Category: Domestic Tax

Prescribed Interest Rates Fall Yet Again in January 2025: Key Tax Considerations

Posted on by RSM US LLP
Executive summary:

The Bank of Canada has reduced the prime rate for the fifth consecutive time, bringing it down to 3.25% in December 2024. Correspondingly, the Canada Revenue Agency (CRA) has adjusted the prescribed interest rates for Q1 2025. These changes have significant tax implications for various financial strategies, including income splitting, shareholder loans, and capital investments.

Key Points:
  1. Prescribed Rate Loans: Lower prescribed rates make income splitting strategies more attractive, as loans carrying these rates can help avoid adverse tax implications due to attribution rules.
  2. Modifying Existing Loans: Taxpayers with existing prescribed rate loans at higher rates may consider restructuring to take advantage of the new lower rates but must consider potential tax costs from liquidating investments.
  3. Family Trusts vs. Direct Loans: New amendments to the Alternative Minimum tax (AMT) make family trusts less favorable due to higher tax burdens, shifting preference towards direct loans to family members.
  4. Shareholder and Employee Loans: Lower interest rates reduce the taxable benefits of shareholder and employee loans, making them more appealing for personal and housing needs.
  5. Capital Investment: Decreasing interest rates are expected to boost capital investments, with several tax incentives available for zero-emission vehicles and productivity-enhancing assets.
  6. Interest Denial Regimes: Companies must consider new rules under the Excessive Interest and Financing Expense Limitation (EIFEL) regime, which could limit the deductibility of interest expenses.

Despite the current trend of decreasing interest rates, future fluctuations remain uncertain. Taxpayers should stay informed and adapt their tax planning strategies accordingly to optimize benefits.

 
Prescribed interest rates fall yet again in January 2025: Key tax considerations

The Bank of Canada has cut prime rate for the fifth consecutive time, from a high of five per cent back in April 2024 to 3.25% in December 2024. Consistent with decreasing interest rates, the CRA prescribed interest rate has decreased yet again starting Q1 2025, as follows:

Income tax situation Interest rate
Overdue taxes, Canada Pension Plan contributions and employment insurance premiums 8%
Corporate taxpayer overpayments 4%
Non-corporate taxpayer overpayments 6%
Rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans 4%
Corporate taxpayers’ pertinent loans or indebtedness (PLOI) 7.78%

In a decreasing interest environment, there are tax consequences that may require taxpayers to reconsider some tax planning previously put in place.

Prescribed rate loans

A common way to avoid adverse tax implications on income splitting strategies is to utilize a loan that carries the prescribed interest rate, oftentimes referred to as a “prescribed rate loan”. Absent a prescribed rate loan, many income splitting strategies can fail due to the application of the attribution rules, which can shift income earned in the hands of the debtor back to the creditor, defeating the intention of the tax strategy. In general, if a loan to a family member or family trust carries the prescribed rate of interest applicable in the fiscal quarter the loan was entered into, the debtor can use those funds to invest in income-earning portfolios and avoid attribution. The loan can be made individually between family members directly but can also be made to a family trust to earn investment income to be subsequently allocated to beneficiaries.

This type of planning becomes more attractive as interest rates decrease, since a prescribed rate loan carries the prescribed rate of interest applicable in the fiscal quarter the loan arises indefinitely. This is ideal, because the interest payable is taxable to the recipient, who is typically a high-income earner (and paying tax at the highest marginal tax rate) that is intending to split income with their family.

Modifying an existing prescribed rate loan

Taxpayers with prescribed rate loan structures in place already may be stuck with a loan carrying a higher rate of interest. As a result, taxpayers may want to consider dismantling their current structure and take advantage of the lower prescribed rate starting Q1 2025. The rules for doing so can be strict, and typically amending the interest rate on the existing loan is insufficient to lock in the new interest rate. Instead, the debtor would need to liquidate their investments, incur the relevant tax implications due to the sale, repay the existing loan, and introduce a new loan carrying the new prescribed rate. Taxpayers considering this would need to model the triggered tax costs associated with liquidation against the possible tax benefits from re-establishing a new loan.

Utilizing a family trust versus direct loans

With new legislative amendments to Alternative Minimum Tax (AMT) effective Jan. 1, 2024, family trust structures are becoming more costly. AMT is, generally, a parallel tax calculation applicable to certain individuals, estates and trusts that is computed using special rules that do not often coincide with typical Canadian tax rules. While AMT can be recoverable in future years, family trusts are not typically structured in a way to be able to recover the tax, and as a result AMT can often be seen as a permanent tax.

The main issue with using a family trust in 2024 is that many expenses, such as interest expense and other carrying charges, are only 50% deductible for AMT purposes. Unlike individuals, family trusts do not benefit from a minimum AMT exemption amount, which increases the likelihood of AMT applying to a trust’s income. While certain tax planning can be considered to minimize AMT, the tradeoff may be paying ordinary income tax at the trust level at the highest marginal rates, which would generally negate the benefit of using a trust.

Consequently, direct prescribed rate loans to family members may become more attractive than loans made to family trusts, on the AMT front. Individual taxpayers do have an AMT exemption amount of approximately $173,000 starting in 2024, which means less AMT exposure as a result.

Other loans
Shareholder loans

Certain loans made by a corporation to a non-corporate shareholder can be included in the shareholder’s income in the year in which the loan was made. There are some exceptions to this rule, such as if the loan is repaid within one year after the end of the taxation year in which the loan was made. In situations where the entire amount of a loan is not included in income for a taxpayer, if interest charged on a shareholder loan is less than the prescribed interest rate, a taxable benefit would arise based on the time the loan was outstanding and the delta in interest rates.

Declining interest rates equates to a smaller deemed interest inclusion for shareholder loans. As a result, shareholders can consider temporarily entering into these loans for personal needs.

Employee loans

Similar to shareholder loans, certain employee loans can also create a deemed taxable benefit based on the prescribed rate of interest. Most commonly, this can be applicable when an employer offers their employee a loan to purchase a home. However, unlike other types of loans, employee loans have an automatic five-year “refresh”, which deems a new loan to arise at that time for tax purposes. This diminishes the value of entering into a loan when interest rates are low, since the prescribed interest rate will only last five years for purposes of computing the deemed employee benefit. That being said, locking in a lower interest rate for five years can still be valuable, and taxpayers can try and structure their employee loans to be in place when the prescribed interest rate falls in Q1 2025.

