If Considering Winding Up a Trust, Now is the Time
WEDNESDAY, NOVEMBER 9, 2022
If you are considering winding up a trust, now is the time to do it.
The Minister of Finance has tabled draft legislation that proposed new trust reporting rules requiring certain information on each trustee, beneficiary, settlor and protector of a trust. The upcoming changes will also require more trusts to file an annual income tax return, and bare trusts will also be subjected to the new reporting rules.
Originally, these rules impacted trust’s 2022 tax filings. An announcement was made November 4th that changed the implementation date to trust’s 2023 tax filings.
So if you were thinking about closing a trust, do not delay!
If you have any questions, please call your RMT representative.
Methods of Tax Payment after CRA Changes Requirements over $10,000
FRIDAY, NOVEMBER 4, 2022
Effective January 1, 2023 the CRA will charge a $100 penalty for each tax remittance over $10,000 paid by cheque or mail. To avoid penalties options 1 and 2 below should be used for all payments over $10,000. For payments under $10,000 all 4 options work.
1. Online Banking
Both individual and business taxes can be paid through your institutions online banking system. You have the option of pre-setting your payment date - in order to set up your individual payment, login to your financial institutions online banking system and select ‘Add a Payee’. The drop-down menu will include an option that says ‘CRA (revenue) - tax instalment/amount owing/current year tax return’, and enter your nine-digit social insurance number as your CRA account number.
The set up for business payment is nearly identical - login to your financial institutions online banking system, select ‘Add a Payee’, and select the option ‘ Federal - TXINS/GST-T/EMPTX’/Canada emergency wage subsidy repayment’. Enter your 15-digit business number as your CRA account number.
For a detailed description of the proper ‘Add a Payee’ option to select click here.
2. Pay by Debit Card, Credit Card, PayPal or Interac
Use a third-party service provider which has payment by credit, debit, PayPal or Interac - the vast majority of Canada financial institutions allow this type of payment. Your provider will send your individual and/or business remittance details to the CRA on your behalf. Your financial institution may charge a transaction fee, but the CRA does not and processing time is normally between 1-3 days.
You can pay via this method directly here.
3. Pay in Person (for under $10,000)
To pay in person, you need a personalized remittance voucher. You can order your remittance voucher here. Once an order has been placed it takes approximately 5 to 10 business days for you to receive it by mail.
You can pay at your Canadian bank, financial institution or credit union.
4. Pay by mail (for under $10,000)
Once you have received your remittance voucher, you also have the option of mailing it along with your cheque or money order to the CRA. The cheque should be made payable to the Receiver General for Canada, and mailing address is: Canada Revenue Agency, PO Box 3800 STN A, Sudbury ON P3A 0C3.
If you have any questions, please call your RMT representative.
Tax Loss Selling
WEDNESDAY, NOVEMBER 2, 2022
As we approach the end of the year, investors should consider whether it makes sense to sell stocks at a loss and then use the loss to save tax otherwise payable. With the stock market down as much as it is this year, unrealized losses are plentiful and it may make sense to recover taxes paid from gains in the previous three years. Different considerations apply depending on whether you sell the stock personally or inside your corporation.
Personal tax loss selling
It’s almost always smart for individuals to create personal losses provided the decision makes sense from an investment perspective. Any losses realized will be used first to offset current year gains, with the remainder available to carry back to any of the three preceding years.
Two items to watch out for are:
1. Selling your position in a stock and then repurchasing: there are “stop loss” rules that prevent you from realizing a capital loss if you repurchase the stock within 30 days of the trade date. These rules come into play if you, your wife, or another “affiliated” person buys the same stock either 30 days before or after selling it. A common strategy is to sell the stock and buy back a similar but different position – for example, selling TD Bank and purchasing Royal Bank.
2. Selling the losing stock to your RRSP or other Registered Investments: when you transfer the stock to your RRSP or TFSA, any capital losses are denied. This is the exact opposite of when you transfer stocks at a capital gain to your RRSP or TFSA whereby you do have to take the capital gain into income.
Corporate tax loss selling
The core advantage of realizing capital losses to utilize in the current or 3 preceding years is the same for corporations and individuals. However, the tax rules relating to corporate income with refundable taxes and capital dividend accounts adds significant complexity. Whether this is a good tax strategy is very fact driven and probably requires discussion with your tax advisor. There are two key items to consider:
1. Do you need to withdraw money from your corporation in the next few years? If you do, then remember that capital gains are your friend from a tax perspective! Capital gains generate less than 30% tax even after accounting for the personal level of tax arising from withdrawing all the gain proceeds to an individual in the top tax bracket. This compares favourably to all other forms of withdrawing cash from your corporation.
2. How large will the refund be? When you pay tax on investment income inside a corporation, the corporation automatically gets a refund for a portion of this tax when it pays you a dividend. This means the tax loss refund may not be as large as you think. On a capital gain your corporation pays 25% tax. When your corporation pays you a dividend, the corporation gets a refund of 15% of this tax back. So, if you plan on carrying back the loss to a year your corporation paid you a dividend, the potential maximum refund you may get is only 10%.
The bottom line is that if you’re an investor who has a holding company with minimal shareholder draws and is built for the future, then realizing losses can make good sense. On the other hand, if your holding company is used to create personal cash flow and most income is used to pay out to shareholders then the tax loss selling might backfire.
If you decide to do tax loss selling make sure you keep the settlement date in mind. In order for the trade to be included on your 2022 tax return the settlement must happen in 2022 which is two days after the day you place the trade. This means you have to place the trade no later than Wednesday, December 28th to have the trade included in your 2022 tax return.
If you have any questions please call your RMT representative.
A few Simple Ways to Reduce the Interest Rate Squeeze
FRIDAY, OCTOBER 21, 2022
There are plenty of complicated decisions to make in today’s environment of rising rates and its resulting impact on stock markets and investment decisions. But some adjustments are straight forward.
Following an increase of .75 percentage points on September 7, the Bank of Canada's policy rate now sits at 3.25%. With five recent hikes and more on the way, there are a few simple adjustments that business owners and investors should consider:
Put any excess cash into short and long-term interest-bearing accounts
Fixed GIC rates are rising, with banks offering nearly 5% for fixed GICs and cashable GICs approaching 3%. We have advised a number of clients who are continuing to leave cash in non interest bearing accounts to get the money working!
2. Carry less debt
Following years of free money, debt now has a real cost attached to it. Ensure that you are aggressively paying down any lines of credit, in particular those that are incurring interest that is non-deductible for income tax purposes .
Also, minimize your use of the line of credit by making sure your business is staying on top of accounts receivable collections and avoiding paying off payables early.
3. Pay your tax installments and overdue balances
The interest charged by CRA fluctuates each quarter with changes in the prime bank rate – so avoiding unnecessary interest charges is much more important than it was at the beginning of 2022.
4. Get any necessary financing earlier
Waiting too long to secure financing may mean settling for higher-cost financing or even potentially not qualifying at all as credit markets tighten. At a minimum, business owners without a line of credit should consider securing one and contemplating whether it makes sense to use these lines instead of term debt to maintain flexibility
5. Refinance variable-rate loans
Consider refinancing a variable-rate loan with a fixed-rate loan. Despite this rate hike, interest rates overall remain attractive for many types of commercial financing. Now may be a good time to secure a loan with a fixed interest rate and predictable payments. Of course, the facts differ from business to business and this is an item that you should discuss with your accountant and banker.
6. Contemplate discretionary spending
Review your 3 or 5 largest recurring monthly expenditures for interest-bearing items and how you can adjust those favourably. Also consider the alternatives of buying vs leasing assets should such a decision be looming in the near term.
To help review your options under rising interest rates, please contact a member of our team.
2022 Federal Budget Highlights
FRIDAY, APRIL 8 2022
The 2022 federal budget focuses on new spending in a wide variety of areas including housing, health care, job measures, and environmental programs. Corporate income tax increases were restricted to the banking and life insurance industries. There are no immediate increases in personal taxes, including no changes to the capital gains rates. However, the budget does mention potential future additional personal tax measures and possible changes in minimum taxes that could impact high income individuals currently paying low tax. The budget also introduced many new personal tax credits targeting assistance for affordable housing and specific medical expenses. For additional information about the below or any other 2022 federal budget measures please reach out to your RMT team member.
Corporate Measures
Larger Corporations Qualify for the Small Business Deduction
Prior to the release of the 2022 budget, small and medium size businesses in Canada had access to the small business deduction (9% tax rate on the first $500,000 of taxable income) if they had capital employed in Canada of less than $10 million. There was a grind on this limit reducing it to zero when capital reached $15 million. The budget proposes an increase in the taxable capital employed in Canada limit from $15 million to $50 million which will allow larger corporations to qualify at least in part, for the 12.2% combined Federal and Ontario corporate tax rate as opposed to the 26.5% combined Federal and Ontario corporate tax rate.
Stricter provisions surrounding corporation tax measures on investment income
There are some Canadian controlled private corporations (“CCPC”) that changed their corporate tax status to non-Canadian controlled in order to reduce their corporate tax rate on investment income. The budget proposes targeted amendments to the Income Tax Act that ensure that investment income earned and distributed by private corporations, that are in substance CCPCs, is subject to the same taxation as investment income earned and distributed by CCPCs. The targeted amendments have not yet been released.
Audits of Larger Entities
The government is continuing to invest in CRA, increasing funding starting in 2022-23 and the proceeding 5 years with an allocation of $1.2 billion. The stated goal of the funding is to provide additional resources for auditing larger entities or non-resident corporations engaged in aggressive tax planning.
Charitable Sector Amendments
There were 2 targeted measures for charitable organizations including a major change to distribution requirements:
Each year charities are required to spend a minimum amount based on the value of its investment assets, this is known as the disbursement quota. Currently the investment quota is 3.5%. This will increase to 5% for investment assets exceeding $1 million. This is effective for a charity’s fiscal period beginning on or after January 1, 2023 and will be reviewed after 5 years.
The Budget provides additional support for the charitable sector by amending the Income Tax Act to allow a charity to provide its resources to organizations that are not qualified donors provided that the charity meets certain requirements designed to ensure accountability.
Personal Tax Measures
Alternative Minimum Taxes (“AMT”)
The budget proposes to examine a new AMT and will release details of this tax later this year. Currently AMT ensures that if an individual earns preferential types of income (for example capital gains) and no other types of high rate income, the individual pays a minimum amount of tax.
