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12
FEB
2018

Income Splitting Using Prescribed Interest Rate Loans

Prescribed interest rate loans allow higher income earners to split income with lower income earning family members. The steps involve the higher income earner loaning money directly or via a trust to the lower income earner. The lower income earner then invests the funds in order to earn investment income. If assets other than cash are loaned, consideration must be given to potential taxes that may arise on the transfer.

In order to avoid the application of the income attribution rules (which cause the income earned from the loaned property to be taxed back into the hands of the higher income earner), the loan must bear interest at least at the “prescribed interest rate”. At the moment, the prescribed interest rate is at the historically low rate of 1%. This rate will be increasing to 2% as of April 1, 2018. This plan creates a tax-saving opportunity due to the spread between the prescribed interest rate paid and the income actually earned. As a result, now is a good time to implement or even increase an existing prescribed interest rate loan plan.

The advantage of setting up the loan when the prescribed interest rate is 1% is that the Income Tax Act only requires the lender to charge the prescribed interest rate at the time the loan is originally made.

It should be noted that the tax rules require that the prescribed interest rate is actually paid for each calendar year to the lender by January 30th of the following year.

If the lender or borrower is a U.S. person for tax purposes, the implications of this type of planning must also be considered.

Please contact your Lipton advisor if you would like to discuss this tax planning opportunity further.
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22
DEC
2017

Federal Government Revises July 2017 Income Sprinkling Proposals

On December 13, 2017, the Department of Finance released revised draft legislation which simplifies the income sprinkling proposals first announced on July 18, 2017. The legislation will likely be enacted as part of the 2018 Budget process, but is intended to apply as of January 1, 2018.

Highlights of the revised draft legislation are as follows:

Tax on split income

The tax on split income (TOSI) will be extended to individuals over 18 (who are “specified individuals”) on amounts that are received directly or indirectly, whether in the form of dividends, trust distributions, partnership distributions or certain capital gains derived from a business in which a related individual is actively engaged or is a significant equity owner.

Income from excluded businesses exempted from TOSI

Amounts derived from excluded businesses are exempted from TOSI. An excluded business is a business in which the specified individual contributes labour on a regular, continuous and substantial basis (at least 20 hours per week) during the year or in any five previous years (need not be consecutive). For businesses with seasonal operations, the labour requirement will be for the part of the year in which the business operates. If the 20 hour per week test is not met, it will be a question of fact as to whether the specified individual contributed labour on a regular, continuous and substantial basis.

Reasonableness test

If none of the exclusions apply, specified individuals aged 25 and older will be subject to a reasonableness test to determine how much income should be subject to TOSI. Reasonableness will be determined based on a number of factors, including labour contribution, capital contribution, risks assumed, and any other relevant factors. The CRA has also released a list of criteria it will consider in assessing reasonableness.

Specified individuals over age 24

For specified individuals over age 24, TOSI will not apply to income derived from excluded shares. To qualify, the individual must own shares representing at least 10 per cent of the votes and value of the corporation, and the corporation must meet one of the following conditions: (i) it must earn less than 90 per cent of its income from the provisions of services; (ii) it must not be a professional corporation; and (iii) no more than 10 per cent of its income can be derived directly or indirectly from related businesses. The condition that the specified individual own shares having at least 10 per cent of the votes and value must be met by the end of 2018. Specified individuals under age 25 who inherit shares that qualified as excluded shares to the deceased will benefit from the excluded share exemption.

TOSI and spouses

TOSI will not apply to dividends paid to a business owner’s spouse if the spouse contributed to the business in an important way and has reached age 65 (with relieving rules applicable where the contributing business owner dies before age 65). This is somewhat consistent with the existing pension income splitting rules.

Capital gains exemption

Taxable capital gains arising from the disposition of property that would be eligible for the lifetime capital gains exemption will be excluded from TOSI. These rules do not apply to non-arm’s length dispositions of property by individuals under age 18, or by trusts for the benefit of individuals under age 18.

