This article, authored by RSM Canada, highlights the international aspects of the recent amendments to Bill C-47 in Canada’s Income Tax Act.
The article covers the expansion of withholding tax obligations for non-residents, the narrowing of the money lending business exception, and the introduction of a new functional currency and broader stop-loss provision.
The aforementioned changes have compliance implications for companies that conduct business across borders.
Traders or dealers in securities must report to CRA the disposition of securities, such as publicly traded shares, mutual fund units, bonds, and T-bills, of their clients on a T5008.
A November 4, 2022, French Federal Court case summarized CRA’s administrative policy where a taxpayer has not filed a tax return, but a T5008 was issued, reporting the disposition of property that does not include the cost of the property disposed. In this case, CRA will assess the taxpayer with unreported income by estimating the capital gain to be a percentage of the total proceeds of disposition based on the stock market performance for the year in question (details on how the calculation was made were not provided in the Court case).
In 2015, CRA applied this policy and assessed the taxpayer for his 2008 year with a $967,806 capital gain (taxable capital gain of $483,903) computed as 20% of all proceeds of disposition reported on the T5008. CRA assessed the taxpayer’s income for 2009 at $141,798. The taxpayer did not object to either of these assessments.
In 2019, the taxpayer filed his 2008 and 2009 returns reporting much lower income than CRA had assessed in 2015. As the 2008 return was filed (essentially requesting adjustments to the original assessment) more than 10 calendar years after the end of the year (December 31, 2008), no adjustments could be made to this year. The taxpayer relief provisions only allow an individual to request an adjustment up to ten calendar years after the relevant year. As such, CRA confirmed their 2015 assessment. The taxpayer then tried to argue that the excess of capital gains assessed by CRA over his actual gains for 2008 should be treated as a capital loss carried forward to offset his gains realized in 2009. CRA refused to reassess the 2009 return for this adjustment.
The Court found that the taxpayer could not indirectly reduce the impact of the capital gain on his 2008 return by claiming a capital loss on his 2009 return.
It is typical for brokers not to include the cost base of securities disposed on the T5008 as they may not have the accurate information. Also, even if an amount is reported on a T5008, the transaction may not always result in a gain; some dispositions may be in a loss or break-even position. For example, money market fund dispositions are often reported; however, there is normally no gain or loss.
ACTION ITEM: Ensure to report all gains from the disposition of securities fully; should dispositions not be reported, CRA may assess the taxpayer with unreported income much higher than the actual gain.
Contact one of our Taxation team members for more tax tips and advice.
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There are 3 options for the legal entity of your business, we can help you determine what’s right for your business.
We can help you register with the following tax authorities:
The creation of a tax calendar is an important part of starting your business. DJB will help setup your tax calendar for services such as, Income Tax, Sales Tax (GST/HST), Ontario Employer Health Tax (EHT), Ontario Workplace Safety and Insurance Board (WSIB), and Employee Withholdings Tax (Source deductions), so that you won’t miss any filing dates and prevent penalties and/or late charges.
DJB will help you setup and plan your fiscal period. This is crucial to any business and can be stressful and costly if setup incorrectly.
Contact a DJB Professional today to get started!
Generally, healthcare professionals are not registered for GST/HST due to the fact that the majority, if not all, of their services supplied to their patients are exempt from GST/HST. Changes made back in 2013 caused medical practitioners to have some taxable services, and therefore, there was a need to register for GST/HST. From speaking with practitioners, there still seems to be some misunderstanding of these changes.
Under the provisions in the Excise Tax Act (ETA), services that are provided solely for non-healthcare purposes, even if supplied by healthcare professionals, are not considered to be basic healthcare and are not intended to be eligible for the exemption. For instance, the GST/HST legislation specifies that all supplies for purely cosmetic procedures are a taxable supply, and thus subject to the GST/HST. Given a number of past court cases, the scope of the GST/HST exemption was expanded beyond the original legislative policy intent to limit the GST/HST exemption to basic health care services.
The 2013 Federal Budget provided some clarity in the fact that GST/HST will apply to reports, examinations, and other services that are not performed for the purpose of the protection, maintenance, or restoration of the health of a person or for palliative care. For example, taxable supplies for GST/HST purposes include reports, examinations, and other services performed solely for the purpose of determining liability in a court proceeding or under an insurance policy. They may also include the preparation of back-to-work notes and the completion of disability tax credit forms. Supplies of property and services in respect of a taxable report, examination, or other service would also be taxable.
A report, examination, or other service will continue to be exempt if it is performed for use in the protection, maintenance, or restoration of the health of a person or use in palliative care. As well, reports, examinations, or other services paid for by a provincial or territorial health insurance plan will continue to be exempt.