Capital investment

Typically, lower interest rates are coupled with increased capital investment. There are many tax incentives to further encourage capital investment that are expected to be available during 2025. For example:

  1. Zero emission vehicles and automotive equipment are afforded a 75% first-year deduction if acquired and available for use before 2026.
  2. Draft legislation, introduced in the 2024 Federal Budget, will permit a 100% first-year deduction for “productivity-enhancing assets”, including assets such as data network infrastructure equipment.
Interest denial regimes

As companies consider making more capital investment, it is important to consider the application of interest denial regimes for tax purposes. Canada has introduced new rules under the Excessive Interest and Financing Expense Limitation (EIFEL) regime, which applies to deny interest expense deducted to the extent it exceeds a certain percentage of tax-EBITDA. Alongside various interest denial regimes from other jurisdictions, such as section 163(j) of the Internal Revenue Code in the United States (which is currently at risk of facing amendments in light of the upcoming second Trump administration), this can severely diminish the value of debt financing. It is important to keep any limits in mind before considering any type of planning.

Interest rates are still in flux

Despite the trend showing that interest rates are decreasing, it is impossible to know what Q2 2025 and beyond has in store for interest rates. No matter what the future holds, tax implications closely follow the economics, and keeping a keen eye on how prescribed rates fluctuate can help taxpayers optimize their tax planning.

This article was written by Daniel Mahne and originally appeared on 2024-12-18. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/services/business-tax-insights/prescribed-interest-rates-fall-yet-again-in-january-2025.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.

Fall Economic Statement 2024

Posted on by RSM US LLP
Executive summary

After a mid-day shake up in the cabinet, the federal government released Canada’s 2024 fall economic statement (2024 Statement) on Dec. 16, 2024. The key tax measures to be considered by middle market taxpayers are outlined in this article.

With a cost that is expected to push its deficit target by more than $20 billion to $61.9 billion, many of the government’s new initiatives are incentives meant to encourage investment and productivity in Canada. The 2024 statement proposes to reform of the scientific research and experimental development (SR&ED) program, allow companies to write off the value of investments immediately by extending the accelerated investment and expand the transactions which qualify for the capitals gain rollover on business investment. Additionally, rising trade concerns were addressed.

The 2024 statement affirms the government’s intention to proceed with previously announced tax measures, including further amendments to the alternative minimum tax (AMT) and introduction of the Canadian entrepreneurs’ incentive. The government also provided additional details on previously proposed clean economy tax credits.

 
Personal tax

The government continued as part of this statement to address inflation and the rising costs of everyday life.

Capital gains rollover on business investments

The Income Tax Act (ITA) allows individuals to defer capital gains taxation realized on a qualifying disposition of eligible small business corporation (ESBC) shares. Under the current rules, this deferral applies to the extent that the proceeds of disposition are used to acquire replacement ESBC shares within the year of disposition, or up to 120 days following that year.

Effective for transactions on or after Jan. 1, 2025, the 2024 Statement proposes to expand the relevant period to acquire replacement shares to include the entire year of disposition and the entire following calendar year.

The types of shares which qualify for this rollover will also be expanded. Currently, the shares must be common shares issued by an ESBC to an individual where the total carrying value of the assets of the ESBC and related corporations does not exceed $50M immediately before and immediately after the share was issued. Under the proposal, both common and preferred shares will qualify. Furthermore, the limit of the carrying value of the assets of the ESBC and related corporations will be increased to $100 million.

This expanded rollover will help small businesses access capital through the deferral of capital gains taxation for its investors.

Confirming the GST/HST holiday tax break

The Tax Break for All Canadians Act, which recently received Royal Assent, provides a two-month goods and services tax/harmonized sales tax (GST/HST) break for holiday essentials, like groceries, restaurant meals, drinks, snacks, children’s clothing and gifts. This initiative aims to provide significant tax relief to Canadians on a variety of goods during the eligible period.

Business tax
EV supply chain investment tax credit

In the 2024 Federal Budget, the government announced a refundable Electric Vehicle (EV) supply chain investment tax credit equal to 10% of the capital cost of buildings involved within the EV supply chain to incentivize EV manufacturing. The 2024 Statement provides the relevant design and implementation details of the previously introduced investment tax credit, including:

  • Eligible corporations: The EV supply chain investment tax credit would be available only to taxable Canadian corporations that invest directly in eligible property. 
  • Machinery and equipment investment requirement: To be eligible, a corporation (either by itself or as part of a related group of companies) will be required to invest a minimum of $100 million in each of the relevant supply chain segments.
Clean electricity investment tax credit for provincial and territorial Crown corporations

The 2024 statement provides clarifications and an exception related to the previously proposed clean electricity investment tax credit including:

  • Any financing provided by the Canada Infrastructure Bank will not reduce the cost of eligible property for the purpose of computing the clean electricity investment tax credit where the eligible property is acquired and becomes available for use on or after Dec. 16, 2024.
  • Provincial and territorial Crown corporation claimants will have to issue public written statements committing to net-zero emissions by 2050 and detail how the credit will be passed on to ratepayers. They will also need to publicly report certain information related to their cost of service and the credit received both for the year and cumulatively.
Clean hydrogen investment tax credit—methane pyrolysis

The 2024 statement proposes to expand the clean hydrogen investment tax credit to include methane pyrolysis as an eligible hydrogen production pathway. With this expansion, eligible items will include pyrolysis reactors, heat exchangers, separation/purification and storage/compression equipment. The expansion of the credit applies to property acquired and becomes available for use on or after Dec. 16, 2024.

Canada carbon rebate for small businesses

In the 2024 Federal Budget, the government announced that the carbon pricing fuel charge proceeds will be returned to Canadian-controlled Private Corporations (CCPCs) with 1 to 499 employees for the 2019–2020 to 2023–2024 fuel charge years if the corporation filed their 2023 tax return by July 15, 2024. Furthermore, on Oct. 1, 2024, the government proposed that corporations who would have qualified without the filing deadline would receive the rebate if they filed their 2023 tax return after July 15, 2024, and on or before Dec. 31, 2024.

