Year: 2023

Changes to the Disbursement Quota Rules for Charities

Posted on by Edixon

On December 15, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022, received Royal Assent. As a result, there have been changes to the Disbursement Quota (DQ) rules for charities.

As of January 1, 2023, the following came into effect:

  • On the portion of property exceeding $1 Million, the DQ rate increased from 3.5% to 5%. For property equal to or less than $1 Million, the DQ rate remains at 3.5%.
  • The Canada Revenue Agency (CRA) has discretion to grant a reduction in a charity’s DQ obligation for any particular tax year, and the CRA can also publicly disclose information related to such a decision.
  • The CRA is no longer accepting requests to accumulate property. Previously approved property accumulation agreements are still valid until the expiry of the approved period.

Read more about the changes here:  C-32 (44-1) – Parliament of Canada.

WITNESSES FOR LEGAL DOCUMENTS: Choose them Wisely

Posted on by Edixon

A June 17, 2022, Ontario Superior Court of Justice case considered whether a will had been appropriately witnessed. In 2020, the owner of an insurance agency was diagnosed with terminal cancer and drafted a final will and testament. As it was the height of the COVID-19 pandemic, she chose two of her employees to meet her outside of the agency to sign the document as witnesses. She left everything to two children and nothing to the third. She died later that year.

Subsequent to her death, one of the beneficiaries wound up the agency and provided severance to the employees. One of the employee witnesses was not happy with the 14 weeks of severance pay offered and refused to affirm that she had witnessed the will signing until the dispute over her severance was completed. The Court also noted that she was quickly rehired by another insurance agent, the deceased’s child who had not received anything from the will. Later, the witness argued that she was not physically close enough to confirm that she had actually witnessed the document being signed.

The circumstances indicated that the witness was present at the signing, was close enough to see what was happening, and as a clerk in an insurance agency, would not have originally signed the will inappropriately. The Court found that the witness was lying about not having witnessed the signing with the likely motivation of increasing her severance.

While the will was eventually determined to be valid, this case reiterates the importance of carefully selecting individuals to witness signing important documents, such as a will.

ACTION ITEM: When selecting an individual to witness the signing of a legal document, consider whether they would be available and willing to properly verify their signature in the future, if required.

EMPLOYEE GIFTS AND PARKING: Updated CRA
Policies

Posted on by Edixon

CRA updated several administrative policies in respect of employment benefits, effective January 1, 2022. Two of the key changes relate to employee gifts and parking. These updates were released in late 2022.

Gifts, awards, and long-service awards

Under CRA’s existing gifts and awards administrative policy, the first $500 of annual gifts and awards provided to arm’s length employees is non-taxable. This policy does not apply to cash or near-cash gifts. Historically, CRA had considered all gift cards to be cash or near-cash gifts and, therefore, a taxable benefit. However, CRA will now accept certain gift cards to be non-cash and eligible to be a non-taxable benefit provided all of the following requirements are met:

  • the gift card comes with money already on it which the terms clearly state cannot be converted to cash;
  • the use of the gift card is limited to purchases from a single retailer or a group of retailers identified on the card;
  • the employer maintains a log to record all of the following details:
  • name of the employee;
  • date the gift card was provided;
  • reason for providing the gift card to the employee (e.g. gift, award, social event);
  • type and amount of gift card; and
  • name of retailer(s) at which the gift card can be used.
Parking

Generally, employer-provided parking is a taxable benefit to employees unless a particular exception applies, such as where there is scramble parking. As a COVID-19 relieving measure, CRA stated that where there was a closure of the place of employment (including situations where employees were given the option to work from home full-time) due to COVID-19 between March 15, 2020, and December 31, 2022, no taxable benefit arose in respect of employer-provided parking in this period. When the employee returns to their regular place of employment to perform their duties, including returning on a part-time basis, the policy no longer applies, meaning that the parking benefit becomes taxable (unless another exception applies).

CRA also discussed many other policies related to parking benefits, such as the exception for scramble parking such that no taxable benefit arises. This policy requires that parking spaces are not assigned and are available to all employees who want to park. Not more than two parking spaces can be available for every three employees who want to park. CRA indicated that this ratio would be based on the average number of parking spaces and employees, calculated at least annually, with a recalculation if there is a significant change.