Overall, what this means is that it is no longer safe to assume that just because a service is provided by a healthcare professional that it will not be subject to GST/HST. If you are a medical practitioner and are providing services that are not direct to your patients, you should discuss all of your revenue streams with your local CPA to ensure you do not have a GST/HST liability. If you need assistance, please don’t hesitate to call a DJB Professional.
On June 22, 2023, new mandatory disclosure rules were passed into law comprised of three sections: reportable transactions, notifiable transactions, and reportable uncertain tax treatment.
These rules are intended to tackle aggressive tax planning, it is important to note that ordinary tax planning done by middle market companies will be captured under the scope of these new rules. Review the following article as written by RSM Canada outlining the requirements to remain in compliance.
Taxpayers who may have reporting requirements under the new mandatory disclosure rules should review the linked forms below carefully.
Form RC312 is used to report reportable and notifiable transactions and Form RC3133 is used to disclose reportable uncertain tax treatment (RUTT). Further details can be found here.
As with all new legislation and reporting forms, there will likely be adjustments as the CRA, tax practitioners, and taxpayers have the opportunity to have practical experience with the new forms and rules. Failure to file the required forms could result in monetary penalties and extended periods for the CRA to reassess the taxpayer.
Earnings in a TFSA are typically not taxable. However, earnings in a TFSA become taxable when they are earned from carrying on a securities trading business.
In a February 6, 2023, Tax Court of Canada case, CRA had assessed the TFSA on the basis that it was carrying on a business and was therefore taxable on its income for the 2009 through 2012 taxation years. The TFSA holder was a professional investment advisor who had engaged in aggressive trading in non-dividend-paying speculative penny stocks, all of which were qualified investments. The total income assessed was $569,481, earned from annual contributions of $5,000 in each of 2009, 2010, and 2011.
The taxpayer argued that the TFSA should be treated in the same manner as an RRSP and not taxed on income from a business of trading in qualified investments. The taxpayer further argued that the traditional tests used to determine whether a business of trading in securities was being carried on were inappropriate for application to TFSAs. The taxpayer referred to an earlier Court case that had suggested registered accounts trading in qualified investments are not carrying on a business.
The Court noted that TFSAs are one of several statutory schemes, each with its own detailed provisions. Their components are not interchangeable. In comparing TFSAs to RRSPs specifically, the Court cited ten significant differences between the two schemes other than the treatment of business income. The Court further noted that the judicial test for carrying on a business of securities trading was well established when TFSAs were introduced in 2008 and would have been known to Parliament when they legislated taxation of income from carrying on a business in a TFSA. This indicated thatthe existing test was considered appropriate for this purpose.
Parliament provided that income earned from carrying on a business within a TFSA would be taxable to the TFSA. If Parliament intended to exclude a business of trading qualified investments, it would have included the same exception provided for RRSPs.
The TFSA, directed by its holder, traded frequently, had an extensive history of buying and selling shares that were speculative in nature and held the shares for short periods. The holder was a knowledgeable and experienced investment professional and spent considerable time researching securities markets. There was no doubt that the TFSA carried on a business of trading qualified investments throughout the period at issue.
ACTION ITEM: Carrying on a business of trading securities in a TFSA leads to full taxable income inclusion rather than tax-free amounts. Caution should be afforded when considering such activities.
The Canadian Federation of Independent Businesses (CFIB) released a report on January 10, 2023, focused on succession expectations for small businesses. It included the following survey responses:
There are many hurdles and opportunities in selling a business. Many can be addressed in advance, leading to significant improvements in the sale process and an increase in sale price. Often, several years are needed to position the business for sale or transition sufficiently, so planning should start as early as possible, even if the owner has not definitively determined if and when the sale will occur. In many cases, simply preparing for a sale can lead to increased profitability, efficient processes and reduced stress for the owner, such that they are in a better position even if they eventually decide not to sell.
ACTION: If you are considering selling or transitioning your business in the near to medium term, start planning now to ensure a smooth transition.
Buyers and sellers often concern themselves greatly with the “price” in a sale of a business. However, an equally important factor that has a large impact on the actual “value” exchanged between the two parties in a sale is the form or type of “consideration” exchanged for the business, and the timing of when the consideration is settled or paid out in cash. In this article, we will discuss various forms of “consideration” that are often seen in a business sale transaction, and how they impact the value exchanged.