The 2024 statement outlines that the design elements and eligibility of the Canada carbon rebate for the 2024–2025 and later years will be modified. In particular:

  • Cooperative corporations and credit unions will qualify for the credit.
  • Small businesses that have less than 20 employees would qualify for a payment amount that is equivalent to having 20 employees.
  • Larger businesses with over 300 employees and up to 500 employees will have their payments gradually reduced on a straight-line basis.
Extension of the accelerated investment incentive and immediate expensing measures

The accelerated investment incentive provides an enhanced first-year capital cost allowance for most depreciable capital property. The 2024 statement proposes to reinstate these incentives for a five-year period starting Jan. 1, 2025, effectively reversing the phase out that began in 2024.

SR&ED program

Following consultations held earlier this year, the government is proposing the following enhancements to the SR&ED program effective on or after Dec. 16, 2024:

  1. Raise the annual expenditure limit from $3 million to $4.5 million for the enhanced 35% investment tax credit for CCPCs.
  2. Increase the prior-year taxable capital phase-out thresholds for the enhanced credit from $10 million–$50 million to $15 million–$75 million.
  3. Extend the enhanced refundable credit of 35% to Canadian public corporations, replacing the current 15% non-refundable tax credit.

The 2024 statement also proposes to restore the capital expenditure eligibility for SR&ED program deductions and investment tax credits, applicable to property acquired on or after Dec. 16, 2024.

Further SR&ED reforms, including updates to qualified expenses, as well as plans to implement a patent box regime to encourage intellectual property development will be detailed in the upcoming 2025 Federal Budget.

Tariff and trade measures
Tariffs on select products from China

Following surtaxes imposed on EVs, steel and aluminum products from China earlier this year, the 2024 Statement announced tariffs on select Chinese solar products and critical minerals for 2025 and additional tariffs on semiconductors and other materials beginning in 2026.

Amendments to the Export and Import Permits Act

The 2024 statement proposes legislative amendments to the Export and Import Permits Act, enabling the government to restrict the import or export of items to enhance supply chain security, or in response to actions by other countries that “harm Canada”.

Reciprocity in federal policies

The 2024 statement establishes reciprocity as a requirement in federal policies, including government procurement, investment tax incentives and grants, to protect Canadian businesses from “unfair foreign trade and economic practices”. Similarly, starting in spring of 2025, Canada will enforce its procurement trade obligations to limit access to federal procurement markets to those who provide reciprocal access to Canada.

Other measures
NPO reporting

The ITA provides an exemption from income tax for organizations that meet the definition of a Non-Profit Organization (NPO). Under the current rules, NPOs are required to file an annual information return if:

  • its passive income in a fiscal year exceeds $10,000,
  • its total assets at the end of the preceding fiscal period exceeds $200,000, or
  • an information return was required to be filed for a preceding fiscal period.

The 2024 statement proposes changes to require NPOs with total gross revenues over $50,000 to also file the annual information return.

For those NPOs that do not meet the above thresholds for filing the annual information return, the government is proposing to introduce a new, short-form return which will require NPOs to submit basic information including:

  • The NPO’s business number or trust number,
  • The NPO’s name and mailing address,
  • The names and addresses of the NPO’s directors, officers, trustees, or similar officials,
  • A description of the NPO’s activities, including whether it conducts activities outside of Canada,
  • The NPO’s total assets/liabilities and annual revenues, and
  • Other prescribed information.

Both measures would apply to the 2026 and subsequent taxation years.

Intention to proceed with previously announced measures

Subject to amendments resulting from public consultations and legislative processes, the government intends to proceed with previously announced tax measures including but not limited to:

  • Legislative proposals included in the notice of ways and means motion introduced on Sept. 23, 2024, related to capital gains and the lifetime capital gains exemption.
  • Legislative and regulatory proposals released on Aug. 12, 2024, including but not limited to the following:
    • New measures
      • Canadian entrepreneurs’ incentive
      • Non-compliance with information requests
    • Amendments to existing measures
      • Alternative Minimum Tax (AMT)
      • Employee ownership trust tax exemption
      • Avoidance of tax debts
      • Interest deductibility limits
      • Substantive CCPCs
      • Global Minimum Tax Act
  • Legislative amendments to implement the hybrid mismatch arrangements rules announced in the 2021 Federal Budget.

This article was written by Jim Niazi, Benjamin Wilson, Mamtha Shree, Sigita Bersenas, Daniel Mahne, Cassandra Knapman, Danny Ladouceur, Clara Pham and originally appeared on 2024-12-17. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2024/fall-economic-statement-2024.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.

Professional Corporations: Are They Still Effective?

Posted on by dflanagan

Background

Historically, Professional Corporations (PCs) have been used by professionals as a vehicle to enjoy significant tax advantages, particularly through the deferral of personal taxes. By incorporating their practices, professionals are able to earn income within the corporation and take advantage of lower corporate tax rates on retained earnings. This structure is only available to individuals in regulated professions, such as accountants, lawyers, and doctors, among others. With the support of trusted advisors, professionals are able to implement tailored tax planning strategies to minimize their tax liabilities and achieve their cash flow objectives.

Benefits of Using a Professional Corporation

Deferral of Personal Tax

One of the primary benefits for professionals to incorporate is the ability to take advantage of the lower corporate tax rates compared to the higher personal income tax rates on active business income. By retaining a portion of their professional earnings within the corporation, professionals can defer paying personal tax on their earnings until a later date when the funds are withdrawn from the corporation as dividends.

Income that is taxed in the PC may be eligible for the small business deduction and be taxed at the lower corporate rate. Income above that threshold will be taxed at the general corporate rate, which is still significantly lower than the higher marginal personal tax rates.

The Small Business Deduction (SBD) applies to active business income (income earned from professional activities) under $500,000 and is taxed at a combined federal and provincial rate of 12.2% in Ontario (2024). This provides for a tax deferral on profits left in the corporation versus unincorporated professionals earning the same income and paying personal tax on the entire amount.

Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption “LCGE) is an invaluable tax and estate planning tool and can be utilized on the sale of shares or the death of the shareholder. If the shares of the PC meet certain criteria, this exemption provides the ability to shelter a significant portion, if not all of the capital gains on the sale of the shares or the deemed disposal of the shares on death. To qualify for this exemption, the shares must be held for certain periods of time and no significant non-business assets can accumulate. Tax planning can be done to ensure that the PC shares qualify for this exemption. There is no similar deduction for unincorporated practices. This is primarily a benefit to professionals with saleable practices.

Income Splitting

While the opportunity to split income among family members, such as spouses and children, through a PC is still available, it has become more restrictive with the passing of the “tax on split income” or TOSI rules in 2018. These rules stipulate certain conditions that must be met by the family members receiving dividends from the PC or via a family trust. If these conditions are not met, the individual will be taxed at the highest personal rate on the income received from the PC.  The main eligibility criteria is that the family member being compensated must be actively engaged in the business on a “regular, continuous, and substantial basis” in either the current or preceding five years. Guidance has been provided to indicate that an average of 20 hours a week will satisfy this criterion. Additionally, once the professional is 65 or over, the PC is able to pay dividends to the spouse of the shareholder without the TOSI rules applying. There are other limited circumstances where TOSI rules are not applied.

Limited Liability

Since a corporation is a separate legal entity, a PC provides limited liability to its shareholder, similar to other corporations.  This offers the professional protection of their personal assets if the PC faces any financial difficulties. It provides them with creditor protection, as creditors can only go after the assets of the corporation and not the personal assets of the professional (shareholder). However, the limited liability protection applies primarily to the business operations and the corporation’s debts and liabilities, not the professional responsibilities of the shareholder. Professionals can still be held personally liable for any malpractice or negligence.

Flexibility in Remuneration Planning

A PC provides professionals flexibility in their remuneration planning. Depending on their financial goals and needs, they can take a salary, or a dividend, or a combination of both. Working with a tax professional, enables individuals to optimize their tax planning and helps them achieve their specific financial goals, such as managing cash flow, retirement planning, or reducing personal tax liabilities. For instance, many professionals will take a sufficient salary to generate contribution room and contribute to their RRSP, enabling them to maximize their retirement savings while minimizing their personal taxable income.

Disadvantages of Using a Professional Corporation

Sharing the Small Business Deduction (SBD)

When a professional corporation is part of a partnership, this advantage could be reduced or lost if income of the partnership is greater than the $500,000 limit because all corporate partners must share the $500,000 SBD.

Restriction on Business Activities

While there are limitations on the ability of a professional corporation to use accumulated wealth in other revenue generating activities, they can invest retained earnings inside their PC as long as these activities are considered ancillary to the practice of the professional. Rules vary by professional regulation boards, so it is important to consult federal and provincial regulations specific to the profession before any investments are undertaken in the PC. A further caveat is that the SBD does not apply to investment income, and it is taxed at the highest corporate rate which is only slightly lower than the highest personal rate; however, there is an opportunity to receive a portion of that tax back once dividends are paid out to the shareholder. Additional consideration is needed, if planning to claim the Lifetime Capital Gains Exemption (LCGE). The PC will need to ensure investments are not significant enough to prevent it from qualifying. It is important to consult a tax advisor for any additional tax planning needed to meet the eligibility criteria in a tax-efficient manner. There are alternative structures and tax planning opportunities available for PC’s looking to invest surplus funds.

Additionally, when earning significant passive income, the SBD can be reduced. Specifically for every $1 of passive income earned above the $50,000 threshold, then $5 of the SBD is clawed back for the PC and any associated corporations. Once the passive income is greater than $150,000, the SBD is eliminated.

Additional Costs and Compliance

There are additional costs incurred when a professional incorporates instead of operating as a sole proprietor or as part of a partnership. Among these costs are the legal fees to incorporate and maintain corporate records, and accounting fees related to annual compliance and filing requirements such as financial statements, corporate tax returns, T5 slips for any dividends paid, and T4 slips and returns for salaries. These additional reporting requirements can be both cumbersome and costly to the professional.

A PC must also comply with both federal and provincial regulations specific to their profession which could result in extra paperwork related to regulatory approvals, and adherence to specific operational guidelines.

Proposed Changes to Capital Gains Inclusion Rate and Why it Matters

As part of the 2024 Canadian federal budget, the government proposed to increase the inclusion rate on capital gains above $250,000 for individuals and on all capital gains by corporations and trusts from one-half to two-thirds. This proposed change will apply to capital gains incurred on or after June 25, 2024.

While these proposed changes have not yet been passed into law, it is important to consider the impact they will have on PC’s. Traditionally, PCs were an attractive tax planning tool due to the deferral of personal tax; however, some of this advantage is lost with the proposed increase to the capital gains inclusion rate if the PC holds certain investments.

Historically, the tax system in Canada has relied on the concept of integration. The concept of tax integration ensures that whether the taxpayer earns the income as an individual or by way of dividends through a corporation, the total income tax paid is similar. However, under the proposed legislation, individuals will benefit from the lower inclusion rate of one half on their first $250,000 of capital gains. Corporations and trusts do not have this carved out and will have an inclusion rate of two-thirds on all capital gains incurred. This presents an issue to integration and could result in higher taxes paid overall on certain income if it is earned in the PC first and then distributed as a dividend to the shareholder. It reduces the advantage of deferring personal tax when paying tax in the PC at a higher rate. This change to the inclusion rate could impact how professionals invest through their PC or structure any associated corporations.

Takeaway

While a PC may still offer valuable benefits, such as the deferral of tax via lower corporate tax rates on active income; the proposed capital gains inclusion rates does reduce some of the tax advantages of this structure. Strategic tax planning is essential to help mitigate the impacts of the proposed new capital gains inclusion rate.

For more detailed advice on whether a professional corporation is right for you or how to adapt your tax planning in light of the recent changes, please contact one of our trusted advisors. 

 

 

Corporate Tax Return Filed Late: Ability to Get a Tax Refund

Posted on by dflanagan

A July 22, 2024, Federal Court case found that CRA’s refusal to accept and provide tax refunds for corporate tax returns filed more than three years after the relevant year-end was reasonable. While a specific provision allows CRA to accept requests (at their discretion) for refunds after the three-year deadline for individuals, there is no parallel provision for corporations.

