The family enterprise is tasked with maximizing efficiency and productivity amidst constant change and uncertainty in the business environment today.
A big focus and looming concern for many family offices is the ability to achieve operational excellence as they consider the latest trends and strategies to evolve their current operating model.
In this study conducted by RSM Canada, they found three key takeaways related to data, technology, and talent.
On March 23, 2023, Ontario’s Minister of Finance Peter Bethlenfalvy delivered the 2023 Ontario Budget (the 2023 budget). The 2023 budget revealed the framework for Ontario’s “Plan to Build”: a targeted approach to help people and businesses by offering tax relief to manufacturers and small businesses.
Despite budget 2023 being the largest spending plan in the province’s history, Ontario is on track to balance the budget by 2024–25, three years earlier than forecasted, due to record-high revenues and a historically low unemployment rate. In 2022–23, the Ontario government is projecting a deficit of $2.2 billion.
No changes were proposed to the Ontario corporate or personal income tax rates.
A new Ontario-Made Manufacturing Tax Credit is proposed, providing up to $2 million of corporate income tax relief for Canadian-controlled private corporations (CCPCs) that make certain qualifying investments. CCPCs with a permanent establishment in Ontario can receive a 10% refundable tax credit for capital investments in buildings, machinery, and equipment for use in manufacturing or processing in Ontario. Generally, qualifying investments would include expenditures in certain capital property. Examples of expenditures can include costs to construct, acquire, or renovate manufacturing or processing buildings in Ontario, as well as machinery or equipment used in the manufacturing or processing of goods in Ontario.
CCPCs are limited to $20 million of qualifying investments that are eligible for the tax credit, which must be shared among groups of associated corporations. As such, any one group of associated corporations would be entitled to up to $2 million of this refundable income tax credit annually.
Key takeaway
CCPCs that make qualifying investments in certain capital property used in manufacturing or processing within a permanent establishment in Ontario may be entitled to a refundable tax credit of up to $2 million per year.
The small business corporate income tax supports CCPCs by providing a preferential tax rate to lower their tax costs. Currently, the preferential tax rate phases out when a CCPC, or an associated group of CCPCs, has between $10 million and $15 million of taxable capital employed in Canada. At the end of 2022, the Ontario government proposed to extend the top end of the phase-out range to $50 million, matching the range found in federal legislation. In the 2023 budget, Ontario government introduces the legislative amendments to bring this change into force. This change will apply to all tax years starting on or after April 7, 2022.
Key takeaway
The top-end increase of the phase-out range will allow more corporations to take advantage of the preferential small business corporate income tax rate and lower their tax costs.
The Ontario government is modernizing its film and television tax credit by allowing professional film and television productions to claim the credits for productions distributed as online exclusives. Draft regulatory amendments for this change are available for public comment until April 11, 2023. Moreover, the Ontario government is considering additional modernization measures, including:
Key takeaway
Media creators can expect increased access to tax credits that support their work.
Effective July 1, 2023, a single basic tax rate of 12% will apply on wine and wine coolers sold in off-site retail wine stores, including wine boutiques. This will replace the current four separate basic tax rates that apply to wine sold in off-site retail wine stores with a single rate. The basic tax rates on the retail price of wine currently range from 6.1% to 22.6%.
These changes are in response to a World Trade Organization settlement reached between Canada and Australia on July 22, 2020. The settlement related to Australia’s complaint about Ontario’s measures governing the sale of wine that favour domestic wine as compared to imported wines.
Key takeaway
Although it is to the detriment of previously tax-favoured domestic wine, the application of a single tax rate rather than four should simplify tax administration.
As previously announced, being part of Ontario’s plan to help keep costs down for Ontario families and businesses, the government has extended the current gas tax and fuel tax rate cuts for an additional year at 9 cents per liter until Dec. 31, 2023.
Key takeaway
These cuts are expected to save Ontario households $195 on average between July 1, 2022, and December 31, 2023.
To help combat the rising cost of goods and services, as previously announced, Ontario is temporarily doubling the Guaranteed Annual Income System (GAINS) payments beginning January 2023 until the end of December 2023. GAINS provides a monthly, non-taxable benefit to low-income Ontario seniors. Ontario is also proposing to make changes to expand the eligibility for GAINS, starting in July 2024, through a higher private income threshold and proposing to index this benefit annually so that it increases with inflation.
Key takeaway
The continuous support from the Ontario government for low-income seniors should assist in subsidizing the rising costs of goods and services.
This article was written by Clara Pham, Daniel Mahne and originally appeared on 2023-03-24 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2023/2023-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.