Stricter Rules Surrounding Principal Residence Exemption
Fully taxable business income will result if a residential property is sold within 12 months of purchase and the sale occurs other than as a result of a specified exemption. This is a very significant change as historically many individuals have claimed either a principal residence exemption application or capital gain treatment.
Personal tax measures targeting affordable housing
Multigenerational Home Renovation Tax Credit
Starting in 2023, up to $50,000 in costs for an eligible renovation of constructing a secondary suite on a home, can be claimed to provide a $7,500 tax savings.
First-Time Home Buyer’s Tax Credit
The budget is doubling the First Time Home Buyer's Tax Credit which is applicable for home purchases after January 1, 2022. A first-time home buyer may claim the credit to save $1,500 in tax, up from the current $750 of savings.
Tax-Free First Home Savings Account
This is a new account whereby contributions to this new account will be tax-deductible, while any withdrawals (and income generated) are non-taxable. The account will assist in saving up to $40,000 with an annual cap of $8,000 per year.
Personal tax measures targeting new medical expense credits
Expansion of Medical Expenses
The budget proposes the expansion of medical expense claims to include expenses incurred by Canadians who want to become parents.
Increase in Home Accessibility Tax Credit
The qualifying expenditure limit increasing from $10,000 to $20,000 which results in a tax credit of up to $3,000 for expenses such as purchasing and installing wheelchair ramps, widening doors, etc. for seniors and those with disabilities.
Other Measures
Proposed Changes to the General Anti-Avoidance Rule (GAAR) rules are being reviewed with new legislation proposed for the end of this year. GAAR is a general provision that allows Canada Revenue Agency to deny tax benefits that are viewed as abusive.
GST/HST on newly constructed or substantially renovated residential housing
Budget 2022 proposes that all assignment sales of the above noted residential properties will be subject to GST/HST effective May 7, 2022.
Clean Technology Tax Credit
The budget announces that a tax credit of up to 30% of investments made in net-zero technologies, battery storage solutions, and clean hydrogens. Further details will be made available in the 2022 Fall Economic and Fiscal Update.
Employers that have increased payroll post April 10, 2021 should read this
SEPTEMBER 13, 2021
Many businesses are stepping up their growth plans. In providing help during this period of recovery, the Federal government has introduced The Canada Recovery Hiring Program (CRHP) which will aid some businesses with their employment costs.
Summary
The CRHP is an alternative to the current wage subsidy program (CEWS). Employers must choose one or the other.
This subsidy will apply if the following occurred:
1. There is a decline in revenue (revenue decline criteria are generally the same as those under CEWS);
2. If employees were hired after April 10; and
3. If wages increased in comparison to the March 14 to April 10, 2021 baseline period.
This new subsidy will provide businesses with funding of up to 50% (declining to 20% by the final period) of incremental remuneration paid to eligible employees during the qualifying periods in comparison to the active employees’ wages during the baseline period of March 14 to April 10, 2021 which is period 14 from CEWS.
For companies that have grown significantly in payroll since April 10, but still meet the revenue decline tests, this program can be significantly more attractive than the CEWS program. This is because CRHP pays a fixed percentage of the growth in payroll rather than the low percentage that can arise if revenue is only down modestly. However, if staffing has not increased significantly then it’s unlikely the program will benefit your company.
Duration
The program duration for this subsidy is from June 6, 2021 to November 20, 2021 where the six periods in the program are broken down into four-week increments. The application deadline is 180 days after the end of each claim period.
Eligibility
To be eligible for the subsidy, businesses must have a revenue loss of more than:
a. 0% between June 6 and July 3, 2021 (period 17)
b. 10% between July 4 – July 31 (period 18) and any following periods set out in the program.
If you have any questions or need assistance, please reach out to a team member at RMT.
2021 Ontario Budget Highlights and
Announcement of Federal Budget Date
MARCH 25, 2021
Ontario Budget
Yesterday Ontario presented their budget which did not include any major tax changes but instead focused heavily on spending, with projected deficits of $20 - $30 billion in each of the next three years.
Modernizing Anti-Avoidance Rules – The Ontario government did not specifically address any tax planning measures but did support the federal government’s plan to consult on the modernization of Canada’s anti-avoidance rules, in particular the General Anti‑Avoidance Rule (GAAR). The Ontario government encourages the federal government to consider ways to combat artificial income shifting through the use of trusts and corporate continuances. We await the Federal government's 2021 budget.
Corporate Tax Measures
Ontario Small Business Support Grant - To help small businesses most affected by government restrictions from COVID‑19, Ontario is providing a second round of Ontario Small Business Support Grant payments to eligible recipients. Approximately 120,000 small businesses will automatically benefit from an additional $1.7 billion in relief through this second round of support in the form of grants of between $10,000 and $20,000. To learn more about this program and how to qualify please review the application guide found here. The deadline is March 31, 2021.
Regional Opportunities Investment Tax Credit – Ontario is proposing to temporarily increase this tax credit to 20 per cent. Currently, this is a 10 per cent refundable corporate tax credit available to Canadian-controlled private corporations that make qualifying investments in eligible geographic areas of Ontario. Qualifying investments include those that invest more than $50,000 to construct, renovate or acquire eligible commercial and industrial buildings in eligible regions. Residential buildings are not eligible. The list of qualifying regions can be found here.
Personal Tax Measures
Temporary Ontario Jobs Training Tax Credit – A refundable tax credit to support eligible individuals whether or not they owe income tax for 2021. It is 50 per cent of eligible expenses, such as tuition and other fees paid to an eligible educational institution in Canada for courses taken in 2021, or fees paid to certain bodies in respect of an occupational, trade or professional examination taken in 2021, to a maximum credit of $2,000.
CARE Tax Credit Enhancement– This is a tax credit that was introduced in the 2019 Ontario budget. It enhances the child care expenses tax credit for families with income below $150,000. The current credit can be as high as $6,000 per child ($8,250 per child with a disability). For 2021, the credit will be enhanced by a one-time top-up equal to 20 per cent of the 2021 credit entitlements.
Previously Announced
Canada United Small Business Relief Fund - Ontario Chamber of Commerce provides a grant of up to $5,000 for PPE costs incurred by small businesses. In order to qualify, the business must have under $3M in 2019 revenues and less than 75 employees. The grant is to cover expenses incurred after March 15, 2020 and receipts are required. More information is available on the government site at - https://occ.ca/canada-united-small-business-relief-fund/
Federal Budget
The federal budget has been set for April 19, 2021.
It’s possible that significant changes could occur with respect to the capital gains inclusion rate. For business owners planning a sale of their business over the next year it's worth considering whether to complete any steps pre-budget. It's also possible that the ability to use multiple capital gain exemptions within a family could be altered.
For clients planning significant transactions in 2021, we are completing steps pre-budget to mitigate the impact of possible changes. If you have a major capital gain anticipated in 2021 and want to explore possible options pre budget please call your RMT team as soon as possible. Additionally, if you have unrealized gains in your stock portfolio and are looking to reposition your assets you should consider doing this prior to the budget.
Update on Government Assistance
MARCH 8, 2021
With some decent luck and hopefully a solid vaccine roll-out, we hope the government assistance will come to a close this summer. But for now, there is ongoing help for companies with declining revenue.
Wage subsidy
Details were announced for the extended three wage and rent subsidy periods from March 14 to June 5.
The basic formulae is unchanged from recent periods. The claim has two components:
Base Subsidy: For revenue drops of 50% or more, the subsidy will be 40% of qualified payroll costs (qualified payroll is capped at $847 per week per employee). For revenue drops less than 50% the subsidy will be the product of qualified payroll costs and the revenue drop percentage multiplied by 80%. For example, if your revenue is down 30% the subsidy will be then 24% of qualified payroll.
Top Up Subsidy: This only applies for revenue drops in excess of 50%. If revenue has dropped 70% then the subsidy will be 35%. If the drop is between 50 and 70 there is an even sliding scale from 0 at 50% to 35% at 70%. For example, if corporate revenue is down 60% the top-up subsidy will be 17.5%.
In determining the revenue decline the rules continue to permit flexibility. The key rules:
For each period you can choose the larger decline from either the previous month or the current month. For example, in period 14 which runs from March 14 to April 10 corporations can claim either the February decline or the March decline.
Beginning with the March month you compare to March 2019 since March 2020 was impacted by Covid. For all months after March revenue is compared to 2019 rather than 2020.
The option of comparing to the average pre-pandemic revenue computed as the average of January and February 2020 continues to be available. However, this option is only available if you have been using it consistently.
Rent subsidy
The rent subsidy program continues to mirror the rules for wage subsidy program
Other programs
The Canada emergency loan was increased from $40,000 to $60,000 last fall. The period for applying closes on March 31, 2021. It's important to remember that this loan is available to all companies that have non-deferrable expenses such as occupancy costs and wages. Payroll must fall between $20,000 and $1.5 million for incorporated entities. Sole proprietors, partnerships and corporations paying family members through dividends can also qualify. For the final $20,000 the business must also attest to having a need – so if your results are strong and you cannot demonstrate a need, you should not apply for the extra $20,000.
For companies severely hit by the lockdown the Highly Affected Sectors Credit Availability (HASCR) program provides BDC guarantees for loans between $25,000 and $1 million. The main criteria is a revenue decline of at least 50% in 3 months over the eight months prior to application – the months do not have to be consecutive. The program provides loans at 4% with repayment terms up to 10 years, with no principal due in the first year and is available until June 30, 2021. Corporations must apply through their primary financial institution.
If you have any questions or need assistance please reach out to a team member at RMT.
A few year-end items
DECEMBER 21, 2020
All the best to everyone for a great holiday season! It's been a challenging year and we have learned a lot about the entrepreneurial spirit in Canada through our amazing clients and friends.
A few quick pre year-end items:
1. Wage subsidy
We might sound like a broken record but we need to drill this home given its importance: please take one further look at the wage subsidy program if you haven’t recently.
Many of you reviewed carefully the wage subsidy program last summer. If you have not reviewed it since please make sure you either review yourself or reach out to RMT – the rules introduced mid-summer provide many options and apply if you have any revenue decline. The application deadline for the claims is the later of January 31, 2021 and 180 days after the end of the claim period. So for claim period 1 to 5 the deadline is January 31, 2021.