ACTION ITEM: Consider whether these updates will affect the taxability of current benefits offered.

CANADA DENTAL BENEFIT: Support for those
with Young Children

Posted on by Edixon

The Canada dental benefit, announced in September 2022, provides up-front tax-free payments to cover dental expenses for children under age 12 without dental coverage. The program began December 1, 2022, with expenses retroactive to October 1, 2022, being covered.

The program is available for two periods: December 1, 2022, to June 30, 2023, and July 1, 2023, to June 30, 2024. While the program expires in mid-2024, the government has stated that it is committed to fully implementing a dental program for all households with income under $90,000 by 2025.

Services that dentists, denturists, or dental hygienists are lawfully able to provide, including oral surgery and diagnostic, preventative, endodontic, periodontal, prosthodontic, and orthodontic services, are eligible for the benefit.

Amounts

The amount of payments that are provided annually (per period) per child under age 12 are based on adjusted family net income (AFNI) as follows:

  • $650/child if AFNI is under $70,000;
  • $390/child if AFNI is between $70,000 and $79,999; and
  • $260/child if AFNI is between $80,000 and $89,999.

AFNI for the benefit’s purpose is the same as for the Canada child benefit, with the annual income period ending on December 31, 2021, for the first period and December 31, 2022, for the second period.

Shared-custody parents at the beginning of the relevant period are each eligible for 50% of the benefit, based on whether they incur or will incur eligible expenses in the period and their respective AFNI.

The benefit does not reduce other federal income-tested benefits (for example, the Canada workers benefit, the Canada child benefit, and the GST credit).

Eligibility

To qualify, parents need to attest that the following conditions are met:

  • their child does not have access to private dental care coverage (for example, through a parent’s employer or coverage that is paid for personally); and
  • the child has received, or is intended to receive, dental care services during the relevant period.

Parents also need to provide documentation to verify that out-of-pocket expenses occurred (e.g. show receipts) if required by CRA.

To qualify, the child must be under 12 on December 1, 2022, for the first period and under 12 on July 1, 2023, for the second period.

Application

The application portal for the benefit is available online through CRA’s My Account. Those unable to apply online can call 1-800-715-8836 to complete their application with an agent. In addition to an individual’s standard identifying information and the above-noted attestation, parents need to provide CRA with the name, address, and telephone number of their and their spouse or common-law partner’s employer. They also need to provide information about the dental service provider from which they received or intend to receive services for their child.

ACTION ITEM: Eligible individuals must apply for this benefit on their own as accountants and representatives cannot apply on the client’s behalf.

Selling a Family Medicine Practice

Posted on by Edixon

There was a time when selling a family medicine practice in Ontario was very rare as the demand for family doctors exceeded the supply so the patient lists weren’t overly valuable on an open market.  If a practice was sold, it was likely for the “book value” of its assets (such as medical equipment and furniture and fixtures) with no premium for its patient lists and goodwill.  However, with new restricted funding models put in place in Ontario for family medicine practitioners, certain practices now have increased value for new or incoming family doctors.

The difficult part is putting a value on your practice.  Essentially, the value is whatever someone is willing to pay for your practice.  While incoming doctors are often hesitant to pay a substantial amount for an established patient list (due to already existing debt and thoughts that family doctors are still in high demand), structures such as Family Health Organizations (FHO) present an opportunity for a “better” funding model that may create value for incoming doctors to invest in.

In previous years, the Province of Ontario created a focus on team-based family medicine funding models such as FHO’s.  These allowed specific funding models for the team-based approach as a way to encourage doctors to practice family medicine and create a service model that benefited the patients.  With recent government restructuring of its funding models, it is now limiting the ability to setup new team based models such as FHO’s to primarily remote areas.  Original FHO agreements are being grandfathered so this creates opportunities to join existing models that have already been setup.

