Category: Domestic Tax

Shareholder Loan Account: Proper Bookkeeping

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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.

 

Psychotherapy and Counselling Therapy: GST/ HST?

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As of June 20, 2024, certain psychotherapy and counselling therapy services have become exempt from GST/HST. This means that those providing these exempt services are no longer required to collect GST/HST on their services, and these service providers are no longer able to claim input tax credits (ITCs) on inputs acquired to provide these services.

Psychotherapy and counselling therapy services are now exempt if the provider:

  • is licensed with a provincial body responsible for the regulation of psychotherapy services (regulated only in Ontario) or counselling therapy services (regulated only in New Brunswick, Nova Scotia, and Prince Edward Island); or
  • operates in a province with no regulatory body but has the equivalent qualifications required to meet the licensing requirements in a regulated province.

In addition, to be exempt from GST/ HST, those providing the services must do so within the profession’s scope of practice in the respective regulated province.

If all of a registrant’s services are GST/ HST exempt, they may close their GST/ HST account with CRA. If only some of their services are exempt, they must keep their account open and continue to charge GST/HST on nonexempt services and goods.

In addition, on June 20, 2024, there may be a deemed sale and repurchase of certain capital property (e.g. computers, furniture) used in the provision of these services due to the change from a taxable to exempt supply. This generally means that the taxpayer will have to repay all or part of the GST/HST they claimed (or were entitled to claim) as an ITC when they bought the property and when they made any improvements to it. The required repayment of GST/HST is adjusted if the assets have declined in value since the acquisition.

If psychotherapy or counselling therapy services are provided, consideration should be provided to determine if the supply is now exempt.

CEBA: Collection Process

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Where borrowers cannot repay their CEBA loan in full when it becomes due, the loan may be assigned from the taxpayer’s financial institution to the CEBA program for collection. CRA is assisting with the collection of loans that are assigned and began said work in the Spring of 2024. Loans may have been assigned if they are in default for reasons such as:

  • not repaying the principal or interest when due;
  • becoming insolvent; or
  • failing to observe the terms of the loan.

When a loan is assigned, a loan assignment notice will be mailed to the taxpayer containing details on how to make payments and how to set up a payment arrangement with CRA. A 12-digit CEBA identification number commencing with “967” will be issued for use in registering for a CEBA portal account. The portal provides information on the outstanding balance, the payment arrangement, payment history, charge history, monthly statements, and contact information. Payment and charge history for only the period that commenced with the assignment to the CEBA program is available on the portal.

While CRA may contact the taxpayer to set up a payment arrangement, taxpayers may also initiate communications by contacting the CRA CEBA contact centre (1.800.361.2808) once the loan assignment notice has been issued.

Payments made to an assigned CEBA loan are applied in the following order:

  • fees outstanding;
  • interest outstanding;
  • principal outstanding; and finally
  • interest accrued.

Authorized third parties, such as a family member, accountant, or lawyer, can request information about the loan through the general CEBA call centre (1.888.324.4201), but they cannot access the loan or sign into the taxpayer’s CEBA portal account. To authorize new third parties or manage existing third parties, the taxpayer must contact the CRA CEBA contact centre.

The CEBA program also provided the following guidance in respect of changes to an entity’s business.

  • Business closure – Taxpayers must repay the loan even if the business is closed.
  • Ownership change – The impact of a change in ownership of the borrower depends on the business’s legal structure (e.g. whether the business is a sole proprietor or a corporation) and the type of ownership change. The general CEBA call centre should be contacted for more information once loans are assigned.
  • Insolvency – The CEBA FAQ stated that the CEBA program cannot provide insolvency advice.
  • Bankruptcy/consumer proposal/ receivership – If a business has filed for bankruptcy, the appointed licensed insolvency trustee can contact the CEBA call centre. The process for entering into payment arrangements does not apply to insolvent taxpayers.

Ensure that a reasonable repayment schedule is established if satisfying the full outstanding CEBA loan immediately is problematic.

Tax Planning: 2024 Year-end Considerations for Businesses and Individuals

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RSM Canada’s 2024 year-end tax guide summarizes the key federal, provincial, and territorial tax updates that may create risk or opportunity for middle market taxpayers going into 2025.

