Announcements

Some of the most valuable business assets that can be sold are the intangibles such as goodwill and customer lists. These types of assets are presently classified as “Cumulative Eligible Capital” (CEC). When sold, there is often a large gain on these assets because their value has been built up over time and there is very little, or no, original cost. The corporate tax rates applicable to this type of gain for 2017 onwards will change significantly.

Half of the gain is currently tax-free, and can be distributed to the corporation’s shareholders, still tax-free, as a capital dividend. This will not change. The tax changes relate to the taxable half of the gain.

For sales occurring before 2017, the taxable half of the gain on CEC sales would be considered “business income”. It may be eligible for the small business deduction which equates to a corporate tax rate around 15%. Even where the small business deduction is not available, the rate would only be approximately 27%. Specific rates vary by province/territory.

In 2017, these assets will be converted from this special CEC class to a regular asset class thereby creating “capital gains” rather than “business income” upon sale. The initial corporate tax rate on the taxable half of the gain for these assets is approximately 51%, but again, ranges by province/territory. The cash left in the corporation after taxes will be significantly less if the sale occurs in 2017 or later.

All is not lost, however, since a large portion of the 51% in corporate taxes will be refunded when the cash is paid out to the individual shareholder as a taxable dividend. Once all of the sale proceeds have been distributed to the individual shareholder, the after-tax cash remaining will be roughly the same whether the asset sale occurred in 2017 or prior.

In other words, realizing the gain prior to 2017 will leave more cash available to the corporation. This deferral of taxes will be particularly beneficial where the shareholder does not require all of the sale proceeds immediately for personal use. The funds left in the corporation can often be invested for many years.

Action Item: If you would like to retain the proceeds of a sale in the corporation for the long term, consider whether a close before the end of 2016 is preferential. Also consider whether planning should be undertaken to trigger the gains now.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

The 2016 Federal Budget proposed a number of measures to prevent the ability to multiply access to the $500,000 SBD limit, addressing several strategies which the Government perceived as inappropriate. Broad restrictions in eligibility for the SBD on payments between private corporations in general have been introduced. The restrictions as proposed are so broad that they will affect many corporations and structures where multiplication of the SBD was not a goal or even a consideration.

The measures will apply to taxation years that begin on or after March 22, 2016. For example, a corporation with a December 31 fiscal year-end will first be subject to these restrictions in the year ending December 31, 2017. A corporation with a March 31 fiscal year-end will first be affected in the year ending March 31, 2017.

In general, these new Specified Corporate Income (SCI) rules will restrict access to the SBD on any active business income (ABI) earned from providing services or property to another private corporation (PayerCo) where there is common ownership.  Such income will not be eligible for the SBD.

Consider the situation where ServiceCo provides services to PayerCo, and PayerCo pays a fee back to ServiceCo.

Payments will be restricted by the SCI rules where an interest in PayerCo is held by any of:

• ServiceCo(the corporation providing the service and receiving the fees);
• any shareholderof ServiceCo; or,
• any personwho does not deal at arm’s length with any shareholder of ServiceCo.

There is no de minimis ownership interest threshold – based on the draft legislative proposals of July 29, 2016, even one share of thousands will cause these restrictions to apply. In addition, even indirect interest can trigger the SCI rules. For example, if you own 10% of ServiceCo, and your brother-in-law owns one share of thousands issued by PayerCo, these rules could apply.

An exception: if all or substantially all of ServiceCo’s active business income (which CRA generally considers to be 90%) is earned from providing services to arm’s length persons other than PayerCo, ServiceCo will not be subject to the SCI rules.

The Budget also proposed that PayerCo may be permitted to assign a portion of its own unused SBD limit to ServiceCo to make the payments SCI (a special form must be filed to make the assignment).

Examples of Corporations Potentially Affected

Consider a corporation, OpCo, held by four unrelated shareholders which pays management fees (or some other type of active income) to four HoldCos each owned by one of the four shareholders (whether in whole or in part).

Under the proposals, the management fees earned by the four HoldCos would not generally be eligible for the SBD, unless OpCo allocated a portion of its own $500,000 limit amongst the HoldCos. In other words, OpCo and the four HoldCos must now share access to a single business limit, assuming the HoldCos do not have ABI from other sources. Historically, each of the five corporations (OpCo and the four HoldCos) may each have had full access to the $500,000 SBD depending on their ownership and business structure.

As a second example, consider Dr. A, whose professional corporation (PC) carries on a dental practice. Dr. A’s spouse owns a second corporation (HyCo), which carries on the hygiene practice at the PC’s dental clinic. PC and HyCo are not associated, either by share structure or by de facto control.  Currently PC and HyCo each have full access to the SBD. Under the proposals, if HyCo provides its services to the PC, HyCo’s income would be ineligible for the SBD, unless one of the exceptions noted above applies.

