The Federal Government’s 2018 Budget promotes Canada’s strong economic growth over the past two years, including real GDP growth of 3.2 per cent since the second quarter of 2016, an unemployment rate of 5.9 per cent, and significant improvements in average weekly earnings, consumer confidence, and household consumption. The Finance Minister expects similar growth in the near-term. In addition, federal revenues increased by more than 11 per cent in 2017, largely from personal and corporate income taxes.
With this positive economic activity and outlook, the government has presented an “Equality and Growth,” budget that includes tens of billions of dollars in new or increased spending over the next six years, with the goal of further growing government revenues by increasing economic participation among women, visible minority Canadians and persons with disabilities, as well as substantial long-term investments in science and technology.
The government suggests that increasing equality for women and enhancing women’s participation in the workplace (especially in technology and trades) could add $150 billion to the Canadian economy over the next decade.
In order to facilitate the accurate preparation of your 2017 T4 information returns, we are pleased to enclose a summary of significant taxable benefits that may apply to your employees.
It should be noted that, as mentioned last year, if you are submitting more than 50 information returns (slips) you are required to file electronically. If you fail to comply with this requirement, you may be subject to an incorrect filing format penalty. We can assist you in ensuring your compliance with these new rules.
If your T4 information return is being prepared by Lipton LLP, we will be electronically filing all 2017 T4 information returns whenever possible.
If you have any questions concerning the preparation of 2016 T4 information returns and slips, please contact our office.
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.
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.
A professional corporation is a corporation that provides professional services and that is regulated by a governing professional body such as the Law Society of Upper Canada or the College of Physicians and Surgeons of Ontario.
Basically, if you are a professional and you are planning on offering your services through a company, you will need to setup a professional corporation.
Who is considered a “Professional”?
Generally only those professions that are governed by a professional body or association will be allowed to incorporate. These typically include physicians, psychologists, dentists, veterinarians, lawyers, accountants, engineers and architects. The rules will differ slightly across provinces, so it’s a good idea to check with your accountant or legal advisor before you go ahead. In Ontario for example, social workers and certain regulated health professionals can also incorporate which may not be the case for other provinces.
Why Setup a Professional Corporation?
The tax reasons for setting up a professional corporation are similar to why many businesses will want to incorporate. The main income tax advantages of a professional incorporation are:
Professional corporations can take advantage of the difference in tax rates between the highest personal tax rate and the more favourable small business corporate tax rate. By taking out less than the full amount of corporate earnings, you can defer the tax paid to a later date when you’re in a lower tax bracket.
Potential income splitting
Professional corporations can issue salary or dividends to family members in lower tax brackets, allowing you to reduce your overall tax liability. Instead of taking out $150,000 in salary by yourself and paying tax at the highest personal rate, you may be able to split the amount between your spouse and children which will significantly reduce your tax bill.
Can all of my family members be included in the income-splitting?
Unlike a non-professional corporation where you typically have the flexibility to elect anyone as a shareholder, a professional corporation is restricted to the rules set out by the governing professional body. That means who can be on your shareholder list (other than you of course) is a question for your governing body, which will differ depending on what profession you are in and in which province you are operating.
Favourable tax rates on dividends
As an incorporated individual, you have the ability to take out a portion of your income from the company as dividends and pay less tax on your earnings due to favourable tax rates on dividends.
Keep in mind that a main differentiator between a professional corporation and a non-professional corporation is that of liability. If you incorporate your photography business and you get sued, your liability will be limited to whatever you invested in the company (there are exceptions). Of course if you weren’t incorporated, all your personal assets would be up for grabs.
In a professional corporation, the story around liability is a bit different. If you are a physician and are sued for malpractice, the corporation does not protect you. You’ll have to check the terms of your professional insurance to see just what your liability is. What the corporation does provide is some protection from creditors if you borrow money, perhaps for the financing of a new office or for some expensive equipment.
Think a professional corporation is right for you?
Getting professional advice is the best way to start! Contact me today, I will be happy to get you started!
Michael Wagman received his Chartered Accountant designation in 1995, and has spent his entire professional career at Lipton, where he became a Partner in 2002. Michael’s extensive experience includes a wide variety of professionals in the medical, dental, psychology, legal and real estate sectors. Michael has decades of experience servicing professionals and has a substantial knowledge of the rules and regulations governing specific organizations, such as the Ontario and Canadian Psychological Associations, The College of Physicians and Surgeons of Ontario, The Royal College of Surgeons of Ontario, Ontario Society of Professional Engineers and The Law Society of Upper Canada.
Michael offers his clients a variety of services including accounting, taxation, estate planning, corporate finance, reorganization and restructuring. Michael has developed an extensive network of contacts, including the community’s top banking, financial, insurance and legal institutions. He is particularly adept at leveraging his contacts for his clients’ benefit. Michael takes pride in bringing the right people together.
Yesterday, the Honourable Joe Oliver, Minister of Finance, tabled Economic Action Plan 2015, the Harper Government’s “balanced-budget, low-tax plan for jobs, growth and security.”
Budget 2015 focused on four key areas:
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.
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.
A Message from the Managing Partners
Managing Partners Fred Arshoff and Jeff Nightingale discuss what Lipton LLP is striving to achieve in the months and years ahead.