Tax trends and topics discussed as the Canadian economy moves into 2025 include:

  • Increase to the capital gains inclusion rate
  • Introduction of the Digital Services Tax Act and Global Minimum Tax Act
  • Enactment of the excessive interest and financing expense rules
  • Updates to the general anti-avoidance rule
As year-end approaches, companies and individuals alike must carefully consider tax-planning opportunities in light of economic uncertainty and evolving tax legislation and regulations. Learn more in the year-end planner.  
 
 
Download the Guide
 
Federal and Provincial Tax Rates

Federal and provincial tax rates, limits and phase-outs directly affect your business and personal tax planning strategies. Download the federal and provincial/territorial rate cards.

 

Download the Rate Cards

 

Canadian Tax Integration of Private Company Income

Tax integration is achieved when a particular stream of income is subject to the same or similar total tax rate once it reaches the individual taxpayer level. These tables provide an illustration of how the Canadian income tax integration system works.

 
Learn More

GST/HST New Residential Rental Property Rebates – Where Do We Currently Stand?

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On September 14, 2023, the Department of Finance announced a new enhanced GST/HST New Residential Rental Property Rebate (“NRRPR”) for certain New Purpose-Built Rental Housing (“PBRH”).  The purpose of the enhanced rebate is to provide relief on the GST costs related to building new residential rental properties in order to assist with stimulating build of PBRH.

Background

The rental of a residential complex or a residential unit in a residential complex is generally exempt for GST/HST purposes. Therefore, builders cannot claim HST paid in relation to these properties.  Typically, the major GST/HST cost is paid or payable on the purchase of a residential complex from a builder or that they accounted for on the “self-supply” of the complex.

However, eligible residential builders can file for the NRRP Rebate for the GST up to a maximum of 36% of the GST payable on the purchase or self-supply of a qualifying residential unit (an Ontario NRRP HST rebate is also available in that province). The amount of the NRRP Rebate is progressively reduced when the fair market value (“FMV”) of the property exceeds $350,000 (no NRRP Rebate is available if the fair market value is $450,000 or more).  Further, the Ontario NRRP Rebate becomes capped at $24,000, which can result in significant GST/HST costs to builders.

Pursuant to the PBRH Rebate rules, to the extent the new residential rental project meets certain requirements, the rebate percentage is increased from 36% to 100%. Moreover, the PBRH Rebate does not have any phasing-out rule or the $450,000 fair market value limitation per unit.

PBRH – What Properties Qualify?

The PBRH Rebate is only available for a residential unit that qualifies for all the following conditions:

  1. Construction has begun after September 13, 2023, and on or before December 31, 2030;
  2. Construction is substantially completed by December 31, 2035; and
  3. It is in a building with at least:
    a. Four private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas), or at least 10 private rooms or suites; and
    b. 90% of residential units designated for long-term rental.

An “addition” to an existing building also qualifies to the extent that such addition includes 4 or more residential units and at least 4 of those units contain private kitchen, bath, and living area (or 10 or more private rooms or suites).

The purpose of this legislation is to increase the supply of new residential properties, therefore, existing residential complexes that undergo a substantial renovation do not qualify for the PBRH.

What is Considered “Construction” to the Canada Revenue Agency (“CRA”)?

Those involved in the construction industry will know there are various stages of “construction”, and this is a crucial element of builders being eligible for the PBRH.  The term “construction” is not defined in the Excise Tax Act (“ETA”) which has left many builders wondering what CRA considers “construction”.

On June 20, 2024, the CRA published new GST/HST Notice 336 (“336”). Included in 336 is the CRA’s comments and administrative view that states CRA’s position is that the construction of a residential complex is generally considered to begin at the time the excavation work pertaining to the property. CRA also implies that the signing of a purchase and sale agreement relating to a newly constructed units prior to September 14, 2023, would not prevent the builder’s eligibility for the PBRH Rebate if the construction of the complex began after September 13, 2023, but before 2031. CRA also confirms that newly constructed long-term care facilities that otherwise meet the relevant conditions would be eligible for the PBRH Rebate.

