Year: 2022

Understanding “Enterprise Value”
and “Equity Value”

Posted on by Edixon

When business owners discuss valuations, they sometimes use the term “price.” However, there is an important distinction in business valuations between “value” and “price.” In business valuations, practitioners usually prepare a notional determination of “fair market value.” In addition, a notional determination of value is typically first approached on a “debt-free, cash-free” capital structure, with additional adjustments as discussed later in this article.

Fair market value is typically considered to represent the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, each acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or to sell and when both have reasonable knowledge of relevant facts.1

When discussing business value with owners, one key area that is often misunderstood is the difference between the “enterprise value” and “equity value.” In order to understand the distinction between the two, it is important to consider the definition of fair market value above, and how it is calculated.

Most operating businesses are valued on a going concern basis, which means the business is assumed to continue to operate for the foreseeable future. This is because in most operating businesses, the value of the future economic benefit generated is greater than the value of the underlying assets employed in the business operations. When this is the case, the value of the overall business enterprise is greater than the value of its underlying assets and liabilities, and therefore a buyer would be willing to pay more to purchase the business altogether instead of the individual assets and liabilities separately.

One of the primary going-concern approaches to valuing a business is to employ a cash flow or earningsbased valuation methodology, which values the business based on its ability to generate future cash flows. Common cash flow-based valuation methodologies include applying a multiple to either the business’ sustainable level of cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization) when earnings are relatively stable, or when changes are expected through a discounted cash flow analysis, where annual future cash flows are discounted based on the risks related to the business, as well as the timing of when the results will be achieved.

What is Enterprise Value?

The above mentioned cash flow/earnings based valuation methodologies each result in the calculation of Enterprise Value, which is the total economic value attributable to the business enterprise, regardless of how it was financed (i.e., debt and cash) or its share structure. Enterprise Value is the “debt-free, cash-free” concept introduced earlier and can also be thought of as the value available to all debt providers, common shareholders, preferred shareholders, etc. Because Enterprise Value represents the business before financing and other discretionary amounts, it does not include the value of cash, non-operating assets or liabilities, or shareholder loans since they are not part of normal business operations.

What is Equity Value?

Equity Value is the value attributable to the shareholders’ equity of the business, including all preferred and common shareholders. In other words, is the value available after any payment to creditors and other non-equity stakeholders. The Equity Value of a business is determined by subtracting outstanding debt and other non-operating liabilities from the Enterprise Value of the business and adding any cash and redundant other non-operating assets.

The distinction between Enterprise Value and Equity Value is not always widely understood. Often, when a business is sold an initial offer is made on a cash-free and debt-free basis or Enterprise Value. In reality, at closing, any debt is deducted from the original price and the value of cash and other redundant assets may be added to come to a final price that is paid for the shares or Equity Value of the business. Another important consideration is the normal working capital requirements of the business, as the extent that there is too much or too little working capital in the business may lead to another significant adjustment. As a result, the working capital needs of the business should be carefully analyzed because this can be a dollar-for-dollar adjustment to the Equity Value, which we will discuss in detail in a subsequent article.

Implications for Business Owners

When discussing business value, owners may not appreciate some of the key differences between Enterprise Value and Equity Value. A common misunderstanding is related to the impact on Equity Value from shareholder/related party loans. Owners often move cash in and out of their corporations for risk management and other purposes. When a business begins, the owner or key investors will lend funds to the newly formed corporation in the form of a shareholder loan or loan from a related company. As a business matures, dividends may be declared and then loaned back to the business for operational purposes. When valuing the shares or equity of a corporation that has loans from shareholders or other related parties, the value of these loans must be deducted from the Enterprise Value of the business along with any other debt and non-operating assets and liabilities. However, it is important to note that the shareholder loans would typically be paid out on a tax-free basis, because these loans were made by the shareholders with after-tax dollars. As a result, owners or sellers should have an understanding of the after-tax proceeds in a potential transaction.

Business owners also often ask about non-operating or redundant assets held in a business, which also impact the Equity Value. Some common examples of these assets include excess cash, marketable securities, real estate, personally used vehicles, and loans receivable (including from shareholders or other related parties). Since these assets do not relate to the ongoing business operations, their values are added to the Enterprise Value in determining the Equity Value.

Identifying redundant/non-operating assets is an important step when preparing a business for sale. Generally, potential buyers are not interested in purchasing these redundant assets or will not pay for their full value since they are most interested in the core operations. When this is the case, it is typically better for the owner to sell or transfer these assets out of the business prior to closing a sale. However, it is not always easy to carve out redundant assets or liability when a business is sold and it is therefore important to understand these items if considering a sale transaction and to work with the appropriate advisor.

Payroll Considerations for Foreign Employees Working in Canada

Posted on by Edixon

Foreign employers should understand that sending even one employee to work in Canada will trigger a payroll obligation. Compliance starts from the first day of the foreign employee’s physical presence in Canada. It is the employer’s responsibility to set up the foreign employee on Canadian payroll and deduct the applicable Canadian income taxes and Canadian social security taxes (Canadian Pension Plan and Employment Insurance).

This article, written by RSM Canada, explains what foreign employers need to know about payroll obligations for employee(s) who are working in Canada.

Read Article

Estate Planning – Don’t Forget About the Tax Clearance Certificate!

Posted on by Edixon

If you are an executor of an estate, one of the last questions that you will need to consider is applying for a Tax Clearance Certificate.

What is a Tax Clearance Certificate? 

A Tax Clearance Certificate issued by the Canada Revenue Agency (CRA) confirms that all amounts owing to the CRA by the deceased and the deceased’s estate have been paid.  The executor is free to distribute all assets of the estate.

