Category: General Business

2022 Ontario fall fiscal update

Posted on by Edixon

Executive summary

On Nov. 14, 2022, Ontario’s Minister of Finance, Peter Bethlenfalvy, released the 2022 Ontario Economic Outlook and Fiscal Review which serves as an update to Ontario’s 2022 Budget.

The government affirmed its commitment to help Ontarians navigate economic uncertainty and introduced new initiatives, particularly for small and medium-sized businesses, as well as additional targeted measures to keep costs down for families.

The following is a summary of the key business and personal income tax measures in the budget.

Business income tax measures

Expanding the small business rate

To mirror the proposed changes to the federal small business corporate rate as announced in the 2022 Federal Budget, the Ontario government is proposing to extend the range over which the benefit from the small business rate is phased out. 

Ontario provides a small business corporate income tax rate of 3.2% for Canadian Controlled Private Corporations (CCPCs) on their first $500,000 of active business income. This benefit is phased out on a straight-line basis for CCPCs, and associated groups of CCPCs, that have more than $10 million of taxable capital employed in Canada in the previous year and is fully eliminated at $15 million. The proposed measure would phase out the benefit from the small business rate for taxable capital between $10 million and $50 million, up from $15 million.

Ontario intends to introduce legislation for this measure once the corresponding federal legislation has received Royal Assent to ensure simplicity and clarity for businesses. The proposed Ontario measure would apply to taxation years that begin on or after April 7, 2022, consistent with the proposed federal change.

Applying to taxation years that begin on or after April 7, 2022, this proposed change will allow more medium-sized CCPCs with Ontario jurisdiction to benefit from the small business rate.

Allowing for immediate expensing

To encourage business investment, the government is proposing to provide temporary immediate expensing for eligible property acquired by a CCPC, an unincorporated business carried on directly by Canadian-resident individuals (other than trusts), and Canadian partnerships where all the partners are CCPCs or Canadian-resident individuals (other than trusts). This measure will mirror the federal measure introduced in the 2021 Federal Budget and received Royal Assent on June 23, 2022.

Once legislation is passed in Ontario, the immediate expensing will be available for property acquired after  April 18, 2021 that is available for use before Jan. 1, 2025. The expense is limited to $1.5 million per taxation year, which must be shared amongst associated members of a group of CCPCs.

Property eligible for this new measure would be capital property subject to Capital Cost Allowance (CCA), other than property in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51.

This change may provide an opportunity for medium-sized businesses to make capital investments at a lower cost.

Modernizing Ontario’s Cultural Media Tax Credits 

In the 2022 Budget, the government announced its intention to modernize various media tax credits. The Economic Outlook confirms that it will proceed with the proposed updates, and in the coming months, proposed regulatory amendments to implement this measure will be posted for public review and comment.

Personal income tax measures

Increasing the Non-Resident Speculation Tax Rate 

Effective Oct. 25, 2022, the government implemented amendments to increase the Non-Resident Speculation Tax rate from 20% to 25%. The Non-Resident Speculation Tax applies to the purchase of a home located anywhere in Ontario by foreign nationals, foreign corporations or taxable trustees.

To ensure taxpayer fairness, purchasers who entered into binding agreements of purchase and sale before Oct. 25, 2022, may be eligible for relieving transitional provisions.

This article was written by Clara Pham, Daniel Mahne, Sigita Bersenas and originally appeared on Nov 14, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/2022-Ontario-fall-fiscal-update.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada 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 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.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

Economic statement 2022

Posted on by Edixon
Executive Summary

On Nov. 3, 2022, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s Fall Economic Statement; the government’s first update in the wake of high inflation, increasing interest rates, and economic uncertainty. The 2022 Fall Economic Statement introduces several new tax measures and affirms the government’s intention to proceed with previously announced tax measures, although the implementation date of some key measures is being delayed (trust reporting rules, mandatory disclosure rules, and excessive interest and financing expense limitation rules).

Along with the 2022 Fall Economic Statement, the government both (i) released draft legislation for public consultation in respect of some tax measures and (ii) introduced Bill C-32 into Parliament to implement many other tax measures. This alert summarizes the key measures from the government’s Fall Economic Statement, draft legislation, and the proposed legislation currently before Parliament.

New tax measures announced in the Economic Statement

The following is a list of the new tax measures announced in the Economic Statement. These are not yet in effect, as the government indicated that it will provide details in the 2023 Federal Budget or at a later date. 