While it can be difficult to estimate the value of your practice, if you are part of an FHO in an area that is restricted for new team based models, a good start is to determine the annual premium being paid on your funding model versus a non-FHO funding model.  A valuation multiple could then be applied to the annual premium to determine the value of the funding model to a third party.

The valuation will depend on a number of factors such as the city/town where your practice operates, the type of building in which you operate and the condition of the building and equipment.  You would also need to factor in whether or not you own the practice building or if you are locked into a lease agreement for a number of years.

The tax implications on the sale of your practice would be determined by the allocation of the proceeds between the physical assets versus the intangible assets such as the patient list.

The physical assets would have a recapture tax at regular business tax rates for any capital cost allowance (CCA) deductions taken in the past if the proceeds attributed to the asset were equal to or more than its original cost.  Any proceeds greater than the original cost would be treated as a capital gain with half of the amount being taxable at the investment income tax rates.

The sale of the patient list or practice roster would be treated as a sale of eligible capital.  There are new rules that have been proposed for the sale of eligible capital for sale transactions that close after 2016.  These new rules treat eligible capital the same as physical assets whereby any previous CCA will be treated as regular business income and any amount greater than the original cost will have half taxed at the investment income tax rate.

The valuation of family physician practices is constantly changing but the current models create an opportunity to sell your practice for a premium if you are in a populated area and are operating in one of the desired family health models.  It is important to talk to your professional advisors in advance to ensure you are planning properly for a potential sale and are aware of the implications of such a sale (such as taxes).  If you have any specific questions or require more information, please contact DJB.

U.S. Tax Compliance for Canadians Who Own U.S. Real Property

Posted on by Edixon
U.S. Rental income

If a Canadian resident receives rental income from real property located in the U.S., they are subject to a non-resident withholding tax of 30% of the gross rental income, which is required to be remitted to the Internal Revenue Service (IRS) by the tenant. The 30% withholding tax cannot be reduced by way of the Canada – United States income tax convention.

Non-residents of the U.S. can also make an election to be taxed as if their rental income was effectively connected with the conduct of a trade or business in the U.S. Furthermore, the taxpayer can deduct expenses engaged to earn rental income and then be taxed on the net income at graduated rates, rather than a 30% flat rate on the gross rent. To make this election and avoid the 30% withholding, a taxpayer must complete form W-8ECI and provide the form to the person who is paying the rent.

To deduct expenses in order to be taxed on your net income, a taxpayer must file a U.S. tax return as a non-resident (form 1040NR). The amount of the tax withheld will be reported on the 1040NR and will get refunded if there is excess tax withheld over the final income tax liability. The tax return must include a statement confirming that an election has been made. The election must include the address of the property, your percentage of ownership, description of improvements made, etc.

A taxpayer only has to make the election once and the election has to be made on each new property. The election will be valid for as long as a taxpayer owns a property and if their 1040NR is filed on time. To file a 1040NR, a taxpayer will need to obtain a U.S. Individual Taxpayer Identification Number (ITIN) by completing a form W-7.

A taxpayer also has to report rental income in the state where the property is located.

Selling U.S. Real Property

If a Canadian resident sells real estate located in the United States, they are subject to a 10% or 15% withholding tax of the gross selling price under FIRPTA (Foreign Investment in Real Property Tax Act). If the property is sold for an amount greater than $300,000 but less than $1,000,000 and the property is being purchased with the intention of being used as the purchaser’s residence, then the sale will only be subject to a 10% withholding as opposed to the 15% rate. The tax withheld will be offset against the U.S. tax liability on any gain realized on the sale and will be refunded if it exceeds the tax liability.

There are two exceptions to the withholding requirement which can reduce or eliminate the requirement.

  • The first exception applies if the property is sold for less than $300,000 USD to a buyer who intends to occupy it as their principal residence. The gain on the sale is still taxable in the U.S. and a tax return (1040NR) must be filed.
  • The second exception is if a Canadian resident gets a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10% or 15% of the selling price. The certificate will indicate the amount of tax that should be withheld by the purchaser rather than the full 10% or 15%. Ideally, the withholding certificate should be obtained from the IRS before the sale closes. To apply for a withholding certificate a Form 8288-B must be completed and sent to the IRS. A U.S. ITIN must be included on the Form 8288-B or can be applied for by way of a Form W-7 with the Form 8288-B. The IRS will generally issue a withholding certificate within 90 days of submission.