What happens if you don’t have a Tax Clearance Certificate?

If the executor distributes the estate assets to the beneficiaries without obtaining clearance, the CRA can hold the executor of an estate personally liable for any unpaid tax debts up to the amount distributed.  This includes unknown taxes that come to light because of a future tax audit.  For example, the CRA could decide to audit that unreported transfer of the family cottage to the next generation (which actually happened 15 years ago).  If a clearance certificate has been issued then the executor is free and clear.  If not, the CRA would then try to collect the unpaid taxes from the executor.

When should you ask for clearance? 

When an estate is ready for final distribution.  This means that all tax returns for the deceased and the deceased’s estate have been filed, (re)assessed, and that any outstanding tax balances owing have been paid in full.  Only then should the final Tax Clearance Certificate be requested.

The final Tax Clearance Certificate covers the period up to the designated tax wind-up date (date of the final T3 estate tax return).  A final Tax Clearance Certificate covers both the deceased’s T1 tax returns and the estate T3 tax returns.

If T3 estate tax returns were not required, then you can request and obtain a date of death Tax Clearance Certificate.  As the name suggests, a date of death Tax Clearance Certificate covers the period up to the date of death.  It may be desirable in some circumstances to obtain a date of death Tax Clearance Certificate or an “interim” Tax Clearance Certificate where the final distribution of estate assets will not occur for several years.

How do you request a Tax Clearance Certificate?

To request a Tax Clearance Certificate, complete Form TX19 – Asking for a Clearance Certificate and send it with the appropriate documentation to your local tax services office, “Attention:  Audit – Clearance Certificates”.  An authorized representative, such as a DJB accountant, can complete and file the TX19 on behalf of the executor(s).

As part of the TX19 submission, the following items are required by the CRA:

  • a completed and signed copy of the taxpayer’s will, including any codicils, renunciations, disclaimers, and all probate documents if applicable. If the taxpayer died intestate (without a will), attach a copy of the document appointing an administrator;
  • a detailed list of the assets that were owned by the deceased at the date of death, including all assets that were held jointly and all registered retirement savings plans and registered retirement income funds (including those with a named or designated beneficiary), their adjusted cost base (ACB) and fair market value (FMV);
  • a copy of Schedule 3, Capital Gains or Losses from the final tax return of the deceased;
  • a list of all assets transferred to a trust, including description, ACB and FMV;
  • a detailed statement of distribution of the assets of the deceased’s estate to date;
  • a statement of proposed distribution of any holdback or residual amount or property;
  • the names, addresses, and social insurance numbers or account numbers of any beneficiaries of property other than cash; and
  • a completed Form T1013, Authorizing or Cancelling a Representative, signed by all executors, authorizing a representative such as an accountant or notary to act on behalf of the executor(s) and/or if the executor(s) want the CRA to send the clearance certificate to a different address.
Choosing not to have a Tax Clearance Certificate

Even though in the majority of cases a Clearance Certificate is warranted, there are some situations where the executor(s) may be willing to live with the risk of not asking for clearance.  After all, asking for clearance is inviting the CRA to review the tax filings.  Where the executor is the sole beneficiary and confident that there are no potential tax issues, the executor may decide not to seek clearance.  This is often the case when one spouse dies leaving their entire estate to the surviving spouse who also is the sole executor.  There may be similar situations depending on the family dynamics and their tolerance for risk.

If you have any questions about this topic or any other estate matters, please do not hesitate to contact a DJB professional, we would be happy to answer your questions.

Bill 88: Working for Workers Act

Posted on by Edixon
Balancing privacy and surveillance: What you need to know about Electronic Monitoring Policy requirements

The Ontario government has recently passed new legislation, Bill 88: Working for Workers Act, 2022, which includes amendments to the Employment Standards Act, 2000 (ESA), and the Occupational Health and Safety Act (OHSA), as well as an entirely new Act, the Digital Platform Workers’ Rights Act, 2022. Bill 88 received Royal Assent on April 11, 2022. For the purposes of this article, the Digital Platform Workers’ Rights Act, 2022 will not be discussed.

Electronic Monitoring

The intention behind the policy on electronic monitoring is to protect the privacy of workers by requiring employers to be transparent about how they track employees’ use of electronic devices such as computers, cell phones, GPS systems among other devices. The policy is applicable in the workplace, in the field or at home.

All employers with 25 or more employees (as of January 1 each year) will be required to develop a written “electronic monitoring” policy by March 1 of that year. For the year 2022, employers must have this policy in place by October 11, 2022, and provide a written copy to existing employees by November 10, 2022.

The policy must address:

  • Whether the employer electronically monitors its employees, and if yes:
    • How and in what circumstances the employer monitors employees; and
    • Set out the purposes for which information obtained through this monitoring may be used by the employer.

While employers are required to have a policy in place that discloses that it electronically monitors employees, this does not affect or limit an employer’s ability to use information obtained through this monitoring.

Employers must provide a written copy of the policy to all employees within 30 days from the day the employer is required to have the policy in place, or for new employees, within 30 days of their joining date, or for assignment employees of temporary help agencies, within 24 hours of the start of the assignment, whichever is later.

Amendments to the OHSA

Bill 88 has increased penalties under the OHSA, which will come into force on July 1, 2022. Employers are also required in certain circumstances to provide a naloxone kit in the workplace.

Digital Platform Workers

The new Act related to digital platform workers is intended to establish certain rights and protections for workers, regardless of whether those workers are employees. Digital platform work means work such as ride share, delivery, courier, or other services provided by workers who are offered work assignments through an operator through the use of a digital platform.

