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Proposed Changes to the Small Business Deduction

In the 2016 Federal Budget, new measures have been proposed to limit multiple access to the small business deduction (SBD). One proposed change that will affect a large amount of Canadian control private corporations and structures are SBD restrictions on payments between private corporations. This is important given that income taxed under the SBD is eligible to be taxed at a lower rate.  These changes will come into effect for taxation years starting on or after March 22, 2016. For example, companies with a year end March 31st 2017 onward will be effected by this new proposal.

This new term is coined as “Specified Corporate Income (SCI)” and will restrict access to the SBD on active business income (ABI) earned from providing services/property to another private corporation (PayCo) where there is common ownership, ineligible for the SBD.

ABI is considered income earned from a business source, rather than other sources such as property/investment income that is not incidental to the business. Common ownership is when there is interest in PayCo held by:

  • Corporation providing the service and receiving fees (ServeCo)
  • Any shareholder of ServeCo
  • Any person who is not at arm’s length with shareholders of ServeCo (for example, children, parents, siblings, spouse etc.)

Even a small amount of interest held may trigger these restrictions to apply. For example, if you own a small share in PayCo and your spouse owns a small share in ServeCo, these restrictions could apply. However, the budget has proposed that companies may assign a portion of their unused SBD limit to the other company to keep the SCI eligible for the SBD.

While the proposals may change during finalization into law, there is no doubt that many corporations will be affected by this new change. Please consult us if you believe that this change may affect your business in order to adjust your tax planning accordingly.

Know your Responsibilities as a Director

A director of a corporation may be personally liable for corporate remittances in certain circumstances. A May 5, 2016 Tax Court case provides a discussion where the taxpayer, who is also Director and 50% shareholder of a corporation, was found liable for the corporation’s unremitted payroll deductions and tax.

Director of corporations are held liable if he or she does not exercise a degree of care, diligence, and skill of a reasonably prudent person in comparable circumstances. In this case, the taxpayer was notified from the other 50% shareholder that the business was doing well, although reality was that the company was in financial difficulty and remittances were not being made. The taxpayer then received correspondence from CRA regarding arrears GST and payroll deduction remittances, which led to the taxpayer to discuss with the other 50% shareholder about the need to be diligent and stopping by every two to three weeks to check on matters.

However, the taxpayer continued to depend on the other 50% shareholder for news regarding the health of the company, even after receiving additional correspondence about outstanding source deductions. As such, the Director was found personally liable for corporate remittances. The Court concluded that the taxpayer was not diligent given the taxpayer’s knowledge of the corporation’s financial state and heavy reliance on the assurances provided by the other 50% shareholder. The Court also suggested that a reasonable person would verify if the remittances were being paid independently. The Director was personally liable for unremitted corporate GST/HST and source deductions.

It is important to continue to exercise a degree of care and review source documents to ensure payments to CRA are being made appropriately, especially in times of corporate financial difficulty.


2016 Federal Budget Highlights – Changes to GST/HST

Here is a highlight of items proposed changes for Changes to GST/HST:

Health Measures
Zero-Rated Medical Devices
Budget 2016 proposes to add insulin pens, insulin pen needles, and intermittent urinary catheters to the list of zero-rated medical devices. This measure will, with certain exceptions, apply to supplies made after Budget Day

Purely Cosmetic Procedures
Budget 2016 proposes to clarify that the GST/HST generally applies to supplies of purely cosmetic procedures provided by all suppliers, including registered charities. This clarification will apply to supplies made after Budget Day.

Exported Call Centre Services
Zero-rated supplies do not attract GST/HST but related input tax credits can be claimed. Budget 2016 proposes to modify the zero-rating rules for certain exported supplies of call centre services. Specifically, rendering technical or customer support to individuals by means of telecommunications (e.g., by telephone, email or web chat) will be zero-rated for GST/HST purposes only if:

  •  the service is supplied to a non-resident person that is not registered for GST/HST purposes; and,
  •  it can reasonably be expected at the time the supply is made that the technical or customer support is to be rendered primarily to individuals who are outside Canada at the time the support is rendered to those individuals.

This measure will apply to supplies made after Budget Day, and in certain cases, prior to Budget Day.

GST/HST on Donations to Charities
Budget 2016 proposes a relieving change when a charity supplies property or services in exchange for a donation, and an income tax receipt is issued for a portion of the donation. Under the proposal, only the value of the property or services supplied will be subject to GST/HST, ensuring that the portion of the donation in excess of the value of the property or services is not subject to the GST/HST. The proposal will apply to supplies that are not already exempt from GST/HST, and will apply to supplies made after Budget Day.

Where a charity did not collect GST/HST on the full value of donations made in exchange for an inducement, for supplies made between December 21, 2002 (when the income tax split-receipting rules came into effect) and Budget Day, transitional relief will be provided.

Closely Related Test
Special relieving rules allow the members of a group of closely related corporations or partnerships to neither charge nor collect GST/HST on certain intercompany supplies. To qualify for these relieving rules, each member of this group must, among other requirements, be considered to be closely related to each other member of the group.

Budget 2016 proposes to require that, in addition to meeting the conditions of the current test, a corporation or partnership must also hold and control 90 per cent or more of the votes in respect of every corporate matter of the subsidiary corporation (with limited exceptions) in order to be considered closely related.

This measure will generally apply as of the day that is one year after Budget Day.

Collection Provisions
Budget 2016 proposes to give the Minister of National Revenue the authority to require security for payment of assessed amounts and penalties in excess of $10 million that are not otherwise collected under the Excise Act, 2001. This measure will apply to amounts assessed and penalties after the day of Royal Assent to the enacting legislation.

If you want to know how the changes may affect you or your corporation, please contact our office to speak with one of our professionals today.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a post 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 post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

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