2. Rent subsidy
As well a reminder that the rent subsidy program mirrors in most ways the wage subsidy program. So, if you qualified for wage subsidy in the fall make sure you review the rent subsidy as well.
3. Home office
Many of our clients have been asking about employee deductions for home office use. On December 15th CRA released further detail on the home office expenses. The form required is T777S. Anyone who was required to, or chose to work from home at least half of the time for a minimum of four straight weeks is eligible. There are two options available.
Option 1 – Temporary flat rate method, eligible employees can claim a flat-rate deduction of $2 for each day they worked from home, up to a maximum of $400. Also, employees will not need supporting documents or a form from their employer.
Option 2 – Detailed method, employees can claim eligible expenses for home office expenses, but will need a T2200S signed by their employer and keep supporting documents for the claim.
Generally, if an employee owns their home they will benefit from the simplified method and if they rent and have a dedicated office it will be better to complete the detailed method. CRA has a calculator found here that will help employees determine whether their deduction is higher using the simplified method or the detailed method.
More information can be found here.
You may wish to share this information with your employees.
2020 Federal Economic Update Highlights
DECEMBER 2, 2020
The federal economic update was released Monday. Surprisingly, there were no substantial personal or corporate tax measures introduced. The economic update extended some COVID-19 measures and touched upon a few corporate tax measures.
COVID-19 measures extended and increased
There is a welcomed increase in the Canadian Emergency Wage Subsidy (CEWS) rate from 65% to 75% for the period beginning December 20, 2020 to March 13, 2021. Nothing else changed pertaining to the CEWS.
For the Canada Emergency Rent Subsidy (CERS), the government is proposing that the maximum rate of 65% be extended to March 13, 2021. Under the Lockdown Support program, for businesses that must shut their doors or significantly restrict their activities, the government is proposing that the 25% top-up be extended until March 13, 2021.
The application date for the CEBA Loan has also been extended to March 31, 2021.
Corporate Tax Measures
There are 2 new corporate tax measures with implementation dates of July 1, 2021.
Stock Option Limits
As previously announced in June 2019, the government intends to change the rules related to the employee stock option deduction. The government is proposing an annual limit on employee stock option grants of $200,000. Employee stock options granted by CCPCs and non-CCPCs with annual gross revenues of $500 million or less will not be subject to this new limit.
Sales Tax Changes
There were a number of changes made surrounding sales tax in order to begin taxing online services such as Netflix, online sellers, such as those selling through Amazon, as well as online short-term accommodations through digital platforms, such as Airbnb. Previously non-resident vendors did not need to collect GST/HST. Effective July 1, 2021, they will need to register, collect and remit GST/HST on taxable sales to Canadian consumers.
Increased Tax Compliance
CRA has proposed increased funding for audit activity specifically in the area of international tax evasion and aggressive tax avoidance. They will be expanding their review of higher risk tax filings, including those of high net worth individuals. Over the coming months, the CRA plans on “modernizing” the Canadian anti-avoidance rules and in particular the General Anti-Avoidance Rules so that they address sophisticated and aggressive tax planning. No further guidance was given as to how they plan on “modernizing” these rules.
Personal Tax Measures
In order to simplify the home office expense deduction due to COVID-19, the CRA will allow those working from home to claim up to $400 based on the amount of time working from home. There will be no need to track detailed expenses nor to obtain a signed T2200 from their employer. Further details are to follow.
2020 Year-end Tax Planning
NOVEMBER 23, 2020
As 2020 draws to a close we wanted to remind you that some COVID programs are still available to support both you and your business. Included in these changes are welcome revisions to the rent subsidy and home office expense guidelines.
We also thought it important that annual year-end planning not be forgotten and therefore we have included annual tax deductions reminders.
2021 also brings with it more reporting disclosure for trusts, as Canada Revenue Agency continues its scrutiny around family trusts.
COVID business supports
Many of the measures introduced over the last 9 months are still available to businesses.
Extended to December 31, 2020
CEBA loans – The interest-free loan program has been expanded by the government. The loan has increased to a maximum of $60,000, of which $20,000 may be forgivable. The application deadline has been extended to December 31, 2020. Note that the forgivable portion of the loan needs to be recorded as taxable income in the year the loan is received.
Canada Emergency Commercial Rent Assistance – If you are a landlord and have applied for CECRA, note that the loans provided by the government will be forgiven by December 31, 2020 assuming that you have complied with all program terms and conditions. The loan forgiveness will be considered taxable income.
Extended to June 2021
Canada Emergency Wage Subsidy – The wage subsidy has been extended until June 2021. The base subsidy rate will be maintained at a maximum of 65% until December 19, 2020. The application deadline for all periods through December 19, 2020 is January 31, 2021. Details for 2021 rates have yet to be released. CEWS amounts received need to be reported as income in the qualifying period to which it relates. There will be additional reporting requirements on T4s that will show employees the CEWS that the employer received.
Canada Emergency Rent Subsidy – Unlike the CECA, this subsidy is paid directly to the tenant when certain revenue decline thresholds are met. It will provide a subsidy of up to 65% of eligible expenses including rent, mortgage interest, property taxes and property insurance. Mortgage interest for a rental property will not be eligible. This subsidy will be available until June 2021.
COVID individual supports
The government continues to support individuals who are not eligible for EI because they are self employed or unable to work due to illness. Three of the new benefits are available until September 21, 2021.
Canada Recovery Benefit (CRB) – If you are self-employed and your income drops by at least 50%, you may be eligible for $500 per week, for up to 26 weeks. This benefit is income-tested, so you are required to repay $0.50 of the benefit for each dollar of annual net income above $38,000 (excluding CRB payments).
Canada Recovery Sickness Benefit – If you are unable to work due to illness or the need to self-isolate, you may be eligible for $500 per week for up to two weeks.
Canada Recovery Caregiving Benefit – If you are unable to work in order to care for a family member, you may be eligible for $500 per week for up to 26 weeks.
Home office expenses
Many employees have been working from home this year due to the COVID-19 pandemic. Historically employees received a T2200 form from their employer and are able to deduct a portion of a limited number of home expenses including utilities, property taxes and insurance.
CRA is currently considering options such as a shorter version of the current T2200 form for employees required to work from home. CRA details are expected in January.
Charitable donations
A good way to minimize your tax bill is by donating public company securities. You don’t pay capital gains tax on the appreciated security donated and you receive a donation receipt for the full fair market value of the shares. Each dollar donated above $200 can save approximately 50% in tax when you are in the top tax bracket.
RRSP
The RRSP contribution deadline for the 2020 tax year is March 1st, 2021. The contribution limit is 18% of your 2019 earned income, to a maximum of $27,230. It is important not to overcontribute or significant penalties apply. Your RRSP contribution room can be found on your notice of assessment or electronically through my account. For every $10 contributed, up to $5.35 of tax is deferred.
RRIF
The 2020 RRIF minimum withdrawal is reduced by 25% for this year.
RESP
If you have children, consider making a RESP contribution. You receive a 20% government grant up to $500 every year for every dollar contributed to the plan. To receive the maximum government grant, you will need to contribute $2,500 for the year.
The investment income earned on your contribution and the grant combined cumulates tax free. Each child is entitled to a lifetime grant maximum of $7,200. There are special considerations for children who are 16 or 17.
TFSA
The maximum amount you are allowed to contribute to your TFSA account for 2020 is $6,000 as long as you are 18 or over, and a resident in Canada. TFSA room is cumulative so check with CRA on your contribution room carrying forward from prior years. If you need to withdraw funds from your TFSA in 2021, consider withdrawing funds before the end of 2020 instead. Withdrawals from a TFSA can be re-contributed to the TFSA account in the next calendar year so drawing out the money at the end of 2020 means you can recontribute in 2021 instead of having to wait until 2022.
Trusts
Canada Revenue Agency continues to scrutinize family trusts. Please remember to keep a careful record of all decisions made by trustees. As part of CRAs increased audit activity new reporting measures were introduced for 2021.
Filing requirements – Currently, only trusts that have activity are required to file a tax return. For the 2021 year-end all trust, whether there is activity or not – will be required to file a trust tax return.
Beneficial ownership schedule – Additional information must be disclosed each year in the trust tax return concerning the various individuals involved in the trust. Such additional information includes names of the settlor, trustee, beneficiary and any person who can exert control or override decisions. This includes names, addresses, date of births, jurisdictions of resident and taxpayer identification numbers. This schedule must be filed with the 2021 tax return due in 2022 giving people time to gather any missing information.
If you have any questions about the COVID measures or year-end planning please contact your team at RMT.
2020 Ontario Budget Highlights
NOVEMBER 6, 2020
The anticipated 2020 Ontario budget was released today. Surprisingly, there were no substantial personal or corporate tax measures introduced. The budget reiterated the COVID-19 measures the Ontario government has put in place to date and touched upon a couple of new ones.
New COVID-19 measure introduced in the budget
Over the last number of months, the government has introduced a number of COVID-19 measures. One additional measure applicable to small business introduced is:
Property tax relief – Beginning in 2021, municipalities would be able to adopt a new optional property subclass for small business properties. The small business property subclass will allow municipalities to provide targeted tax relief by reducing property taxes to eligible small business properties.
Lowering Payroll Taxes for Employers
The EHT exemption increase from $490,000 to $1M will be made permanent. This is an increase in payroll tax savings for employers of up to $9,945 per year.
EHT installments starting in 2021 will be based on a $1.2M starting point for payroll threshold, up from the previous $600k. This will defer the need to pay EHT during the year.
Corporate Tax Measures – Some New Extensions of Deadlines
1. Ontario Research and Development Tax Credit (ORDTC). The proposed change would parallel the extension of the reporting deadlines for federal scientific research and experimental development claims. Corporations with tax yearends from September 13, 2018 to December 31, 2018 would have an additional six months to file an ORDTC claim and those with tax year-ends from January 1, 2019 to June 29, 2019 would have until December 31, 2020 to file a claim.
2. Ontario Cultural Media Tax Credits – There is an extension to deadlines for many aspects of these credits including The Ontario Film and Television Tax Credit, Ontario Interactive Digital Media Tax Credit and the Ontario Book Publishing Tax Credit.
Personal Tax Measures
1. Introduction of the Senior's Home Safety Tax Credit which is a refundable tax credit worth up to $2,500 and based on $10,000 of eligible home renovation improvements.
If you have any questions about these measures or other aspect of the Ontario 2020 Budget please contact your RMT representative.
