Category: General Business

What do the proposed Alternative Minimum Tax changes mean for charitable giving?

Posted on by RSM US LLP

Authored by RSM Canada

Executive summary

Individuals and trusts who benefit from tax deductions, credits and exemptions may find themselves paying a higher rate of tax under the Alternative Minimum Tax (AMT) regime. The 2023 and 2024 Federal Budgets proposed changes to the calculation of AMT by limiting the inclusion rates of some significant deductions and credits, including charitable donations.

What is AMT?

For each taxation year, individual taxpayers and certain trusts calculate their taxes payable under two methods: regular income tax and AMT. The method which yields the higher taxes payable determines the amount the taxpayer owes for the year. Compared to the regular income tax method, the AMT limits the ability to offset income earned with certain eligible deductions and credits. Typically, AMT applies in situations where high-income taxpayers substantially lowered their taxes payable due to deductions and credits.

If a taxpayer is subject to AMT in a given year, the difference between the amount calculated under the AMT method and the amount calculated under the regular tax method can be carried forward for seven years. The carry forward is treated as a credit against taxes payable calculated under the regular tax method.

Charitable Donations under the Current AMT regime

Under the regular tax system, taxpayers that make donations of publicly listed securities receive a tax receipt for the fair market value of the securities donated and an exemption on any applicable taxes on the accrued capital gain of those donated securities.

Similarly, under the current AMT regime, charitable giving does not have an impact on the AMT calculation as:

  • the full amount of all donation tax credits can be fully applied against any AMT owing and;
  • the full capital gains from donating public securities are excluded in calculating AMT owing

For high income taxpayers, the current method allows them to shelter potentially large accrued gains on the donation of publicly traded securities, as opposed to donating an equivalent cash amount.

Charitable Donations under the Proposed AMT regime

The following changes will be effective Jan. 1, 2024.

The federal government has proposed to increase the AMT flat rate from 15% to 20.5% when calculating adjusted taxable income. Moreover, it is proposed to concurrently raise the AMT exemption threshold, being the amount of adjusted taxable income to which AMT does not apply, from $40,000 to $173,000. This should result in fewer Canadians being subject to AMT.

Alongside the increased rate and exemption base, the treatment of charitable donations is proposed to be changed so that:

  • an increase in the inclusion of capital gains realized on the donation of qualifying securities from 0% to 30%, and,
  • A decrease in the recognition of the donation tax credit from 100% to 80%

For large donations of publicly traded securities, taxpayers may now find themselves with an AMT payable, when previously any accrued gains would have been exempt.

Impact on Taxpayers

The proposed changes to charitable donations will likely have a significant impact on how taxpayers subject to the new AMT make donations going forward.

Consider a taxpayer (below) that wants to make a significant donation of publicly traded securities with a large accrued capital gain. Under the proposed changes, the capital gain inclusion rate for the donated property is 30% alongside limiting the donation tax credit to 80%. This increases the taxpayer’s tax liability that they will have to personally fund even when no consideration has been received for the donated property and may result in taxpayers being less inclined to donate as a result.

Current AMT

Proposed AMT

Earned Income

1,000,000

1,000,000 (A)

Capital Gain on donated public securities

500,000

500,000

Taxable Capital Gain on donated public securities

–

150,000 (B)

Adjusted Taxable Income

1,000,000

1,150,000 (A+B)

Basic AMT exemption

(40,000)

(173,000)

Taxable Income

960,000

977,000

AMT rate

15%

20.5%

144,000

200,285

Donation Tax Credit

(165,000)

(132,000)

(21,000)

68,285

Planning Strategies

Taxpayers that consider donating significant cash or property on an annual basis need to start planning ahead to determine if these donations will result in any AMT being payable.

Perform charitable giving through a corporation

Taxpayers may consider donating publicly traded shares with accrued capital gains through a corporation, as AMT is not applicable at the corporate level. This may be advantageous as the tax-free amount of the capital gain of the donation of public securities will be added to the corporation’s Capital Dividend Account (CDA) and can be distributed to shareholders on a tax-free basis.

