TAX TICKLERS… some quick points to consider…

  • Of the approximately 28 million personal tax returns filed for the 2016 year, 58% got refunds. 68% received them by direct deposit. The average refund was $1,735.
  • Only the last year of CPP survivor benefits can generally be accessed for late applications. Don’t delay submission.
  • Effective December 3, 2017, parents will be able to choose to receive parental benefits under the employment insurance program, if eligible, over the standard period (12 months) or the extended period (reduced amount taken over 18 months). The total benefits would be the same regardless of the option selected.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

OPERATING A BUSINESS IN THE U.S.: The IRS is Targeting Smaller Foreign Entities

The IRS has recently noted that they are rolling out campaigns to focus on entities below the “big fish” that have historically been targeted. Such campaigns include:

  • Related party transaction campaign – a redefined focus on mid-market entities to determine compliance with U.S. transfer pricing requirements.
  • Inbound distributor campaign – reviewing whether S. affiliates distributing imports from other countries are realizing adequate returns based on their assets, risks assumed, and functions performed.
  • Form 1120-F non-filer campaign – targeting corporations (the IRS believes there are many) with a S. permanent establishment or branch which have not filed U.S. income tax returns. The IRS indicates external data sources will be used to identify these companies, commencing with a “soft letter outreach”. There is no indication of any amnesty, meaning penalties and interest are likely for Canadian corporations which have not complied with any U.S. filing obligations.

 

Action Item: If operating as a mid-market business in the U.S., be prepared for the possibility of more scrutiny from the IRS.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

PROFESSIONALS’ WORK IN PROGRESS EXCLUSION: Coming Changes?

In the past, taxpayers in certain designated professions (i.e., accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors) may have elected to exclude the value of work in progress (WIP) in computing their income for tax purposes. This essentially enabled these professionals to defer tax by permitting the costs associated with WIP to be expensed without including the matching revenues.

However, the 2017 Federal Budget proposed to eliminate this election, effective for the first tax year that begins after March 22, 2017. Transitional rules have been introduced to implement the change over two years. Once fully implemented, WIP, which is valued at the lower of cost or fair market value, will need to be included in income each year.

At present, many professionals either do not account for WIP in their financial accounts or account for WIP at its expected billing amount, using staff and partner billing rates rather than cost. These professionals will be required to determine the cost of their WIP in order to comply with these new provisions. There has been some uncertainty expressed regarding how the cost of WIP is properly calculated.

CRA has stated that the proposed changes are not expected to have any impact on bona fide contingency fee arrangements. That said, some practitioners have expressed concern that this concession has little or no basis in law.

 

Action Item: If you are in one of the industries impacted, and have not previously tracked the cost of your WIP, consider doing so. Also, budget for the possible additional tax liability over the next two years due to catching up the deferral of WIP.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

ELECTRONIC T4 SLIPS: Now More Widely Available

CRA has provided commentary on its website to discuss recent changes to allow the electronic distribution of T4 slips. In the past, an employer could provide a T4 electronically only with the employee’s consent. For 2017 and subsequent tax years, employers may also satisfy their obligations by providing electronic versions without specific consent, provided other criteria are met. The employer must provide the following by the last day of February following the calendar year to which the slip relates:

  • a secure electronic portal through which the employee can access their T4 slip;
  • a secure site for printing the slip; and
  • an option to receive paper copies upon request.

Paper copies must be provided if:

  • one of the above conditions are not met (unless employee consent has been received);
  • the employee requests a paper copy;
  • the employee is on sick leave or is no longer an employee of that employer; or
  • the employee cannot be reasonably expected to have access to obtain the T4 slip electronically.

The above only applies to T4 slips. Employers cannot issue T4 slips by email due to insufficient security features.

Action Item: Consider whether these new rules allow for a more streamlined T4 distribution at your business.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

WITHHOLDINGS ON REMUNERATION TO NON-RESIDENT: Get your CRA Filings Correct

In a March 9, 2017 Technical Interpretation, CRA commented on the tax filing and withholding requirements related to a non-resident individual providing services to a Canadian company.

If an individual is employed solely outside of Canada, and is not, and has never been, a resident of Canada, no withholdings on payments are required. However, the corporation would generally be required to file a T4 in respect of the non-resident individual’s total remuneration. One exception to this rule, would be where the total remuneration for the year is less than $500. This requirement to file a T4 is not conditional upon the payee being taxable in Canada.

CRA also opined that participation in meetings using the Internet or telephone from outside of Canada would not constitute performing the services in Canada.

 

Action Item: Ensure you are filing T4s in respect of non-resident employees providing services outside of Canada.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

2017 REMUNERATION

Higher levels of personal income are taxed at higher personal rates, while lower levels are taxed at lower rates. Therefore, individuals may want to, where possible, adjust income out of high income years and into low income years. This is particularly useful if the taxpayer is expecting a large fluctuation in income, due to, for example,

  • taking maternity/paternity leave;
  • receiving a large bonus/dividend; or
  • selling a company or investment assets.

In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may lose financial support in the form of reduced Canada Child Benefit (CCB) payments. Likewise, excessive personal income may reduce receipts of OAS, GIS, GST/HST credit and other provincial/ territorial programs.

There are a variety of different ways to legally smooth income over a number of years to ensure an individual is maximizing access to the lowest marginal tax rates. For example,

  • In owner/managed companies, owners may take more, or less, earnings out of the company.
  • Realizing investments with a capital gain/loss.
  • Deciding whether to claim RRSP contributions made in the current year, or carry-forward the contributions.
  • Withdrawing funds from an RRSP to increase income. Care should be given, however, to the loss in RRSP room based on the withdrawal.
  • Deciding on whether or not to claim CCA on assets used to earn rental income.

