Category: Domestic Tax

Vacant Unit Tax Regime – Hamilton Homeowners

Posted on by dflanagan

The city of Hamilton will participate in the Vacant Unit Tax regime for 2024 (similar to Ottawa and Toronto) whereby every Hamilton residential homeowner will be required to file the declaration form. The deadline is April 30, 2025.

What Happens If I Don’t File?

Failure to file the form will result in the City considering the property to be vacant, and the Vacant Unit Tax will apply.

The Vacant Unit Tax is calculated at a rate of 1% of the property’s current assessed value and will be included in the final property tax bill that gets mailed out in June 2025.

What Are the Penalties?

If the form is not filed by the deadline, a $250 late fee will apply.

The penalty for non-payment is 1.25% immediately, plus 1.25% interest per month.

How Do I File the Form?

Please see Vacant Unit Tax | City of Hamilton for further information, as well as details on how to file the form.

For Further Assistance

For questions regarding the Vacant Unit Housing Tax or for help with completing the form, you can contact the City of Hamilton by phone at 905-546-2573 or by email at VacantUnitTax@hamilton.ca.

My Business Account: No More Paper Mail

Posted on by ssiconolfi

In the Spring of 2025, CRA will change the default method of correspondence for most businesses to online only.  This means that most businesses will receive their notices of assessment, letters, forms, statements, and other documents from CRA through My Business Account rather than by traditional mail. Notifications that new mail is available online will be sent to the email address(es) registered on My Business Account. Business correspondence will be presumed to be received on the date that it is posted in My Business Account.

This change will apply to all of the following:

  • existing businesses registered for My Business Account;
  • businesses who have a representative that access taxpayer information through Represent a Client; and
  • all entities that register for a new business number or program account.

CRA recommended taxpayers sign in to My Business Account to ensure the email address on file is current. There can be up to three email addresses for each program account.

Owners of new businesses should ensure to register for My Business Account and provide a valid email address to ensure that they do not miss notifications or correspondence from CRA.

Impacted businesses can continue to receive paper mail by opting out of the online default by taking one of the following two actions starting in May 2025:

  • selecting paper mail as the delivery option in My Business Account; or
  • filling out and mailing Form RC681 – Request to Activate Paper Mail for Business to CRA.

No information was provided on the required lead time to avoid the transition and continue to receive traditional mail.

This change will not apply to the following who will continue to receive traditional mail:

  • existing businesses not registered for My Business Account through the business owner or an authorized representative (via Represent a Client);
  • charities, unless they sign up to receive online mail; and
  • non-resident businesses that do not have access to My Business Account through their representative or an owner who is a Canadian resident.

Ensure that your email address listed in My Business Account is up to date. Consider opting out of electronic only communications in May 2025, if that is your preference.

GST/HST Tax Holiday: Rebate Applications

Posted on by dflanagan

For the December 14, 2024, to February 15, 2025, period, certain items normally subject to GST/HST should not have GST/HST applied at the point of sale. Businesses selling these goods can still claim input tax credits for the GST/HST they paid on inputs acquired to supply the good, as they are zero-rated.

The types of items covered by this temporary measure include (but are not limited to):

  • children’s clothing, footwear, diapers, and car seats;
  • select children’s toys, jigsaw puzzles, and video games/devices;
  • printed newspapers and books;
  • Christmas and similar decorative trees; and
  • various foods and drinks (including some alcoholic drinks), including but not limited to those provided at establishments like restaurants.

If GST/HST is mistakenly charged on the purchase of one of these goods, the purchaser can request a refund directly from the supplier.

If the supplier does not provide a refund or is no longer in business, the purchaser can apply to CRA for a GST/HST rebate (minimum claim is $2) using Form GST189: Rebate under reason code 1C, “Amounts paid in error.” The application must be filed within two years after the date the amount was paid in error. CRA has suggested that a purchaser consolidate all their claims (including associated receipts) and submit a single rebate application after the GST/HST break period is over.

Ensure to keep receipts for purchases where GST/HST was charged improperly. Multiple claims can be included in a single rebate submission.

Shareholder Purchasing Asset: Input Tax Credit (ITC)

Posted on by dflanagan

An August 20, 2024, Tax Court of Canada case reviewed whether a corporation could claim ITCs of $8,874 related to the purchase of two vehicles that were used by the corporation. One vehicle was purchased by the shareholder and the other was purchased by the shareholder and his spouse.

Taxpayer loses

To be eligible for an ITC, the corporation must meet all of the following conditions:

  1. the corporation must have acquired the vehicles;
  2. the GST/HST in respect of the vehicles must be payable or must have been paid by the corporation; and
  3. the vehicles must have been acquired in the course of the corporation’s commercial activities.

The Court found no evidence that the corporation acquired either vehicle; the corporation’s name was not on the sales agreements, bill of sales, vehicle registrations, or proof of insurance. In addition, there was no evidence of any trust, agency or assignment agreement. As such, criterion (a) was not met.

The Court also found that the corporation was not liable to pay consideration under the purchase agreement for either vehicle; therefore, GST/HST was not payable by the corporation. As such, criterion (b) was not met.

While the corporation argued that the vehicles were used or available for use by the corporation, the vehicles were not actually acquired in the course of the corporation’s commercial activities. As such, criterion (c) was not met.

While only failing one of the above criteria would be fatal to the claim, the corporation failed all three. The ITC was appropriately denied.

Care should be afforded to acquire assets in the proper entity such that GST/HST can be recovered as an input tax credit, if appropriate.

Trust Distributions: Violating Trust Terms

Posted on by dflanagan

A March 30, 2023, Tax Court of Canada case reiterated the importance of the trustee of a trust properly understanding the terms of the trust. In this case, the trust had paid $100,000 to two beneficiaries, both under age 18, from capital gains eligible for the capital gains exemption. However, the terms of the trust prohibited payments to beneficiaries under age 18.

Taxpayer loses

The Court ruled that amounts paid in violation of the trust terms were not payable for income tax purposes and were therefore neither income to the beneficiaries nor deductible from the trust’s income

If acting as a trustee of a trust, ensure to fully understand the terms of the trust to avoid a surprising tax consequence.

 

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.

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.