The gain or loss on the sale of a U.S. real property by a non-resident is required to be reported on a U.S. Non-Resident Income Tax Return (1040NR). As a Canadian tax resident the disposition of a U.S. property is required to be reported in Canada. If there is a gain on the sale, the U.S. has the right to tax the gain first and the U.S. tax liability can be claimed as a foreign tax credit against any Canadian and provincial tax on the sale.

Similarly, state income tax may apply on the sale depending on where the property is located.

Please contact your DJB accountant should you wish to discuss this further.

New Regulations Prohibit Builders/Developers with Whole or Partial Foreign Ownership from Purchasing Canadian Residential Property

Posted on by Edixon

On December 21, 2022, the federal government released the Prohibition On The Purchase Of Residential Property By Non-Canadians Act.  This new regulation came into force immediately on January 1, 2023, for a period of two years.

Although the Act when initially announced was intended to prevent the purchase of housing units by non-Canadians (and curtail the rising housing costs), the publication of the Regulations states that it also applies to Canadian companies with more than 3% foreign ownership. 

The act will prohibit affected entities with partial foreign ownership from buying vacant land for residential development, or purchasing properties with less than four units on them (hence inhibiting assembling parcels of land for multiple-unit construction). This also precludes buying farmland to develop communities. 

In reviewing the publication of the Regulation, it has been noted that there is an unintended consequence in its wording that also directly affects the development industry, specifically builders/developers with partial foreign ownership, preventing them from buying or assembling land for the development. This Regulation will not affect companies that are 100% Canadian-owned. 

There are significant penalties for non-Canadians in violation of the Act, and for Canadians that knowingly assist a non-Canadian in violating the Act. The penalties include both a fine of up to $10,000.00 and a court-ordered sale of contravening property.

The federal government’s ban on residential property purchases by non-Canadians is part of a broader effort to address rising housing costs that includes federal tax changes for residential property flipping (also in effect as of January 1, 2023) and underused housing (in effect as of January 1, 2022), and provincial and/or municipal taxes on vacant homes or land speculation.

If you are a builder/developer with whole or partial foreign ownership and have questions on how this new regulation may affect you, please contact one of our Construction Industry Professionals.

Role of an Expert

Posted on by Edixon

When a dispute or litigation arises the people involved will often need to seek the advice of several professionals. While their lawyers will often act as their advocates, other professionals are frequently retained as independent experts. Depending on the nature of the dispute, this type of expert may include psychologists or social workers, medical doctors, real estate appraisers, actuaries, Chartered Business Valuators (CBVs), forensic accountants and economic loss experts.

These experts are expected to assume an objective, neutral and independent role. In matters that proceed to court, the experts will be expected to serve as a neutral expert in order to assist the court. It is important for experts to maintain their independence not only in fact but also in appearance. If a judge believes that an expert has failed to maintain their independence and has assumed the role of an advocate on behalf of the party who hired them, they may either refuse to accept their report and testimony or, if accepted, give it less weight in their decision.

Several years ago, the courts expressed concern about the role of experts and what they felt was an increasing trend for some experts to assume the role of an advocate. This concern led to a requirement for any expert appearing in an Ontario court to sign a form in which they acknowledge that, regardless of which party hired them, they have duty to the court to provide an opinion that is fair, objective, non-partisan and related only to matters that are within their area of expertise. The expert also acknowledges they are required to assist the court and that these duties prevail over any duties or obligations to the party that hired them.

