tax return for the trust no later than March 31 each year.
Income contributed to an AAT after 2013 qualify as earned income for purposes of determining the registered retirement savings plan (RRSP) contribution limit of the trust’s beneficiary.
November 3, 2016
Using a corporation can mean financial benefits and wealth accumulation but also increased administrative responsibility. Things to keep in mind after you have incorporated:
1. File form RC1 with the CRA to obtain federal and provincial tax registration numbers for corporate tax, GST/HST, payroll withholdings.
2. Open and operate corporate bank account(s) with all revenues and expenses flowing through the account(s). You will need your articles of incorporation in order to open a corporate bank account. Keep in mind business cash belongs to your corporation which is a separate person from you.
3. Prepare annual financial statements. This means selecting the way you will record your business activity either through a manual spreadsheet or using accounting software.
4. File annual Canadian corporate tax returns with the federal government and specified provinces as applicable which are due six months after year end.
5. No tax installments are required for the corporation’s first fiscal year. If there are taxes payable for your end, this may be due as soon as two months after year end.
6. Withhold and remit to Canada Revenue Agency payroll deductions, the frequency of which will depend on how salary is paid; monthly, quarterly, etc.
7. Hold annual shareholder and director meetings and document such in minutes and director’s resolutions
8. If the gross Ontario remuneration for the year is to exceed $450,000, apply for an Employer Health Tax (EHT) Account to file an annual EHT return and to pay the required EHT. Also apply if your first year salaries for all associated companies will exceed $5M.
9. Issue and file annual T4/T4A forms to evidence salary paid and T5 forms to evidence dividends and interest paid during a calendar. This is due at the end of February of the following year.
10. Have proper professional liability and general insurance.
11. Have new stationary such as business cards, letterhead, etc.
12. Use a proper signage showing the name of the corporation.
13. Change all lease agreements or contracts pertaining to you before to the name of your corporation.
October 28, 2016
Each Canadian is entitled to a Lifetime Capital Gains Exemption (“LCGE”) of up to $824,177 for 2016, (this amount is indexed annually) on the disposition of Qualified Small Business Corporation (“QSBC”) shares. The exemption is $1,000,000 on qualified farm and fishing properties. The exemption also applies to capital gains that are flowed to individuals through partnerships and trust.
How to qualify for the exemption:
To qualify for the exemption, shares of a corporation must be QSBC shares. To be a QSBC share, a few tests must be met:
1. At the time of share disposition, the corporation must be a Small Business Corporation (SBC). A SBC is a Canadian Controlled Private Corporation (CCPC) where all or substantially all (i.e., 90% or more) of the assets, on a fair market value basis, are used principally in an active business, that is carried on primarily (i.e. 50% or more) in Canada by the corporation or a related corporation.
Note: The assets meeting the 90% or more test may include shares or debt in another SBC which is controlled by the CCPC or of which the CCPC owns at least 10% of the voting shares and value.
2. The second test is a holding period test. No one other than the shareholder (or a person or partnership related to the shareholder) must have owned the shares during the 24 months immediately preceding the disposition. During this period, at least 50% of the fair market value of the corporation’s assets must have been used in an active business.
Planning regarding availability and timing of LCGE:
1. If a corporation holds non-active assets such as stocks, rental buildings, etc., consider transferring those assets to another holding company to purify the corporation.
2. Have family members as shareholders to allow access to multiple LCGE as each Canadian resident is entitled to a LCGE.
3. Consider crystalizing a gain by selling shares of the QSBC to a spouse or adult child. A reason to do this is to lock in the capital gain exemption while the corporation shares still qualify, for example, before the corporation accumulates investment assets.
Access to capital gain exemption can be reduced or denied depending on the shareholder’s previous tax claims. If you have any questions regarding LCGE and QSBC planning, please contact our office.
October 21, 2016
Canadians looking to move to the United States must consider a number of tax issues as some significant differences, noted below, must be properly planned for to avoid paying significantly higher cumulative taxes.
Income Tax Residency: U.S. persons, which includes citizens and resident aliens, are subject to tax in the United States on their worldwide income. A resident alien is a person who (1) is lawfully admitted for permanent residence; (2) meets the substantial presence test; or (3) satisfies the requirements and makes an election to be treated as a resident. Many Canadians moving to the U.S. are likely to be taxed on their worldwide income.
RRSP: Periodic withdrawals will be subject to 15% Canadian withholding tax but the cost amount of the RRSP investments as calculated on the day Canadians take up residence in the U.S. can be withdrawn tax free.
TFSA: Emigrants can continue to hold a TFSA and pay no Canadian tax on TFSA income. There is tax in the U.S. on any income earned each year in the TFSA as the tax treaty does not protect a TFSA as it does an RRSP.