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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. |
With rampant inflation and growing interest rates, Canadians everywhere are bracing for a looming recession. The interest rates applicable for tax planning in Canada have been increasing as well, leaving many tax decisions that once made sense to now being much tougher to manage economically. Interest rates applicable for tax planning refer to the prescribed interest rates, which are computed quarterly and published online by the Canada Revenue Agency (CRA).
This article is the second article in the series with a focus on the impact of increasing prescribed interest rates on certain tax-planning loans. You can find the first article here, which discusses how increasing prescribed interest rates impacts income tax reassessments.
Under certain employment circumstances, employees are able to take advantage of low-interest loans offered by their employers to purchase a dwelling. These housing loans have certain beneficial tax attributes, including that the loan itself would not be considered employment income. Rather, the employee would only have taxable income inclusion equal to the prescribed interest rate times the principal amount owing less any interest actually paid on the loan.
The prescribed interest rate on these types of loans is fixed at the rate at the time the loan was made. Therefore, if the loan was first made a few years ago, it would still be fixed at the prescribed interest rate of 1%. However, there is a mandatory 5-year “refresh” on home purchase loans, deeming a new loan to arise at that time. This means that any housing loans previously taking advantage of historically low prescribed interest rates may soon be up for a refresh at current prescribed interest rates.
As an example, assume there was an outstanding home purchase loan issued to an employee for $250,000 on January 1, 2018, requiring to be repaid by January 1, 2028. The loan did not require any interest to be paid and the employee was including $2,500 (1% prescribed interest rate times $250,000) in their taxable income each year since 2018. On January 1, 2023, there was a mandatory refresh of the loan, meaning it now carries the Q1 2023 prescribed interest rate of 4%. Assuming there has been no principal repayments yet, the inclusion to taxable income for 2023 has now increased to $10,000 (4% prescribed interest rate times $250,000). Depending on the employee’s marginal tax rates this could mean an increase of taxes owing of almost $4,000.
Taxpayers who may be affected by this mandatory refresh should start considering if it still makes financial sense to have the home purchase loan or if they should refinance.
A common way to avoid adverse tax implications on certain types of loans is to have the loan carry the prescribed interest rate. For example, individuals can generally borrow funds from a corporation they own for a short term at the prescribed interest rate and only need to include that interest in their taxable income. These type of financing options may have historically been effective, but given the recent increases to prescribed interest rates, this may no longer be a sound strategy.
Prescribed rate loans are also used in income splitting strategies for high-net-worth families by utilizing a family trust to hold income-earning securities. The trust then distributes the income earned to its beneficiaries, typically minors or a spouse, to attempt to split the investment income earnings across taxpayers with lower marginal tax rates. While this strategy can be thwarted under certain circumstances, one way to make sure the planning works as intended is to utilize a prescribed rate loan. Typically, this involves a high-income-earning family member to loan funds to the family trust at the prescribed interest rate.
In contrast with home purchase loans, there is no mandatory refresh of these loans. Instead, these loans remain outstanding indefinitely as long as the taxpayer continues to meet the relevant criteria. This means that taxpayers are incentivized to enter into these loans when the prescribed interest rate is as low as possible. The reason for this is because the interest paid on the loan is taxable to the creditor, typically the high-income-earning family member. As such, the higher the interest rate, the larger the income inclusion to an individual likely already at the highest marginal tax rate.
If taxpayers were interested in utilizing this type of planning right now, they have until March 30, 2023 to lock in the current prescribed interest rate of 4%. Despite the rate being relatively high, economically is still may make sense to take advantage of this planning. For example, assume that a high-income-earning family member paying tax at a marginal rate of 50% has $500,000 of excess cash they would otherwise have invested themselves in a security that yields 6% annually. They could consider a prescribed rate loan plan where they lend the $500,000 to a family trust at an interest rate of 4% which would then invest in a security that yields 6% annually.
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|
High-income-earning family member |
Family trust |
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Revenues |
Interest income on loan: $20,000 |
Security yield: $30,000 |
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Expenses |
– |
Interest expense on loan: $20,000 |
|
Net income |
$20,000 |
$10,000 |
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Approximate tax owing @ 50% |
$10,000 |
– |
Absent this planning, the high-income-earning family member would have earned $30,000 on the security themselves and pay an approximate tax of $15,000. The planning has effectively saved approximately $5,000 of taxes annually ($30,000 * 50% vs $20,000 * 50%).
Tax planning involving loans is not static, it requires constant attention and reevaluation of effectiveness regularly. Even if a plan made sense a certain time ago, changes in economic circumstances can change that drastically.