New wage subsidy rules for July 5 and onward
SEPTEMBER 16, 2020
All entrepreneurs should carefully review the new Wage Subsidy rules for the period July 5 and onward.
Tax changes are coming and most of them won’t be good news! Therefore, it's important to take advantage of the last tax win for entrepreneurs that we may see for some time.
The new rules have major changes that can help entrepreneurs. Two key items to focus on:
Any rate of decrease means that a business qualifies for a particular period (and the following period). It may be small – but unlike the previous 30% test all declines receive some support
The period from which you measure the decline can be reset: it can be either comparing to January and February of 2020 or the previous 2019 comparative month.
Plenty of options are available to help entrepreneurs retain employees for the 5 months from July 5 onward. (note: the period July 5 to August 1 is referred to as period 5 under the tax legislation).
Now the details:
Starting July 5, the wage subsidy will be based on a sliding scale. So any revenue decrease will result in a wage subsidy. When revenue has decreased more than 50% for the preceding 3 months, there is an additional top-up subsidy. The subsidy rate will gradually decrease over the coming periods.
For periods 5-9, there is an option to change the prior reference period to determine revenue decline. The options are to use either the January and February 2020 average, or the equivalent month in 2019. Once this is changed, this prior reference period must be used for all the remaining claim periods. There continues to be an option to use either the current month’s revenue, or the prior month’s revenue, whichever is more advantageous.
For baseline remuneration, this can be calculated using the January 1 to March 15, 2020 average wages or July 1 to December 31, 2019 average weekly wages. For periods 5 and onwards, employees who were unpaid for 14 or more days in a claim period will now be eligible for the wage subsidy.
To ease the transition to the new CEWS rate calculation, you are permitted to take advantage of the old rules for period 5 and 6. This allows you to use the previous 75% subsidy rate for revenue drops of greater than 30%. This may provide a more advantageous subsidy.
The subsidy rate for periods 5-9 is calculated as follows, using the calculated revenue drop and the tables below.
Overall CEWS rate = base rate + top-up rate
Table 1: Base CEWS rate for claim periods 5 to 9
Table 2: Top-up rate calculation for claim periods 5 to 9:
Example 1 – less than a 50% decrease in revenue
If the baseline revenue was $10,000 and claim period revenue is $8,000, this represents a 20% revenue drop. The CEWS base rate for the period would be 24% (calculated based on Table 1 column 3: 1.2 x revenue drop of 20%). The top-up rate would not apply here as the revenue drop was less than 50% for the preceding three months, so the overall CEWS rate is 24% for period 5.
Example 2 – above 50% decrease in revenue
If the baseline revenue was $10,000 and the claim period revenue was $4,000, this represents a 60% revenue drop. From the Table 1 column 2, as this is greater than 50%, the base rate would be 60%. The top-up rate would be calculated as 12.5% (calculated based on Table 2: 1.25 x (65% - 50%), The overall CEWS rate for this period would be 72.5%. However, for this period, there is the option to use the safe harbour rule for period 5 and 6, which would provide a 75% rate subsidy.
You can find more information and a CRA calculator to help you with the above at:
This work is complicated – so please contact your team at RMT for any required help.
Continued assistance for Entrepreneurs
JULY 20, 2020
Last week the government announced new assistance to corporations that are suffering from revenue declines. The details are very thin but here are the big picture announcements from last week.
Wage Subsidy
Extended from December 2020 to June 2021. The subsidy will remain at the current rate until December 19, 2020. The current rate is for up to 65% - previously the plan was to drop the maximum percentage to 45%.
- Rate for Periods 9 & 10 will be a maximum of 65%
- Rates for Periods 11 and onwards not yet available
Remember that the program no longer requires a decline of 30% - there are a number of options to choose from and any level of decline leads to some recovery.
Small business loans
Businesses and not-for-profits seriously impacted by the pandemic can access an additional $20,000 loan on top of the original $40,000 loan. Half of this additional amount will be forgivable if repaid by December 31, 2022. The extension for claiming this loan has been extended to December 31, 2020. This additional financing is only available to companies that indicate that COVID 19 has had a significant impact. We are awaiting the final details on the process and the requirements for qualifying.
Rent subsidy
Many landlords and business owners have been frustrated with the existing program and the challenges of having the landlord and tenant work together to accomplish the plans intent. The new plan addresses this frustration and simplifies it by making the payment directly to the tenant. Elements of the new plan are:
- For the period from September 27 to December 19, 2020
- For eligible expenses up to 65% which can include both rent and interest on mortgage payments
- For businesses, charities and not-for-profits that have suffered a revenue drop
- An additional 25% is available for organizations that are required to be shut down
- Likely to be extended into 2021, but parameters will be adapted as needed
Although the details are not yet announced we expect that the percentage will move proportionally with the percentage decline in revenue.
Ontario support
Assistance will be provided to waive provincial and municipal property tax bills as well as Hydro and natural gas bills. We do not have the details yet but the intent is to help only those most impacted and heavily impacted in revenue and its only for the month of October.
The EHT exemption has been increased from $490,000 to $ 1million. This can save up to $10,000 for employers.
New wage subsidy rules for July 5 and onward
JULY 20, 2020
All entrepreneurs should carefully review the new Wage Subsidy rules for the period July 5 and onward.
Tax changes are coming and most of them won’t be good news! Therefore, it's important to take advantage of the last tax win for entrepreneurs that we may see for some time.
The new rules have major changes that can help entrepreneurs. Two key items to focus on:
Any rate of decrease means that a business qualifies for a particular period (and the following period). It may be small – but unlike the previous 30% test all declines receive some support
The period from which you measure the decline can be reset: it can be either comparing to January and February of 2020 or the previous 2019 comparative month.
Plenty of options are available to help entrepreneurs retain employees for the 5 months from July 5 onward. (note: the period July 5 to August 1 is referred to as period 5 under the tax legislation).
Now the details:
Starting July 5, the wage subsidy will be based on a sliding scale. So any revenue decrease will result in a wage subsidy. When revenue has decreased more than 50% for the preceding 3 months, there is an additional top-up subsidy. The subsidy rate will gradually decrease over the coming periods.
For periods 5-9, there is an option to change the prior reference period to determine revenue decline. The options are to use either the January and February 2020 average, or the equivalent month in 2019. Once this is changed, this prior reference period must be used for all the remaining claim periods. There continues to be an option to use either the current month’s revenue, or the prior month’s revenue, whichever is more advantageous.
For baseline remuneration, this can be calculated using the January 1 to March 15, 2020 average wages or July 1 to December 31, 2019 average weekly wages. For periods 5 and onwards, employees who were unpaid for 14 or more days in a claim period will now be eligible for the wage subsidy.
To ease the transition to the new CEWS rate calculation, you are permitted to take advantage of the old rules for period 5 and 6. This allows you to use the previous 75% subsidy rate for revenue drops of greater than 30%. This may provide a more advantageous subsidy.
The subsidy rate for periods 5-9 is calculated as follows, using the calculated revenue drop and the tables below.
Overall CEWS rate = base rate + top-up rate
Table 1: Base CEWS rate for claim periods 5 to 9
Table 2: Top-up rate calculation for claim periods 5 to 9
Example 1 – less than a 50% decrease in revenue
If the baseline revenue was $10,000 and claim period revenue is $8,000, this represents a 20% revenue drop. The CEWS base rate for the period would be 24% (calculated based on Table 1 column 3: 1.2 x revenue drop of 20%). The top-up rate would not apply here as the revenue drop was less than 50% for the preceding three months, so the overall CEWS rate is 24% for period 5.
Example 2 – above 50% decrease in revenue
If the baseline revenue was $10,000 and the claim period revenue was $4,000, this represents a 60% revenue drop. From the Table 1 column 2, as this is greater than 50%, the base rate would be 60%. The top-up rate would be calculated as 12.5% (calculated based on Table 2: 1.25 x (65% - 50%), The overall CEWS rate for this period would be 72.5%. However, for this period, there is the option to use the safe harbour rule for period 5 and 6, which would provide a 75% rate subsidy.
You can find more information and a CRA calculator to help you with the above at:
This work is complicated – so please contact your team at RMT for any required help.
Wage subsidy program changes and extension
JULY 20, 2020
The wage subsidy program has been extended until December 19, 2020. However, there are major changes to the program so it’s important to understand how your company will be impacted.
The details are complicated; however, the big picture highlights are:
-the subsidy amount will decline steadily over the next 6 months;
- the new rules allow all companies with revenue declines to apply;
- the wage subsidy will be more complex with two different subsidies being calculated for each period; and
- the subsidy will vary significantly depending on the level of decrease in revenue.
Here is an overview:
For period 4 (which ended on July 4) there is no change to how the plan works. Companies must determine whether revenue is down 30% and if so the company qualifies for the subsidy consistent with the methodology in periods 1 to 3 (75% cap up to roughly $3,400 for each 4 week period).
For period 5 (July 5 to August 1) and period 6 (August 2-29) the legislation will permit companies to select to use either the old rules or the new rules.
The new rules have the following major changes:
a) The maximum subsidy declines, beginning with $2,700 per month in period 5 and 6 and declining gradually to $900 in period 9. The maximum subsidy continues to be based on the same monthly salary of approximately $4,500 being eligible for the subsidy but with the percentage declining from 60% in periods 5 and 6 to 20% in period 9.
b) The subsidy will vary with the percentage decline in revenue. The subsidy will roughly equate to the percentage decline in revenue. If, for example, revenue is down 15% assume that you will receive a subsidy of approximately 15% for each employee's first $5,000 a month in salary for the remainder of the year. The actual mechanics give you more than that in the early periods and less in the final periods.
c) For companies with revenue declines of over 50% there is an additional subsidy that tops up the above by an additional percentage of up to 25% (called a “top-up subsidy). The top-up subsidy is calculated by multiplying the percentage decline in excess of 50 by 1.25. If, for example, revenue is down 60% then the excess of 60% decline over 50% is an excess 10% multiplied by 1.25 leads to an extra 12.5% subsidy. To add further complexity to the calculations this subsidy is based on 3 months revenue as opposed to the regular subsidy which is based on a month's revenue.
The impact of the combined subsidies is that for period 5 and 6 companies most severely impacted could receive a subsidy of up to 85%. That maximum will fall gradually to 45% by period 9.