When a notional business valuation is prepared it is usually under the concept of a “fair market value”, which is usually defined as the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, each acting at arm’s-length in an open and unrestricted market, when neither is under compulsion to buy or to sell and when both have reasonable knowledge of relevant facts. However, in open market transactions many of the factors are not always so simple and the purchase price may be paid in a number non-cash forms. As a result, the economic value of the purchase price may be different from the face value of those items and should therefore be assessed on an equivalent cash basis.
The simplest type of consideration seen in business transactions is cash, paid immediately at the time of closing. When a business is sold and the seller receives the entire purchase price upfront in the form of cash from the buyer, the value to the buyer and seller is equal to the amount of cash exchanged. All-cash transactions offer the lowest risk to the seller, as the cash is received immediately and the purchase price is certain. However, all-cash transactions are generally risker for the buyer. If the business does not perform as expected after the sale, the buyer may not realize the full value of the purchase price paid. Additionally, it is often difficult for a buyer and seller to come to an agreement on the price that should be paid for a business.
As a result, business sales are often structured to include multiple types of consideration. Often, a partial upfront cash payment is made, and the remainder of the purchase price is paid in other ways, such as:
Holdbacks are an effective way to manage risk in a transaction and usually represent only a small portion of the purchase price. Holdbacks tend to be released over an agreed upon time period ranging from six months to two years.
Promissory notes or vendor takebacks (VTB) are forms of debt issued by the seller to the buyer. The promissory note or VTB may or may not bear interest, and the interest may be fixed or variable, and may be higher or lower than comparable commercial rates. VTBs arise when a portion of the negotiated purchase price is withheld by the buyer and is paid to the seller over a period of time, or entirely at a later date.
Buyers often favour VTBs as they lower the up-front investment (i.e., cash) required, while still satisfying the purchase price negotiated between the parties. VTBs are also favourable to buyers, as they tend to motivate sellers to ensure a smooth transition after the sale, as the seller retains a portion of the risk related to the business. Further, when using bank debt to finance the purchase of a business, the lender will typically require at least a portion of the purchase price paid through a VTB in order to ensure the interests of the buyer and seller are aligned. VTBs can also be beneficial to sellers in a number of ways. By agreeing to accept a VTB, sellers are able to lower the up-front capital needed by potential buyers, creating a more competitive sale process and attracting multiple potential buyers. Additionally, in a VTB, the negotiated interest rate may lead to higher returns for the seller than if the entire amount was received in cash up-front.
The economic value of a VTB may be different from the dollar amount, or face amount, that is financed. In order to determine the fair market value (i.e., cash equivalent) of a VTB, the payments of future principal and interest should be discounted using a market interest rate. The sum of the present value of these payments is equal to the total fair market value of the VTB loan.
An earn-out is when a portion of the purchase price is paid over time based on the prospective revenues, earnings, or some other measure related to the post-acquisition results of the acquired business. Earn-outs are commonly used in a business sale to bridge a pricing gap between the buyer and seller, where the parties may disagree on the future prospects of the business. An earn-out effectively shifts the risk from the buyer to the seller because if prospective results are not realized, the purchase price is reduced. Similar to a VTB, in order to determine the fair market value (i.e., cash equivalent) of an earn-out arrangement, the expected earnout payments should be discounted using a discount rate that considers the risk that payment will not be satisfied, as well as the general risk of the business.
When a business is sold to another corporation, the corporation may offer its own shares as currency to finance a transaction leaving the seller with an interest in the combined company after the transaction has taken place. Where the seller is a privately held company, and the buyer is a public company, the seller is typically able to assess the value received if the shares received in exchange are freely tradable. However, the valuation exercise becomes more complex where the seller is restricted from selling the shares for a period of time and/or the public company buyer has a relatively small market capitalization, thereby causing the block of shares held by the seller following the transaction to be somewhat illiquid. In these cases, the value of the publicly traded shares that carry restrictions on trading or are illiquid is generally lower than their face value.
Determining the fair market value (i.e., cash-equivalent) of shares received in a share exchange is particularly complicated where the buyer is also a private corporation (i.e., not publicly traded). In effect, it becomes a relative valuation exercise between the buyer and seller. These situations are further complicated when a controlling interest in a privately held company is sold in exchange for a minority interest position in a privately held, and generally larger company. In these situations, a shareholders agreement becomes extremely important as they typically provide a means for the seller, who ultimately holds minority interest of the combined company, to sell their shares to the remaining shareholders for their prorata value (i.e., without a minority or liquidity discount). In the absence of a shareholders agreement where shares of two private companies are exchanged, the minority position that the seller receives may be worth less than pro-rata value of their shares in the combined company.