Although the CRA announcement from June of 2023 is welcomed, there is still remains some subjectivity.  The CRA announcement is an administrative position, meaning, it isn’t legislation – which comes with some element of risk.  For instance, there are many stages of excavation work, including the initial clearing of land.  It appears that further clarification will still be required, which will likely come in the form of taxpayer’s disputing what “construction” is, as CRA challenges these rebate filings.

 

Canada Pension Plan: Changes to Certain Benefits

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Several changes have been introduced to targeted measures and benefits under the Canada Pension Plan (CPP). None of the below changes are expected to impact contribution rates.

Death benefit

The CPP death benefit is increased to $5,000 (from $2,500) where all of the following criteria are met:

  • the estate would otherwise be eligible for the regular death benefit;
  • the deceased had not received any retirement or disability benefits, or similar benefits under a provincial pension plan; and
  • no survivor’s benefit is payable as a result of the individual’s death.

The increased benefit applies to deaths after December 31, 2024.

Children’s benefits

Prior to the change, the CPP surviving child benefit was only payable to children of a deceased parent if the child was under 18 or between the ages of 18 and 25 and was a fulltime student. While this benefit is still available, a similar benefit has now been introduced for part-time students, equal to 50% of the amount payable to full-time students.

In addition, eligibility for the disabled contributor’s child benefit is extended such that it continues to be available even when the disabled parent reaches age 65. Previously, the benefit ended when the disabled parent reached age 65.

Survivor benefits

Previously, couples who were legally separated but still married or in a common-law relationship could be eligible for CPP survivor pension on their partner’s passing. However, after this change, the survivor pension is not payable after a legal separation where there has been a division of their CPP pensionable earnings following the separation.

Ensure you apply for these enhanced benefits if you are eligible.

Business Receipts: What is Sufficient?

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In a recent Tax Tip, CRA stated that an acceptable receipt for income tax purposes must contain all of the following:

  • the date of the purchase;
  • the name and address of the seller;
  • the name and address of the buyer;
  • the full description of the goods or services purchased; and
  • the vendor’s business number if the vendor is a GST/HST registrant.

Credit card statements are not generally acceptable unless they contain all the above information.

To avoid disputes when claiming deductions, ensure that receipts contain all the required information.

TFSA: Caution with Over Contributions

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Taxpayers who contribute excess amounts to their TFSA are subject to a penalty tax of 1%/month that the excess contribution remains in the TFSA. If subject to the tax, an individual may apply to have the tax waived. If the individual is unsuccessful after the CRA’s first and second review of the application, the individual may apply for a judicial review of the denial in the Federal Court.

Moving Funds between TFSA Accounts

In an April 9, 2024, French Federal Court case, the taxpayer withdrew $40,000 from a TFSA at one financial institution and deposited it into another TFSA at a different financial institution at a time when he only had a TFSA contribution room of $6,270, leading to an overcontribution. Withdrawals from a TFSA are only added to an individual’s contribution room at the start of the following year. Had the taxpayer directly transferred $40,000 between the two TFSAs, there would have been no overcontribution. CRA held that the overcontributions were not the result of a reasonable error, so they could not waive the penalty tax.

The Court noted past cases that supported CRA’s interpretation that neither ignorance of the tax law nor bad advice constitutes a reasonable error. The taxpayer’s failure to transfer funds by direct transfer between the two TFSA issuers resulted in the penalty tax being properly applied CRA’s decision to deny relief was reasonable, and the application for judicial review was dismissed.

Relying On CRA Portals

In a March 27, 2024, Federal Court case, the taxpayer made TFSA contributions in line with the available TFSA room listed on CRA’s My Account; however, the balances online did not reflect some contributions, resulting in the taxpayer making excess contributions. CRA alerted the individual after the excess contributions were made. As the individual continued to contribute based on the values posted on My Account, the Court found CRA’s decision to deny relief on the penalty tax reasonable.

Do not overcontribute to your TFSA, as the penalty tax can become costly and difficult to pay. Balances posted in My Account may not be timely nor accurate.