Key Takeaways

Applicable employers are encouraged to consider the circumstances surrounding their own workplace, their position on electronic monitoring of employees, and ensure that an appropriate electronic monitoring policy is implemented in accordance with government deadlines.

Additionally, employers should continue to review their obligations under the OHSA and understand the risks associated with non-compliance.

Contact a DJB Human Resources Advisor today at djbhr@djb.com to ensure that you are compliant with all of your legislative requirements.

CRA COLLECTIONS: Potential Impact on Business

Posted on by Edixon

As some businesses struggle with cash flow, they may be motivated to prioritize suppliers and other creditors ahead of CRA. A recent court case demonstrates CRA’s power to collect tax arrears and the impact of CRA exercising this power on a business.

In a June 11, 2021, Court of Queen’s Bench of Alberta case, the taxpayer had fallen into arrears in respect of both GST/HST and payroll remittances. Payment arrangements were entered into with CRA to assist in meeting the obligations. However, after failing to meet the agreed-upon terms, requirements to pay (RTPs) were issued to several of the taxpayer’s clients.

RTPs are legal documents that require recipients (the taxpayer’s clients in this case) to submit payment to CRA rather than the taxpayer. The RTP gives priority to CRA over most other creditors.

After the taxpayer had renegotiated a new payment plan, all RTPs were cancelled except for the one to its largest client. After struggling to meet the new payment plan and facing a new withholding liability, CRA once again issued RTPs. Shortly after, the taxpayer lost its largest client (the one that the sole RTP had been issued to previously).

The taxpayer advised CRA that it was considering receivership, which led to the seizure of assets and issuance of more RTPs. One client sent a letter to the taxpayer that noted that CRA had visited them personally to serve the RTP and implied that the taxpayer could be out of business or shut down. Further, the client noted that they were asked by CRA whether they could get their parts from alternate suppliers, and the client indicated that they were now considering doing so.

Taxpayer loses

The court found that CRA and its agents did not owe a duty of care to the taxpayer, that there was no negligence, and that the government’s actions did not unlawfully interfere with the economic relations of the taxpayer.

ACTION ITEM: CRA can collect your tax liability by requiring your clients to pay them rather than you. To limit the business and operational issues arising from an RTP, steps should be taken proactively to communicate with CRA collections.

2022 Ontario Budget Commentary

Posted on by Edixon

On April 28, 2022, Ontario’s Minister of Finance, Peter Bethlenfalvy, tabled the 2022 Budget, entitled Ontario’s Plan to Build. As the name suggests, the budget displays a focus on rebuilding the economy and infrastructure for families, seniors and workers.

The following is a summary of the key business and personal income tax measures, and indirect tax measures in the budget.

Business income tax measures

No changes were proposed to Ontario’s corporate income tax rates or the $500,000 small business limit. 

Extending the Regional Opportunities Investment Tax Credit

The Budget proposes to extend the 10% increase to the Regional Opportunities Investment Tax Credit (ROITC) to Jan.1, 2024. 

Budget 2021 temporarily increased the ROITC from 10% to 20% for qualifying expenditures between $50,000 and $500,000 for properties that become available for use in the period from March 24, 2021, to Jan. 1, 2023. 

The ROITC is a refundable corporate income tax credit available for Canadian-controlled private corporations (CCPCs) that make qualifying investments in eligible geographic areas of Ontario. 

Extending the film and television tax credits

The government proposes to extend the eligibility of two of the major media tax credits: (i) the Ontario Film and Television Tax Credit (OFTTC) and (ii) the Ontario Production Services Tax Credit (OPSTC).

OFTTC is a refundable tax credit based on eligible Ontario labour expenditures incurred by a qualifying production company with respect to an eligible Ontario production. Similarly, OPSTC is a refundable tax credit based upon Ontario qualifying production expenditures (labour, service contracts and tangible property expenditures) incurred by a qualifying corporation with respect to an eligible film or television production. 

Updates to the Ontario Book Publishing Tax Credit

The Ontario Book Publishing Tax Credit (OBPTC) provides a refundable tax credit based on qualifying expenditures incurred by a qualifying corporation with respect to eligible book publishing activities and expenses related to publishing an electronic or digital version of an eligible literary work.

To be eligible for the OBPTC, one of the requirements is that the literary work must be published in an edition of at least 500 copies of a bound book. To help companies overcome the printing delays due to COVID-19, the government is permanently removing the 500-copy minimum threshold to be eligible for the credit for the 2022 taxation year.

Personal income tax measures

No changes were proposed to Ontario’s individual income tax rates.

Strengthening the Non-Resident Speculation Tax

Effective March 30, 2022, the government implemented several amendments in relation to the Non-Resident Speculation Tax (NRST). The NRST is a tax on the purchase or acquisition of an interest in residential property located provincewide by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees.

The changes include (i) an increase to the NRST rate from 15% to 20%, (ii) an expansion of the NRST’s application provincewide, and (iii) an elimination of two rebates specific to international students and foreign nationals working in Ontario.

Agreements of purchase and sale entered into on or after March 30, 2022, will be subject to these changes. Rebates remain available for foreign nationals who become permanent residents of Canada within four years after the tax became payable if eligibility criteria are met. 

Supporting lower-income individuals and families

To help more individuals and families, the Ontario government is proposing to enhance the non-refundable Low-Income Individuals and Families Tax (LIFT) Credit. 

Starting in 2022, the enhanced LIFT Credit would be calculated as the lesser of:

  • $875 (up from the current $850); and
  • 5.05% of employment income.

