Chartered Professional Accountants

CRA Updates

Consultation on Proposed Tax Changes

On July 18, 2017, the Department of Finance (Federal) released a consultation paper that proposes new tax rule changes that may impact many common tax strategies that many small business owners implement today. Impacts to multiple common tax strategies are discussed below:

Income sprinkling
As proposed, the ability to split income to your spouse and between family members will be greatly restricted. The tax on this split income will have a reasonability test component implemented and income splitting to related family members may be subject to kiddie tax (effectively tax at the highest marginal rates in Canada). The consultation paper also proposes to limit access to the capital gains exemption to certain individuals and Family Trusts. This may increase the tax on the sale of certain small businesses when the transaction relates to the sale of shares.

The changes are expected to be effective in 2018.

Passive Investments in Corporation
The Federal Government is proposing is to eliminate the ability of corporation to generate additional capital through income being taxed at small business rates and using that tax deferral to buy passive investments (stocks, rental real estate properties, GICs), rather than investing directly back into their business by means of high wages for employees, new machinery or other methods to improve productivity etc. The Federal Government is still seeking significant feedback on this topic. However, the new tax system regarding holding passive investments is expected to be complicated for many small business owners and the compliance cost to be quite high.

The timing on implementation on this part of the proposal has not be specified.

Corporate Surplus Stripping
The Federal Government is expanding its rules with regards to corporate surplus stripping. It will limit certain tax planning methods involving the ability to extract corporate surplus normally taxed as a dividend rates to be taxed at capital gains rates.

The changes for implementing these new corporate surplus stripping rules will be effective on amounts received or receivable on or after July 18, 2017.

If you believe that as a small business owner you are being unfairly targeted by the Canadian Government, you have the opportunity until October 2, 2017 to comment on these changes. All Canadians can provide their comments in the following link.

Although these are just proposed measures, it is important as a business owner to understand how this may impact your existing tax planning strategy and to be proactive in making changes as necessary to your current plans. If you need assistance in determining the impact it will have on your business, please contact our office and speak to one of our tax professionals today.

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.

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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