Tax Break Bulletins

Many individuals received unusually high incomes in 2015 as a result of triggering capital gains or taking extra dividends and/or salary from their corporation to avoid being subject to the higher tax rates taking effect in 2016.

When tax returns for 2015 were filed, many of these individuals would have been required to make a substantial tax payment in April of 2016 since their 2015 withholdings and instalment payments were not sufficient to cover the additional income. In general, if that April payment upon filing was greater than $3,000, CRA will request those individuals to make instalment payments during the 2016 year.

Instalment reminders are sent out by CRA (usually in August) and may ask for large amounts to be paid in September and December of 2016. Those amounts are based on the income from the 2015 year. The first few instalment requests in 2017 may also be based on 2015 income levels. If the taxpayer’s income in 2016 is, or will be lower than 2015, the instalments per the notices may significantly exceed the taxpayer’s expected 2016 liability. It is important to note that there are alternatives to paying the recommended instalment amount included on the notice.

One such possibility is to pay instalments based on the expected tax liability for the 2016 year. If there has been a significant decrease in income, this method may free up large amounts of cash that may otherwise have been tied up in instalment payments and only returned upon CRA processing of the 2016 personal tax return.

Where CRA’s requested instalments are remitted, no instalment interest will be charged. Instalments based on 2016 taxes must be made equally by March 15, June 15, September 15 and December 15 to avoid instalment interest. If no payments were made for March and June, remitting payments for September and December can offset the late payment of the earlier amounts. Paying early, and/or paying more than the expected 2016 taxes, will reduce the potential of interest for late payments, and provide a cushion in case actual 2016 taxes exceed the estimated amount.

Action Item: Review your 2015 and expected 2016 tax situation to determine appropriate instalment payments.

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.

Similar to limitations on accessing the SBD on payments amongst certain corporations, the 2016 Federal Budget also proposed changes when payments are made from a partnership. The measures will apply to taxation years that begin on or after March 22, 2016.

Currently, a corporation which is a member of a partnership may claim the SBD on active business income it receives from the partnership up to its pro-rata share of a notional $500,000 business limit determined at the partnership level (its specified partnership income limit, or “SPI”).  For example, if $500,000 or more of ABI is earned by a partnership with 10 equal partners, the SPI of each partner would be $50,000.

A corporation’s SPI is added to its active business income from other sources, if any, and the corporation can claim the SBD on the total (subject to its annual business limit).

Some business structures circumvent the application of the SPI rules. In one structure, a shareholder of a corporation is a partner and the partnership pays the corporation as an independent contractor under a contract for services separate from the Partnership Agreement. As a result, the corporation claims a full SBD in respect of its active business income earned in respect of the partnership because the corporation itself is not a partner. A number of professional services firms, such as those of lawyers and medical professionals, use a structure like this.

To address this, and other similar strategies, the 2016 Federal Budget proposed to extend the SPI rules. Basically, the amount paid to a corporation available for the SBD will be restricted if the corporation has a shareholder who is a partner, or, if it does not deal at arm’s length with a partner.

Action Item: Consider whether your current partnership structure achieves your goals. Be prepared to pay a higher corporate tax rate if affected by these changes.

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.

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

Have you recently received written notification from the Canada Revenue Agency (CRA) on your personal or corporate accounts?

As part of their letter campaign, the CRA will often conduct spot checks, react to inconsistencies in information provided, and focus on differences between your information and that of people you deal with. Many of these notices are random and will not always result in an audit of your records; however if your selection by CRA does result in an audit, here are five helpful tips to make the audit process run as smooth as possible:

• Contact your accountant: Your accountant is best suited to handle the audit in a timely and efficient manner. Make sure you contact them as soon as possible.
• Do not take a passive approach: If you have been contacted, it’s in your best interest to respond as soon as you can. Ignoring a reassessment or audit letter will escalate the situation quickly and could lead to significant interest and penalties being incurred.
• Be patient: This process may not be completed overnight – it may take some time, so patience is key.
• Do not feel you are being targeted: The CRA is doing their best to ensure that tax compliance has been met across the board and many audits are actually conducted at random and as such should not be taken personally.
• Right to object: Any CRA assessment arising from the audit is not a matter of fact. You always have the right to file an objection.

Keeping these tips in mind will help you stay proactive and informed while being audited – which will allow the process to go a smooth as possible.

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.

On Tuesday June 21st, Kathleen Wynne announced there is no longer the need for Ontario to proceed with the proposed retirement plan that was promised as part of her 2014 victory.

An agreement was reached a day earlier between the Federal and Provincial governments which resulted in a new and enhanced Canada Pension Plan.