Individuals would be able to claim at least some of the LIFT credit if they have a net income up to $50,000 (up from $38,500), while for families their net income could be up to $82,500 (up from $68,500).

Helping Ontario’s seniors

The government is proposing a new refundable personal income tax credit to help seniors with

eligible medical expenses, including expenses that support aging at home. Eligible recipients of the

new Ontario Seniors Care at Home Tax Credit would receive up to 25% of their claimable medical expenses up to $6,000, for a maximum credit of $1,500.

Starting in the 2022 tax year, the proposed credit would support a wide range of medical expenses to help low- to moderate-income senior families age at home. Eligible taxpayers are those who reside in Ontario and turned 70 years or older in the year.

The proposed credit could be claimed in addition to the non-refundable federal and Ontario medical expense tax credits for the same eligible expenses. As such, the new credit would even assist seniors who do not owe any personal income tax.  

Indirect tax measures

On April 14, 2022, the Tax Relief at the Pumps Act, 2022 (Bill 111) received Royal Assent, introducing amendments to the Gasoline Tax Act and Fuel Tax Act to temporarily reduce the gasoline tax and the fuel tax to 9 cents per litre from July 1, 2022 to Dec. 31, 2022. Currently, the gasoline tax rate is 14.7 cents per litre and the current fuel tax rate is 14.3 cents per litre. The reduction will not apply to leaded gasoline.

A mechanism has been designed to refund importers, wholesalers and retailers who may have inventories of gasoline or fuel for which tax was pre-collected at the higher rates. Under this process, importers, wholesalers and retailers who hold inventory purchased at the higher rate would be required to take inventory at 12:01 a.m. on July 1, 2022, and suppliers up the supply chain should then issue tax adjustments in the form of credits to accounts based on inventory reported. The request for a refund must be made to the supplier on or before Oct. 31, 2022, or some later date that the Minister may prescribe. Additionally, the Minister may allow a late refund application if there were mitigating factors that prevented a timely application. 

The measure mirrors those in Alberta and will reduce the cost of fuel for Ontarians.

There is no provision in the Bill that addresses how the supplier will obtain credit for the amount of the refund that they provided to their customer. There will also be an increased risk to the suppliers if the Minister believes that the refund was not appropriate.  

This article was written by Dan Beauchamp, Chetna Thapar, Sigita Bersenas and originally appeared on 2022-05-05 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/2022-ontario-budget-commentary.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

REMINDER – Bill 27: Working for Workers Act Policy on Disconnecting from Work

Posted on by Edixon

The Government of Ontario passed Bill 27: Working for Workers Act on December 2, 2021. The legislation includes among other things, the requirement that Ontario employers with 25 or more employees prepare a written policy on disconnecting from work by June 2, 2022.

Disconnecting from work under the Employment Standards Act, 2000 (ESA) is defined as not engaging in work-related communications, including emails, telephone calls, video calls, or the sending or reviewing of other messages, so as to be free from the performance of work. However, the ESA does not require an employer to create a new right for employees to disconnect from work and be free from the obligation to engage in work-related communications in its policies.

In developing a written policy, employers should ensure that the policy meets the following requirements:

  • pertains to disconnecting from work as defined in the ESA
  • includes the date it was prepared and where applicable, the date of any changes to the policy
  • covers all employees however you may have different policies for different groups of staff
  • is in place by June 2, 2022

Employers must provide a copy of the written policy to all employees within 30 calendar days of:

  • the policy being prepared
  • the policy being changed (if any changes have been made)
  • a new employee being hired

The employer may provide the policy to employees as:

  • a printed copy
  • an attachment in an email if the employee can print a copy
  • a link to the document online if the employee has a reasonable opportunity to access the document

Guidelines for the content of the policy have been left open-ended and are subject to the employer’s discretion. The Ontario Ministry of Labour provides some examples of what the policy may address related to employer communication with employees:

  • time
  • subject
  • who is contacting the employee
  • employer requirements regarding out of office notifications or voicemail messages

Applicable employers are encouraged to consider the circumstances surrounding their own workplace and ensure that an appropriate policy is implemented prior to the government deadline.

Need Further Assistance?

Contact djbhr@djb.com to connect with one of our HR Professionals to discuss this new Act and how it may apply to your business.

2022 Canada Federal Budget: Detailed commentary

Posted on by Edixon

Key budget insights and implications for the middle market

On April 7, 2022, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s 2022 budget.

The budget is based on three pillars: (i) investing in people by increasing the housing supply and establishing affordable child care, (ii) facilitating a transition to a green economy to fight climate change, and (iii) incentivizing and supporting Canadian production and innovation.

The budget signals the end of COVID-19 subsidies and credits, and adopts a measure of fiscal restraint. From a tax perspective, the only tax rate increases are on banks and life insurers. However, there is a clear focus on strengthening anti-avoidance rules and eliminating other tax deferrals and benefits that could affect many middle market businesses. In this respect, Budget 2022 continues one of the themes from Budget 2021, which introduced the Luxury Tax, the Digital Services Tax, mandatory disclosure rules and enhanced collection measures to combat tax avoidance.

This tax alert summarizes the business and personal income and indirect tax measures in Budget 2022 relevant to the middle market.

Audit and enforcement

Budget 2022 reiterates the government’s intention to correct perceived inequalities in the tax system by bolstering anti-avoidance rules and enhancing audit and enforcement measures.

Expanding the application of the general anti-avoidance rule

The general anti-avoidance rule—or GAAR—is an anti-avoidance measure that the Canada Revenue Agency (CRA) uses to combat abusive tax avoidance strategies that are not subject to specific anti-avoidance rules in the Income Tax Act (ITA). In recent years, the courts have held that the GAAR does not apply to an increase to a tax attribute that has not yet been utilized to reduce taxes.