While the above is generally true, in certain cases some individuals may wish to pay out additional dividends in 2017. Effective in 2018, there are proposals to increase the tax cost of dividends paid out to shareholders of a corporation that do not “meaningfully contribute” to the business. As such, individuals who may be subject to this higher tax rate in future years may consider increasing dividend payments in 2017. Details on this proposed change are expected to be released by December 21, 2017.

Prior to paying increased dividends, consideration should be given to a number of factors (in addition to the items noted above related to increases in income), such as the impact on the business operations, cashflow, and other agreements (like bank covenants), and whether the dividend can be paid under corporate law.

Three different types of dividends can be paid from a corporation depending on the attributes and earnings of a corporation: eligible, non-eligible and tax-free capital dividends. Due to tax rate changes, the tax cost of non-eligible dividends will likely be increasing in 2018 and 2019. As such, some may consider declaring non-eligible dividends in 2017 to access current tax rates. Changes in provincial/ territorial rates may also impact the above decision.

Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:

1)      Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the personal tax is paid when cash is withdrawn from the company).

         The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares where large amounts of capital have accumulated.

2)      Consider paying taxable dividends to obtain a refund from the “Refundable Dividend Tax on Hand” account in the Corporation.

3)      Individuals that wish to contribute to the CPP or a RRSP may require a salary to create “earned income”. RRSP contribution room increases by 18% of the previous years’ “earned income” up to a yearly prescribed maximum ($26,010 for 2017; $26,230 for 2018).

4)      Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby possibly providing greater access to the capital gain exemption.

5)      Recent tax changes may make it costlier to earn income in a corporation from sales to other private corporations in which the seller or a non-arm’s length person has an interest. As such, consideration may be given to paying a bonus to the shareholder and specifically tracking it to those higher taxed sales. Such a payment may reduce the total income taxed at higher rates.

6)      Proposed changes to the tax regime will likely require more careful tracking of an individual shareholder’s labour and capital contribution to the business, as well as risk assumed in respect of the business. Inputs should be tracked in a permanent file.

7)      If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the corporation as a Personal Services Business. There are significant negative tax implications of such a classification. In such scenarios, consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated employee) with your professional advisor.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

SUPPORT OF REFUGEES: Tax Implications

SUPPORT OF REFUGEES: Tax and Filing Requirements

Two Technical Interpretations (May 26 and March 3, 2017) considered whether support provided to a refugee would be required to be reported on a Form T5007, Statement of Benefits.

 

Essentially, the CRA considered whether the support would constitute “social assistance” which would require a T5007. If the amount is not considered “social assistance”, no T5007 would be required.

 

CRA opined that amounts would be considered “social assistance” if provided by a government or government agency, or other organization such as a charity (the “source” test”) and the payment is made on the basis of one of the following (the “purpose” test):

  • an “income” test, which is based solely on the income of the applicant;
  • a “means” test, which is similar to the income test but also takes into account the assets of the applicant; and
  • a “needs” test, which not only takes into account income and assets but also financial needs of the applicant.

 

Social assistance payments should be reported on Form T5007, unless a specific exclusion applies (related to, for example, medical expenses, child care, legal fees, job training, or funeral expenses). Also, payments that are paid in a series that total less than $500 need not be reported on a T5007.

 

While CRA opined that, for example, support provided by a church would likely constitute “social assistance”, support provided by an individual would not constitute “social assistance”. A review of the specific facts should be conducted to determine the filing obligations.

 

Further, if the amount is considered “social assistance” the amount must be reported on a tax return. While a deduction may be available, such that no tax may be owing on the amount, certain other income tested benefits such as the Canada Child Benefit may be affected. If the taxpayer had a spouse or common-law partner when the payments were received, the individual with the higher net income must report all of the payments, regardless of whose name is on the slip.  

 

Action Item: If you are involved with supporting refugees, consider whether you or your group should be issuing a T5007 slip to the recipients of the support.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

TAX TICKLERS… some quick points to ponder…

  • The tuition tax credit has been extended to include courses at a post-secondary educational institution that are not at a post-secondary school level. This may include, for example, courses on basic literacy or numeracy, or learning a second language.
  • Medical expense claims for reproductive technologies have been extended to include situations where the patient does not have a medical condition preventing conception. Claims will be allowed for 2007 and later years.
  • Individuals can now pay their individual taxes, by cash or debit card, at Canada Post.
  • Despite legal uncertainties, individuals may wish to review their estate planning, life insurance policies, and documents addressing Powers of Attorney and advanced directives, related to physician assisted dying.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

 

DEATH BENEFITS: Tax-Free Employment Benefit

A death benefit is a payment received subsequent to the death of an employee, in recognition of the deceased employee’s services. Up to $10,000 can be received by the Estate or beneficiaries of the deceased as a death benefit on a tax-free basis. As an employment-related cost, this would generally be deductible to the payer.

A March 14, 2017 Technical Interpretation, addressed several questions related to these payments following the death of an owner-manager.

CRA noted that the determination of whether an individual is an employee is a question of fact. The fact that an owner-manager received salaries for several years but was only paid dividends in the two years prior to death would not automatically mean that no death benefit could be received. It would be more difficult to support an employment relationship where the individual never received employment income from the corporation.

The existence of a formal commitment, such as a contract or a Directors’ Resolution, prior to the date of death is not a requirement for an amount to be a death benefit. Finally, a death benefit could be paid out over time, but the $10,000 exclusion applies only once, not once for each year.

 

Action Item: Consider this tax-free employment benefit.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a blog such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this blog accepts any contractual, tortious, or any other form of liability for its contents.

For any questions… give us a call.

Marsha MacLean Professional Corporation