The rule continues that allows employers to use the immediately preceding periods revenue decline in order to determine current period eligibility. If for example, period 5 revenue is down 40% and period 6 revenue is down 25% then the period 5 decline can be used to compute the subsidy for period 6.
The new rules require some additional modeling to make sure you properly claim. If you need help call your RMT team.
A few “watch outs”
JUNE 10, 2020
We are impressed by the ingenuity and hard work of our clients. When you're working hard to succeed, we prefer good news to an article about pitfalls. That said, we need to identify a few “watch outs”.
Be careful with delayed income tax and HST payments
For those of you that have deferred large amounts of income tax or HST payments a heads up!
Do not assume that all income tax payments can be delayed until September 1. A quick read of the rules may provide that impression, but beware the fine print.
Only payments due between March 18 and August 30 can be delayed. Final balances owing during this period for personal and corporate tax and tax installments between those dates can be delayed.
If you owe because you didn’t pay installments prior to March 18 then the shortfall should be paid (assuming cashflow permits). There is no interest-free period for balances that were already due.
For HST you must pay the outstanding balances that you have delayed by June 30 in order to avoid an interest charge. The legislation forgives interest only if the balances are paid by the end of June.
Interestingly, it appears to us that CRA is confused as well. We are finding interest charged inappropriately and not charged in other scenarios. So please reach out to us with any assessments that appear to overcharge.
If you have any doubts and owe a material amount please contact your RMT team for specific advice.
CERB and wage subsidy penalties
These generous programs are having teeth added to penalize those who cheat. And there are whistleblower programs being set up – so if you know individuals that are being aggressive you might want to give them a wake-up call.
This legislation is not intended to slam those in a grey area – but rather to hit hard the abusers who are double-dipping or manipulating accounting records.
Wage subsidy amounts to appear on T4s
Employees T4s will show the amount of wage subsidy that a corporation receives for that individual employee. So, employees will know how much their employer received to offset their individual salary.
Employers should be aware of this as they consider their messaging to employees.
Enhancement to existing programs
MAY 11, 2020
A couple of significant enhancements were made to the government assistance for business owners this past week. In addition, a new program was announced.
Extension of enhanced 75% wage subsidy
This program has been extended through until August 29, 2020. Previously the program terminated on June 6.
Remember that there are multiple ways to determine whether you qualify – and the program is designed around monthly results – so even if you are not consistently down 30% each month you can still qualify for those months where you meet the test.
2. Expansion of small business loans of $40,000
If you run a small business that does not have a payroll the previous rules disallowed the company from applying. The new rules permit many more companies to apply. To apply the only criteria are:
· An existing business operating account
· A business number with CRA and having filed a 2018 or 2019 tax return
· Eligible non deferable expenses of between $40k and $1.5 million
These loans are interest-free and $10,000 is forgiven provided the remainder of the loan is repaid and the terms of the loan are met
3. New Regional Relief and Recovery Fund (“RRRF”)
RRRF provides interest-free loans to help support fixed operating costs of businesses that have been affected by COVID-19. This fund is intended to help those that did not qualify for or have been declined for current Government COVID-19 relief measures – so, if you haven’t applied for BDC assistance that is already offered you will need to do that first. Priority may be given to those businesses in the manufacturing, technology, tourism and other sectors key to the region. Applications are received and accepted on a first-come, first-served basis and there is only $200 million available so quick action is required.
We suggest you consider this program if you have a business with high non-payroll costs – for example, if you run a manufacturing business with large monthly lease and rental payments this program may be worth considering. If you are a service business with high payroll costs then the wage subsidy program is a smarter route.
Eligible applicants
Applicants must:
Have 1 to 499 full-time equivalent employees and face funding pressures with fixed operating costs as a result of COVID-19
Have been a viable business before COVID-19 pandemic and plan to continue to operate their business or resume operations
Have already applied to other Government of Canada emergency credit relief measures for which they are eligible including
Canada Emergency Business Account (CEBA);
Business Credit Availability Program (BCAP) – Business Development Bank of Canada (BDC) Co-Lending and Export Development Corporation (EDC) Loan Guarantee programs; and
BDC COVID-19 Working Capital loans.
Funding
Two funding options are available (and both programs are interest-free)
Funding option 1
the amount of the loan will be the lesser of three months eligible and supported fixed operating cost or $40K
no payments required until Dec 31, 2022 and up to 25% or $10K forgivable if the remainder of the loan is paid back by December 31, 2022
Funding option 2
the amount of the loan will generally be the lesser of three months of eligible supported fixed operating costs or the max loan amount based on revenues (ranging from up to $50K for revenues below $1M to $500K for those that have revenues of $5M to $10M and above)
This loan is fully repayable
No payments required until Dec 31, 2022. Fixed payment schedule begins January 2023
Eligible expenses
Eligible expenses may include:
Capital lease payments for existing equipment and machinery and other interest expenses;
Salaries and benefits for which the business is not eligible for the wage subsidy.
Property taxes; utilities and rent (Applicants are expected to pursue with their landlord access to the Canadian Emergency Commercial Rent Assistance (CECRA) for small businesses);
Professional fees and insurance payments; and
Other fixed operating costs applicable to the applicant.
Reporting requirements
For both funding options, the SME will be required to submit a Final Report that includes a description of how the funds were used, the number of employees maintained as a result of the program and a copy of the financial statements.
Application
Applications for funding are accepted on an ongoing basis with no submission deadlines, until the Fund is fully committed administered by FedDev Ontario. The application can be accessed here: RRRF Application for Funding.
Updates on existing programs
MAY 11, 2020
Rent assistance - some clarifications have been released
The rent assistance program helps companies with annual revenue less than $20 million and suffering a 70%+ decline in revenue (using the same measures used for the wage subsidy program). Application can be for each location with rent less than $50,000 per month. For the tenant, the benefit is that their rent for each location will be reduced by at least 75%. The government handles 50% and the landlord suffers a loss of 25%. This is much more helpful than the tentative, and thankfully dropped, plan released by Ontario a week ago that indicated the subsidy would only cover 75% of the “costs” from the landlords perspective. So, we have clarity now that it’s a simple calculation based on the gross rent.
The program requires that the property owner apply through the Canada Mortgage and Housing Corporation (CMHC). The landlord must accept the terms and complete an agreement with the tenant that describes the rent reductions and confirms that the tenant will not be evicted prior to June 30. The landlord initially borrows the funds from the CMHC and then that amount is forgiven when the landlord complies with the terms of the agreement. They have also announced that for properties that are mortgage-free the program will still be available.
The program covers April, May and June. The program recognizes that applications will occur in many situations after the rent has already been paid. A credit can be offered rather than refunding the amount provided the tenant and landlord agree. The CMCH website promises that the details and application process will be available soon.
75% Wage subsidy extended
The government announced that the 75% wage subsidy program will be extended past June. This was not a surprise as the legislation was drafted to make it simple for the government to extend the subsidy through the summer. Details will follow – at this stage no announcement has been made on how long the program will be extended.
Creativity and our clients
Our clients and friends of RMT are working through reinventions and new ideas to deliver on market opportunities created recently.
If you are looking for intelligent signage for the COVID environment check out these great ideas from Proprint Services: https://proprintpromoshop.com/
Or, if you need a great design for protecting workspaces consider this product from Mecsmart that separates work spaces for both offices and manufacturing facilities: https://www.facebook.com/Mecsmart-Systems-Inc-107030517668683/
Alternative Board Presentation
MAY 7, 2020
Today Jeff McRae presented to the 25 entrepreneur members of The Alternative Board, a program run by Scott McLean and Lisa Kember under Business Leaders Growth Group. Their clients - business owners and leaders in manufacturing, industrial, professional services and other industries – benefit from executive coaching and peer advisory services to help them strengthen the business, grow profit and address challenges to ensure their success. Visit them at www.businessleadersgrowthgroup.com
Here is the presentation….
Canada emergency commercial rent assistance program
APRIL 24, 2020
The government has provided some details around the Canada Emergency Commercial Rent Assistance (CECRA) program. The specifics referred to below are gleaned from announcements as the formal legislation has not been released – accordingly, there remains some uncertainty.
Qualified small businesses, charities and NPOs paying less than $50,000 a month in rent and suffering a 70% drop in revenues will be able to reduce rent expense by 75% for April, May and June. The intent is that rent will be covered up to 25% by tenants and 50% by the government, leaving landlords with a hit for the difference. The program will be operational by mid-May.
The government’s 50% share will be in the form of a forgivable loan and the loan will be forgiven if the property owner agrees to reduce the rent by at least 75% for the three months. The agreement will include a pledge not to evict the tenant while the agreement is in place. The forgivable loan will go directly to the mortgage lender.
There appears to be some uncertainty if a tenant and landlord are not able to agree on the amount of the rent forgiveness. That uncertainty will likely be resolved as more details are released.
The government is also considering rent relief for larger businesses, additional information is expected next week.
Canada emergency wage subsidy
APRIL 13, 2020
The Canada Emergency Wage Subsidy (CEWS) legislation was passed on the weekend and the details are now available. The CEWS reimburses eligible employers for up to 75% of eligible remuneration for each of three 4 week periods commencing March 15.
Does my business qualify?
Provided your business has employees and revenue or cash collections are down by 15% in March or will be down by 30% in April and May then you qualify. Alternatively, you can also qualify if your revenue is down by the same percentages against the average of January and February of 2020. Remember each month is a separate test and separate qualification period – so you can qualify for one, two or three periods. Importantly, if you qualify as an eligible employer for one month you automatically qualify for the succeeding month as well. So, if you qualify for March then you will be an eligible employer for the first two 4 week periods; and if you qualify in April then you automatically qualify for both the final two periods.
Does the 75% reimbursement apply to non-arm’s length employees?
Yes, so long as they were on the payroll throughout the period January 1 to March 15, 2020.
How do I apply and when?
Soon, but date not known yet. Businesses will apply either through their CRA My Business Account portal or a new web-based application. Applications must be made no later than October, 2020. It is anticipated that you will receive your subsidy by cheque or direct deposit within one month of application.
If your cash flow permits, you may be wise to delay applying until you can determine which of the 4 methods of revenue comparison yields the best result. Once you have chosen a method you must keep the same methodology for all 3 periods so having more information will help you make the optimal decision.
How does it work if my business has multiple related companies?