Spreading out the donations

Taxpayers may consider donating smaller amounts over the span of several years as opposed to one large lump-sum. This could help limit the amount calculated under the AMT method in a given year.

Managing taxable income

If taxpayers have the flexibility to do so, they may consider managing their income in future years to ensure they can get a credit from any tax paid under AMT that can be applied against regular income tax for up to seven years.

Charitable giving at death

AMT does not apply in the year of death. Taxpayers may consider charitable giving through their will at death to avoid AMT but still create the positive impact of giving.

This article was written by Farryn Cohn and originally appeared on 2024-05-29. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2024/proposed-alternative-minimum-tax-changes.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.

Our History

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Since 1940, Durward Jones Barkwell & Company LLP (DJB) has been providing financial and business consulting services to companies of all sizes. We can assist with complex mergers and acquisitions or guide you through the many facets of starting a small business. We do all this while remaining personally involved with our clients and the communities where we work and live.

Our professionals service clients locally, nationally, and internationally, offering industry-specific advice to clients in several industries, including agribusiness, construction & real estate, general contracting, healthcare, manufacturing & distribution, not-for-profit, professional services, tourism & hospitality, transportation, and wineries.

To learn more about our history, download the printable pdf.

Why is Operational Resiliency Important?

Posted on by Edixon

During a crisis, companies need to be able to continue to deliver core products and services. Companies that fail to prepare for unexpected challenges can suffer a host of negative consequences that include reputational damage and financial loss.

Creating a business model that anticipates and has a plan to rebound from disaster will ultimately achieve a high degree of operational resiliency.

This article drills down on the importance of operational resiliency in today’s business atmosphere and breaks down the steps that companies can take now to plan, prepare, respond, and recover from a crisis.

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Managed services can deliver results for businesses

Posted on by Edixon

Effectively utilizing managed services is becoming a critical success factor for companies of all sizes and in all industries. Often times, a board might recommend maintaining an in-house model to manage risks, but that may not be completely realistic anymore.

With risks coming quicker and from many more directions, adopting a managed services strategy may be the best option.

In this article from RSM Canada, they explore how organizations can use managed services to assist with supporting smaller back-office functions or to fill an executive role, or staff an entire department such as human resources or finance.

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New Financial Statement Disclosure Requirements for the Construction Industry and Enhanced Guidance Issued for the Percentage of Completion Method under ASPE

Posted on by Edixon

The Accounting Standards Board has issued significant application guidance for entities utilizing the percentage of completion method (POC) for revenue recognition under Canadian Accounting Standards for Private Enterprises (ASPE). This will specifically affect the construction industry since the POC is utilized in accounting for revenue on long term contracts. Also, there are new disclosure requirements outlined in the ASPE revenue recognition standard which mandate specific details that companies operating in the construction sector must now include in their financial statements.

Next steps:

With the enhanced guidance issued, entities should review their existing methods to ensure they are following the new requirements. Entities will want to evaluate their methods to ensure they have selected  the appropriate basis for progress measurement, the type of costs for inclusion in the POC calculation (such as whether it is appropriate to include uninstalled materials or equipment when an input method is used) and the method of calculating amounts of revenue and costs recorded in the reporting period. Identifying contract costs and reviewing your process to allocate general costs to a specific contract will be an important consideration under the new amendments. Lastly, entities should review their processes to compare total contract costs to expected contract revenue and recognize an expected loss when total contract costs exceed contract revenue.

New disclosures:

The additional guidance added specific disclosure requirements to Section 3400 of the ASPE Accounting Handbook for any contracts accounted for using the percentage of completion method. These new disclosures provide users of the financial statements with information regarding the significant estimates and assumptions involved in calculating revenue using this method. An enterprise is required to disclose each of the following for contracts in progress at the end of the reporting period accounted for using the percentage of completion method: (a) The method or methods of measuring the degree of completion; (b) The aggregate amount of costs incurred and recognized profits (less recognized losses) to date; (c) The aggregate amount of advances received; (d) The aggregate amount of holdbacks withheld; and (e) Uncertainties affecting the measurement of the degree of completion.  These disclosures are required for entities with fiscal year ends beginning on or after January 1, 2022. These new disclosures make take time and effort to accumulate this information.