This article was written by Daniel Mahne and originally appeared on Mar 24, 2023 RSM Canada, and is available online at https://rsmcanada.com/insights/services/business-tax-insights/managing-increasing-prescribed-interest-rates-on-loans.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.
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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. |
A September 12, 2022, Tax Court of Canada case reviewed the gain on a residential property purchased in 2007 and disposed of in 2011. The property was substantially rebuilt during the ownership period. The proceeds, cost, and gain were all determined by CRA as the sale was unreported. These amounts were largely unchallenged by the taxpayer and accepted by the Court. The Court noted that the taxpayer’s tumultuous relations with her ex-husband, whom she divorced in 2014, resulted in “an off-again/on-again cohabitation” during much of the relevant period.
Although the taxpayer argued that the property was her principal residence, CRA denied it, assessing the gain as an adventure in the nature of trade and, therefore, fully taxable. CRA also assessed outside the normal reassessment period of three years and applied gross negligence penalties.
The Court accepted that the taxpayer lived at this property from time to time during the ownership period, a personal use inconsistent with a business venture of acquiring, improving, and selling the property for a profit. In addition, the taxpayer was a teacher not connected to the real estate sector. Her marital difficulties demonstrated a plausible reason for acquiring this larger residence for personal use as a residence in which to start a family. There was no suggestion that the reconstruction was undertaken for purposes other than for personal use. The nature of the property, length of ownership, lack of prior or subsequent activity in real estate, and her personal circumstances all led to the conclusion that the property was acquired for personal use and not resale, so it was a capital property.
The property was used as an intermittent refuge and was never occupied with regularity. In the absence of evidence such as a change of address, domestic expenses beyond mandatory utilities, or other permanent hallmarks, the Court could not conclude that the property was ordinarily inhabited, preventing it from being the taxpayer’s principal residence. As such, the taxpayer could not claim the principal residence exemption on the disposition.
The Court acknowledged that a fully exempt principal residence sale was not required to be disclosed in the taxpayer’s 2011 personal tax return. However, the taxpayer provided no details to show a reasonable basis for believing the gains were fully exempt. Without such evidence, she could not support her defense that the failure to report the gain was based on a reasoned and thoughtful assessment of her filing position rather than a result of carelessness or neglect, as CRA asserted. As she could not disprove CRA’s assertions, the return could be assessed outside the normal reassessment period.
Note that all principal residence sales were required to be disclosed in an individual’s tax return starting in 2016. If not reported, the individual could not claim the principal residence exemption on the disposition of the property and would be liable for the tax on the gain on disposition. As the taxpayer’s disposition was in 2011, this issue was not addressed in the Court case
The Court noted that CRA’s gross negligence penalty assessment (50% of the understated tax) was linked to three factors: the conclusion that the property was held in the course of an adventure in the nature of trade; the assertion that the taxpayer never lived in the property; and the magnitude of unreported income. All three of these assertions were incorrect. The taxpayer’s belief that she could navigate the tax laws related to personally held real property was incorrect; however, it was not tantamount to a deliberate act demonstrating indifference to compliance with the law. The gross negligence penalties were therefore reversed.
ACTION ITEM: Ensure to report all dispositions of real property, whether it is eligible for the principal residence exemption or not, on your personal tax return.
In a December 4, 2018 Technical Interpretation, CRA was asked whether the costs of installing a steam shower (sauna) and hydrotherapy pool could be eligible for the medical expense tax credit (METC). The use of these devices was recommended as treatment to maintain strength and mobility.
CRA noted that, for renovations to be eligible, they must:
While the expenses contemplated may meet criteria (a), CRA opined they would likely fail criteria (b) and (c) and, therefore, not be eligible for the METC. However, eligibility remains a question of fact, with the onus on the taxpayer to demonstrate that all requirements were met.
Also, CRA noted that a renovation cost incurred for the main purpose of enabling a qualifying individual to gain access to the dwelling or be mobile and functional within it (the same as criteria (a) for the METC) could be eligible for the home accessibility tax credit (HATC). The HATC is a non-refundable credit that provides tax relief on up to $10,000 annually of renovations to a home to enhance mobility or reduce risk of harm for a qualifying individual (those 65 years of age or older at the end of the taxation year or eligible for the disability tax credit). The HATC requirements do not exclude costs failing criteria (b) or (c) above.
ACTION ITEM: There are several renovations that can be eligible for one or both of these credits. Receipts, invoices and/or other supporting documents should clearly identify the health benefits and purpose.
Contact one of our Taxation team members for more tax tips and advice.
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:
Read more about the changes here: C-32 (44-1) – Parliament of Canada.
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.
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.
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:
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.
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.
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:
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).
To qualify, parents need to attest that the following conditions are met:
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.
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.
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.