This agreement will see the following changes go into effect January 1, 2019:

• Increase the income replacement from 1/4 to 1/3 of pensionable earnings
  • E.g.: Individual with $52,400 in constant earnings throughout their working life would now receive an annual pension of approximately $17,460 instead of the current $13,110
• Increase to the maximum amount of income subject to CPP of 14%
  • Current projection results in this maximum being $82,700 in 2025 – the current maximum is $54,900
• Changes will be phased-in gradually over 7 years to allow businesses more time to adjust

The main advantage of the enhanced CPP when compared to the Ontario Retirement Pension Plan is that it will apply across Canada thereby benefiting more individuals.

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.

Starting July 2016, the Universal Child Care Benefit (UCCB) and Child Tax Benefit (CTB) will be replaced with the Canada Child Benefit (CCB).

The CCB is a monthly benefit paid to Canadian families with children under the age of 18 and is based on income level.

Some quick facts about the new benefit include:

• Canada Child Benefit is entirely tax-free
• Maximum annual benefit per child under the age of 6 is $6,400
• Maximum annual benefit per child between the ages of 6 through 17 is $5,400
• Families with less than $30,000 will receive the maximum benefit

The Government of Canada has a benefit calculator which provides an estimate of the child benefits a family could receive: http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html

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.

Employees who earn tips or gratuities are required to report these amounts as income earned. This type of income may be included as insurable earnings and is subject to CPP and EI.

There are two types of tips an employee may receive: controlled tips and direct tips.

Controlled tips are considered part of the employee’s total gross pay and are therefore subject to CPP and EI. Controlled tips are provided by the employer and are considered to have been paid from the employer to the employee. Common examples of controlled tips are:

• Tips that are given to the employer and later disbursed to the employees.
• When a tip sharing formula is used by the employer to allocate the tips to employees.

Direct tips are not considered to be under control of the employer and are paid out by the customer. This type of gratuity is not subject to CPP or EI. Common examples of direct tips are:

• Tips left by a customer after the service is complete and the employee keeps the entire amount.
• Tips that are shared among the employees in a method determined by the employees, with no input from the employer.

An employee may receive both types of tips, but only the controlled tips will be included in the employee’s insurable earnings.

When an employer uses a controlled tip method, they are responsible for including the amounts in their employee’s gross earnings and must make the corresponding deductions for CPP and EI.

If you are unsure of what type of tip system your company is using, or how to account for tips within insurable earnings, contact your accountant today!

The Capital Gains Exemption (CGE) is available to Canadian residents who have disposed of qualifying property.

• Qualifying property is identified as Qualified Small Business Corporation (QSBC) shares, qualifying farm property, and qualifying fishing property. The CGE allows for the reduction in the gain reported in taxable income.

Example:
A total net capital gain on the disposition of qualifying property is $50,000, and 50% of this is brought into net income. Provided all eligibility criteria are met, the individual could have enough CGE to offset the entire taxable capital gain. This results in none of the original gain being brought into taxable income.

In 2014, the lifetime limit was $800,000. Going forward, this limit will be indexed for inflation.

What is a Qualifying Small Business Corporation Share?

The shares of a private corporation would qualify as a QSBC share if the following criteria have been
met:

1. At the date of disposition, the shares must be those of a Small Business Corporation (SBC), a Canadian Controlled Private Corporation (CCPC) in which 90% or more of its assets (measured at fair market value) are:
   1. Used in business, actively and primarily carried out in Canada (50% or more); or
   2. Invested in either the shares or debt of a connected SBC.
2. During the last 24 months immediately prior to the disposition:
   1. The shares are CCPC shares;
   2. More than 50% of the company’s assets (measured at fair market value) are used in carrying on active business primarily in Canada; or
   3. The shares were owned by either the taxpayer or a related person.

Your business may qualify as a QSBC. If you are considering selling your business, consult with your accountant immediately to ensure that proper structure is be maintained.

Did you receive funds this year through a non­-contemporary source? Are you unsure of the tax implications imposed by receiving these funds? We are here to help!

Non­-contemporary income sources include, but are not limited to:

Crowdfunding

• Raising funds from the public to be used towards a special project.

Any funds received by means of crowdfunding are considered income and are ultimately taxable.

Expenses incurred that relate to any crowdfunding efforts – for the purpose of gaining income – may be deductible if other requirements from the Income Tax Act are met.

YouTube Advertising

• Money received from YouTube when your post generates a specific number of views.

The Canada Revenue Agency (CRA) views this income source as taxable and must be reported.

Selling Goods Online

• Money received from the sale of goods on eBay, Kijiji, and other third party websites.

The CRA targets high­-volume sellers who earn a minimum of $20,000 with at least 24 sales per year, or sellers who generate over $100,000 in a single year.

eBay has released details on certain Canadian eBay sellers who meet the above criteria.

If you are unsure on whether the funds you have received during the year are considered taxable income, please consult with your accountant before filing your income tax return.