Year: 2023

GST/HST and Damage Payments

Posted on by Edixon

Given the vastness of the GST/HST rules, it is wise to check the GST/HST rules for all transactions, especially those that are non-routine, such as damage payments.  Generally, damage payments do not constitute consideration for a taxable supply under the Excise Tax Act (ETA), so GST/HST is normally not payable. However, section 182(1) of the ETA deems certain damage payments to be consideration for a taxable supply, and inclusive of GST/HST.

Generally, subsection 182(1) applies under the following conditions:

  • there must be a breach, modification, or termination of an agreement for the making of a supply subject to GST/HST, of property or a service in Canada (other than a zero-rated supply);
  • an amount must be paid or forfeited to the supplier, or a debt or other obligation of the supplier must be reduced or extinguished;
  • that amount must be paid as a result of the breach, modification, or termination, and not as consideration for a supply; and
  • exceptions referenced in subsection 182(3) cannot apply (i.e. the section 161 late payment provisions).

The application of this provision is limited, in that it does not apply to damage payments, which are made by the supplier to the recipient.  These rules would seem to apply for the liquidated damages, which can occur in large dollars in construction contracts.   There are common situations that the CRA comments on in Policy Statement P-218, where the rules under subsection 182(1) would not be met, and they include:

  • no prior agreement for the making of a supply existed between the parties;
  • the original agreement was for the making of an exempt or a zero-rated supply;
  • the amount is not paid or forfeited to the person making the original supply, or used to reduce or extinguish a debt of the supplier, e.g., where the person making the payment is the supplier of the original supply;
  • the original agreement was for the making of a supply by a person who was not a registrant;
  • the payment is consideration for the supply under the agreement; or
  • the amount is paid otherwise than as a consequence of the breach, modification or termination of the agreement for the making of a supply.

The CRA does provide a number of examples as to when these rules would and would not apply. If your payment does fall into this provision, subsection 182(1) provides that the place of supply rules that applied to the original supply also apply to the deemed consideration. Thus, if the original supply was zero-rated, the deemed supply under subsection 182(1) will also be zero-rated and no tax will be remittable by the registrant. Furthermore, if the original supply was made in the participating province, then the deemed supply will also be made in the participating province.

We often see contracts where subsection 182(1) of the ETA is not considered in advance; and as this provision deems the payment to be inclusive of GST/HST, it can result in the monies you actually receive to be reduced by 5/105 or 13/113 in Ontario.  If this oversight in the contract is noticed after the fact, as this is a deeming provision, even if the person receiving the damages payment separately is charged GST/HST, this will result in GST/HST being paid twice, as this provision deems GST/HST to have already been included in the damage payment.   Thus, resulting in GST/HST to have been paid twice; first by virtue of the deeming rule discussed above and secondly by virtue of the separate invoice that charged GST/HST in error.

If you are the party making the damage payment, this deeming provision allows you to claim an ITC for the GST/HST deemed to have been paid pursuant to section 182 of the ETA.   If you have made these payments in the prior 4 years, it would be prudent to see if the damages met the rules under 182 of the ETA to recover any GST/HST deemed to have been paid.

Overall, when drafting agreements, it would be wise to contemplate the rules in section 182 of the ETA that apply.  If they do apply, the agreement should ensure the damage payment as calculated in the agreement is grossed up by an amount equal to the GST/HST applicable to the transaction.  Therefore, when the payment is received and GST/HST is calculated into the total payment, you will not be out of pocket the GST/HST.

Underused Housing Tax (UHT): Increased Disclosures and Taxes

Posted on by Edixon

UHT is a 1% federal tax intended to apply to the value of vacant or underused residential real property owned by non-resident non-Canadians. However, many Canadian individuals and other entities are also required to file UHT returns and may even be liable for the tax. Numerous exemptions from the tax itself exist, but significant penalties can apply where the required return is not filed, even if no tax is payable.
UHT was first applicable to the 2022 year, with the first filing deadline being April 30, 2023. However, CRA recently announced (March 27, 2023) that penalties and interest for the 2022 calendar year will be waived for any late-filed UHT return and any late-paid UHT payable, provided the return is filed or the UHT is paid by October 31, 2023. The late filing penalties start at $5,000 for individuals and $10,000 for corporations.