The proposals are quite broad and there are many existing corporate structures which are, or could be, exposed to these provisions. While the proposals may change during the process of becoming law, it is clear that many existing structures will be affected.

Action Item:  Review your current corporate structures to determine if the small business rates will remain applicable, and whether any change in historical planning is appropriate.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

A well-publicized aspect of the Liberal election platform was the replacement of the Canada Child Tax Benefit, National Child Benefit Supplement, and the Universal Child Care Benefit with the Canada Child Benefit.

This new program commenced in July 2016, with payments determined from the family’s 2015 personal income tax returns. The family income used in the calculation consists of the net income (not including Universal Child Care Benefits and Registered Disability Savings Plan Income) of the person primarily responsible for the care and upbringing of the child, plus that person’s spouse or common-law partner, but not the net income of the child.

Families may be eligible for the maximum annual benefits of $6,400 per child under age 6 and $5,400 per child age 6 to 17. Benefits will be phased out based on family income in excess of $30,000 with a reduced phase-out rate applied to incomes over $65,000, as follows:

For example, the payment for a family with $75,000 of income and a 4-year old would be: $3,630 = $6,400 – (10k (income over 65k) X 3.2%) – ((65k-30k) X 7.0%)

A further benefit of $2,730 per disabled child may apply, with the phase-out rates generally aligning with the Canada Child Benefit.

For a tool which will calculate an individual’s entitlement to the Canada Child Benefit, go to http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html. For a tool which will consider additional benefits available for those with children, go to http://www.cra-arc.gc.ca/benefits-calculator/.

Action Item: Ensure that your children are registered in order to receive payment. If you were previously receiving the Canada Child Tax Benefit, you are already registered.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

As a Not-For-Profit organization, are you aware of what your audit requirements are and how they vary based on your jurisdiction?

For more information, please see our helpful guide “Audit Requirements For NPOs” which can be found in our Resource section here: https://new.andrews.cawp-content/uploads2016/11/Audit-Requirements-for-NPOs.pdf

Canadians have long been utilizing the Principal Residence Exemption (PRE) in order to be exempt of capital gains tax on the sale of their primary home. Effective October 3, 2016, the federal government has imposed some changes with the intent to ensure the PRE is only available in appropriate cases and only for Canadian residents.

Some of the notable changes include the formula calculation and reporting requirements.

The prior formula for calculating your PRE would use the number of years owned (or designated) plus one. Effective October 3, 2016 this formula of designating one additional year for exemption will no longer be available for home owners who were a non-resident in the year of purchase. The one additional year of exemption will be strictly for Canadian residents only. The goal of this is to deter foreign speculators from coming in.

For an illustration of the change, please see the example further below in this blog.

An additional change will be the reporting obligations for taxpayers claiming a PRE, which will include additional disclosure and an increase in audits. The CRA has not yet announced whether it will be using existing forms or developing a new form for the additional disclosure, but we will be sure to keep you posted.

Example calculation:

You own two properties: House – purchased in 2001 for $350,000 and Cottage – purchased in 2005 for $150,000.

In 2014 you decided to sell your house for $500,000. You then sell your cottage in 2016 for $225,000

Under the old rules – same for Canadians and non-residents:

(1 + # of years designated / total # of years owned) x Capital Gain = Principal Residence Exemption

House: (1 + 13 years designated / 14 years owned) x $150,000 capital gain = $150,000 exemption and $NIL capital gain

Cottage: (1 + 3 years designated / 12 years owned) x $75,000 capital gain = $25,000 exemption and a $50,000 capital gain

Under the new rules – non-residents only:

(# of years designated / total # of years owned) x Capital Gain = Principal Residence Exemption

House: (14 years designated / 14 years owned) x $150,000 capital gain = $150,000 exemption and $NIL capital gain

Cottage: (2 years designated / 12 years owned) x $75,000 capital gain = $12,500 exemption and a $62,500 capital gain

Total increase in capital gain for this example of $12,500 – applicable only to non-residents

Note: since you had to designate one extra year to the house to receive a full exemption, there is one less year to designate to the cottage

If you are unsure of any of these new rules with regards to PRE and how they may impact you, we advise you to speak with your accountant today!

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

As the summer is winding down, you may find this is the perfect time to get your corporate books in order.

Having clean, organized records can help save time and costs when it comes to preparing your year-end financial statements and tax return.

We have an entire business management department that is happy to assist if you find the process overwhelming. For more information please see our helpful guide: https://new.andrews.cawp-content/uploads2016/05/Andrews-_-Co-BMS.pdf

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

We have updated our Estates & Income Taxes resource.

Check it out now to stay informed! https://new.andrews.cawp-content/uploads2016/08/Estates-IT-001.pdf