If you need assistance with implementing these amendments and new disclosure requirements, please reach out to your trusted advisor at DJB.

Included is an article authored by RSM Canada, some helpful insights on the percentage of completion method.

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Federal economic statement 2023

Posted on by Edixon

Authored by RSM Canada

Executive summary

On Nov. 21, 2023, the Minister of Finance, Chrystia Freeland, released Canada’s 2023 Fall Economic Statement (2023 Economic Statement). The Economic Statement introduces several new tax measures which focus on Canada’s plan for affordable housing and building a strong economy in the form of clean energy credits and addressing international tax gaps.

The Economic Statement also affirms the government’s intention to proceed with previously announced tax measures, including by providing clarifications to certain priority economic areas.

Economic statement 2023

Business tax measures

Clean hydrogen investment tax credit

The 2023 Economic Statement provides further details on the clean hydrogen investment tax credit (Clean Hydrogen ITC), originally proposed in the 2023 Federal Budget (Budget 2023), outlines key design elements of the credit, including eligible projects, credit rates and carbon intensity measurement. The federal government plans to continue reviewing low-carbon hydrogen production pathways leading up to Budget 2024.

Budget 2023 highlighted that the Clean Hydrogen ITC would provide support for clean ammonia production, offering a 15% credit rate with specific conditions. The 2023 Economic Statement extends eligibility of the credit to property converting clean hydrogen into ammonia, subject to sufficient production capacity, transportation feasibility and hydrogen sourcing criteria. The 2023 Economic Statement also addresses the conditions necessary for the inclusion of power purchase agreements and similar instruments for calculating project’s carbon intensity (CI). Eligibility is contingent on sourcing electricity from hydro-, solar- or wind-powered generation that:

  • first commenced production on or after March 28, 2023, and no more than one year before the initial CI assessment; and,
  • is located in the same province or territory and connected to the electricity grid of that province or territory. 

The Clean Hydrogen ITC’s positive environmental impact aligns with the federal sustainable development strategy, aiming to reduce greenhouse gas emissions by 40% to 45% below 2005 levels by 2030 and achieve net-zero emissions by 2050.

Clean Technology and Clean Electricity Investment Tax Credits

The 2022 Fall Economic Statement introduced a 30% refundable clean technology investment tax credit for eligible taxpayers investing in clean technology property between March 28, 2023 and 2035, subject to a phase out in 2034. Budget 2023 added a 15% refundable clean electricity investment tax credit for eligible property starting from Budget 2024 until 2034.

Notably, the 2023 Economic Statement extends the eligibility of these tax credits to encompass systems that support the generation of electricity, heat or a combination thereof, from waste biomass.

The expanded eligibility for the clean technology investment tax credit applies to property acquired on or after the day of the 2023 Economic Statement, as long as it has not been used before acquisition. For the clean electricity investment tax credit, eligibility starts from the Budget 2024 release date and extends to projects that have not commenced construction before March 28, 2023.

Exception on dividend received deduction by financial institutions

In Budget 2023, the government proposed to disallow financial institutions from claiming a deduction for dividends received on shares of other corporations resident in Canada where those shares are mark-to-market property. This measure is intended to better calculate the income of financial institutions from securities consistent with the purpose of the mark-to-market property rules.

The 2023 Economic Statement offers relief from the above amendments by allowing financial institutions to continue to claim the deduction on dividends received on “taxable preferred shares”. Financial institutions will need to review their holdings to fully understand the tax impact of losing this deduction on securities that do not qualify for the exemption.

These changes are proposed to apply to dividends received on or after Jan. 1, 2024.

Supporting the adoption of employee ownership trusts

First introduced in Budget 2022, employee ownership trusts (EOTs) serve as a mechanism to allow employees to purchase a business without requiring them to pay directly to acquire the shares of the business. EOTs also serve as a valuable option for owners planning business succession.

To further incentivize the use of EOTs, the 2023 Economic Statement expands on the proposals contained in Budget 2023. The government proposes to exempt the first $10 million in capital gains realized from the sale of a business to an EOT from taxation. This incentive will apply to the 2024 to 2026 tax years. Details on the exemption will be provided at a future date.