Passive investment income

The government also reconfirmed its commitment to introducing the proposed passive investment income rules to limit tax deferral opportunities for private corporations in the 2018 Federal Budget.

Please contact your Lipton advisor if you would like to discuss these proposed changes further.

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22
NOV
2017

Ontario’s Fall Economic Statement

On November 14, 2017, Ontario Finance Minister Charles Sousa delivered the Fall Economic Statement.

Please click here to read our summary of the upcoming changes.

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26
FEB
2016

2016 Ontario Provincial Budget Commentary

On February 25, 2016 Finance Minister Charles Sousa tabled his fourth Budget.

The deficit for the 2015-16 fiscal year is projected to be $5.7 billion, which is $2.8 billion less than forecasted in the 2015 Budget. The deficit is projected to drop to $4.3 billion for 2016-17 and to be eliminated by 2017-18. Furthermore, the government is also projecting a balanced budget in 2018-19.

The Budget does not include any changes to Ontario’s personal tax rates but certain personal tax credits are being eliminated. In addition, changes to the so-called “sin taxes” are proposed. From a business perspective, although there are no changes to corporate tax rates, there are proposed reductions to certain credits.

Please Click Here to read our full Ontario Provincial Budget Commentary


Jeff Nightingale is the Co-Managing Partner and Senior Tax Partner at Lipton LLP, Chartered Accountants.  Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Scociety of Upper Canada.  He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.

Learn More about Jeff Nightingale

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15
DEC
2015

Income Tax Rate Changes Effective January 1, 2016

Personal tax rates

On December 7, 2015, Finance Minister Bill Morneau introduced changes to various personal tax rates by way of a Notice of Ways and Means Motion.

Effective January 1, 2016, the personal tax rate on income between $45,283 and $90,563 will decrease from 22 per cent to 20.5 per cent and the tax rate for income over $200,000 will increase from 29 per cent to 33 per cent.

Impact of rate changes on Canadian Controlled Private Corporations (CCPCs)

As a result of the above-noted personal income tax changes, the refundable corporate tax on investment income earned in a CCPC will also be changing as follows:

  • Refundable tax on CCPC investment income will be increased to 10 2/3 per cent from 6 2/3 per cent,
  • The dividend refund rate on taxable dividends paid by a corporation will increase from 33 1/3 per cent to 38 1/3 per cent,
  • The Part IV tax rate will increase from 33 1/3 per cent to 38 1/3 per cent.

As a result, if a CCPC has a refundable dividend tax account balance on December 31, 2015, consideration should be given to paying a dividend prior to January 1, 2016.

Trusts

The top personal tax rate will also impact inter vivos trusts. They will also have a top tax rate of 33 per cent, effective in 2016.

Donations

The tax credit for donations in excess of $200 will be increased to the new highest marginal tax rate of 33 per cent in 2016, up from the current 29 per cent.

The Tax Free Savings Account (TFSA)

The annual contribution limit for TFSAs (which was increased to $10,000 in 2015) will be reduced to $5,500 for 2016.

Stock options

Changes to stock options were not addressed, although it is now widely expected that any changes to these will be effective from the date the changes are announced and will not affect stock options issued prior to that date.

To assess the potential impact of the proposed tax amendments, please contact your Lipton advisor.

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15
OCT
2015

The Importance of Strategic Planning Retreats

It is often said that the long-term success of a business depends largely upon the ‘forward thinking’ of its owners and managers.  Unfortunately, many of these leaders claim to be too busy to devote the necessary time required to look objectively at their business.

We don’t often have the opportunity to sit back and reflect unless we stop the routine.  This is where Strategic Planning Retreats can help.  This type of retreat involves taking time, in a safe and quiet place, to reflect, discuss, plan, set goals, and commit to future results.  Giving yourself and others an opportunity to understand the current situation is valuable.  Learning about important issues and the strategies for addressing these issues has the potential to create opportunities and mitigate risk.