RESP: Although emigrants can continue to be the subscribers on the plan after they move to the U.S, the annual income earned in the RESP plus any grant or bond money received annually would be taxable in their hands in the U.S. since the RESP is considered to be a foreign trust for U.S. tax purposes.
Capital Dividends: Under U.S. law, dividends follow a certain order of distributions so Canadian capital dividend may become taxable in the U.S.
Canadian Estate Freezes: A typical Canadian estate freeze is exchanging common stock for fixed value preferred stock to freeze the current value of the company for the founder, and pass future growth to the subscriber of new common shares. This technique may not work in the U.S. because preferred stocks are not considered stock in these transactions. The exchange will be taxable in the U.S.
Capital Gain Exemption: The U.S. does not recognize the capital gain exemption.
Allowable Business Investment Losses (ABIL): An ABIL remains a capital loss for U.S. tax purposes.
Principal Residence Exemption: Property must have been used as the principal residence for at least 2 years in the 5 year period ending on the date of sale. The exemption is only up to $250,000.
Stock Options: Benefits from an employee stock-option are taxed at different time in Canada and U.S. Double taxation may occur due to a potential mismatch of foreign taxes for foreign tax-credit purposes.
Flow-through shares: In Canada, flow-through shares allow for the “flow-through” of exploration expenses from resource companies to individual investors. The U.S does not recognize the flow through characteristic of these shares and will disallow the deduction of resource expense.
Pension Income Splitting: Canadian residents can elect to split eligible pension between spouses to reduce total taxes but the U.S. does not recognize the deduction for pension split.
Lottery winning and gambling: Lottery and gambling winnings are taxable in the U.S. Losses, however, may be deductible subject to certain limits.
The taxation of residents moving between Canada and the United States is a complex area, and is likely to remain so. Negative tax consequences can be alleviated (at least to some degree) with proper planning. If you have any questions, please contact our office.
October 13, 2016
Provincial Taxation of Individuals
There is a difference in tax rates between Ontario and Alberta. The salary difference is 6% (Alberta at 48% while Ontario 54%) while the difference on dividends received from public company’s is 7% (Alberta 32% while Ontario 39%) and the difference on dividend received from a private corporation is generally 5% (Alberta 40% while Ontario 45%). Becoming a resident of Alberta is appealing to high-income Ontario residents particularly when they are about to receive large amount of dividends, or compensation payments.
Generally speaking, where a person lives on December 31st determines what province he pays tax in for the entire year. Where an individual has residential ties to more than one province at the end of year, he will be deemed to be resident only in that province which may reasonably be regarded as his principal place of residence. The determination of a principal place of residence will be dependent on the strength of ties to each province, including where the individual has a permanent residence, where the individual’s family lives, attends school, where the individual works, and where the day-to day activities occur.
We recommend the following actions concerning provincial residency change from the perspective of an individual who is moving from Ontario to Alberta:
Sell Ontario residential properties, or list it for sale; a long-term lease with an arm’s length third party if a sale is not desirable;
Ship all of your belongings to Alberta residential address;
Purchase/lease residential property suitable for you and your family in Alberta;
Ensure that family members relocate to Alberta;
Notify the CRA and any other persons who send correspondence to you of your new address in Alberta;
Discontinue, or place on a non-resident status, your memberships or associations in Ontario, including social, community, religious and professional organizations;
Any subscription of newspapers, periodicals and magazines currently sent to you at an Ontario address should be cancelled or redirected to your Alberta residential address;
Discontinue rental of any Ontario safe deposit box or post office box;
Terminate Ontario government health insurance and apply for coverage under Alberta government health insurance;
Do not maintain a personal mailing address or telephone listing in Ontario, and have your cell phone number updated;
Discontinue use of stationery, including business cards, showing and Ontario address;
Bank account currently maintained through Ontario bank branches should be moved to Alberta bank branches;
Cancel any Ontario driver’s licence and obtain an Alberta driver licence;
Ensure your vehicles are register in Alberta;
All federal and provincial income tax returns and other filings should be prepared on the basis that you are resident in Alberta as at December 1, 201X and thereafter, assuming that appropriate steps have been taken in 201X;
Limit the time you spend in Ontario as much as possible.
The foregoing facts are in no particular order of importance. Specific personal situations could affect the actions needed.
September 14, 2016
Our goal in this presentation is to focus on the following questions:
Why are holding companies so common among higher net worth individuals?
How is investment income taxed in a corporation and how does this compare to taxation of individuals? Is it better or worse to hold investments corporately rather than personally?