The government sees this line of decisions as running counter to the policy underlying the GAAR. As a result, Budget 2022 proposes to amend the GAAR so that it will apply to transactions that increase or preserve tax attributes even when the tax attributes have not yet become relevant to the computation of tax. This measure would apply to notices of determination (regarding the tax attribute) on or after April 7, 2022.

This change, once legislated, will significantly expand the scope of the GAAR.

Previously announced measures

Budget 2022 confirms the government’s intention to proceed with previously announced enhancements to audit powers, anti-avoidance rules and collection measures, including the following:

  • Enhanced reporting requirements for certain trusts
  • Mandatory disclosure rules
  • Bolstering collection measures to prevent tax avoidance
  • Requiring oral interviews and other reasonable cooperation practices during audits

Business tax

Aside from two new taxes on banks and life insurers, the budget proposes no changes to the federal corporate income tax rates or the $500,000 small business limit. However, the government proposes to expand eligibility for the small business deduction, allowing more midsize businesses to benefit from the lower rate.

Small business deduction

The small business deduction (SBD) provides eligible Canadian-controlled private corporations (CCPCs) with a reduced corporate income tax of 9%. Currently, the limit is reduced on a straight-line basis when:

  • The combined taxable capital employed in Canada of the CCPC and its associated corporations is between $10 million and $15 million; or
  • The combined adjusted aggregate investment income of the CCPC and its associated corporations is between $50,000 and $150,000

Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations: the taxable capital range is between $10 million and $50 million. Applying to taxation years that begin on or after April 7, 2022, this proposed change will allow more medium-sized CCPCs to benefit from the SBD.

Additional taxes on banks and life insurers

First, Budget 2022 proposes the Canada Recovery Dividend (CRD), which is a one-time 15% tax on banks and life insurers (as determined under Part VI of the ITA). The 15% tax would apply on an entity’s taxable income over $1 billion as determined for taxation years ending in 2021. The CRD liability would be imposed for the 2022 taxation year and is payable in equal amounts over a five-year period.

Second, the budget proposes a permanent increase to corporate tax rates for banks and life insurers (as determined in the same manner as the CRD) by introducing an additional tax of 1.5% on taxable income above $100 million. The proposed additional tax applies to taxation years that end after April 7, 2022.

Introduction of substantive CCPCs to counter deferral of tax

Some taxpayers interpose foreign entities into their corporate structure to avoid being designated as a CCPC. Although CCPCs enjoy beneficial tax treatment in some instances, they are subject to a temporary tax on investment income that, in effect, is double the tax rate that a non-CCPC pays on its investment income. Loss of CCPC status in many instances results in the elimination of an additional layer of refundable taxes that would otherwise apply on investment income. Notwithstanding that such taxes would eventually be payable upon a distribution of the investment income to individual shareholders, the elimination of CCPC status would provide for a deferral advantage until such time.

To curb such tax planning, the budget introduces the concept of “substantive CCPCs” to capture corporations that would otherwise not be CCPCs and subject them to CCPC taxation on investment income. However, the substantive CCPCs would continue to be treated as non-CCPCs for all other purposes of the ITA.

The budget defines substantive CCPCs as private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or fact) by Canadian-resident individuals. Similar to the CCPC criteria, the test would contain an extended definition of control that would aggregate the shares owned, directly or indirectly, by Canadian resident individuals, and would therefore deem a corporation to be controlled by a Canadian resident individual where Canadian individuals own, in aggregate, sufficient shares to control the corporation.

The budget aligns the taxation rules of investment income earned and distributed by substantive CCPCs with the rules that apply to CCPCs. However, the budget provides an exception to genuine commercial transactions entered into before April 7, 2022, where the share sale occurs before the end of 2022.

The budget aims to ensure that the investment income earned and distributed by substantive CCPCs is taxed in the same manner as CCPCs. These rules are intended to ensure that private corporations cannot effectively avoid CCPC status and applicable anti-deferral rules. They also capture arm’s-length transactions where a non-resident buyer has a right to acquire shares of a CCPC.

Elimination of the flow-through share regime for oil, gas and coal activities

To phase out inefficient fossil fuel subsidies, the government proposes to eliminate the flow-through share regime for fossil fuel sector activities.

In general, flow-through shares provide certain companies with greater access to financing by forgoing the tax benefit of Canadian exploration expenses and Canadian development expenses to investors. The investors who hold the flow-through shares are permitted to deduct the expenses that the corporation has renounced to them in calculating their taxable income.

Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.

This measure will apply to flow-through share agreements entered into after March 31 2023.

Critical mineral exploration tax credit

Although the budget proposes to phase out flow-through shares for inefficient fossil fuel subsidies, it introduces a 30% tax credit for individuals who invest in specified minerals that are used in the production of zero-emission vehicles and other clean technologies.

Expansion of clean energy tax benefits

Building on previous measures introduced for investments in clean energy, Budget 2022 proposes to expand these benefits to include air-source heat pumps.

Immediate expensing

Under the CCA regime, Classes 43.1 and 43.2 provide accelerated CCA rates (30% and 50%, respectively) for investments in specified clean energy generation and energy conservation equipment. On Nov. 21, 2018, the government introduced immediate expensing for Class 43.1 and 43.2 assets. Budget 2022 proposes to expand the list for eligible property to include air-source heat pumps primarily used for space or water heating.