Successful leaders and managers have learned that working away from the normal place of business can produce valuable results.  A Strategic Planning Retreat provides a unique opportunity to address both ongoing and new issues that arise throughout the business year and how they will affect the business’ future.

The process involves creating concise statements of a business’s vision, mission, values, goals, and strategies.  It also involves reinforcing the values that guide people’s behaviour.  Developing and reminding your team of the business’ strategic intention helps everyone focus, make decisions, plan for current operations, and handle critical issues.

A Strategic Planning Retreat is also a forum for nurturing teamwork.  Successful owners and managers have learned the extra value that a team of people can generate for the business.  Retreats create synergy, excitement, and a sense of optimism amongst the people attending them.  These positive feelings can become infectious throughout the organization.

At Lipton, we often deal with clients on the financial side, but our in-depth knowledge of their business and its personnel allows us to help in so many other ways.  We have the knowledge and the perspective to see things objectively and assist in facilitating and leading your Strategic Planning Retreat.  This allows all parties to focus on the discussion instead of the retreat’s timetable and process.

Recognizing the importance of Strategic Planning Retreats, we at Lipton recently held our own two day retreat.  Led by an outside facilitator, the Partners met to discuss the Firm’s vision for the future.  We reviewed our current strategies and updated them to ensure we can continue serving our clients to the best of our abilities.

It also gave us time to focus on strategies to continue improving our proactive thinking, professional standards and perhaps most importantly, continuing our overall objective of being our clients’ “Most Trusted Advisor.”

We considered our retreat to be a great success and we continue to ‘follow it up’ in order to ensure that our strategies and related action steps are fully monitored to their completion.

If you are interested in having Lipton organize a retreat for your firm, please contact your relationship partner.  We will be happy to assist you.

Jeff Nightingale is the Senior Tax Partner and a Managing Partner at Lipton LLP, Chartered Accountants.  Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Scociety of Upper Canada.  He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.

Learn More about Jeff Nightingale

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28
NOV
2014

GST/HST election for closely related persons: Important changes for 2015

The GST/HST joint election available to closely related persons (the “156 Election”) under section 156 of the federal Excise Tax Act (the “ETA”) saw significant amendments after the last federal budget was tabled last February.

Generally speaking, a Related Party Election may be made by qualifying members of a qualifying group (i.e., certain closely related corporations and partnerships). It allows corporations resident in Canada as well as partnerships each member of which is: (a) a corporation or partnership and is resident in Canada; (b) a GST/HST registrant; and (c) engaged exclusively in commercial activities, to make supplies to other similar corporations or partnerships in the same closely related group without being required to collect or remit any GST/HST. Under a Related Party Election, supplies between related persons are deemed to be made for nil consideration.

Mandatory filing in 2015

As of January 2015, to be effective, these elections must be filed with the tax the Canada Revenue Agency via form RC4116 (not yet released). This means that “retroactive” elections (where the parties acted as if an election had been made, but did not sign the required form) will likely no longer be valid without the approval of the CRA. Historically, these forms did not have to be filed, and could often be completed retroactively so long as the parties acted as if the election had been made.

A Related Party Election will have to be filed on or before the first day on which the particular specified member, or the other specified members, must file a GST/HST, for the period that includes the effective date of the election.

For related parties that currently have a Related Party Election in effect, the election will have to be filed before 2016. However, the parties are not allowed to file the election prior to January 1, 2015 (otherwise it is deemed not to have been filed). Taxpayers who have a Related Party Election in effect should ensure that they file their elections in 2015 (preferably in January, 2015); otherwise, they will no longer be valid.

Please contact your Lipton representative in order to discuss how these changes may apply to you.

Jeff Nightingale is the Senior Tax Partner and a Managing Partner at Lipton LLP, Chartered Accountants.  Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Scociety of Upper Canada.  He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.

Learn More about Jeff Nightingale

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30
AUG
2013

Consider Taking Advantage of Income-Splitting Loans by September 30, 2013

For those of you considering taking advantage of income splitting loans with family members, it is expected that the CRA will raise the current perscribed interest rate of one percent (1%) to two percent (2%) on October 1, 2013.