If those companies are part of a group of related businesses that consolidate their results in normal practice then you can use the consolidated revenue to determine if your business qualifies. This is particularly helpful for our clients where a service company provides services to related companies that sell to 3rd parties.
Which salaries are eligible for reimbursement?
In most cases it's straight forward – all salaries up to 75% up to $847 a week. There are a number of technical exceptions that will apply if an employer artificially inflates income to take advantage or if the pay is part of a termination package. There are other exceptions and complications that will apply in some circumstances.
What if my business already applied for the 10% wage subsidy?
No problem, the benefit of that program will simply reduce the benefit paid under the CEWS.
If my business can’t afford to pay the remaining 25% can the program help?
Yes, there is a methodology that permits employers to reduce employee's compensation but have the reimbursement based on average earnings in the period January 1, 2020 to March 15, 2020. The reimbursement cannot exceed the amount paid to the employee. Employers are expected to attempt to pay the 25% but the plan contemplates that some employers will not be able to do that.
Wage subsidy program
APRIL 9, 2020
The complexity of this program is causing the roll-out to be delayed as the government wrestles with the conflicting challenges of avoiding abuse while ensuring simplicity and timeliness!
Here is the new information that has been released:
They are adding an element to encourage summer hires under the Canada Summer Jobs Program. To access the program a company needs to make an application. Qualified employers can claim 100% of the wages for eligible summer students to a maximum of the minimum wage.
The Canada Emergency Wage Subsidy (“CEWS”) monthly revenue test has been adjusted so that for the month of March revenue needs to decline by 15% rather than 30% in order to qualify. For April and May the rule will continue to be 30%.
The government has introduced rules to allow more companies to qualify for the CEWS. Under the revised rules there are four ways to measure the decline and employers can select the one that works best – but once they choose they have to stick with the methodology for the entire 12 week period of the program. Schematically the program options can be illustrated as follows:
The new options are intended to help in specific circumstances but the wording in the Minister’s announcement indicates that regardless of the circumstance employers can select any of the 4 methods. The new methods can help seasonal businesses, new businesses, rapidly growing companies and those that are struggling with cash collections in today’s cash tight environment.
4. The government has expanded the CEWS by introducing a 100% refund of employer contributions to CPP and EI in the rare circumstances where employees are being paid but are not working. This refund will not be subject to any maximum benefit per employee.
5. The definition of average weekly wage has now been clarified – it is the average weekly remuneration in the week between January 1 and March 15.
It’s a stressful time for those needing to make decisions now based on partial information – but the picture is starting to get clearer and more flexibility is being introduced.
Ontario credit for building additions
The Ontario government is providing a 10% credit for up to $500,000 in qualified expenditures – so a maximum credit of $50,000. If you're looking at constructing, renovating or acquiring commercial or industrial buildings outside the GTA and Ottawa please let us know. The credit only applies for rural areas in the Province. The list of eligible regions is here: https://budget.ontario.ca/2020/marchupdate/annex.html#section-3
Quick checklist
APRIL 6, 2020
If you need help with any of these tax and financing questions reach out to a member of your RMT team. We have written previously about these topics but thought a quick list might be helpful.
For entrepreneurs – tax and financing questions
Do you understand the two wage subsidy programs to help employers? The small program allows you to reduce withholding remittances by the lesser of 10% of certain payroll costs or $25,000 based on your payroll for March 15 to June 15. The more generous program provides a direct reimbursement of 75% of qualified wages for companies suffering from revenue declines of 30% in each of March, April and May.
Have you considered or implemented delays in remitting corporate tax withholdings and HST in accordance with the interest-free delay period?
If you had payroll in 2019 of between $50,000 and $1 million, have you contacted your bank to obtain the $40,000 loan that is non-interest bearing and may provide $10,000 forgiveness?
Have you considered accessing the up to $2 million in financing available to entrepreneurs through BDC? Alternatively, have you considered the co-lending program where BDC shares risk with your bank at an 80:20 ratio?
Have you had a constructive discussion with your landlord to delay rent payments?
Have you asked your banker for delays in principal payment for any term loans?
Have you put together a good assessment of your cash flow assuming that this shutdown lasts throughout the spring and that the following months have more than the usual challenges?
For investors
Off the cuff advice is the worst advice in these times. A careful look at your objectives, your current asset mix, and personal needs leads to different answers. A member of your team at RMT would be glad to participate in a call with your financial advisor.
Here are logical responses we have seen in the last weeks.
Some clients have lost sleep on their equity exposure and have revisited their comfort level with their asset mix. A quick look at TSX 60 EFT XIU gives you a sense of where we are and where we could go. 2020 began with the index at $26 and now we are at $20, a loss of 23%. If you compare the $20 to the average price of the last couple of years the decline is more like 12%. Going back to 2008, XIU fell from $22.50 to $12.30, a fall of 45% and it took 8 months to get to the bottom. If you prefer to give up some upside in exchange for sleeping at night you might wish to modify your exposure, particularly after an up week in the market.
Another client was very heavy in cash and low risk fixed income instruments and wished to start buying some equities that he and his advisor believe are long term holds. He picked a few entry points with an action plan starting last week, and intends to carefully increase equity exposure over the next 6 months. Nobody knows where the bottom is and buying high-quality portfolios in an organized way over the next while seems like a good long term strategy.
Working with your financial advisor and making sure your comfortable with the asset allocation is the place to start. We have always loved Buffett’s advice to be greedy when others are fearful and fearful when others are greedy. But it has to fit your situation.
One other item to mention: for those of you in your RIF years consider modifying downward your 2020 withdrawal. The government announced that the RIF minimum withdrawal fell by 25% so that those who don’t need the money now can leave more in the RIF to, hopefully, rebound and grow.
More on the 75% wage subsidy program
APRIL 1, 2020
More on the 75% wage subsidy program
Finance has released several details, but there is still plenty missing. You may recall that the subsidy reimburses companies suffering a 30% decline in revenue for up to $3700 per month per employee. Here is what has been announced:
This program is separate and apart from the 10% wage subsidy program. The 10% program will continue to be in place.
The new program will require an application to be filed with CRA – the ability to apply will start in three weeks. Employers will need to update each month to show that the 30% decline existed for each particular month.
Payments will begin to be made six weeks from the application date. Unlike the 10% wage subsidy program this program will not work through the employer remittance account but instead will be a separate transfer from CRA. So, for those with tight cashflow this has to be carefully managed.
To be eligible CRA will compare revenue for March, April and May of 2020 against the prior year. We have no details on precisely how this will work but it appears that it is a monthly test – a company may qualify for one month but not another.
The program will not require that employees be paid their full 100% salary. It appears that keeping employees at full pay is optional – you may be able to simply pay the employees the 75% flow through from the government if you can’t afford to pay the remaining 25% (of course paying less than 100% will require a review of relevant employment law or negotiations with employees). We have a number of questions on how this will be applied.
The finance minister committee will be releasing details “shortly”.
Another alert on cyberattacks
We’ve mentioned earlier the heightened risk. Please make sure your staff is on the look-out. Many of the current frauds appear as a reaching out from a local health authority in connection with the outbreak and a request for information. The attached links are, apparently, very dangerous.
75% wage subsidy program update
MARCH 31, 2020
The details for the 75% wage subsidy program were expected today but have been delayed until tomorrow. We will be back to you once the details are provided. The key questions are how will the 30% decline be measured and will there be anything for companies with declines less than 30% (the arbitrary nature of the firm 30% measure must be giving the government pause as it considers lower margin businesses and charities)?
There is now clarity on how the government intends to pay the subsidy to employers: it will come through reduced withholdings remittances. For most of our clients, the tax component of the withholdings in a given pay period will be much less than the 75% rebate. The excess subsidy will come from future withholding remittances – so in other words, the companies receiving the subsidy need to plan in their cashflow for the delay in getting back the full 75%.
If your feeling a little overwhelmed with the number of announcements we have two suggestions:
Review this website for complete list of programs that the government has introduced. It's an efficient resource to quickly get an overview: https://www.canada.ca/en/department-finance/economic-response-plan.html. There are separate tabs for individuals and corporations and its surprisingly user friendly.
Email your RMT team with any questions – we can then direct the question to the right person on our team to help.
75% wage subsidy program
MARCH 30, 2020
We have no written details yet; however, the announcement has been made that the 75% wage subsidy program will apply only for companies that have lost more than 30% of their revenue. How the decline will be measured is completely uncertain with more details expected tomorrow. The subsidy covers 75% of salaries up to approximately $60,000 per year (so a maximum of almost $3,750 per employee per month).
This program has no impact on employee's net pay so that should be processed as due. For government remittances, we advise waiting for tomorrow’s details and then making a decision on whether you qualify for the subsidy.
The subsidy will not have restrictions based on the number of employees or a hard cap. The announcement mentioned serious penalties for those who game the system.
Update to wage subsidy program
MARCH 30, 2020
Very short note as we wait for the government to clarify the rules concerning the enhanced small business loan programs and the 75% wage subsidy program. We will have more details on this shortly after the information is released
There is one important clarification that did come out last week on the existing 10% wage subsidy program
Partnerships, Trust and Individuals
The legislation indicates that partnerships, trusts and individuals that employ others will be eligible for the 10% wage subsidy. The initial language indicated that only qualified corporations or non profits and charities qualified. The final legislation makes more sense and broadens the types of entities that will qualify. We believe that those who employee nannies or house keepers that receive T4s qualify. This will be particularly important to understand if the rules for the 75% subsidy mirror the rules for the 10%.
Canada Emergency Loan Amounts for Small Business
One new detail was revealed with respect to the $40,000 loan program: to qualify corporations must show that they had payroll of between $50,000 and $1 million in the 2019 year.
Companies that qualify you should take advantage of this program. Your bank will likely make it easy to complete. And, the win is that upon repayment $10,000 is forgiven.
For mid sized corporations this program doesn’t apply – the programs from BDC and EDC are more relevant for these organizations.
Harmonized Sales Tax
Last week we mentioned that the government has allowed taxpayers’ to delay HST remittances. We want to remind you that HST is collected as agent for the government and accordingly directors are liable for HST not remitted. So, for many of you using the cash flow saved from HST may make sense – but tread carefully and monitor where you stand on this liability. Reducing corporate income tax withholdings on the other hand always makes sense – this liability does not flow through to the directors in most circumstances.
Remember that the delay on HST is only until June 30, 2020 – although it may be extended. We worry that for service businesses with large HST remittances this cash flow saving could haunt some taxpayers when the recovery is happening.