While no tax refund can be provided where corporate tax returns are not filed within three years of the fiscal year-end, CRA has discretion to re-appropriate the refund to another account of the taxpayer (e.g. the taxpayer’s GST/HST, payroll or income tax account). However, this re-appropriation is fully at CRA’s discretion, based on factors such as CRA error or delay, natural or man-made disasters, death, accident, serious illness, or emotional or mental distress.

Ensure that corporate tax returns are filed in a timely manner to avoid risking the loss of the tax refund.

Navigating the GST/HST Holiday Tax Break

Posted on by RSM US LLP
Executive summary:

The House of Commons recently passed Bill C-78, the Tax Break for All Canadians Act, which proposes a temporary GST/HST holiday on certain items. This initiative, pending Senate approval, aims to provide significant tax relief to Canadians on a variety of goods during the eligible period, including children’s items, food and more. Read on to discover when the holiday will take effect, the eligible items, and key considerations for both consumers and businesses to maximize the tax break this season.

 

On Nov. 28, 2024, the House of Commons passed Bill C-78, titled the Tax Break for All Canadians Act, to temporarily relieve good and services tax/harmonized sales tax (GST/HST) on eligible supplies, such as children’s clothing, toys, games, books, food and beverages, made between Dec. 14, 2024 to Feb. 15, 2025 (eligible period). Note that the legislation is still in draft and pending Senate approval.

The tax relief provides that the eligible supplies will be considered zero-rated, which means that they will carry an applicable GST/HST rate of 0%. This is positive news for GST/HST registered businesses, as the GST/HST holiday will not affect their eligibility to claim input tax credits of GST/HST paid on expenses related to providing the eligible supplies.

Eligible supplies

Items eligible for the temporary zero-rating include:

  • Most food and beverages for human consumption which would otherwise be taxable, such as snack items and other prepared foods, catering services (where performed and paid for during the eligible period), and beverages including beer, wine, sake and other low alcohol packaged beverages. However, food or beverages sold from a vending machine and spirits or other hard alcohol are excluded from the temporary zero-rating.
  • Children’s toys and games if they are intended for children under 14 years old for learning or play. Most toys that are marketed as being for an age below 14 (for example, a toy recommended for children ages eight and up) would qualify.
  • Children’s clothing, footwear, diapers and car seats
  • Jigsaw puzzles for all ages
  • Video game consoles, controllers and physical video games provided in a read-only tangible format (i.e., game cartridges)
  • Christmas and similar decorative trees, including natural trees and artificial trees
  • Physical books and printed material. Key exclusions comprise of colouring books, calendars, magazines and downloadable audiobooks (except physical audio recordings of printed books if 90% or more of the recording is a spoken reading of a printed book).

The above items qualify for GST/HST relief during the eligible period whether they are being purchased retail (B2C) or wholesale (B2B). Eligible supplies imported into Canada during the eligible period also qualify for the temporary GST/HST relief.

Timing of eligible supplies

In order to avail the benefit of the temporary GST/HST zero-rating, the eligible supplies made during the eligible period should meet the following conditions:

  • All consideration for an eligible supply must be paid within the eligible period.
  • The property must be delivered or made available to the recipient during the eligible period. For these purposes, delivery is deemed to be complete on the date the supplier either transfers the property to a common carrier retained on behalf of the recipient or sends the item by mail/courier.

If a deposit was paid before the eligible period, the eligible item supplied during the eligible period will still qualify for this GST/HST relief, provided the entire balance is paid and the item is delivered during the eligible period.

Key considerations for businesses ahead of the GST/HST tax holiday

While the timing of eligible supplies and related payment conditions appear to be straightforward for point-of-sale retailers, GST/HST registered suppliers issuing invoices with payment terms (e.g., 30 days from issuance of invoices) must verify whether payment will be due and received by Feb. 16, 2024, prior to applying the zero-rating on their products. Affected businesses will need to adjust their billing rates in the system, review payment terms, and address other related details.

While the tax holiday brings exciting savings for consumers, businesses making the eligible supplies need to delve into these intricacies, especially with the implementation date approaching soon.

This article was written by Gautam Rishi and originally appeared on 2024-12-04. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2024/navigating-the-gst-hst-holiday-tax-break.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.

Regulation 105: What You Need to Know About Withholding Tax and CRA Audits

Posted on by RSM US LLP
Executive summary

Regulation 105 of the Income Tax Regulations imposes a 15% withholding tax on payments made to non-residents for services performed in Canada. Recent updates from the Canada Revenue Agency (CRA) declare that the reimbursements for subcontractor services made after Sept. 30, 2024 are now included under these rules. This article reviews the consequences of non-compliance and offers practical steps for employers and non-resident contractors to ensure adherence to the updated regulations.

 

When an amount is paid by any person to a non-resident person for services performed in Canada, the payment is subject to withholding tax. Specifically, Regulation 105 of the Income Tax Regulations and paragraph 153(1)(g) under the Income Tax Act (Act) provide that payments made to non-residents for services rendered in Canada are subject to a 15% withholding tax. The policy behind this rule is to ensure that funds are available to cover any potential Canadian income tax assessments on Canadian-source income earned by non-residents.

As all other provisions within the Act, the Canada Revenue Agency (CRA) is responsible for its administration. The CRA frequently releases guidelines for practitioners to interpret the rules, and often provides technical views to clarify these rules, sometimes in response to case law developments.

Background on CRA policy and updated policy

In 2007, the Tax Court of Canada released a decision (Weyerhaeuser Company Limited v. The Queen) which confirmed that Regulation 105 applies only to payments characterized as income earned in Canada by the non-resident and does not apply to reimbursements for disbursements or travel costs, as they are not considered income. As a result of the Weyerhaeuser decision, the CRA issued a view and reaffirmed its position that excluded reimbursements from the Regulation 105 withholding requirement.

Earlier this year, CRA released a view (2022-0943241E5) which clarified that Regulation 105 will apply to payments made to reimburse a non-resident for fees related to subcontractor services performed in Canada. However, this new withholding policy will not extend to reimbursements of travel and meal expenses so long that these expenses were agreed to be reimbursed. CRA also confirmed that the updated policy will apply to reimbursements made after Sept. 30, 2024.

This marks a significant change to CRA’s longstanding policy from 2008 for withholding tax on cross-border services rendered in Canada.