As a result, now is an ideal time to consider this tax planning opportunity. Similarly, employers making home purchase loans to their employees should also consider making these loans before the rate increase.

In order to take advantage of these opportunities, all arrangements must be finalized by September 30, 2013.

Please contact your Lipton advisor if you would like to discuss this further.

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13
AUG
2013

Non-taxable benefits can help retain excellent employees

Good employees are difficult to find, so it may be worthwhile to offer benefits that will encourage them to stay.

Many owner-managers would like to provide their employees with additional benefits but may be reluctant to do so because Canada Revenue Agency (CRA) requires that many benefits be included in employee compensation. Unfortunately, this may attract additional income tax for the employees and add costs to both the employee and employer for employment insurance and CPP.

Some benefits, however, are not taxable to the employee, yet may provide a deductible expense to the employer.

If you, the owner-manager, could design the ideal benefit for your employees, what features would it include? The following four factors may be worth considering:

  1. A deductible expense to you;
  2. No extra costs for you, such as employment insurance or CPP;
  3. Non-taxable in the hands of the employee; and
  4. Attractive enough to keep hard-to-replace employees working for you.

You may be surprised to discover that a few such benefits already exist – if they meet the right criteria.

Uniforms and Special Clothing

In most situations, an employer cannot provide clothing to an employee without creating a taxable benefit for the employee. Uniforms and special clothing (including protective clothing, safety footwear and safety glasses) are exceptions, however.

The Employee Point of View

When employees receive special work-use clothing and protective gear, the benefits to the employee are two-fold: employees don’t have to spend their own money for these items and the CRA does not consider these items a taxable benefit.

The Employer Point of View

From the owner-manager’s point of view, the benefits are also two-fold: a distinctive uniform, usually containing the employer’s logo, is a walking advertisement for your business, while protective gear, if it helps to prevent injuries, keeps insurance costs down. The uniforms and protective gear are deductible expenses to the employer.

Reimbursement and Clothing Allowances

You can also provide employees with an allowance for uniforms, protective clothing, safety glasses, boots, etc., or reimburse them for purchases made with their own money. If the allowance is accountable (i.e., requires receipts) it is considered to be a reimbursement of expenses and is not a taxable benefit to the employee. If you do not require a receipt, the purchases must meet the following three criteria in order to be a non-taxable benefit to the employees:

  1. Laws require protective clothing on the worksite;
  2. The employee purchases the protective clothing; and
  3. The amount of the reimbursement is reasonable.

If laundry or dry cleaning costs are incurred to clean uniforms or protective clothing, employers may opt to pay a reasonable allowance to the employee or, alternatively, to reimburse the employee when receipts are presented. These costs are not taxable to the employee. (The reimbursement includes HST/GST recoverable by the employer.)

Cellular Phone Service

If you provide employees with a personal cellular or other handheld device for business use, the portion attributable to business is not taxable to the employee. In theory, if an employee uses any of these devices for personal use, the personal-use portion would be considered a taxable benefit. The CRA has, however, recognized that it is impractical to try to draw a distinct line between personal and business use. Instead, the CRA states:

Generally, we do not consider your employee’s personal use of the service to be a taxable benefit if all of the following apply:

  • The plan’s cost is reasonable.
  • The plan is a basic plan with a fixed cost.
  • Your employee’s personal use of the service does not result in charges that are more than the basic plan cost.

Child-Care Expenses

Child care is not just a financial issue; it is also an emotional one. A non-taxable, child-care facility at work is an excellent way to keep employees happy. This benefit is only non-taxable to the employee if all the following conditions are met:

  • Child care must be provided at the place of business;
  • Services must be managed by the business;
  • All employees must have the option of utilizing the service;
  • The service must be provided free or with minimal costs attached;
  • Third parties (individuals who are not employees) cannot use the service.