In general, UHT returns must be filed by all persons (which include both individuals and corporations) that are on title of a residential property on December 31 of each year, unless that person is an excluded owner. No tax is applicable if there is no filing obligation.

From an individual perspective, the only excluded owners are Canadian citizens and permanent residents. However, individuals that are on the title of a property in their capacity as a trustee of a trust, or a partner of a partnership, cannot be excluded owners, even if they are Canadian citizens or permanent residents.
From a for-profit corporate perspective, the only excluded owners are public corporations (i.e. listed on a Canadian stock exchange). That is, a private Canadian corporation is not an excluded owner.

Even if a filing obligation exists, an owner may still benefit from one of fifteen exemptions from the tax liability. The exemptions broadly fit into four categories: type of owner; availability of the property; occupant of the property; and location and use of the property. Even though the exemption eliminates the tax, the person still has a filing obligation. The exemptions are listed in Parts 4 through 6 of the UHT Return and Election Form (UHT-2900).

Some of the more common questions and concerns related to the UHT are noted below.

Is my property a “residential property”?

In general, a “residential property” is a property that contains a building with one to three dwelling units under a single land registry title. A unit is considered a dwelling unit if it contains private kitchen facilities, a private bath and a private living area. CRA provides various examples of properties that they view as residential properties in Notice UHTN1, such as: detached houses, duplexes, laneway houses, condominium units and cabins. Apartment buildings, commercial condominiums, hotels and motor homes would not be residential properties. Properties provided through accommodation platforms are likely residential properties (see Notice UHTN15).

How would an income-earning property (such as an Airbnb property or long-term condo rental) that is held by two or more individuals, such as a married couple, be treated?

Although both individuals may be Canadian citizens or permanent residents, there is a possibility that the property is being held in their capacities as partners of a partnership. In that case, the individuals are not excluded owners. The analysis generally starts with determining whether the operating relationship for the income-earning activity constitutes a partnership, which can be complicated. In general, a partnership is a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit. See Notice UHTN15 for guidance.

A parent or child is on title of a property for probate or mortgage purposes.

Where a person is on title but is not a beneficial owner (such as where a relative is on title only for probate or mortgage purposes), they may be holding an interest in the property in their capacity as a trustee of a trust, even if no formal trust agreement is in place. As such, filing may be required even if the individual is a Canadian citizen or permanent resident. Professional advice may be required.

Properties sold before year-end.

UHT may apply in respect of a property sold prior to December 31 if the applicable land title registry has not been updated by the year’s end.

Multiple returns to file.

One return must be filed for each of the properties owned by the person, potentially resulting in multiple filings by a person. Likewise, if multiple persons are on title for a single property, each has their own filing obligation.

Private corporations that own residential property.

Most private corporations that are on title of a residential property will have filing obligations, even if they are holding the property in trust and even if they are exempt from the tax liability.

Owner of residential property passes away.

Usually, some time is needed to transfer title of a property from a deceased person to a beneficiary or executor/trustee of an estate. In cases where an individual has died but is still on title of the property, a filing obligation may still exist. However, if the owner was an excluded owner before their death, CRA has indicated that they will continue to consider them excluded after death. Where the property title has been transferred to a personal representative of the deceased (such as an executor), a special provision applies which allows the new holder to be an excluded owner for a limited period even though they are holding the property in their capacity as a trustee.

ACTION: Consider whether you or your corporation may have UHT filing or tax obligations.

Important Insights for the Family Office

Posted on by Edixon

A recent interactive discussion with more than 460 family office executives, family members, and their advisors revealed important insights related to their greatest challenges. 

Today’s tight labour market, in particular, has family offices competing with other businesses for top talent.  As a result, they are faced with many options to consider, including insourcing, outsourcing, and hybrid staffing models.  

Read the following article, authored by RSM Canada, to learn what the discussion uncovered and some key insights for today’s family office. 

Read Article

Employee Time Theft: Some Challenges

Posted on by Edixon

A January 11, 2023, BC Civil Resolution Tribunal case addressed a claim for wrongful dismissal. The employer filed a counterclaim in respect of a 50-hour discrepancy between the employee’s timesheets and tracking software data over a period of about a month during which the employee was working remotely.