Concessional loans

When a taxpayer receives government assistance in the course of earning income from business or property, the amount of assistance may reduce the amount of related expenses, property costs or may result in a potential inclusion in the taxpayer’s overall income.

Historically, non-forgivable and concessional loans from public authorities were not considered government assistance, until a pivotal 2021 decision by the Tax Court of Canada. This ruling, upheld in 2022 by the Federal Court of Appeal, changed the treatment of concessional loans, considering their full principal amount as government assistance.

Addressing this shift, the 2023 Economic Statement proposes a crucial amendment to the Income Tax Act. The proposed change aims to exclude bona fide concessional loans with reasonable repayment terms from public authorities as government assistance. If enacted, this amendment will take effect on the day of the 2023 Economic Statement, signaling a swift government response to evolving tax law.

International tax measures

Underused Housing Tax

The Underused Housing Tax Act (UHTA) requires affected owners of residential property in Canada to file an annual return starting for the 2022 calendar year. Where the residential property is considered vacant or underused, the owner is required to pay an annual federal 1% tax. The implementation of the UHTA has caused significant confusion and most recently necessitated a second administrative extension to the filing and payment deadline regarding the 2022 calendar year. In particular, if affected owners file their returns and pay the underused housing tax for the 2022 calendar year by April 30, 2024 (previously extended to Oct. 31, 2023), the CRA will waive all penalties and interest otherwise applicable.

In light of feedback received on the UHTA, the 2023 Economic Statement proposes several amendments to the legislation. The UHTA was originally positioned in Budget 2021 as a tax on property owned by non-Canadian individuals and entities. Despite this intention, certain Canadian owners of residential property were also required to file returns and potentially pay tax. The amendments proposed in the 2023 Economic Statement will bring the UHTA closer in line with its original objective by expanding the definition of “excluded owner”. Excluded owners are not required to file a UHTA return or pay tax on their property. “Specified Canadian corporations”, partners of “specified Canadian partnerships” and trustees of “specified Canadian trusts” will now be considered excluded owners. The definitions of “specified Canadian partnership” and “specified Canadian trust” will also be expanded. These changes will apply for 2023 and subsequent calendar years.

The other proposed changes to the UHTA are:

  • Decreasing the minimum failure to file penalty from $5,000 for individuals and $10,000 for corporations to $1,000 and $2,000, respectively, for 2022 onwards;
  • Introducing an exception for residential properties held as a place of residence or lodging for employees in rural areas for 2023 onwards; and,
  • Exempting unitized (“condominiumized”) apartment buildings from the definition of “residential property” for 2022 onward, and limiting the “vacation property” exemption to only one residential property for a calendar year for 2024 onward, in addition to other technical changes alluded to but not described.

Canada’s intention to proceed with implementing global minimum tax

The 2023 Economic Statement reiterates Canada’s commitment to international efforts to reform corporate taxation, particularly through the implementation of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two, aimed at establishing a global minimum tax rate.

Canada intends to enact the Global Minimum Tax Act (GMTA) to implement Pillar Two of the inclusive framework, with an effective date after Dec. 31, 2023. Pillar Two (and the GMTA by extension) would establish a global minimum tax rate of 15% on the profits of large multinational corporations, regardless of where they maintain tax residency. Tax revenue is projected to exceed $3.1 billion by fiscal year 2029 from the Pillar Two international tax reform.

The 2023 Economic Statement also includes an exemption from the application of the GMTA for income from shipping companies to align with global treatment.

Indirect tax measures

Removing GST from new co-op rental housing

The federal government proposed on Sept. 14, 2023 to remove the goods and services tax (GST) from new purpose-built rental housing construction projects to incentivize the rapid construction of new homes. The federal government has also called on provinces to remove provincial sales taxes on rental property construction. Consistent with the federal government, Ontario plans to offer full HST rebates for long-term rental units, as previously announced in the 2023 Ontario Fall Economic Statement.

In the 2023 Economic Statement, co-operative housing corporations that provide long-term rental accommodation will also be eligible to benefit from the GST exemption, subject to additional conditions. The exemption will not apply to substantial renovations of existing residential properties to prevent the displacement of existing renters.