Options to Consider

Assume for a moment you want to provide on-premises child-care facilities for your employees but the costs are so high you will have to offer the service to non-employees at a higher rate. If you decide to go that route, the difference between the cost to your employees (which may be as low as zero), and the price paid by third parties, will be considered a taxable benefit to your employees.

However, if you subsidize your employees to use the child-care services of a third party, the CRA considers the subsidy to be a taxable benefit to employees who use the service. If the subsidized care is for children 14 years of age or younger and for daily periods of less than 24 hours, you pay no HST/GST but you must contribute to CPP.

Internet

If you have employees working at home, you may wish to pay for the portion of their Internet service used for business. Internet costs for business use are a non-taxable benefit to the employee; however, the personal portion of Internet use must be included in the employee’s income as a taxable benefit. It is up to the employer to determine the fair market value and the percentage of business use. The fair market value should be based on the employer`s cost, including GST/HST.

Spouses and Business Trips

Under most circumstances, any reimbursement for the cost of having a spouse or partner accompany an employee on a business trip is taxable to the employee. If, however, the spouse or partner is involved in activities related to the business and attendance is requested by the employer, reimbursement of reasonable travelling expenses is not taxable to the employee.

Education Cost for Employees’ Children

Reimbursement of educational costs for employees’ children is a taxable benefit to the employee. The CRA recognizes, however, that education facilities may not be available to employees’ children because of the remoteness of the worksite or because the local curriculum is inadequate. If an allowance or reimbursement is paid and it is established that the following FOUR conditions are met, then the CRA may consider the amount to be a non-taxable benefit to the employee:

  1. Education is provided in one of Canada’s official languages used by the employee;
  2. The education facility must be the closest one available;
  3. Full-time attendance is required; and
  4. The reimbursement must be reasonable.

GST/HST is not included as part of this benefit.

Parking

Taxable benefits regarding parking are a contentious issue for both the employer and the employee because many employees need to drive to work and believe the cost of parking should be absorbed by the employer.

Under most circumstances, parking is a taxable benefit to employees. The benefit to the employee is calculated at the rate charged for the parking plus HST/GST. Any contribution by the employee toward parking costs is deducted from the benefit. There are, of course, exceptions to the general rule:

  • Employees with disabilities are not subject to the taxable benefit.
  • If the employer provides parking because it is necessary to conduct business AND the employee must regularly use a vehicle (their own or a company vehicle), the add-on to income as a taxable benefit does not apply.
  • Where your business operates from a mall or an industrial park and parking is considered free to all, a taxable benefit does not arise. The CRA recognizes that if an individual is not assigned a specific spot and therefore it is uncertain as to whether a parking spot is attainable, the benefit does not apply.

Be Prepared to Defend Yourself

In many of the situations discussed above, determination of the non-taxable portion of the benefit may be somewhat subjective. Owner-managers should be prepared to support their position with solid documentation in the event the CRA decides to challenge any claims.

Jeff Nightingale is the Senior Tax and Managing Partner at Lipton LLP, Chartered Accountants. Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Society of Upper Canada. He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.

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07
MAY
2013

2013 Ontario Provincial Budget Commentary

Finance Minister Charles Sousa delivered Ontario’s 2013 Budget, his first as Finance Minister, on May 2, 2013. The Budget is projecting a deficit of $9.8 billion for 2012-13, $5 billion lower than projected a year ago, and increasing to $11.7 billion for 2013-14. The 2010 Budget put forward a plan to cut the deficit in half within five years and to eliminate it in eight years. The government remains on track to meet the fiscal targets outlined in the 2010 Budget beyond 2013-14. This includes steadily declining deficits and a return to balanced budget by 2017-18.

There are very few tax related measures included in the Budget. Those that were introduced are summarized in our commentary.

2013 Ontario Budget Commentary

Jeff Nightingale is the Senior Tax Partner at Lipton LLP, Chartered Accountants.  Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Scociety of Upper Canada.  He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.

Learn More about Jeff Nightingale

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