The employee argued that significant hours were spent working from hard copies; however, this was rebutted by records of printer usage and a lack of evidence of such work being uploaded to the employer’s electronic system. The Tribunal accepted the software evidence of time theft, and indicated that this was a “very serious form of misconduct” which justified the employee’s dismissal. The Tribunal further awarded the employer damages of over $2,600, plus interest, for the unaccounted-for time and an unrepaid advance.

ACTION: As employment work models shift, new employment-related challenges may arise.

Budget 2023: Top Five Items for Owner-Managers

Posted on by Edixon

Budget 2023 (A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future) was introduced in the House of Commons on March 28, 2023. The top five changes that may impact individuals and owner-managed businesses are as follows:

  1. Dental plan – The Canadian Dental Care Plan would be introduced to provide coverage for all uninsured Canadians with an annual family income of less than $90,000 (the previous Canada Dental Benefit only provided benefits for children under 12) by the end of 2023. Benefits would be reduced for families with income between $70,000 and $90,000.
  2. Green investments – New and expanded green investment tax credits for businesses, including for clean electricity at 15%; clean hydrogen ranging from 15% to 40%; clean technology manufacturing at 30%; and expansion of the clean technology investment. Labour requirements, including wage levels and apprenticeship training opportunities, would need to be met to receive the full amount for most business credits.
  3. Intergenerational business transfers – In the summer of 2021, rules were introduced that allowed individuals to benefit from the sale of their corporation to a child’s corporation in the same way as a sale to a third party. Previously, such transfers to a child’s corporation would result in a capital gain being converted into a more highly taxed dividend and also prevent the usage of the capital gains exemption. Budget 2023 proposed amendments to limit the 2021 rules by adding specific eligibility requirements focused on the transfer of ownership, management, and control of the business. The proposals would take effect in 2024.
  4. Employee ownership trusts (EOTs) – Rules were proposed to better facilitate employees buying their employer through a trust. Proposed to be effective in 2024, these rules would provide business owners with an additional exit strategy, where for example, a third-party buyer or transition to a family member is not feasible or desired.
  5. Alternative minimum tax (AMT) – The AMT is an alternative method of calculating taxes that ensures that an individual pays a minimum amount of tax even if they would not have a tax balance under the normal system due to using one or more tax advantages. Budget 2023 proposed to modify the AMT rules to better target wealthier individuals. The standard exemption from this tax would be increased from $40,000 to approximately $173,000; however, the tax rate would be increased from 15% to 20.5%. In addition, many of the deductions and credits currently allowed to reduce AMT would be eliminated or restricted. These changes would be effective for the 2024 tax year.

ACTION ITEM: If you are significantly affected by, or could benefit from, any of these changes, reach out for more information and assistance.

Psychology of Selling Your Business

Posted on by Edixon

Whether you’re an established business proprietor, a generational business owner, or an entrepreneur, you’ve put your heart and soul into building your company. Still, there comes a time when you need to move on, and that’s where selling comes in. However, it’s more than finding the right buyer and negotiating the best price or contract terms. Many owners, like you, find themselves struggling with a deep-seated reluctance to sell, which can be hard to understand and even harder to overcome.

You may have invested so much time and energy into your business that it’s become a part of you. Or there are family issues that are holding you back. Whatever the reason, it’s essential to recognize that this reluctance is not uncommon, and it’s perfectly normal to feel this way.

You may find yourself delaying the acceptance of a fair offer, stalling the process, declining, or otherwise sabotaging the deal without really understanding why. You may think it just didn’t “feel right”, the buyer wasn’t the right fit, or you convince yourself you’re not ready. Perhaps it is one of these reasons, but often this is not the case.

The psychology of selling your business

Selling a business that has been painstakingly created, nurtured, and struggled with, and one that is ultimately successful, is akin to a child leaving home to take on the world for themselves. For owners like you, a business can be like having a child. Whether you’ve conceived the business from an idea, inherited the family business, or purchased an established enterprise, you’ve put your blood, sweat, and tears into your business to make it successful.

