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.
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.
Generally speaking, under Section 5 of Part II of Schedule V of the Excise Tax Act (ETA) services provided by a medical practitioner, as defined, in a health care facility, a private clinic, or a doctor’s private office are exempt from HST. “Medical practitioner” is defined as a person who is entitled under the laws of a province to practice the profession of medicine or dentistry. In addition, the majority of dental appliances are considered to be zero-rated under the ETA. That being said, there are various situations when services or goods provided by a dentist may be taxable for GST/HST.
One example where a dentist may be supplying a taxable service as it relates to GST/HST is cosmetic procedures. The CRA states in GST Memorandum 300-4-2 that surgical and dental procedures that alter or enhance a patient’s appearance but that otherwise has no medical or reconstructive purposes are considered to be cosmetic surgery. The criteria for cosmetic surgery to be medically necessary, and thus not applicable to GST/HST is also listed in the same GST memorandum and includes:
Examples of GST/HST taxable services and products provided by a dentist, assuming they are not a small supplier, may include the following if done for cosmetic or other purposes:
Artificial teeth and orthodontic appliances are zero-rated for GST/HST purposes. That being said, an implant, crown, cap or onlay that is fabricated to replace 50% or more of a natural tooth will qualify for zero-rating as an artificial tooth. As a general rule, if it does not replace more than 50% of the existing tooth, it would be taxable for GST/HST purposes.
As a result of the above, dentists may have a mix of exempt and taxable revenue streams, which would result in some portion of the GST/HST paid being claimable as an Input Tax Credit (ITC), and some not. Generally when there are mixed revenue streams, the taxpayer must allocate the ITC’s on a fair and reasonable basis amongst the taxable and exempt revenue streams. The allocation of these expenses as it relates to an ITC claim can be complex and heavily scrutinized by the CRA. The CRA has published GST/HST Memorandum 8.3 as a guideline to what the CRA considers to be ‘fair and reasonable’ allocation methods. It is important that when determining your fair and reasonable allocation method, that it be documented to defend its reasonableness should it be challenged by the CRA.
Please note that the definitions and rules are more complex than outlined above. Before you make any changes to your GST/HST, please consult your GST/HST advisor for clarification and what your next course of action should be.
When conducting our estate plans, we are often focused on the distribution of assets (such as homes, bank accounts, investments, and interest in private corporations), providing for dependents, and ensuring overall family harmony. However, softer issues may be overlooked. For example, some suggest that it may be useful to leave a video legacy for surviving family members to view after a loved one passes.
One app, RecordMeNow, allows users to make a video legacy through targeted question-prompting and video recording. Users can create a video library organized into different subject areas for the surviving loved ones. As an individual’s death can rarely be predicted with certainty, the founder advises recording a legacy due to the risk of an untimely death.
The service was originally developed such that children who lost parents at a young age would have something to connect with their deceased parent(s); however, it can be used by individuals of all ages.
For further information see the BBC article (If you die early, how will your children remember you?, Shaw, Douglas), or go to www.recordmenow.org.
ACTION ITEM: What would happen if you were to pass away unexpectedly? Is everything in place such that in the days and years following, the desired results would be achieved? Consider revisiting your estate plan, will, and any other communications you would like to leave for your family.
On March 21, 2023, Ontario tabled their 2023 Provincial Budgets. To help understand the implications of the budgets across major industries, we have consolidated the key highlights pertinent to middle market companies.
This article was written by Clara Pham and originally appeared on 2023-05-02. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/services/business-tax-insights/2023-provincial-budget-ontario.html
RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.
The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP 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 LLP 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.
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.
|
|
High-income-earning family member |
Family trust |
|
Revenues |
Interest income on loan: $20,000 |
Security yield: $30,000 |
|
Expenses |
– |
Interest expense on loan: $20,000 |
|
Net income |
$20,000 |
$10,000 |
|
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 2023-03-24. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/services/business-tax-insights/managing-increasing-prescribed-interest-rates-on-loans.html
RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.
The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP 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 LLP 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.
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.
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.