Ensuring compliance

As a result of this change of position, taxpayers can take steps to ensure they are compliant. First, employers should review and amend any contracts with non-residents to explicitly state when withholding tax may apply to certain reimbursements and define who will bear the tax liability. Second, non-resident contractors should provide detailed invoices and separate travel and meal expenses as these amounts are generally not subject to Regulation 105 withholding tax. Finally, non-resident contractors can consider applying for a waiver from Regulation 105 withholding if they are not liable for Canadian tax. Until a waiver is granted, 15% withholding from payments is still required. Failure to properly withhold under the Regulations and Act could result in significant penalties.

Regulation 105 disputes

If non-compliance occurs and employers and subcontractors err in their withholding obligations, it could result in an audit by the CRA. Regulation 105 audit and compliance initiatives have escalated recently due to businesses increasingly transacting across borders. We surmise that the federal government is focusing on ensuring cross-border payments are being appropriately captured in the Canadian tax net, notably since the increase in remote work post-pandemic. As such, especially in light of the new administrative position, it is important employers and subcontractors ensure internal systems are in place to maintain compliance.

This article was written by Sigita Bersenas, Patricia Contreras and originally appeared on 2024-12-03. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/services/business-tax-insights/regulation-105-what-to-know-about-withholding-tax-and-cra-audits.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.

Key Tax Measures in 2024 for the Real Estate Market

Posted on by RSM US LLP
Executive summary

The Canadian real estate sector is navigating a period of significant tax reforms, aimed at curbing speculative investments, promoting housing affordability, and encouraging sustainable construction. Real estate stakeholders should be mindful of pivotal changes that will impact tax compliance obligations.

Key changes include an increased capital gains inclusion rate, a new withholding tax for non-residents, and the introduction of the Underused Housing Tax (UHT). Recent property flipping rules and limitations on short-term rental deductions may impact investment decisions, while new GST/HST rebates are set to offer substantial financial relief for builders.

This article delves into these critical tax measures, providing strategic insights to help real estate clients navigate the evolving landscape while staying ahead of expected changes in 2025.

 

The Canadian tax landscape for the Real Estate (RE) sector has experienced significant shifts, reflecting targeted measures to address skyrocketing housing prices, discourage speculative investment, promote housing affordability, and support sustainable construction. RE clients must prepare for critical tax changes and new compliance requirements that could impact their 2024 filings.

The 2024 tax amendments bring both challenges and opportunities for RE clients. While these changes pose compliance challenges, they also present opportunities for those who adapt proactively. By understanding the key changes and implementing strategic adjustments, stakeholders can navigate the complexities of the new tax landscape while optimizing their financial outcomes.

This article outlines key tax measures introduced in 2024 that affect middle-market RE clients, recent legislative amendments, and practical strategies to navigate these changes effectively.

Changes to the capital gains inclusion rate

Budget 2024 introduced several tax measures aimed at enhancing access to affordable housing for Canadians. One of the most notable amendments is the increase in the capital gains inclusion rate (CGIR) from 50% to 66.67%, effective June 25, 2024, resulting in higher tax liability for the taxpayers disposing of the assets on or after the effective date.

In addition, w.e.f. Jan. 1, 2025, non-residents disposing of their taxable Canadian property (TCP) will face an increased withholding tax rate of 35%, up from the current rate of 25%.

Taxpayers who have disposed of the assets after the effective date must be prepared to pay increased taxes when filing their income tax returns next year. In addition, non-residents planning to sell TCP must consider completing the transaction before the end of 2024 to benefit from the lower withholding tax rate.

Underused housing tax (UHT)

The UHT targets vacant and underutilized residential properties (RPs) held by non-residents and/or non-Canadian entities. UHT requires affected owners to file a return annually and pay a one per cent tax on the property value if the affected owner doesn’t qualify for an exemption. The 2023 federal economic statement exempted unitized (“condominiumized”) apartment buildings from the UHT regime. In addition, starting in the 2024 tax year, individuals or spouses can claim an exemption for only one vacation property under the UHT.

Taxpayers with multiple vacation properties should evaluate their RE holdings to assess which property is most beneficial to claim under the exemption. Furthermore, taxpayers need to recognize that the UHT is a federal tax, unaffected by provincial or municipal taxes. If their property is also subject to local vacancy taxes, they could incur additional liabilities.

Property flipping rules

Effective from Jan. 1, 2023, federal property flipping rules tax gains from selling RPs held for less than 365 days as business income, disqualifying them from taking advantage of the principal residence exemption (PRE) or the lower CGIR in comparison to the marginal tax rate. Sales arising due to life events such as death, marital breakdown or disability may be exempt from such tax implications, but intent remains crucial.

Therefore, the sale of RP due to financial hardship may be exempt from the property flipping rule, but the profits from the disposition may still be classified as business income rather than a capital gain if the property was acquired with the intent to resell for profit, regardless of whether the sale was driven by financial hardship or insolvency.

British Columbia’s home flipping tax (BCHFT)

Similarly to the federal property flipping rules, effective Jan. 1, 2025, BCHFT imposes a separate tax on RPs sold within 730 days of purchase. The BCHFT imposes a 20% tax on sales within the first year, decreasing thereafter, and requires a distinct return to be filed within 90 days of sale.

Taxpayers in BC must evaluate the implications of the BCHFT and federal rules before selling RPs. Taxpayers must consider delaying the sales beyond the two-year threshold to avoid the higher taxes altogether.

Denial of deductions for short-term rentals (STRs)

In an effort to address the housing crisis by disincentivizing STRs and encouraging long-term rentals, deductions for expenses incurred on non-compliant STRs, such as Airbnbs, are denied effective Jan. 1, 2024, if they violate local regulations. Non-compliant STRs are defined as properties rented for less than 90 days that either:

  • are located in regions where STRs are not permitted or
  • do not meet local registration, licensing or permit requirements.

Taxpayers must ensure compliance with all local regulations to remain eligible to claim for tax deductions related to STRs. For this, the taxpayers may need to modify the rental durations or terms of the rental agreement. In addition, taxpayers planning to sell the properties used for STRs must consider the revised CGIR and any GST/HST implications on the sale. Taxpayers must also keep records of licenses, permits and other relevant documents to substantiate tax positions.