Corporate tax rate reduction for zero-emission technology manufacturers

In Budget 2021, the government reduced the corporate income tax rate on eligible zero-emission technology manufacturing and processing income as follows:

  • From 15% to 7.5%, where the income is subject to the general corporate tax rate; and
  • From 9% to 4.5%, where the income is subject to the small business tax rate.

Budget 2022 proposes to include the manufacturing of air-source heat pumps as an eligible activity for purposes of the temporary corporate tax rate reduction for qualifying zero-emission technology manufacturers.

International tax

Amendments to foreign accrual property income rules for CCPCs and substantive CCPCs

Budget 2022 proposes targeted amendments to the foreign accrual property income, or FAPI, rules to prevent taxpayers from gaining a tax deferral advantage by earning certain types of income (including investment income) through controlled foreign affiliates (CFAs) that are held by CCPCs and substantive CCPCs (as introduced in the budget and described above).

Unlike the domestic anti-deferral rules that tax investment income at a higher rate for CCPCs than for non-CCPCs to achieve tax neutrality, the FAPI rules tax all Canadian corporations at the same rate (whether CCPC or non-CCPC). This creates a deferral advantage for CCPCs and their individual shareholders.

The budget proposes to eliminate the tax deferral advantage to CCPCs (including substantive CCPCs) and their individual shareholders by adjusting the FAPI computation for CCPC for these types of entities. In tandem, the budget also proposes amendments so that integration (tax neutrality) will be achieved by adding amounts to the capital dividend account that can be distributed to a Canadian individual tax-free.

These measures would apply to taxation years that begin on or after April 7, 2022.

CCPCs and substantive CCPCs that earn FAPI (including investment income) through CFAs should revisit their international corporate structures as the proposed rules will eliminate the tax deferral previously available.

Interest coupon stripping

The budget proposes to apply the withholding tax rules on interest paid under an interest coupon stripping arrangement as though interest had been paid to the non-resident non-arm’s length lender.

Interest coupon stripping arrangements involve a non-resident lender selling its right to receive future interest payments (interest coupons) from a non-arm’s length Canadian-resident borrower to a party that is not subject to withholding tax (e.g., a person resident in Canada) or a person resident of a country with a lower treaty reduced withholding tax rate.

This measure is expected to apply on interest paid or payable by a Canadian-resident borrower to the interest coupon holder to the extent that such interest accrued on or after April 7, 2022, subject to certain exceptions for debt obligations entered into before April 7, 2022.

Exchange of tax information on digital economy platform sellers

Consistent with the Organisation for Economic Co-operation and Development’s rules for reporting by digital platform operators with respect to platform sellers, the budget has proposed to implement similar rules in Canada to ensure that revenue earned by taxpayers through those platforms can be properly taxed.

The proposed measure would require platform operators who provide support to reportable sellers for relevant activities (e.g., rental of immovable property or means of transportation or personal services) to complete due diligence procedures to identify reportable sellers and their jurisdiction of residence.

The proposed measures apply to a platform operator that is (i) resident in Canada or (ii) not resident in Canada but facilitates relevant activities of sellers resident in Canada, or with respect to rental of immovable property located in Canada. Certain platform operators would be excluded.

The CRA would automatically exchange information received from Canadian platform operators with partner jurisdictions under the exchange of information provision in tax treaties and similar international instruments. This measure will allow Canadian tax authorities to access information on platform sellers earning income in Canada which may result in additional tax obligations and compliance in Canada.

This measure would apply to calendar years beginning after 2023.

Transfer pricing

Budget 2022 focuses on the Inclusive Framework on Base Erosion and Profit Shifting, and largely reaffirms Canada’s positions. The government also commits to continue efforts around the transfer pricing consultation announced in Budget 2021.

Pillar One (reallocation of taxing rights)

Pillar One seeks to introduce profit allocation and update existing nexus rules for certain multinational enterprises. It is expected to initially target companies with revenues greater than 20 billion euros and profitability above 10%. The government has affirmed it is working with international partners to further develop the Pillar One framework and bring the rules into effect.

If Pillar One is not implemented in a timely fashion, the government will continue to advance the Digital Services Tax.

Pillar Two (global minimum tax)

Pillar Two seeks to introduce a minimum effective tax rate of 15% for large multinational enterprises (expected to be entities with revenue greater than 750 million euros).

Budget 2022 proposes to implement Pillar Two effective 2023, with public consultation being launched as part of Budget 2022.

Credits and incentives

The budget renews funding for many well-used credit and incentive programs for Canadian businesses. Specifically, existing programs designed to spur innovation investment and tourism, and to increase agricultural production output, have been bolstered in the budget. Many incentives have a clean technology component to help companies reduce greenhouse gas emissions while enhancing their operations.

Agricultural grants

Targeted agricultural grants will be dispersed through the country, to be administered by the provinces. These grants are designed to address regional issues and foster growth in the different agricultural subsectors across the country. Agricultural producers and processors will enjoy a range of grants for sustainable agriculture, potentially enhancing operational efficiency while reducing their farming/production emissions.

Innovation funding

Innovation funding targets programs that partner with organizations on large projects for industries ranging from manufacturing to life sciences. A particular area of focus is increasing the strength of specific innovative sectors such as carbon capture utilization and storage (CCUS) and the semiconductor industry.

The new CCUS refundable tax credit is between 37.5% and 60% of the costs associated with eligible projects and equipment.

Tourism

The government has announced significant investment to generate visits from foreign nationals to various destinations in Canada. These investments exceed $1 billion, plus additional funding to support the Indigenous tourism industry.

Scientific research and experimental development

No changes are proposed to the well-used scientific research and experimental development—SR&ED—program. Canadian businesses can continue to take advantage of these tax credits to help with costs incurred when undertaking advanced research and development.