How do we help with estate planning for individuals who have corporations that will cause significant capital gains tax at death?
To click on the full presentation, please click on the link below:
March 22, 2016
The much anticipated 2016 Federal budget was presented today by Finance Minister Bill Morneau. For most of our clients, the tax changes were insignificant, with the major change being the new personal high tax bracket introduced in January. Below are some tax highlights.
Restricting Small Business Rate Multiplication – The budget introduces measures that eliminate the small business deduction for corporations that provide services to a partnership during the year, where at any time, the corporation or shareholder of the corporation is a member of the partnership. This impacts professional service firms with complex structures, however it does not impact the structures used by most of our clients.
Increased Personal Service Business Rate – Effective for 2016 and later years, the federal tax rate on such corporations is increased 5% from 28% to 33% making the rates on such a business much worse off than earning the income as a self employed individual. This increases the downside for individuals who might be considered employees rather than independent contractors.
Life Insurance Transfers – Effective March 22, 2016, measures were passed to ensure that life insurance
policies transferred into a corporation do not result in amounts that can be extracted by the shareholder tax
free. This change was expected for several years.
Eligible Capital Property replaced – A new amortization (CCA) class with 5% amortization rate is being introduced eliminating eligible capital pools with the transition effective January 1, 2017. Current balances will transfer to the new CCA class. Future sales of goodwill and other former eligible capital property will result in recapture and capital gains. This effects clients who are selling their business and may make a share sale more attractive than an asset sale.
Canada Child Benefit – Effective July 2016, this replaces the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). The benefit is as much as $6,400 for children under the age of 6 and $5,400 per child aged 6 through 17. The benefit is tax free however the amount received is income tested.
Child related credits removed – The arts and fitness tax credits are being halved in 2016 and completely eliminated in 2017.
Income Splitting – The budget introduced measures to remove income splitting through the family tax cut which previously saved families up to $2,000 per year. This is eliminated effective for 2016 and future years.
Eliminating the Education and Textbook tax credits – Effective January 1, 2017, there will be no credits for education and textbooks, however a credit will remain for the tuition itself.
OAS – The changes which were put in place to move the Old Age Security application age to 67 are eliminated, accordingly OAS application remains at age 65.
Increased audit and collection activity – The budget earmarks money and concerted effort in the area of increasing CRA audit activity and CRA collections.
Making Post-Secondary Education More Affordable – Through increases to Canada Student Grants (effective for the 2016-2017 year), increasing repayment income thresholds and other similar measures.
Labour Sponsored Venture Capital Corporation (LSVCC) Tax Credit – The budget restores to 15% such credits effective for the 2016 tax year for provincially registered LSVCCs.
August 28, 2015
Meals and entertainment expenses incurred for business purposes can be written off in your company. So whether you are entertaining existing clients, potential clients, vendors or employees, these may be considered valid business expenses. Some of these are only 50% deductible for tax purposes while others could be 100%. It is important to distinguish between the two.
What meals and entertainment expenses are limited to a 50% deduction?
• Meals at restaurants where all employees are not invited;
• Tickets for a theatre, concert, athletic event or other performance;
• Private boxes at sports facilities;
• Fee paid for attendance to a conference, convention, seminar or similar event where meals are included, other than incidental items such as coffee and muffins, $50 per day is deemed to be paid for meals and entertainment and is subject to the 50% limitation.
What meals and entertainment expenses are 100% deductible?
• Meal and entertainment expenses of providing a holiday party or similar event where all the employees from a particular location are invited. Up to 6 such events are allowed in the year. Corporate clients can be included although expenses related to the clients are subject to the 50% limitation.
• Food/meals if it is part of the cost of goods sold for the business for example a restaurant, airline or hotel
• Meal pertaining to work by employees at remote work sites
• Meal and entertainment expenses incurred for a fund-raising event that was mainly for the benefit of the registered charity.
– Keep in mind there are specific rules pertaining to long haul truckers which are not covered in the above
– Also, self employed couriers and rickshaw drivers have allowable flat rate deductible amounts which may be taken
June 9, 2015
Beware of e-mails you receive that seem to come from Canada Revenue Agency (CRA) wanting to give you an increased refund through INTERAC or other means. These e-mails are NOT from CRA and are schemes to get personal information from individuals for nefarious use (identity theft, withdrawing funds from accounts, etc).
E-mails from CRA will be in both languages and will never be in only English or French. CRA is very clear that they do not send e-mails containing links (typical in e-mails requesting an INTERAC acceptance) and will not request personal information of any kind through e-mails.
If you would like more guidance, CRA has provided more information here, including examples of fraudulent e-mails, texts, letters and other materials that are circulating so you can better spot if something is fraudulent or not. If you are ever in doubt, contact CRA by phone directly so that they can confirm if a communication is legitimate.
