Highlights:
Tax Ticklers
Canada Child Benefit
Selling Your Business
CRA Instalment Notices
Looming Life Insurance Changes
Losing the Small Business Deduction – Intercompany Payments
Losing the Small Business Deductions – Partnerships
Director Liability
Highlights:
Tax Ticklers
Tips and Gratuities
Working But Not Paying Yourself: Employment Insurance Issues
CRA Scammers: Who is Really Calling?
Multiplication Of The Small Business Deduction (SBD): Significant Changes Ahead
Combined Audits of Owner-Managed Companies: Shareholders’ Personal Information
Credit Card Comparison: Do You Have the Best Card for Your Needs?
CRA Online Services: My Account Update
Insurable Earnings: Related Employee
TTT114 Formatted
Please be sure to read all of the Blogs posted on our website.
The Federal Budget was presented March 22, 2016 by Finance Minister Bill Morneau.
Many of the speculated and feared changes did not materialize. In particular there was no change made to the capital gains inclusion rate from the current 50%, nor was the access to the small business deduction altered for Professional Corporations earning income directly. The following represent what we feel are key changes impacting our clients:
Corporate Tax
Previously announced decreases in the small business tax rate for small business income earned by a Canadian controlled private corporation (CCPC) of 0.5% per year for 2017, 2018 and 2019 were revoked. As a result the 2016 rate of 10.5% for Federal corporate tax purposes on the first $500,000 of active business income is to remain in place going forward. In Ontario the combined rate is therefore 15% for the calendar year 2016 and beyond.
The general corporate tax rate of 15% for Federal tax purposes remains the same for active business income not eligible for the small business deduction.
Access to the $500,000 small business deduction on active business income is restricted for certain corporate and partnership structures for taxation years beginning on or after March 22, 2016. These rules apply in very specific circumstances so professional advice is required if you think this might apply to your situation. Of particular note, there was no change to the basic definitions that allow a corporation to claim the small business deduction and hence the low rate of corporate tax in general.
There is also a change in the way income from an associated company on property is taxed in very specific circumstances. The budget proposes to limit the eligibility of having income taxed at the small business rate earned from an associated corporation where the corporation is not a CCPC or has made an election not to be associated. Again these are very specific circumstances and professional advice is required should you fall into this change.
The budget also noted that the government has completed its review the characterization of income from property as active and hence eligible to be taxed at the small business rate and determined that no change is to be made at this time.
Changes to the rules for the tax treatment of eligible capital property previously announced will be effective January 1, 2017.
The tax rate for personal services businesses is increased to 33% from 28% for Federal income tax purposes.
Life Insurance
Budget 2016 proposes two major changes:
Personal Tax
No further tax rate changes were proposed.
The following tax credits were eliminated:
The budget did however include one new tax credit for teacher and early childhood educator school supplies to a maximum of $1,000 spent on qualified items.
There were also a number of very specific changes applying in limited circumstances that do not apply to the average taxpayer.
GST/HST
There are no changes proposed in this area.
Please consult your trusted advisor at Graham Scott Enns LLP to discuss how any of these changes might apply to your unique tax situation.
Many clients are asking us about the merits of life insurance as an investment. The following discussion presented by Garth Howes discusses the taxation of life insurance policies and how the policies are structured for tax purposes.
Premiums paid are not tax deductible and death benefits received are not taxable.
Each premium paid is used as follows:
Guaranteed and fixed income investments are considered to be very secure given the reserves the insurance company is required to maintain.
Income earned on the investment portion is not taxable; this is the main attraction of these policies and normally allows them to out perform non-registered investments on a long term basis (particularly for fixed income investments).
The death benefit paid depends on the type of policy; Participating Life policies pay the base amount plus additions resulting from the income whereas Universal Life policies pay the base amount of insurance acquired plus the cash value of the investments.