GST/HST new residential rental property (NRRP) Rebate

Effective 2024, the GST/HST NRRP rebate offers landlords and builders full GST relief on qualifying residential rental properties, especially purpose-built rental housing (PBRH). Projects with a fair market value (FMV) under $450,000 are eligible, with a full rebate available for projects having an FMV below $350,000. However, for PBRH projects starting between Sept. 14, 2023, and Dec. 31, 2030, and completed by Dec. 31, 2035, the GST rebate will be 100% irrespective of the FMV, thereby eliminating GST on these projects.

The rebate offers financial assistance to builders of new rental housing. To maximize rebates and minimize self-assessed GST/HST liabilities, builders must maintain accurate records, seek professional appraisals, and comply with the Canada Revenue Agency (CRA) guidelines. Builders required to self-assess and pay GST/HST based on the FMV of the property can now back out GST/HST from the appraised FMV, reducing both the self-assessed GST/HST and any related rebates.

Excessive interest and financing expenses limitation (EIFEL)

The EIFEL rules limit the amount of interest and financing expenses that can be deducted for tax purposes, aiming to prevent excessive deductions that reduce taxable income. Middle-market RE taxpayers should assess the impact of EIFEL rules on their investment structures to avoid denied interest expenses or penalties. Areas of focus may be the use of partnerships in RE development or investment, non-residents with Canadian RE, and sector-specific exemptions.

Foreign accrual business income (FABI)

The new FABI and FABI surplus election regime proposes tax-saving opportunities for Canadians earning RE income through foreign subsidiaries, possibly leading to a neutralization of tax that otherwise would be recognized in Canada on a current basis, and on the repatriation of profits to Canadian shareholders. Although the rules are not enacted yet, middle-market taxpayers with RE operations abroad should be mindful of these changes, and the deadline to file various elections, which could increase deductions against both foreign accrual property income and foreign dividends reported in prior tax years.

Disclosure requirement for RE trusts

Enhanced disclosure requirements for RE trusts now mandate detailed reporting of income distributions and beneficiary information. While initial rules broadened T3 filing obligations for trusts, CRA has since narrowed their scope through proposed amendments issued on Aug. 12, 2024.

From challenges to opportunities

Initiatives like the UHT, property flipping rules and STR deductions, combined with tax relief for new rentals and Budget 2024 strategies, are vital for taxpayers. However, ongoing adaptation and strong partnerships between government and private sectors are crucial to translating these measures into meaningful results for Canadians. Stakeholders must remain informed to navigate and contribute effectively.

Looking ahead in 2025

As we step into 2025, the RE sector is poised to navigate further changes in the tax landscape. The anticipated rollout of green incentives for energy-efficient buildings, discussions around potential adjustments to capital gains inclusion rates and targeted policies addressing housing affordability could shape RE transactions and investment strategies. Additionally, increasing penalties for non-compliance with federal and provincial reporting obligations highlight the need for meticulous record-keeping and proactive tax planning. As evolving regulations will likely continue to influence planning opportunities and compliance obligations in this dynamic sector, taxpayers must take timely action.

This article was written by Chetna Thapar, Nicole Lechter, Mamtha Shree, Neil Chander and originally appeared on 2024-12-02. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/services/business-tax-insights/key-tax-measures-in-2024-for-the-real-estate-middle-market.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.

Shareholder Loan Account: Proper Bookkeeping

Posted on by dflanagan

A July 31, 2024, Tax Court of Canada case reviewed whether payments made by a corporation in 2013 and 2014 of $24,249 and $41,680, respectively, were taxable as shareholder benefits on the basis that they were for the personal expenses of the shareholder. The Court also reviewed whether payments of $13,693 and $28,131 in 2013 and 2014 were taxable to the shareholder as indirect payments on the basis that they were made on behalf of the shareholder’s son for personal mortgage payments and day-to-day expenses. The taxpayer argued that all these payments constituted non-taxable shareholder loan repayments.

Starting in 2001, and continuing over several years, the taxpayer loaned a newly incorporated entity, of which the taxpayer and his spouse were shareholders, over $600,000. The loans enabled the corporation to acquire and operate a tire/auto detailing business managed by the taxpayer’s son. As the corporation could not afford a professional to prepare the corporation’s tax returns, the taxpayer compiled the returns, although he had no accounting training other than a personal tax preparation course he took 40 years prior. In 2018, the corporation ceased operations due to financial problems.

Taxpayer loses – shareholder benefit

The Court acknowledged that the taxpayer had made a bona fide loan to the corporation. However, the Court observed that payments the taxpayer received from the corporation were not properly recorded via a debit entry to the shareholder loan account as a repayment of the shareholder loan. The taxpayer argued that he did not know how to record payments for personal expenses in the shareholder loan account. The Court found that this was not a sufficient reason for not debiting the shareholder loan account for the repayments of the shareholder loan. The Court noted that the choice was to pay for professional assistance for the books and records or learn how to do it properly, neither of which the taxpayer selected. The shareholder benefit income inclusion was upheld.

Taxpayer loses – indirect payment

The Court noted that all of the following conditions were met in respect of payments to or for the benefit of the taxpayer’s son:

  • the payments were made to a person (the son) other than the reassessed taxpayer (the shareholder);
  • the allocations were at the direction or with the concurrence of the reassessed taxpayer (the shareholder);
  • the payments were made for the benefit of the reassessed taxpayer (the shareholder) or for the benefit of another person (the son) whom the reassessed taxpayer wished to benefit; and
  • the payments would have been included in the reassessed taxpayer’s income (the shareholder’s income) if they had been received by them.

The taxpayer was, therefore, required to pay tax on the indirect payments benefiting his son.

Ensure that all loans to a corporation and associated repayments are properly recorded in the books and records of the corporation.

Employment Expenses: Salary to Spouse

Posted on by dflanagan

A June 17, 2024, Tax Court of Canada case reviewed a commission salesperson’s deduction for remuneration paid to their spouse for general administrative services as a self-employed contractor.