The GST exemption will apply to construction projects that are initiated between Sept. 14, 2023, and Dec. 31, 2030, and fully completed before 2036.

Other tax measures

Non-compliant short-term rentals

The Economic Statement outlines the federal government’s proactive measures to address the growing issue of non-compliant short-term rentals in major Canadian cities like Montréal, Toronto and Vancouver.

The federal government plans to deny income tax deductions for expenses related to earning short-term rental income, including interest expenses, in provinces and municipalities that have prohibited such rentals. This denial of deductions is also extended to cases where short-term rental operators are non-compliant with provincial or municipal licensing, permitting or registration requirements. These measures are set to take effect from Jan. 1, 2024.

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. These measures include, but are not limited to:

  • The introduction of:
    • Hybrid mismatch arrangements rules;
    • Excessive interest and financing expenses limitations (EIFEL) regime and;
    • Substantive Canadian-controlled private corporations.
  • Amendments to:
    • Alternative minimum tax for high-income individuals;
    • Intergenerational business transfers;
    • General anti-avoidance rule and;
    • Information requirements for claiming input tax credits for GST/HST purposes, back from the 2021 Federal Budget. 

As some of these measures are slated to come into effect in 2024, middle market companies should consider proactive changes to ensure readiness for these new measures.

This article was written by Clara Pham, Daniel Mahne, Farryn Cohn, Sigita Bersenas, Cassandra Knapman, Olukayode Akinbosede, Elizabeth Ojesekhoba and originally appeared on 2023-11-21. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2023/federal-economic-statement-2023.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.

Tax Planning: 2023 Year-end Considerations for Businesses and Individuals

Posted on by Edixon

RSM Canada’s 2023 year-end tax guide summarizes the key federal, provincial, and territorial tax updates that may create risk or opportunity for middle-market taxpayers in 2024 and beyond.

Tax trends and topics discussed as the Canadian economy moves into 2024 include:

  • Revisions to the general anti-avoidance rule
  • Mandatory disclosure rules
  • Financial institutions dividend
  • Tax on repurchase of equity

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 our year-end planner.

 

Download the Guide

 

Canadian tax integration on 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.

 
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Operating Costs: Ways Companies Can Reduce the Expenses

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Organizations can fulfill their needs and position themselves for success while keeping operating expenses low by outsourcing non-core functions such as information technology, human resources, and financial accounting.

In this article from RSM Canada, they explore some of the ways that companies can reduce operating expenses while still capturing market growth.

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The Healthy Way to Hire the Kids

Posted on by Edixon

Most businesses have accounting, computer, and vacation policies. Why do so few have family employment policies?

Making decisions about hiring younger relatives can be difficult. Skills and talents may vary widely, or maybe there’s not a job for everyone.  And sometimes a family member just doesn’t work out as an employee.

Hiring the kids requires a lot of thought, and the time to do the thinking is before the next generation comes of age. Employment in a family business is not an entitlement; business needs and individual abilities must determine hiring decisions.  

When creating family employment policies, consider:

Experimentation:  Summer jobs can be a great way for kids to “try out” the family business and vice versa. Create a summer job policy outlining the type of work kids are expected to perform, along with personal learning goals.

Education:  Is a college degree required to work at the company?  Perhaps a graduate degree in a certain specialty?  If so, detail the company’s expectations before hiring family members.

Situation:   In what position will the children start?  Will they rotate through jobs in a training program?  Should they work outside the family business first?  Address these questions in writing.

Compensation:   Family members should be paid based on fair market value for their job responsibilities.  Detailing salary and bonus formulas will help to ensure that everyone is treated fairly.

Performance:   All employees, including family members, deserve regular performance reviews. Spell out review schedules and adhere to them.

Separation:   It’s imperative to consider a separation protocol for family members. Indicate performance requirements for continued employment, and include specific behaviors or actions that will not be tolerated.  Also, specify severance package details.

Human resources issues are complicated.  Having formal family employment policies in place can alleviate at least some of the emotion and angst inherited in mixing family and business.