Policies can be owned corporately which allows for the premiums to be paid from pre-personal tax funds; at the same time, often the entire death benefit received by the company can be paid tax-free to the shareholders.
Rules are changing for policies acquired after 2016; the two most important aspects of these changes are (i) the long term accumulation of these policies is being reduced and (ii) the amount that can be paid tax-free to shareholders may be reduced.
If the policy is terminated “early” (typically prior to 7 – 10 years), there is often a significant administrative charge by the insurance company.
You can withdraw the investments from the policy; a portion of what is withdrawn would be a return of your original contributions and a portion would be from the income earned and this must be included in income. As an alternative to making withdrawals from the policy, it is possible to borrow from a financial institution using the policy as security; under this scenario, the loan would eventually be repaid from the death benefit and the income earned in the policy would never be taxed; tax deductibility of the interest expense on the loan can be an issue.
The cash value is an asset on the corporation’s balance sheet.
Upon the death of a shareholder, when valuing the shares of a corporation for tax purposes only the cash surrender value of a life insurance policy is taken into account (not the death benefit payable on that life insurance).
Garth Howes is a Tax Partner at Graham Scott Enns LLP with many year of experience advising clients owning life insurance products on tax issues. Please note that we are not life insurance advisors and advice from a professional insurance advisor should be obtained in regard to any life insurance product.
The Liberal Government will be delivering their first Federal budget on March 22, 2016. Much of the coverage so far has been on the expected amount of the planned deficit and the impact of the fallen price of oil.
There are many rumours about potential changes in the income tax system and rates. The main rumours fall into two categories:
Capital Gains Inclusion Rate
If the capital gains inclusion rate were to increase, then there would be an incentive to realizing capital gains prior to the date of the increase, but not losses. Consideration should be given to whether it would be beneficial to realize accrued gains now to avoid a potential tax increase. Possible assets that might bear unrealized gains to consider would be, portfolios of stocks, bonds, mutual fund assets, real estate such as investment properties, cottages, residences not subject to the principal residence exemption, vacant land, shares of a private corporation not eligible for the capital gains exemption, farm and fishing properties not eligible for the capital gains exemption, goodwill, quotas and many other items.
The current capital gains inclusion rate is 50% of the amount of realized capital gain (or loss). Speculation suggests that the 50% rate could be increased. Prior to 1972 capital gains were not taxable. Since then the capital gains inclusion rate has varied according to the following chart:
| Year | Inclusion Rate |
| Before 1988 | 50% |
| 1988 and 1989 | 66 2/3% |
| 1990 to 1999 | 75% |
| Jan 1 to Feb 27, 2000 | 75% |
| Feb 28 to Oct 16, 2000 | 66 2/3% |
| Oct 17 to Dec 31, 2000 | 50% |
| 2001 to present | 50% |
It should be noted that in all cases the rate in effect at the time of the realization of a gain has been the rate used to calculate the gain and hence the tax, as opposed to a system where gains would be allocated by year to the rates above.
The non-taxable portion of a capital gain earned through a corporate structure is added to the capital dividend account. A capital dividend is an amount that can be paid out by a corporation tax free to the shareholder. The result is that the shareholder is put in the same position as if they had earned the capital gain in their personal hands. An increase in the capital gains inclusion rate, based on historic transitions between rates, would result in a decrease in the amount added to the capital dividend account but not an adjustment to amounts already added to the capital dividend account prior to the change in inclusion rate. There is always the possibility that the government would break from past precedent.