Taxpayer loses

The annual deductions of $20,000 for services, including arranging appointments with prospective clients (who completed preprinted forms at a kiosk to express interest in a salesperson’s products/services), were not supported by a contract or by any documentation such as a log or list of customers contacted. The taxpayer testified that payment was made in the form of joint household expenses that did not directly match the amounts deducted. The taxpayer testified that he left the determination of the amount deducted to his accountant.

The Court agreed that the onus was on the taxpayer to maintain books and records, such as a contract for services or actual payments for those services, to document expenses claimed. His verbal testimony alone was not adequate to support the deductions claimed – they were properly denied.

Employment expenses – regular vs. commission employee

The scope of deductible employment expenses for employees earning commission income is much broader than for non-commission employees. Expenses incurred to earn commission income are deductible provided that they are not specifically prohibited (purchase of capital assets, personal expenses or payments that reduced a taxable employment benefit) and provided that the other standard conditions for deduction are met. In contrast, only expenses specifically listed as deductible can be deducted against non-commission employment income. For example, a non-commission employee can deduct salaries paid to an assistant only if the employment contract specifically requires them to pay for an assistant; however, no provision would permit a deduction for fees paid to a self-employed assistant.

If paying an assistant such that you can earn commission income, ensure to properly pay and retain documentation to support the claim­.

Ontario Made Manufacturing Investment Tax Credit

Posted on by dflanagan
Overview

The Ontario made manufacturing investment tax credit was passed alongside Ontario 85 bill on May 18, 2023. It is a refundable investment tax credit designed to support manufacturers in Ontario. Eligible Canadian-controlled private corporations (CCPCs) can receive a 10% tax credit on qualifying investments in manufacturing and processing (M&P) property, up to a maximum $2 million per year. For investments of up to $20 million annually, corporations can claim this credit to reduce their tax liability and reinvest in their business.

Qualification Criteria: Does your corporation qualify?

The corporation must meet ALL the following criteria to claim the credit:

  1. Be a CCPC throughout the tax year;
  2. Have a permanent establishment in Ontario, actively carrying on business throughout the year;
  3. Not be exempt from Ontario corporate tax during the year
Eligible vs Ineligible Purchases

For corporations to qualify for the credit they must ensure that purchases are NOT excluded property as these properties are considered ineligible for the tax credit claim. From a general standpoint, M&P properties purchased from a third party are considered eligible. Provided below is a more detailed outlook of the M&P property purchases that are customarily considered acceptable:

There are two main classes of investment purchases that qualify for claim of this credit. These include capital cost allowances (CCA) classes 1 and 53. Below is a detailed look of the requirements for each class:

Class 1

  1. Includes buildings that become available for use after March 22, 2023.
  2. Consists of buildings that are primarily used (at least 90% of the floor space) for manufacturing or processing purposes at the end of the year. The credit may also apply to buildings under construction or undergoing renovations, provided they meet the manufacturing use requirement.
  3. The building must also be eligible for an additional 6% CCA claim.
    • To satisfy this requirement the corporation must make an election under regulation 1101(5b.1) of the Federal Income Tax Act.

Class 53

  1. Includes machinery and equipment that became available for use after March 22, 2023.
  2. Machinery and equipment that are used in Ontario for manufacturing or processing of the goods for lease or sale.
  3. Property that the corporation leases in the ordinary course of business that is used primarily for manufacturing or processing of goods for lease or sale will also qualify.

 

Ineligible Claims & Excluded Property

A claim will be deemed ineligible if the expenditure was acquired by the following means:

  1. If there is an existing contract with a non-arm’s length individual or partnership at the time of acquisition.
  2. For the case of amalgamation, if the predecessor corporation was deemed as a non-qualifying corporation prior to amalgamation.

An M&P property will be deemed an excluded property and will be ineligible to claim the Ontario made manufacturing investment credit if one of the following criteria are met:

  1. If at any time during the properties existence the property was owned by a non-arm’s length party or purchased from a non-arm’s length party.
  2. If the credit was previously claimed by an associated corporation or the qualifying corporation.
  3. If the reason for holding the property was for a leasehold interest by an associated corporation or the qualifying corporation.
  4. If the property was leased to a non-profit organization or a registered charity or any other property that is considered exempt from paying tax under section 149 of the Federal Income Tax Act.
  5. If the M&P property was purchased from a seller who has a right or option to either lease or acquire a portion or all the property.
  6. If the corporation that qualifies for the exemption provides a buyer with an option or right to purchase the property.
  7. If the property was transferred following an election from a Class 1 asset to a Class 2 or 12.
How To Claim the Credit

Corporations must file Schedule 572 with their corporate income tax return to claim the Ontario Made Manufacturing Investment Tax Credit. It is essential to file within 6 months after the end of the corporation’s tax year to ensure eligibility. Late filings may result in the credit being denied.

How The Credit Is Calculated

The credit is calculated as 10% of the total eligible expenditures for the year, up to a maximum of $2 million. If a corporation (or group of associated corporations) makes qualifying investments exceeding $20 million, the total credit claimed is still capped at $2 million annually.

Example:

A manufacturing corporation invests $12 million in a new manufacturing facility and $8 million in machinery during the year, for a total investment of $20 million. The corporation can claim a 10% credit on the total qualifying expenditures, resulting in a $2 million tax credit.

If this corporation is associated with another company, the total credit of $2 million must be shared between them, and the total qualifying expenditures (up to $20 million) must be allocated across both companies.

Key Takeways

The Ontario Made Manufacturing Investment Tax Credit provides a significant opportunity for manufacturing businesses or reduce their tax burden on qualifying investments in Ontario. With a refundable tax credit of up to $2 million annually, this incentive can help corporations reinvest in their operations. While there is no immediate deadline for the credit, the Ontario government plans to review the review the program in three years, which may lead to future changes.

Below are key considerations to keep in mind when applying for the Ontario made manufacturing investment tax credit:

  1. The investment limit will be prorated for short taxation years.
  2. The amount of the $20 million expenditure limit must be allocated among all associated corporations.
  3. The total claim for the credit is 10% of the amount of eligible qualifying investments for a maximum of up to $2 million dollars per year.

The Ontario Made Manufacturing Investment Tax Credit is considered a government inducement, subsidy or grant.  Therefore, the resulting refund would be considered taxable income and would need to be reported in the year it is received.  For more detailed advice on how your business can benefit from this credit, please contact one of our trusted advisors.