Tax Tips – September 2017
Quick point to remember…
- 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..
TAX FOR PRIVATE CORPORATIONS: Major Changes Proposed
On July 18, 2017, Minister of Finance, Bill Morneau announced the release of a Consultation Paper which focused on three tax practices that the Government considers to provide an unfair tax advantage to private corporations and their owners. These include:
· Income Sprinkling – The Government is concerned that business owners can direct income to lower income family members who are not involved in the business, gaining a tax advantage unavailable to other Canadians. A common example is dividend sprinkling, where lower income family members own a share of the business and therefore can receive dividends, subject to their lower marginal rate. The Paper suggests taxing the unreasonable portion of dividends received by a family member of the principal of the business at the top marginal tax rate. Reasonability will be based on factors such as labour and capital contributions, and risk assumed. While this reasonableness test will apply on all dividends to family members of the principal, a more stringent criteria will apply for individuals between age 18 and 24.
Similarly, the Paper proposed limits on access to the capital gains exemption (CGE) based on age and reasonableness, with minors not entitled to the CGE at all. The proposals also deny the CGE for most gains accumulated while shares are held by a trust.
The Paper noted that the Government is committed to addressing this issue in some fashion, and that the changes will be effective in 2018.
· Passive Investment Income – The Government is concerned that it is unfair to most Canadians to permit the accumulation of passive investments with capital shielded from the higher personal tax rates. No specific proposals were made, but a number of possible approaches were set out which will essentially eliminate the advantage provided by the deferral on funds retained for investment in private corporations.
The new rules will be designed in the coming months. The timing of any changes was not specified.
· Capital Gains – The Government is concerned with plans to withdrawcorporate funds as capital gains rather than dividends. The overall tax liability on capital gains is generally much lower than that of dividends, in particular for individuals subject to tax at the top marginal tax rate. The Government has proposed some more complicated technical measures which would limit this type of planning.
These changes will apply to amounts received, or becoming receivable, on or after July 18, 2017 (i.e. the date the Paper was released).
Action Item: If you or your corporation utilize one of the above tax planning strategies, be cognizant of any legislated changes, their impact, and the effective date of the change.
EMPLOYEE DISCOUNTS ON MERCHANDISE: Change in CRA Policy
Historically, CRA has stated that an employee enjoying a discount on the purchase of merchandise from their employer is only taxable if a limited number of specified situations exist, such as where the employer makes a special arrangement with the employee or group of employees to buy the merchandise at a discount; the employee buys the merchandise for less than the employer’s cost; or the employer makes a reciprocal arrangement with another employer so that the employees of one employer can buy merchandise from the other at a discount.
While the above guidance is still published in certain CRA documents, CRA has recently released updated guidance which appears to limit this administrative position. In CRA Folio S2-F3-C2, CRA noted that where an employee receives adiscount on merchandise because of their employment, the value of the discountis generally a taxable benefit. This would apply regardless of whether the discount was provided by the employer or a third-party.
This updated guidance appears to be consistent with a number of Court decisions.
Action Item: Consider your business policy in respect of discounts on merchandise for employees in light of this updated administrative position.
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.
DISCLAIMER: The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter 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 letter accepts any contractual, tortious, or any other form of liability for its contents.
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