The following table shows a tax difference of $13,383 ($40,148 – $26,765) crystallizing a $100,000 gain now at the 50% inclusion rate vs. triggering a gain at a hypothetical 75% inclusion rate (assuming only personal tax applies at 2016 rates for simplicity):
| Tax result at 50% Inclusion rate | Tax result at 75% Inclusion rate | |
| Amount | $100,000 | $100,000 |
| Taxable amount | 50,000 | 75,000 |
| Income tax at 53.53% | 26,765 | $40,148 |
| Net after tax | $73,235 | $59,852 |
One must also consider the time value of money, so assuming any gain crystallized now would have been deferred into the future at the higher tax rate, the following rates of return are applicable over the following time periods:
| Time | Rate (approximate) |
| 1 year | 50% |
| 5 | 8.45% |
| 10 | 4.14% |
| 15 | 2.74% |
| 20 | 2.05% |
Given the number of previous changes in the inclusion rate over the 44 year history, any analysis of a long term cost/benefit is almost meaningless as any future government could simply lower the inclusion rate again, but could also increase it further.
Small Business Tax Rate
Possible ways to avoid a potential additional tax cost should the Small business deduction become unavailable to your company include operating as a proprietorship or partnership, earning income before a rate change where possible (although in the event of a change it might be that income for the fiscal year would be prorated by the number of days before and after a change), taking advantage of the tax deferral and graduated rates available to an incorporated entity and splitting income with family members at lower tax rates where possible to reduce or eliminate the incremental tax cost.
The current tax rate on the first $500,000 of active business income for a small business is 10.5% for 2016. In combination with the Provincial tax on small business income the overall tax rate on the first $500,000 of active business income is 15% in Ontario for 2016.
Speculation is that access to the Small Business Deduction may be restricted for companies not meeting certain criteria. There are precedents in that the current law does not allow a small business deduction for a specified investment business or a personal service business. There is also a recent change to the qualification criteria for the Small business deduction in Quebec, the main changes being that for tax purposes in Quebec:
are eligible for the Quebec small business deduction.
Should the Federal government adopt a similar set of rules, the changes will apply in Ontario as well. Ontario has adopted the Federal tax rules in this regard.
The good news is that unless the government were to stray far from the current tax theory that says no matter how you earn a dollar you should pay roughly the same amount of tax on it, a comparison of the possible loss of the Small Business Deductions can be made by comparing the tax rates for income over $500,000 vs. income eligible for the deduction using 2016 rates:
| Small Business Income up to $500,000 | Active Business Income over $500,000 | |
| General Federal rate after abatement | 28% | 28% |
| Small Business Deduction | (17.5) | 0.0 |
| Rate reduction | 0.0 | (13.0) |
| Net Federal tax rate | 10.5 | 15.0 |
| Ontario | 4.5 | 11.5 |
| Total corporate tax rate | 15.0 | 26.5 |
Example showing incremental tax on $100,000 in Ontario assuming personal income is over $220,000:
| Earned by a Proprietorship | Small Business Income up to $500,000 | Active Business Income over $500,000 | |
| Taxable income | $100,000 | $100,000 | $100,000 |
| Corporate income tax | 0.0 | (15,000) | (26,500) |
| Net | 100,000 | 85,000 | 73,500 |
| Personal tax on dividend (45.30%/39.34%) | 0.0 | (38,505) | (28,915) |
| Personal tax on income (53.53%) | (53,530) | 0.0 | 0.0 |
| Net after tax dollars at top tax rate | 46,470 | 46,495 | 44,585 |
If you would like to discuss the above prior to the release of the 2016 Federal budget please contact your trusted advisor at Graham Scott Enns LLP Chartered Professional Accountants.
The Ontario budget contained a number of changes to the Ontario personal and corporate income taxes. The highlights are summarized below.
Personal Income Tax:
Corporate Income Tax:
These changes apply to the calculation of Ontario Income Tax only.
Personal Income Tax Checklist 2015
Highlights:
New Federal Liberal Government
New – Home Accessibility Tax Credit
Caregivers From Overseas
Statute-Barred Assessments
Keeping Contact Info Current
CRA Project
CRA Selection For Audit
Filing Slips With CRA
CANADAHELPS.ORG
2015 Personal Income Tax Return Checklist
Please review the attached tips and traps for year end tax planning. Please contact our office to discuss any items and their applicability to your personal situation.