Major announcement
MARCH 27, 2020
For those of you making tough payroll decisions you may be wise to pause until Monday. This flies against our general recommendation that in tough times you need to make tough decisions early but here is the rationale….
The Prime Minister has announced an incredible 75% wage subsidy program for qualifying businesses and the subsidy will be back dated to Sunday March 15th. No details are available so it’s impossible to know who this will apply to (he refers to small and medium business) and what the caps will be.
Business owners will recall that the last 10% announcement for wage subsidy had a cap of $25,000 to any one employer and an individual employee cap of $1,375 – so with no details it’s impossible to tell how much this plan will help.
We will share the relevant details which are expected to be released on the weekend.
Other news from his announcement:
- HST remittance and duties and related taxes deferred until June 1.
- a new loan program offering government guaranteed loans to qualifying businesses for up to $40,000 interest free for the one year. If certain conditions are met $10,000 of the loan will be forgiven. This loan will be administered through the banks.
- an additional $12.5 billion to Export Development Canada and the Business Development Bank to assist financing for small and medium sized businesses.
We will leave editorial comments for later – but the nagging immediate question is: how will we pay for this? The 10% employer program with a $25,000 cap was not enough but 75% seems unaffordable. Time will tell.
Partnerships and Trusts
The government announced a delay of one month in the filing deadline for these important returns until May 1.
At RMT we will continue to file these as early as possible and avoid delaying this process. We appreciate your help in sending in relevant information for your taxes as you can.
Key takeaways from Ontario’s COVID-19 action plan
MARCH 26, 2020
Key takeaways from Ontario’s COVID-19 Action Plan
Implications form the Provincial announcement yesterday for entrepreneurs include:
· A proposed temporary increase to the Employer Health Tax (EHT) exemption. The exemption will be increased from $490,000 to $1 million for 2020. This will reduce the cost of labour within the additional $510,000 band by almost 2%. If you manage your own payroll rather than using an outside provider you should ensure that you take advantage of this.
· You have the option of deferring WSIB payments for 6 months. This is particularly important for manufacturers and construction industries with high rates.
· Providing a five-month interest and penalty-free period for the majority of provincially administered taxes to help support Ontario businesses when they need it the most ( the most significant item being EHT for most of our clients; a few clients will benefit by delaying the fuel tax, gas tax and the sales tax on insurance contracts and benefits)
For the full release click here, please reach out to your RMT contact with any questions.
Cash flow planning
Many of our clients have rarely dealt with careful short term cash flow planning. We are working with some now on simple models that lay out the cash for the next 4 to 12 weeks. These are simple excel spreadsheets that you give you visibility on your key metrics. If you need help thinking this through please call a member of the RMT team.
Acts of kindness
We have heard some great stories but wanted to share one here. One of our many great clients emailed to ask yesterday if there was a tax-efficient way to support the cleaners who take care of their office space every day. Incredible to take the time to think about those with the least support in these challenging times. We are proud to be associated with our clients.
Government assistance is quickly evolving
MARCH 25, 2020
As expected announcements are coming quickly on two important and evolving areas: assistance for individuals and assistance on rent. These issues are front of mind for entrepreneurs as they make tough decisions.
Assistance for individuals
Understanding these rules is important as it may affect how you decide to reduce payroll costs.
The EI system was not designed to process the unprecedentedly high volume of applications received in the past week. Given this situation, all Canadians who have ceased working due to COVID-19, whether they are EI-eligible or not, would be able to receive the Canada Emergency Response Benefit (CERB) to ensure they have timely access to the income support they need. As well, the work-sharing programs are complicated and time-consuming to get approval for.
Recognizing this the federal government has proposed legislation to establish the CERB. This taxable benefit would provide $2,000 a month for up to four months for workers who lose their income as a result of the COVID-19 pandemic. The CERB would be a simpler and more accessible combination of the previously announced Emergency Care Benefit and Emergency Support Benefit.
The CERB would cover Canadians who have lost their job, are sick, quarantined, or taking care of someone who is sick with COVID-19, as well as working parents who must stay home without pay to care for children who are sick or at home because of school and daycare closures. The CERB would apply to wage earners, as well as contract workers and self-employed individuals who would not otherwise be eligible for Employment Insurance (EI).
Additionally, workers who are still employed, but are not receiving income because of disruptions to their work situation due to COVID-19, would also qualify for the CERB. This would help businesses keep their employees as they navigate these difficult times, while ensuring they preserve the ability to quickly resume operations as soon as it becomes possible.
Canadians who are already receiving EI regular and sickness benefits as of today would continue to receive their benefits and should not apply to the CERB.
The portal for accessing the CERB would be available in early April. EI eligible Canadians who have lost their job can continue to apply for EI here, as can Canadians applying for other EI benefits.
Canadians would begin to receive their CERB payments within 10 days of application. The CERB would be paid every four weeks and be available from March 15, 2020 until October 3, 2020.
Rent Relief
This is an incredibly tricky area to navigate. The cascading effects of corporations and individuals not paying rent is a nightmare. We have been working with clients to make partial payments and create deferrals.
However, the government is making further announcements in this area. Please be aware of this as you plan for your April 1 rent payments. More information will follow on this as available.
Essential services defined and an idea for those who remain open
MARCH 24, 2020
Essential services defined
Most of you already know that the Provincial government released its list of essential services. The list of services that can remain open was quite broad and reflects the reality that allowing the economy to completely stop would have huge implications. The list can be found at https://www.cbc.ca/news/canada/toronto/ontario-list-essential-businesses-1.5507687 among other places.
Of course many businesses on that list will still need to close as business will be slow in their segments. These companies may find a way to work share or do short term layoffs as we have mentioned in previous notes.
Sanitization
We think that a return to work in a reasonable time frame is a near must for the economy. To make that a reality new business processes will need to be developed if we want to do our part to contain the spread of the virus. Part of the solution will be enhanced plans for sanitization and cleaning. One of our clients with deep experience in health care suggests immediately developing new workflows and processes to reduce infection risk. There are consultants that work in the infection spread area and for those of you employing large groups or running schools/daycares its worth thinking about and developing strategies.
As always call us if specific questions arise.
What the BDC is offering in the wake of COVID-19
MARCH 23, 2020
The economic aid by the Government of Canada included $10 billion to establish a Business Credit Availability Program (BCAP). The program will be deployed by the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). Their goal is to help small and medium-sized organizations directly impacted by the COVID-19 crisis by providing them with short-term, low-interest rate loans to bridge them through this difficult period.
BDC is making available working capital loans of up to $2M to individual businesses with flexible repayment terms such as principal postponements. These loans are intended to provide working capital, not to pay down existing debt. To access these loans it is advised that businesses seek support through their normal financial institutions for an assessment of their situation; however this will this not always be possible. The financial institutions will then make a referral to BDC whose needs extend beyond what their financial institution can offer. As well, if you have an existing relationship with BDC as some of our clients do then a direct contact of your representatives is a very good idea.
Pre-screening requirements include:
An outline of how the COVID-19 crisis has created a business challenge
Confirmation that the funds will be used to support ongoing operations and not pay existing debt
An overview of the financial needs of your business for the next six months and how they will be covered
What your existing financial institution has been able to do in order to help
Items you should expect to provide to both your financial institution and BDC
Financial statements for the three most recent years
Notice of assessments for corporate taxes for the three most recent years
Interim financial statements for the current period
Revenue and cash flow projections
All of these should be ready to go.
Some questions that BDC will ask include:
At what capacity do you expect to operate over the next six months?
What are the business’s key carrying costs for the next six months (this would include rent, salaries, insurance etc.)
With the loan from BDC, will this cover your cash needs for the next six months? Should it not be enough, what other sources of funding are available to the business
What are the agreements with key suppliers, and have adjustments been made or requested as a result of the change in business needs for the next six months
If you need additional financial assistance and believe that you are eligible for the loans under the BCAP from BDC, start to gather the necessary financial information.
If you require assistance, please reach out to one of our partners for more information.
Subsidy Assistance Program
March 22, 2020
Update on $25,000 Government Credit for Employers
The Government of Canada has released details describing its wage subsidy assistance program. The program provides eligible small business employers with a credit for 10% of pay for a three month period. This will be accomplished by reducing the corporate withholdings remitted to the government.
Key rules:
The subsidy is for wages paid to employees for the period from March 18 to June 20
Your business has an existing business number and payroll program account with the CRA on March 18, 2020. Large corporations with taxable capital in excess of $15 million do not qualify
The 10% subsidy exists with two important maximums;
No company can claim more than $25,000
The maximum per employee is $1,375
Once your subsidy is calculated, you can reduce your current remittance of withholding income tax that you send to the CRA by the amount of the subsidy
Examples:
A simple example - you are operating a business with eight employees, and they each make $10,000 per month. Your maximum subsidy per month will be $8,000 ($10,000 x 8 employees x 10%).
Other quick examples:
You operate a manufacturing business with two entities – one for sales and one for manufacturing. Each will be able to apply with its own $25,000 maximum so that you could receive up to $50,000
You operate a law firm with multiple Professional Corporations as partners. Each corporation will be eligible for its own credit on wages the professional corporation pays, and each partner should be notified to make the claim
Other information:
There is no prescribed form for eligible employers in calculating and claiming. All calculations will be done manually, and a copy should be kept by the employer in case the CRA asks to see it at a later date. For employers who use a payroll service, contact them directly as they may have the software to automatically calculate on your behalf.
A subsidy received from a government is considered taxable income. Eligible employers who receive this benefit are required to include the amount as income in the year it is received. Presumably, non-profit organizations and charities will not have to pay tax on the benefit received because they are generally exempt from income tax.
This link from the CRA provides additional information: Frequently Asked Questions – Temporary Wage Subsidy for Employers - Canada.ca
We are happy to help if you have implementation questions. Please reach out to one of our partners for more information.
Work-Sharing Program
March 20, 2020
Many of our clients will find the Work-Sharing Program worth considering. It allows employers to temporarily reduce hours for a group of employees in order to avoid layoffs during a time like this, reducing hours between 10-60% while keeping all or some of your workforce intact. The government will provide EI benefits for the outstanding balance of your employees hours for up to 76 weeks. Both the employer and employee must agree upon the temporary arrangement.
All necessary application paperwork and fax details are included. If this program sounds beneficial, see detailed information below.