The issue regarding independence was highlighted in a recent court case (Plese v. Herjavec, 2018 ONSC 7749). This case was a matrimonial dispute in which CBVs were retained as independent experts. The judge was critical of the CBV’s retained by each party to value Mr. Herjavec’s business, stating:

“Both valuators signed the requisite acknowledgement of their duties as experts, namely to provide opinion evidence that is fair, objective and non-partisan. As was the case with the real estate appraisers, their opinions squarely align with the interests of the party who retained them. Again, I am astonished that there should be this kind of disparity between them. I wonder if their results would have been the same had they been retained by the other party. This case highlights in very stark fashion the continued problems with expert evidence. Notwithstanding the experts’ clear duties, they nevertheless end up supporting the position of the party who hired them. The changes to the expert rules, and the requirement for experts to acknowledge their duties of independence and impartiality were supposed to solve the problem of experts simply being ‘hired guns’. Sadly, the problem remains. I must therefore approach each expert’s opinion with a certain degree of caution and skepticism.”

When retaining an expert to assist you, it is important for the expert to maintain their independence and to provide a balanced, objective opinion. While it is natural for the party retaining the expert to want that expert to act as their advocate, doing so may ultimately be of limited use as that opinion may be rejected.

An alternative to the ‘traditional’ model of each party hiring their own experts, involves both parties jointly retaining a single expert. Where an expert is jointly retained, both parties are involved throughout the process, both provide their input and raise any questions they have with the jointly retained expert. In our experience, this approach often leads to a better exchange of information and is less costly than each party retaining separate experts. This approach is used extensively in matrimonial disputes for which the parties agree to and follow a collaborative model. Under the collaborative model, the parties agree to work with their lawyers outside of the court system and to jointly retain any experts that are required to assist them in the collaborative process.

DJB is frequently retained to act as independent experts both by an individual party and on a joint retainer basis. Please contact us if you wish to discuss our role and how we may be able to assist.

 

The Virtues of Family Employment Policies

Posted on by Edixon

There comes a time in every company — a tipping point — when growth prompts the need for more formal policies and procedures. One of the areas where this need quickly becomes most obvious is in the human resources arena. As the number of family members increases from generation to generation, the complexity of hiring, training, and managing relatives can quickly overwhelm the original founders.

Part of the problem is that sometimes, typically after the second generation of family members is hired, there’s an expectation that all of the third generation of children and cousins will find life-long careers in the family business. While this works beautifully for a few family companies, it’s untenable for most.

Some relatives are more talented, knowledgeable, or harder working than others. Some have unique skills or training that make them particularly valuable to the company. Others are less motivated or less responsible, or just aren’t interested in pursuing a career there.

Be Intentional

The best way to manage these expectations — and the ensuing family drama — is to create thoughtful written family employment policies. Having these policies in place lets all of the relatives know exactly how the company handles the employment of family members. The topics to be addressed by the policies should include:

Education and training: Do you expect family members to attain certain degrees, licenses, or certifications before they join the company? If so, this should be spelled out in the employment policies, along with a timeframe required for completing the education or training. Also, clarify the company’s policy on paying for additional education or training programs.

Experience: Some family businesses require relatives to have a certain number of years of outside experience before joining the company. Exposing young adults to the rigors of the “real world” often gives them an appreciation for the dedication it takes to make a company thrive. They can also learn from others outside the business and bring those lessons back to the family, which adds a fresh perspective and new ideas.

Career track: Where will family members start their careers and how will they move up the corporate ladder? Some companies have formal training programs that rotate relatives through the various departments of the business so they get the big picture and discover their passions. Others start relatives at the lowest position and have them work their way up just as non-family employees do. Whatever path you choose is fine, but get it in writing so relatives know what to expect.

Compensation: How and how much will family members be paid? It’s not unusual for family businesses to overpay or underpay relatives. Best practices dictate that salaries be market-driven. That way, the family employees know the true value of their services relative to other employees and the marketplace.

You must also determine how to compensate relatives who actually work in the business (versus those who don’t), who will participate in ownership, and how ownership shares will be dispersed.

Communicate Regularly

To be effective, these policies must be enforced, communicated, and updated. An annual family meeting — separate from a business meeting — is the perfect forum for discussion of these and other family issues. While introducing these policies may be met with some resistance, moving forward with them in place takes a huge burden off the executive team and ultimately preserves family relationships.

If you’re making major changes to the way family employment has been traditionally handled, these discussions might be a bit emotionally charged. But getting everything out on the table is often a relief, and having everyone informed and on the same page sets the stage for a successful future.