Rule Changes with Respect to Foreign Income Reporting
The Canadian government has made it a priority to “crack down on international tax evasion and aggressive tax avoidance.” As part of this effort, the government has released a revised Form T1135, the Foreign Income Verification Statement. Tax partner, Sunita Arora addresses what these changes mean.
Tax Season Tips
Tax season is just around the corner. To make sure you’re prepared, assurance & advisory partner Paul Roberts offers his quick tips.
Software Compliance and Why it Matters
Manager of IT Services, Bryan Walderman provides his advice on how to avoid a software compliance audit.
With the exception of RRSP contributions (in most cases) and pension income splitting, any tax planning strategies intended to reduce one’s tax payable for 2013 must be implemented by the end of the calendar year.
While 2013 tax returns don’t have to be filed for at least another six months, it’s worth taking the time now to review possible tax-saving opportunities to make sure any necessary steps are taken before December 31st. Doing so can help avoid or minimize “sticker shock”, in the form of a large tax bill, when the annual tax return is completed next spring.
Make charitable donations for 2013
The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To earn a credit for the tax year, donations must be made by the end of the calendar year. There is, however, another reason to ensure donations are made by December 31. For federal purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess.
As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2013 will receive a federal credit of $88.00 ($200 times 15% plus $200 times 29%). If the same amount is donated, but the donation is split equally between December 2013 and January 2014, the total credit claimed is only $60. ($200 times 15% plus $200 times 15%), and the 2014 donation can’t be claimed until the 2014 return is filed in April of 2015. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% rather than the 15% level.
It’s also possible to carry forward for up to five years donations which were made in a particular tax year. So, if donations made in 2013 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2008, 2009, 2010, 2011, or 2012 tax years can be carried forward and added to the total donations made in 2013, and then the aggregate amount claimed on the 2013 tax return.
When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high income surtax (i.e., Ontario, Prince Edward Island and the Yukon) it makes sense for the higher income spouse to make the claim for the total of charitable contributions made by both spouses.
For Canadians who have not been in the habit of making charitable donations, there is now an additional incentive to make a cash donation to charity. In this year’s budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit allows individuals who have not claimed a charitable donations tax credit in any of the last 5 tax years (that is, 2008, 2009, 2010, 2011 and 2012) to claim a super-credit on up to $1,000 in cash donations made after the budget date of March 21, 2013. The super-credit is equal to 40% of donations under $200 and 54% of donations over the $200 threshold. Donations in excess of $1,000 will, of course, be creditable at regular federal charitable donation credit rates of 15% and 29%, as outlined above.
Make a registered education savings plan (RESP) contribution
It’s possible for Canadians to save for their children’s education on a tax-favoured basis, through a registered education savings plan. While no deduction is provided for contributions made to the plan, investment income earned by those contributions accumulates tax-free, and amounts paid out of the plan to pay for post-secondary education are generally taxed at lower rates in the hands of the student and not those of the original contributor.
The federal government assists contributors to an RESP through a grant program, the Canada Education Savings Grant (CESG). The CESG is equal to 20% of the first $2,500 in contributions made during the year, for a maximum annual grant of $500.
While it’s possible to carryforward grant entitlement to a future year, there are restrictions on the amount of such carryforward. The best way to ensure that the maximum possible CESG is received is to make $2,500 in RESP contributions in each calendar year, by the end of that year.
Consider accelerating medical expenses into 2013
While most out-of-pocket medical expenses incurred by Canadians may be claimed for purposes of the medical expense tax credit, the rules governing that credit can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency website in excess of 3% of the taxpayer’s net income, or $2,152, whichever is less, can be claimed for purposes of the medical expense tax credit.
More practically, the rule for 2013 is that any taxpayer whose net income is less than $71,750 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $71,750 will be limited to claiming expenses which exceed the $2,152 threshold.
The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year but weren’t claimed on the return for the year the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending during 2013 will produce the greatest credit amount. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb.
Medical expenses incurred by all family members can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lowest income member of the family who has tax payable for the year.
As December 31st approaches, it’s a good idea to add up the medical expenses which have been incurred during 2013 as well as those paid during 2012 and not claimed on the 2012 return. Once those totals are known, it will be easier to determine whether to make a claim for 2013 or to wait and claim 2013 expenses on the 2014 return. And, if the decision is to make a claim for calendar year 2013, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2014. It may make sense, where possible, to accelerate the payment of those expenses to December 2013, where that means that they can be included in 2013 totals and claimed on the 2013 return.
Take a look at the amount of tax instalments paid this year
Millions of Canadian taxpayers (in particular, the self-employed or retired) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total tax liability for the year.
The final quarterly instalment will be due on December 15, 2013. (However, since this year December 15 falls on a Sunday, the actual date on which payment is due will be Monday December 16.) By that date, almost everyone should have a reasonably good idea of what his or her income will be for 2013 and so will be in a position to estimate what the tax bill will be for the year. While the tax return forms to be used for the 2013 tax year haven’t yet been released by the Canada Revenue Agency, it’s possible to arrive at an estimate by using the 2012 form. Increases in tax credit amounts and tax brackets from 2012 to 2013 will mean that using the 2012 form will result, if anything, in a slight overestimate of tax liability for 2013.
Once one’s tax bill for 2013 has been estimated, it’s possible to compare that figure with the total of tax instalments already made for 2013 and to determine whether the tax instalment to be paid on December 15 can be adjusted downward.