Temporary special measures to the Government of Canada's Work-Sharing Program have been put in place due to the downturn in business caused by COVID-19.
Work-Sharing is in place to help employers and employees avoid layoffs when there is a temporary decrease in business activity beyond the control of the employer. The program provides EI benefits to eligible employees who agree to reduce their normal working hours and share the available work while their employer recovers. A work-sharing unit must reduce its hours by at least 10% (one half day) and up to 60% (three days).
If, for example, you have ten employees but only enough work for six, rather than terminating four employees you can put all ten on a three-day Work-Share Program. The employer will then compensate the employees for three days a week, while the government provides EI coverage for two.
Work-Sharing agreements have been extended by an additional 38 weeks, now totalling 76 weeks. Mandatory waiting periods have also been waived so that employers with recently expired agreements can immediately apply for a new agreement without waiting between applications and to ease recovery plan requirements.
To be eligible for a WS agreement, your business must:
• be experiencing a recent decline in business activity of at least 10%
• be experiencing a recent decline in business activity directly or indirectly related to the impact of COVID-19
• demonstrate that the shortage of work is temporary, beyond your control and not a cyclical/recurring slowdown
• be a year-round business in Canada for at least two years
• be a private business, a publicly held company or a not-for-profit organization
• have at least two employees in the WS unit
• be willing to implement a recovery plan to support the on-going operations and viability of the business
To be eligible for WS, your employees must:
• be year-round, permanent, full-time or part-time employees needed to carry out the day-to-day functions of the business (your "core staff")
• be eligible to receive EI benefits
• agree to reduce their normal working hours by the same percentage and to share the available work
Attached are the applicant guide and necessary application forms. An application for a Work-Sharing agreement must be submitted a minimum of 30 days prior to the requested start date. To apply in Ontario, you must submit the application by fax to 1-866-720-6094.
The applicant guide is available online at 2017 Work-Sharing temporary special measures for forestry sector downturn - Canada.ca
Here are some documents that may be useful for you:
WORK SHARING APPLICATION GUIDE
APPLICATION FOR A WORK SHARING AGREEMENT
Please reach out to one of our partners for more information.
Cyber Threats Associated with COVID-19
March 20, 2020
A message from one of our clients.
We want to inform our clients about ongoing cyber-attacks on Canadian companies that are leveraging the Covid-19 global pandemic.
Cyber-Threat Actors are leveraging the Covid-19 in several ways:
Phishing Emails: Multiple emails are being observed with related themes as a lure for phishing and malware activity
Remote Workforce: Actors are taking advantage of the current state-of-emergency and work from home announcements with phishing campaigns to compromise corporate email
Financial Disruption: Several phishing emails are written to try to beat the stock market with investment knowledge and insight
Sample ‘Subject Lines’ attacking Canadian Companies:
Corona Virus is spreading – Learn how to survive
Corona Virus – Do this before it is too late…
Corona worse than Ebola?
EMERGENCY EMAIL
Feeling helpless against Corona?
Tips to work from home
How to be efficient working from home
Shared file in the cloud
Beat the Bull Market
Please pass this email along to all your employees and remind them to remain vigilant against these types of email phishing campaigns.
The material provided here is summarized from a security bulletin from the Canadian Cyber Threat Exchange.
COVID-19 FAQ’s for Employers
March 16, 2020
Email Scam Warning from RMT
DECEMBER 2, 2019
We are all aware of the many scams that are taking place with emails and payments. We have written before in connection with CRA scams and no doubt you are aware of that risk.
This week one of our clients had their e-mail account hacked. The scammer was able to contact some of their clients and have their clients make payments to the scammer’s account, rather than our client’s account.
Please always remember to verify with a phone call to the person who sent you the e-mail if there is anything that might seem suspicious. In this case, sending a new e-mail to our client didn’t help because the hacker had actually hacked into their e-mail account, rather than take the easy route and just spoof the e-mail. This is much rarer than e-mail spoofing but it does happen!
Suspicious requests might include, but are not limited to…
1. Requests for payment
2. Requests to change identifying information (banking info, phone numbers, e-mail addresses, addresses, etc.)
3. Any out of the ordinary requests
4. Any request that involves money
If you are the least bit suspicious about an e-mail you receive, please verify by voice from now on. It is the only foolproof way to avoid being victimized in this manner.
If you have any questions, please reach out to Chris Cole at chris@rmtcpa.ca.
Should I Purchase my Car Corporately or Personally?
OCTOBER 9, 2019
Don’t always trust your gut feel – especially for decisions that are complicated!
The choice to buy a car personally or corporately is often written off as a minor decision. Surely the tax rules must be designed to come up with a similar tax result no matter where you purchase the vehicle. Wrong!
Recent examples for clients have led to results that might surprise:
One client was buying his dream vehicle for $170k – after we tried to talk him out of it – we did the work to figure out where to buy. In his situation and based on a home based business where he drives for work to clients the conclusion was that he would save $100k in tax by purchasing in his corporation. This was because primarily because his personal use was low.
Another client purchasing a modest $40k vehicle with heavy business use was far better off to pay for it personally and charge the company for mileage.
The lesson here is to do the analysis for major decisions and make sure your not missing an unexpected savings opportunity.
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
Futurepreneur Canada
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.
EI Training
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/
Important QST Tax Registration Changes
SEPTEMBER , 2018
Click here for the pdf.
The 2018 Quebec provincial budget introduced significant changes may effect businesses that have no physical or significant presence in Quebec, but do have Quebec customers as there are new rules on QST registration coming in 2019.
Scenarios which may be impacted by these changes would include professional or other services provided to individuals, providing apps, software or other downloadable electronic content to individuals.
Canadian Businesses Located Outside Quebec
The new registration rules will effect Canadian companies outside Quebec that:
‐ are currently not registered for QST,
‐ sell taxable goods, intangibles, or services to specified Quebec consumers and
‐ the amount of those sales exceeds $30,000 a year will have a QST registration requirement effective September 1, 2019.
Non-Canadian Businesses
Non-resident businesses located outside of Canada which:
‐ are currently not registered for QST,
‐ sell taxable intangibles or services to specified Quebec consumers and
‐ the amount of those sales exceeds $30,000
will have a QST registration requirement effective January 1, 2019.
Note that taxable goods are not included for non-Canadian businesses as Quebec is looking to work with the federal government to improve QST collection on goods at the border.
Specified Quebec Consumer
This doesn’t incorporate ALL Quebec customers, but essentially unregistered end users as the term is defined to be those who reside in Quebec, and are not registered for QST purposes.
If QST were incorrectly charged to a registered entity, the registered entity is not simply able to claim a tax refund on their QST return, but must request the refund from the non-Quebec entity that collected it.
Filing and Administration
For these mandatory registration filers, the plan is for a new online service to be available for remittance of the QST collected which will include that they may be able to pay in a currency other than Canadian dollars, but details are still forthcoming.
With the QST implications, there is also a requirement to retain all relevant books and records for six years after the year to which they relate.
If you have any questions or concerns on how the above changes may impact your business, please contact us so that we may discuss the specifics of your situation.
Potential US Sales Tax Changes Ahead
July, 2018
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.
What changed?
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.
Operating Expenses
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.
Club Memberships
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[1] 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.[2]
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.
[1] Dividends from non-connected corporations
[2] 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%.
Our position
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
cc:
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:
https://www.canada.ca/en/revenue-agency/corporate/security/protect-yourself-against-fraud.html
You may wish to also advise the Canadian Anti-Fraud Centre which is the government department that looks to shut these schemes down:
http://www.antifraudcentre-centreantifraude.ca/index-eng.htm
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.
Ottawa to cut small-business tax, simplify reforms after uproar
How Morneau’s small-business tax cut increased another tax without people noticing
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
JM/dg
Sousa Says Ontario Better For Corporate Tax Than U.S.
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.
What New Review Standards Mean For Your Year-End
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
REPORT
The new report will be longer and will look similar to an audit report which more clearly defines the responsibilities of management and practitioners.
OPINION
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.
MATERIALITY
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.
Finance Climbing Down From Several Proposed Tax Measures
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.
Income Sprinkling
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 fin.consultation.fin@canada.ca.
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.
RMT Clients are Speaking Up
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.
General Partner Distributions and New GST/HST Rules
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.
Proposed Changes
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.
Current Rules
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.
Effective Date
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.
RMT Clients are Speaking Up
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.
RMT Clients are Speaking Up
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.
RMT Clients are Speaking Up
SEPTEMBER 6, 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:
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.
RMT's Letter to the Minister of Finance
August 31, 2017
Dear Minister,
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.
3. Risk
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
JM/dg
Finance Proposes Significant Negative Tax Changes for Canadian Entrepreneurs
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 fin.consultation.fin@canada.ca.
Incorporation for Ontario Lawyers
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%.
2017 Federal Budget Highlights
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
Personal Tax
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.
5 Simple Internal Controls To Put In Place Around Financial Information
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.
New Residential Rental Property Rebate
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
• Duplex
• Condominium unit
• Townhouse
• A unit in a coop housing corporation
• A mobile home
• A floating home
Eligible Transaction
• 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.
New Housing Rebate
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:
Eligible House
• Detached or semidetached single unit house
• Duplex
• Condominium unit
• Townhouse
• A unit in a coop housing corporation
•A mobile home
• A floating home
Eligible Transaction
• 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.
IFRS Leases (2016)
January 25, 2017
Our goal in this presentation is to focus on the following questions:
Overview
Accounting Details
Transition
Example
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
Taxable Benefit/Payments
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
U.S. Estate Tax Issues for Canadians
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.
Planning Ideas
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
Year End Tax Planning – Checklist for the Individual
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.
Year-End Planning for the Family Trust
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
Amateur Athletic Trust Tax Issues
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.
Incorporation
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.
Capital Gain Exemption
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.
Canadians Moving to the US – Tax Concerns
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.
Provincial Residency
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.
Taxation of Investment Holding Companies
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:
2016 Federal Budget Highlights
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.
Corporate Tax
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.
Personal Tax
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.
Other Matters
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.
Expensing Meals and Entertainment in Your Corporation
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.
Other exceptions:
– 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
E-mails That Are Too Good To Be True
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.
SR&ED For Medical Professionals
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.
Spousal Income Splitting – How to pocket more by making the same
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.
Self Funding Your Health Care Cost
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:
RRSP Contribution Deadline Looming
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.