Like new parents, you can often feel nervous, unprepared, and overwhelmed, having never done this before. Regardless, you push through as the reward and satisfaction far outweigh the fear; the effort is fulfilling and long-lasting. Over the years, you’ve spent many hours cultivating and nurturing the business, celebrating its successes, and watching it grow into a successful, independent, self-reliant enterprise that is ultimately valuable to the world.

You and your business struggled together, overcame obstacles in the face of adversity, stumbled, got back up, and learned and grew through it all. Like a baby, you initially carried the business when it could not carry itself. Over time, your business grew and found its legs and rhythm. As your business matured, it became important to others – clients, staff, suppliers, and, most importantly, you. Like a child, the business gained independence over time and needed you less and less, becoming an entity unto itself. You no longer manage every aspect of the enterprise, coddle it, and protect it. Your business has become a thriving entity that can stand on its own.

Letting go of what you or your family created, nurtured, and grew is often very difficult. Like a child, you are proud of what it has become but still worry about what might happen if you let it go. Will it be okay without you? Will it be damaged if you are not there to protect it? Will it even survive if you are not guiding it in the future?

With business, as with children, you reach the point where you have done everything you can to prepare it for the world, and you must let go. Let it move on. Let it continue its evolution, whatever that may be.

Considering a different perspective about the sale of your business and understanding the emotions you may be experiencing often helps you conquer the reluctance of finalizing the sale. Selling is a very difficult time for many business owners, which could result in a lost opportunity to monetize your lifelong achievements if you can’t overcome this obstacle.

How we can help

Work with your trusted accounting and financial advisors under our TriCert™ integrated approach. We specialize in owner-managed businesses to help you overcome many psychological hurdles of selling your business.

Leveraging the experience of accountants and tax specialists, and integrating these advisory services with your financial planner, can give you the peace of mind and the confidence to work through one of the most significant events in your lifetime with a strong team supporting you every step of the way.

 

Ontario Interactive Digital Media Tax Credit – What You Need to Know 

Posted on by Edixon

Are you a business owner that is developing interactive digital media products at a permanent establishment in Ontario using employees that reside in the province of Ontario? If so, the Ontario Interactive Digital Media Tax Credit (“OIDMTC”) program may apply to you.

Read the program highlights and full eligibility details in this short synopsis prepared by RSM Canada.

Program Details

 

I Own a Small Business. Should I Incorporate?

Posted on by Edixon

This is a very common question among small business owners, and the answer depends on a number of factors.

THE ADVANTAGES OF INCORPORATING

Limited Liability – Operating your business through a corporation provides some security against personal liability.  It makes it more difficult for someone to go after your personal assets if the business defaults on its debts.  If you operate your business as a proprietorship, your personal assets such as your home could be at risk.  However, if your corporation applies for a business loan your banker may still require a personal guarantee in some circumstances. 

Tax Savings and Deferral – In Ontario, most Canadian-controlled private corporations can earn up to $500,000 profit from their business and only pay a 12.2% tax rate on this income.  This is considerably lower than personal tax rates.  Therefore, there is more money left over to reinvest into the business such as purchasing more equipment or hiring more employees.  You should note that the profits need to stay in the corporation.  If taken out, they must be taxed as either a salary or a dividend to the individual.  At that point, the tax deferral is lost. 

Income Splitting – Income splitting can be a major reason for incorporating your small business.  Dividends can be paid to other family members who have shared ownership.  However, this has changed significantly due to some new tax legislation.  The ability to pay dividends to other family members depends now on the amount of share ownership and their involvement in the business.  You need to consult a tax professional before making any decisions on share ownership where other family members are being considered.

Lifetime Capital Gains Exemption (LCGE) – The LCGE allows some incorporated businesses to be sold at a gain of up to $971,190 per individual without paying any tax.  There are a few specific requirements that must be met before the LCGE can be claimed on the sale of an incorporated business, but with a successful business and proper planning, the possibility is there.

Estate Planning – A corporation is a separate entity to you, so it continues to live on regardless of what happens to you.  This can be helpful when planning to transfer your assets to others.  It is much simpler to pass on to the next generation shares of your corporation rather than all of the assets that would be held by you directly if the corporation did not exist.  If you accumulate significant wealth inside your corporation, you could freeze the value of your estate and thus tax bill on death and let future growth accrue to your children.  In Ontario, you could draft a second will that deals with just your ownership in your corporation.  This allows the shares of the company to pass to your beneficiaries without estate administration taxes (probate fees).  These are just a few examples of how corporations provide more flexibility.