If it seems too good to be true – unfortunately – it probably is.
June 3, 2015
Many companies, especially those in the manufacturing and technological space, take advantage of the Scientific Research & Experimental Development (“SR&ED”) tax credit program offered by the federal government in order to benefit from the funding on eligible research projects. Medical professional corporations (MPCs) may also perform work in the space of research which may qualify. Many practitioners with their own MPC work closely with hospitals, universities, or other such organizations to perform this work.
The SR&ED program allows materials and a portion of the salary for the individuals related to eligible research activities to be claimed for the credit. Where refundable, the credit can result in a current year reduction of taxes of about 60% of the actual SR&ED expenses – for example $1,000 of eligible salary expense creating a reduction/refund of up to about $600 of tax in the current year.
SR&ED claims can be filed up to 18 months after an MPCs year end. Therefore there may be an opportunity to make a claim for the last two taxation years. It is also an important factor in current and future remuneration planning.
If you would like to discuss how this opportunity may be applicable to yourself and your practice, please contact our office.
May 29, 2015
Personal tax rates in Canada are incremental which means that as you earn more income you pay more taxes. One may be able to take advantage of the incremental tax rates by moving income from the higher income spouse to the lower income spouse. This would mean income that would have been taxed at a higher incremental rate is now being taxed at a lower tax rate.
For example, in 2014, a couple with only one income earner making $100,000 gross and with no children would have paid $6,000 more in tax than a similar couple where each person made $50,000 gross.
The federal government has taken steps to provide income splitting measures in two areas, pension income splitting and new in 2014, the Family Tax Cut. Pension splitting has been around for a few years and allows people receiving pension income to transfer up to half the eligible pension amount to their spouse. The Family Tax Cut is generally available for couples that have a child under 18 at the end of the year and allows the couple to notionally shift (unlike the pension split which actually moves the income, the family tax cut is only a calculation and doesn’t actually move the income) up to $50,000 of income to allow a reduction in tax of up to $2,000.
The are also other great options one can implement for income splitting between spouses including:
Low Interest Loans – Have the higher income spouse lend money to the lower income spouse at prescribed interest rates (currently at 1%) to invest. This will allow the income earned from the investments to be taxed in the hands of the lower income spouse. Even though the higher income spouse has to report the 1% interest earned on the loan, the income earned from the investment would ideally be greater than this 1%.
Self-Employed – If one spouse is self employed and the other assists with the business, it may be possible to pay a reasonable salary or fee to the spouse. This would reduce the self employment income of the higher income spouse and move some of the income into the other spouse’ hands.
Whether income splitting with your spouse is possible and of benefit will depend on your specific situation and should be discussed with a tax professional.
March 17, 2015
A business can sometimes find the cost of health insurance premiums overwhelming. Yet not providing some form of health insurance to your employees is not an option. For some businesses, self funding employees’ health care may be an option. Canada Revenue Agency recognizes this fact and has set up rules around a private health service plan (PHSP).
To read more about Private Health Service Plans, please click on the link below:
February 14, 2015
There is still time (27 days including today!) to make your RRSP contribution to be able to deduct the contribution on your 2014 personal tax return. It may seem like a simple decision, but there are many things to consider when making an RRSP contribution.
What does an RRSP contribution do?
Contributing to your RRSP provides a dollar for dollar reduction in your taxable income. This means that if you are in the highest Ontario tax bracket, every dollar you contribute to your RRSP will reduce your taxes by almost 50 cents.
What if I don’t have the money to contribute to my RRSP on time, but will have it in a couple months?
It can make sense to borrow money on a short term basis in order to make an RRSP contribution. This will depend on your taxable income and your ability to repay the loan in a short period of time. By borrowing money and contributing before the deadline you will receive an immediate savings in taxes on your 2014 taxes. However the interest on the loan is not tax deductible so longer the loan is outstanding, the less of a tax advantage there is.
Should you or your spouse be making the contribution?
As long as both spouses have RRSP contribution room (you can confirm this with CRA or by reviewing your last Notice of Assessment), it generally is best for the person with the higher taxable income to make the contribution as they will benefit from greater tax savings. You can also choose to make a contribution on behalf of your spouse. This will allow you to get the tax deduction however when it comes time to draw the money out, it is your spouse (not you) that picks up the income and receives the money. Making this decision would be part of your overall retirement strategy.
RRSP or TFSA – Which should I do?
There is no quick answer – which is better will depend on your personal situation as there are many different factors that need to be considered such as age, expected income when the funds are drawn out, how long the money is to be put away for, etc.