Buyers and sellers typically employ a wide range of transaction structures involving different types of consideration such as contingent and non-cash. When assessing a potential transaction as either a buyer or seller, it is important to consider the types of consideration being offered and the associated risks with each consideration to properly evaluate the merits of the transaction and the economic value being exchanged. Additionally, the tax consequences of a transaction varies depending on the transaction structure, and should be discussed with a designated tax professional.
To receive more information on the topics discussed in this article or assistance in determining the most appropriate structure for your business purchase or sale, please contact our valuation and tax specialists.
Given the vastness of the GST/HST rules, it is wise to check the GST/HST rules for all transactions, especially those that are non-routine, such as damage payments. Generally, damage payments do not constitute consideration for a taxable supply under the Excise Tax Act (ETA), so GST/HST is normally not payable. However, section 182(1) of the ETA deems certain damage payments to be consideration for a taxable supply, and inclusive of GST/HST.
Generally, subsection 182(1) applies under the following conditions:
The application of this provision is limited, in that it does not apply to damage payments, which are made by the supplier to the recipient. These rules would seem to apply for the liquidated damages, which can occur in large dollars in construction contracts. There are common situations that the CRA comments on in Policy Statement P-218, where the rules under subsection 182(1) would not be met, and they include:
The CRA does provide a number of examples as to when these rules would and would not apply. If your payment does fall into this provision, subsection 182(1) provides that the place of supply rules that applied to the original supply also apply to the deemed consideration. Thus, if the original supply was zero-rated, the deemed supply under subsection 182(1) will also be zero-rated and no tax will be remittable by the registrant. Furthermore, if the original supply was made in the participating province, then the deemed supply will also be made in the participating province.
We often see contracts where subsection 182(1) of the ETA is not considered in advance; and as this provision deems the payment to be inclusive of GST/HST, it can result in the monies you actually receive to be reduced by 5/105 or 13/113 in Ontario. If this oversight in the contract is noticed after the fact, as this is a deeming provision, even if the person receiving the damages payment separately is charged GST/HST, this will result in GST/HST being paid twice, as this provision deems GST/HST to have already been included in the damage payment. Thus, resulting in GST/HST to have been paid twice; first by virtue of the deeming rule discussed above and secondly by virtue of the separate invoice that charged GST/HST in error.
If you are the party making the damage payment, this deeming provision allows you to claim an ITC for the GST/HST deemed to have been paid pursuant to section 182 of the ETA. If you have made these payments in the prior 4 years, it would be prudent to see if the damages met the rules under 182 of the ETA to recover any GST/HST deemed to have been paid.
Overall, when drafting agreements, it would be wise to contemplate the rules in section 182 of the ETA that apply. If they do apply, the agreement should ensure the damage payment as calculated in the agreement is grossed up by an amount equal to the GST/HST applicable to the transaction. Therefore, when the payment is received and GST/HST is calculated into the total payment, you will not be out of pocket the GST/HST.
UHT is a 1% federal tax intended to apply to the value of vacant or underused residential real property owned by non-resident non-Canadians. However, many Canadian individuals and other entities are also required to file UHT returns and may even be liable for the tax. Numerous exemptions from the tax itself exist, but significant penalties can apply where the required return is not filed, even if no tax is payable.
UHT was first applicable to the 2022 year, with the first filing deadline being April 30, 2023. However, CRA recently announced (March 27, 2023) that penalties and interest for the 2022 calendar year will be waived for any late-filed UHT return and any late-paid UHT payable, provided the return is filed or the UHT is paid by October 31, 2023. The late filing penalties start at $5,000 for individuals and $10,000 for corporations.
In general, UHT returns must be filed by all persons (which include both individuals and corporations) that are on title of a residential property on December 31 of each year, unless that person is an excluded owner. No tax is applicable if there is no filing obligation.
From an individual perspective, the only excluded owners are Canadian citizens and permanent residents. However, individuals that are on the title of a property in their capacity as a trustee of a trust, or a partner of a partnership, cannot be excluded owners, even if they are Canadian citizens or permanent residents.
From a for-profit corporate perspective, the only excluded owners are public corporations (i.e. listed on a Canadian stock exchange). That is, a private Canadian corporation is not an excluded owner.
Even if a filing obligation exists, an owner may still benefit from one of fifteen exemptions from the tax liability. The exemptions broadly fit into four categories: type of owner; availability of the property; occupant of the property; and location and use of the property. Even though the exemption eliminates the tax, the person still has a filing obligation. The exemptions are listed in Parts 4 through 6 of the UHT Return and Election Form (UHT-2900).
Some of the more common questions and concerns related to the UHT are noted below.
ACTION: Consider whether you or your corporation may have UHT filing or tax obligations.