Personal tax

With a focus on economic growth, inclusivity, and making life more affordable for Canadians, Budget 2022 includes several key measures targeted toward individuals.

Notably, there are no changes to personal tax rates.

Genuine intergenerational share transfers

Having received royal assent on June 29, 2021, Bill C-208 was intended to provide an exception to surplus stripping rules in order to facilitate genuine intergenerational business transfers. However, the government soon realized that the bill may have unintentionally permitted surplus stripping without requiring that a genuine transfer take place. As a result, the government previously indicated its intention to revise the legislation to limit its scope.

Budget 2022 announces a consultation process among stakeholders and key affected sectors such as the agriculture industry. This will allow Canadians to share their views as to how the existing rules could be modified. The Department of Finance has asked that all comments be submitted by June 17, 2022.

Taxpayers contemplating succession of business ownership to family members will need to carefully navigate the proposed rules and any required documentation to avoid any unexpected tax consequences. Taxpayers may benefit from expediting such transactions before additional measures come into effect.

Residential property flipping

As part of the government’s effort to make housing more affordable, Budget 2022 proposes a new rule that would deem proceeds earned on the sale of a residential property owned for less than 12 months to be business income.

This proposed measure targets individuals who purchase real estate with the intention of flipping the property within a short period of time. The deeming rule will not apply if the disposition of property is in relation to one of several life events, such as the death of a taxpayer, change in work location or the breakdown of a marriage.

The new deeming rule would apply to any residential properties sold on or after Jan. 1, 2023. An individual who is considering selling a house should ensure that the house is owned for more than one year.

Enhanced support for taxpayers looking to buy first homes

The budget includes several measures to assist first-time home buyers.

First, the budget proposes to create a Tax-Free First Home Savings Account (FHSA), a new registered account to assist individuals in saving for their first home. To qualify, individuals must be (i) resident in Canada, (ii) at least 18 years of age, and (iii) not have lived in a home they owned at any time in the year the account is opened or in the four preceding calendar years. Contributions to the FHSA are tax deductible but are not taxable when withdrawn for an eligible home purchase. The FHSA has an annual contribution limit of $8,000 and a lifetime limit of $40,000. Funds can be transferred from an existing registered retirement savings plan to an FHSA, subject to the annual and lifetime limits. Budget 2022 proposes that the FHSA will be introduced in 2023.

Second, the government will double the First-Time Home Buyer’s Tax Credit (HBTC) from $750 to $1,500. This measure will apply to acquisitions of a qualifying home made on or after Jan. 1, 2022.

Enhanced support for homeowners

The new Multigenerational Home Renovation Tax Credit is a refundable credit for eligible expenses incurred for a qualifying renovation, which is one that creates a secondary dwelling unit permitting an eligible person (including a senior or person with a disability) to live with a qualifying relation. The credit can be claimed by an individual who ordinarily resides in the eligible dwelling in the amount of 15% of the lesser of eligible expenses and $50,000 within 12 months after the end of the renovation period. This measure will apply for the 2023 and subsequent taxation years, in respect of work performed and paid for and/or goods acquired on or after Jan. 1, 2023.

The Home Accessibility Tax Credit (HATC) is a non-refundable tax credit for eligible home renovation or alteration expenses in respect of an eligible dwelling of a qualifying individual. Budget 2022 proposes to increase the annual expense limit of the HATC from 15% of $10,000 to 15% of $20,000. This will provide additional tax support for more significant renovations undertaken to improve accessibility. This measure will apply to expenses incurred in the 2022 and subsequent taxation years.

Indirect tax measures

Assignment sales

With a view to curbing speculative trading in the Canadian housing market, Budget 2022 proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, effective May 7, 2022. An assignment sale is a transaction in which a purchaser of a new home from a builder sells the purchase rights and obligations under the agreement with the builder to another person.

The proposal may affect the amount of a GST new housing rebate or of a new housing rebate in respect of the provincial component of the HST, as the rebates are based on the total consideration payable for a taxable supply of a home, including the consideration for a taxable assignment sale.

Expanded hospital rebate

Budget 2022 proposes to amend the GST/HST eligibility rules for the expanded hospital rebate that covers charities and nonprofit organizations that provide health care services similar to those traditionally performed in hospitals.

Under the current GST/HST rules, hospitals can claim an 83% rebate and charities and non-profit organizations can claim a 50% rebate of the GST and the federal component of the HST. Currently, one of the conditions to be eligible for the expanded hospital rebate is that a charity or non-profit organization must deliver the health care service in a geographically remote community.

Budget 2022 proposes to extend the GST/HST rebate to health care services provided by charities or non-profit organizations irrespective of geographical location. This measure will generally apply to rebate claim periods ending after April 7, 2022, in respect of tax paid or payable after that date.

This measure will allow all charities and nonprofits that provide health care services to reduce their operating costs. 

Excise Act 2001 measures

Taxation of vaping products

Following consultation, the government is proposing various changes to the rules originally proposed in Budget 2021. The new tax will apply to vaping products that include either liquid or solid vaping substances with an equivalency of 1 millilitre of liquid to 1 gram of solids. It will not apply to those vaping products subject to cannabis excise duties or those produced by individuals for personal consumption. Additionally, the government is prepared to collect provincial duties for coordinating provinces or territories. There will be a travel exemption for vaping products that are imported for personal use by travellers.