Canada Pension Plan (CPP) – If you are a self-employed proprietor and have business income at or above $66,600 in 2023, you will pay CPP of almost $7,508.90.  If you transferred your business to a corporation and began paying yourself dividends you could eliminate this annual cost.  However, a decision such as this needs to be part of an overall plan.  There may be times you wish to remunerate yourself by way of dividends, and other times by way of a salary.  A corporation gives you that flexibility.

THE DISADVANTAGES OF INCORPORATING YOUR BUSINESS

Administration – The main disadvantage of incorporation comes in the form of administration, which translates to additional costs.  Since the corporation is a separate entity, it has to file its own income tax return.  To do so you will need appropriate accounting records so you can produce annual financial statements, which include an income statement and a balance sheet.  You should hire an accountant to look after this.  You will also need to incur legal costs to incorporate the business and prepare the annual minutes and other filings required by the Business Incorporations Act. 

Losses Are More Difficult to Use – It’s not uncommon for start-up businesses to incur losses at first.  When you operate a proprietorship and incur a loss, you can deduct that loss against your other personal income.  If you were operating that same business through a corporation, the loss could not be applied to your personal income.  Instead, the loss can be applied to another year’s corporate tax return to reduce tax within the company only.  The company could carry the loss backward for up to three years to receive a refund of some previously paid taxes.  Alternatively, the company can carry the loss forward up to twenty years to reduce taxable income on a future return.

If you have any questions, we invite you to contact a DJB tax professional.

Valuing Lost Employment Income – Don’t Forget to Include Employer-Sponsored Benefits!

Posted on by Edixon

The value of employer-sponsored benefits (health, dental, disability, pension, etc) often forms a significant part of a person’s ‘income’ from employment, especially when a pension plan is available. Therefore, the loss of these benefits will often form a significant part of the economic loss quantification for an injured party, especially if the person is unable to return to any gainful employment, and thus no longer has these benefits available to them.

For the purpose of this article, we are concerned mainly with the difficulties in valuing employer-sponsored benefits that are not ‘paid’ to the employee, such as health, dental, life, and disability. Benefits such as statutory holiday pay and vacation pay are generally paid to the employee and are included in their salary or wage. Bonuses can also often form a significant part of a person’s earnings. However, these amounts are also generally ‘paid’ to the employee and, thus, are included in their earnings. Lost pension benefits (whether a defined contribution plan, or a defined benefit plan) often form the largest portion of the value of lost employer-sponsored benefits. Although they are not paid to the employee, there is generally sufficient information and documentation available to us, to enable us to value the lost pension benefit amount.

However, employer-sponsored benefits, such as health, dental, life, and disability premiums, are not paid to the employee, and often the employer’s cost of providing these benefits is not available to us.

In determining a person’s income from employment, either for purposes of calculating a loss due to injury, or for IRB (Income Replacement Benefit) purposes, the value, or the employer’s cost, of providing these benefits, should be added to a person’s salary or wages that they earned. Unfortunately, as noted above, the actual cost to the employer of providing these benefits (i.e. health, dental, disability, life) is generally not available to us. As such, calculating the loss of these benefits can present some significant challenges. We often need to rely on statistical data in our calculations.

The following are four important questions to consider when valuing the employer’s cost of lost benefits:

  1. What benefit coverage was available to the employee?
    Most full-time employees and some part-time employees are entitled to some employer-sponsored benefit coverage. A copy of the benefit booklet detailing all of the benefits available to the person should be obtained. The booklet may indicate that some benefit coverage may be mandatory and some may be optional. If so, it is important to obtain details of the coverage that the employee elected. This information should be included in the employment file.
  2. What benefits, if any, have been lost?
    Information should be obtained from the employee, the employer, or the insurance company detailing what, if any, benefits have been terminated as a result of the employee’s inability to continue working. Confirmation of the termination date of the benefits is also important. If the insured is receiving disability benefits, they often continue to be covered under the employer’s benefit plan and thus no loss of benefits may have been suffered. However, if there is a concern that the disability coverage will be terminated at some point in the future, there may be a future loss of benefits. The short-term disability (STD) and long-term disability (LTD) files should be requested from the insurer as they often contain information regarding the status of the employer-sponsored benefits.
  3. Who was paying for the lost benefits?
    It is important to determine if the employer, the employee, or some combination of both paid for the cost of the benefits. Only the portion of the benefits that were paid for by the employer should be included in the loss calculation. The benefit booklet should detail who is responsible for paying for the benefits. In addition, a review of the employee’s pay stubs, if available, should show if the cost of any benefits are being deducted from their gross pay.
  4. What is the employer’s cost of the benefits?
    Generally, it is often difficult to obtain the employer’s cost of providing the benefits to the employee. Occasionally the benefit booklet, or paystubs may include costs. However, confirmation from the employer will usually be required. If this information cannot be obtained, then an alternative would be to use statistical information, such as the KPMG 1998 Survey of Employee Benefit Costs in Canada, which breaks down the cost of various employer-sponsored benefits by employment sector as a percentage of gross annual payroll. In many situations, such as when the injured party was a young child or student, they would not have any work history. Therefore, using statistical data would be appropriate to estimate future lost employer-sponsored benefits in those situations.

Ultimately, calculating the value of lost employer-sponsored benefits for economic loss or IRB purposes is a complicated issue with each case presenting its own set of unique challenges. Our Financial Services Advisory Team (FSAT) has significant experience preparing these calculations. If you have any questions or require assistance with a calculation, please contact a member of our team.

Staying Calm When Markets are Volatile

Posted on by Edixon
Why Avoiding Short-Term Performance Figures Can be a Sound Strategy

In times of economic turbulence, it’s normal to feel apprehensive when you’re about to read your portfolio’s performance. And, of course, seeing the fluctuating short-term results doesn’t help. It is more important to keep your sights on the bigger picture and stay focused on your long-term investment strategy and performance. By doing so, you can navigate the choppy waters of the current economic climate more confidently and ultimately achieve your financial goals.

Typically, volatility is a short-term issue; in the long run, your long-term investment plan and confidence in your investment holdings matter. Therefore, avoiding short-term “noise” can be a good strategy. While performance is undoubtedly crucial, it should be evaluated in years, not months.

For example, take a look at it in graph terms:

Strategies for navigating market volatility

The performance figures can be an unpleasant surprise, depending on the period you are looking at or the duration being reported on your account statements.

Consider:

  • Evaluating the quality and long-term sustainability of your investments with your portfolio manager. It’s likely that your holdings are still reasonable, and no drastic changes are necessary. You may come across opportunities to refine your portfolio, but try to refrain from making significant “panic changes” that could lead to missing out on future market recoveries.
  • Updating or creating a financial plan. It’s crucial to take this step during market downturns as it can
    provide reassurance that your long-term financial goals are still achievable. Our experience has shown that personal financial plans often remain on track despite market downturns. Take advantage of this opportunity to update your plan and gain some much-needed reassurance.
  • Triggering a capital loss strategically if you have non-registered accounts. This can help offset a realized capital gain if you plan to sell an asset, or if you need cash or want to diversify your holdings.
  • Lowering the risk profile of your account permanently only if you cannot tolerate market
    volatility anymore. It may involve selling some holdings at a less-than-ideal time, but taking a hit now could be easier for you in the future. However, this should be considered a final, one-way option.
Reframe your perspective

Imagine thinking about your investment portfolio as if it were your own home. This relatable comparison can help you weather market downturns with greater ease.

Unlike your monthly investment statement, you don’t receive regular updates on your home’s value nor see real estate index numbers fluctuating in real-time. This lack of daily stress means that when the value of your home drops, you don’t immediately consider selling it. After all, your home is a long-term investment and a significant part of your net worth.

Similarly, selling off your stocks doesn’t make sense just because the market is down. Likewise, jumping
out of the market and buying back once values have risen is not a sound strategy. Instead, stay the course
and trust in your long-term investment plan.

Bottom line

We will always have periods of volatility. It’s important to keep calm and avoid knee-jerk reactions that may jeopardize your long-term plan. Review your portfolio and strategies with your Accountant, Financial Planner, and Portfolio Manager, and gain the confidence you need to stay the course.