Cannabis framework

The government is proposing to streamline, strengthen and adapt the cannabis taxation framework. Quarterly remittances will be allowed for producers that were required to remit less than $1 million in excise duties during the four fiscal quarters immediately preceding the quarter ending April 1, 2022. Transfers of packaged and unstamped products will be allowed in certain contract-for-service situations upon royal assent. The penalty for lost stamps will be adjusted so that the penalty will be higher if the stamp is for a coordinating province or territory. This reflects the fact that the stamp for a coordinating jurisdiction has a higher value since it represents both the federal and coordinating province tax. The requirement to hold a cannabis excise licence will be removed for entities that hold a Health Canada-issued research licence or cannabis drug licence.

General administration

The budget proposes to match the cancellation conditions for an excise licence with the conditions required to suspend a licence. Applicants for a tobacco, spirits, wine and/or cannabis excise licence will now be required to comply with all federal and provincial legislation and regulations respecting the taxation and control of cannabis in addition to those respecting tobacco, spirts and wine. Acceptable security will no longer include cash and transferrable bonds from the government of Canada, but will now include bank drafts and Canada Post money orders. The CRA will now be able to carry out virtual audits and reviews where the agency deems it appropriate, even after the end of the pandemic. 

Canadian wine

Canadian wine is currently exempt from excise duties if it is produced in Canada and is wholly composed of agricultural or plant products grown in Canada. However, this exemption will be repealed on June 20, 2022, in response to a settlement agreement to a World Trade Organization challenge.

Beer taxation under the Excise Act

The Excise Act will be amended to reduce the existing tax on beer having no more than 0.5% of alcohol by volume (ABV). This will bring this product in line with the existing exemption for wines and spirits containing no more than 0.5% ABV.

The measures are intended to ensure equity among products and to simplify administration.

RSM Contributors

Peter Ahn, Sr. Director
Dan Beauchamp, Sr. Director
Allison Baum, Sr. Manager
Sigita Bersenas, Associate
Bob Boser, Partner
Adrian Jack, Manager
Marino Jeyarajah, Partner
Nakul Kohli, Manager
Danny Ladouceur, Partner
Bev Lucas-King, Sr. Manager
Sean McNama, Partner
Hayley Mercer, Manager

Yoni Moussadji, Sr. Manager
Clara Pham, Partner
Shannon Preitauer, Supervisor
Austen Ramsay, Partner
Melina Rocha, Manager
Stephen Rupnarain, Partner
Greg Synanidis, Sr. Manager
Sam Tabrizi, Partner
Enzo Testa, Partner
Chetna Thapar, Sr. Associate
Danielle Wallace, Manager

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/budget-commentary/2022-canada-federal-budget-detailed-commentary.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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TEACHERS AND EARLY CHILDHOOD EDUCATORS:
Expanded Access to Tax Credit

Posted on by Edixon

The eligible educator school supply tax credit is a refundable tax credit that allows teachers and early childhood educators to claim up to $1,000 for amounts expended (for which no allowance or reimbursement was provided) for supplies and some durable goods used to teach or facilitate students’ learning. Individuals must have a certificate from their employer attesting to the eligibility of their expenses for the year.

Shift to online learning

In an October 19, 2021, Technical Interpretation, CRA stated that if a shift has been made to an online classroom due to COVID-19, supplies consumed could still be eligible for the educator school supply tax credit.

Enhancements to the credit

The government has proposed to enhance the eligible educator school supply tax credit to 25% of eligible supplies from the existing 15% credit and expand the list of durable goods eligible for the credit, both effective for 2021 tax years. The limit of $1,000 of eligible supplies remains unchanged.

The expanded list of durable goods includes all of the following (the first four items were previously allowed, while the other items have been added for 2021 and onwards):

  • books;
  • games and puzzles;
  • containers (such as plastic boxes or banker boxes);
  • educational support software;
  • calculators (including graphing calculators);
  • external data storage devices;
  • web cams, microphones, and headphones;
  • multimedia projectors;
  • wireless pointer devices;
  • electronic educational toys;
  • digital timers;
  • speakers;
  • video streaming devices;
  • printers; and
  • laptop, desktop, and tablet computers, provided that none of these items are made available to the eligible educator by their employer for use outside of the classroom.

ACTION ITEM: Ensure to provide receipts for amounts expended by teachers and early childhood educators based on the expanded list of eligible expenses for the credit.

FALSIFIED EMPLOYMENT RECORDS: The Penalties
Can be Large

Posted on by Edixon

With numerous COVID-19 benefits being based on employment and remuneration levels, the federal government has likely become increasingly concerned with falsified employment records. However, this is not a new issue. In particular, the government already has experience dealing with false records used to increase access to employment insurance (EI) benefits.

Employers can face penalties of up to the greater of $12,000 and the total of all claimants’ penalties in relation to the offences. In addition, false claims by the applicant would result in an increased number of required hours to qualify for EI benefits in the future, with the specific number dependent on the value of the EI overpayment.

A September14, 2021, Federal Court case addressed a $15,277 penalty that was assessed for a single employee’s records. In respect of COVID-19 subsidies, employers may be subject to penalties including the following:

  • loss of all CEWS, CERS, and CRHP benefits for the period plus a 25% penalty for manipulations of revenue;
  • loss of all CRHP benefits for the period plus a 25% penalty for manipulations of remuneration;
  • gross negligence penalties of 50% of any applicable disallowed claims;
  • third-party penalties to advisors equal to their compensation from the employer plus as much as $100,000 in situations of culpable conduct; and/or
  • in the extreme, criminal liability for false statements, attracting penalties of up to 200% of the excessive claim and potential imprisonment for upwards of five years.

ACTION ITEM: Maintain supporting employment activity documentation as the government will be looking for situations in which employment records were falsified.