  • A tax on share buybacks. The government announced its intention to introduce a corporate-level 2% tax that would apply on the net value of all types of share buybacks by public corporations in Canada, similar to a recent measure introduced in the United States. The details of this new tax will be announced in Budget 2023, and the tax would come into force on January 1, 2024.
  • Revisions to the Alternative Minimum Tax. The Alternative Minimum Tax (AMT) has been in effect for more than 35 years and is intended to ensure that high-income individuals cannot lower their tax bill too much. The government intends to revise (read and enhance) the AMT in the 2023 Federal Budget. 
  • Investment tax credit for clean technologies. To attract investments in Canada’s clean technologies, the government proposes a refundable tax credit of up to 30% of the capital cost of investments in eligible equipment for property available for use on or after the day that the 2023 Budget is released.
  • Residential property-flipping rule will apply to assignment sales. Starting on Jan. 1, 2023, profits arising from dispositions of residential property (including rental property) that was owned for less than 12 months is deemed to be business income (subject to limited exceptions). The government proposes to extend this new deeming rule to profits arising from the disposition of the rights to purchase a residential property via an assignment sale.
Intention to proceed with previously-announced measures

The government reiterated its intention to proceed with previously-announced tax measures and introduced Bill C-32 to implement these measures. Below are some of the notable measures: 

  • Introducing the Canada Recovery Dividend under which banks and life insurance companies pay a temporary one-time 15% tax on taxable income above $1 billion over five years;
  • Increasing the corporate income tax rate of banks and life insurance companies by 1.5% on taxable income above $100 million;
  • Raising the upper limit for the phase-out of the small business tax rate from $15 million to $50 million;
  • Providing that a tax benefit as defined in the general anti-avoidance rule (GAAR) applies includes an increase in tax attributes that have not yet been used to reduce taxes; 
  • Strengthening the rules on avoidance of tax debts (i.e., enhancing the government’s power to collect unpaid tax debts); and
  • Increasing reporting requirements for trusts, however, the Bill C-32 delays the implementation by one year: for taxation years that end after Dec. 30, 2023 (instead of after Dec. 30, 2022). Bare trusts are still included in the scope of the trust rules.

Notably absent from Bill C-32 are the new Mandatory Disclosure Rules (reportable transactions, notifiable transactions, and uncertain tax treatments). The government still intends to proceed with these rules but confessed that it needs more time to consider the feedback it received from the tax community before it proceeds with legislation. As a result, the proposed implementation date of Jan. 1, 2023, for reportable transactions and notifiable transactions is being pushed back to an unspecified date (whenever the legislation for the mandatory disclosure rules receives Royal Assent). The government still intends to have the uncertain tax treatment rules apply for taxation years starting on or after Jan. 1, 2023 (but the penalties will not be applicable until the legislation receives Royal Assent).

Excessive interest and financing expense limitation rules

The excessive interest and financing expense limitation (EIFEL) rules – announced as part of Budget 2021 – were first released in draft form on Feb. 4, 2022. On Nov. 3, 2022, the Department of Finance released an updated package of the draft EIFEL legislation, which provides essential considerations to the middle market of Canada. 

The EIFEL rules have not been enacted yet. However, it is not too early to consider their application.

What is EIFEL?

The EIFEL rules limit a taxpayer’s interest and financing deduction (i.e., interest and financing expenses (IFE) net of interest and financing revenues (IFR)) to a fixed ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA), referred to as adjusted taxable income (ATI). The EIFEL rules apply after the existing limitations on the deductibility of IFE including the thin-capitalization rules under the Income Tax Act (Act).

IFE includes, among other things: interest; financing expenses that are ‘capitalized’ and deducted as capital cost allowance or as amounts in respect of resource expenditure pools; an imputed amount of interest in respect of certain finance leases; certain amounts that are economically equivalent to interest or that can reasonably be considered part of the cost of funding; and various expenses incurred in obtaining financing. IFR includes the taxpayer’s interest income, as well as other income from the provision of financing. 

The ratio of permissible IFE, or taxpayers’ deduction capacity, will be 40% for taxpayers with a taxation year beginning on or after Oct. 1, 2023, and before Jan. 1, 2024. This ratio will reduce to 30% for taxation years beginning on or after Jan. 1, 2024. The denied IFE will be carried forward indefinitely and may be deducted in a future tax year where the taxpayer has sufficient capacity. Where the taxpayer’s IFE is less than its deduction capacity, the taxpayer will be able to carry forward the deduction capacity to apply against its own IFE in the next three tax years. Alternatively, a taxpayer may transfer the excess deduction capacity to another group member, subject to certain conditions.

To whom does EIFEL apply?

The EIFEL rules apply to taxpayers that are corporations or trusts, including non-resident corporations or trusts that earn income in Canada. The rules also apply to members of a partnership who are corporations or trusts, with the IFE and IFR being attributed to them in proportion to their interest in the partnership. 

The following entities are excluded from the EIFEL regime:

  1. CCPCs, together with any associated corporations have taxable capital employed in Canada of less than $50 million;
  2. Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $1 million or less; 
  3. Certain standalone Canadian resident corporations and trusts and groups consisting exclusively of Canadian resident corporations and trusts that carry on substantially all their business in Canada. This exception will not apply where a group member has a ‘material’ foreign affiliate, a non-resident holds a ‘significant’ interest in any group member, or a group member has any ‘significant’ amount of IFE paid to a non-arm’s length ‘tax-indifferent investor’ such as a non-resident or a person exempt from tax. 
Excluded and exempt IFE

Subject to certain conditions, taxpayers (including corporations and partnerships) may file an election to exclude IFE and IFR from the application of the 30% or 40% fixed ratio of deductible IFE when they are members of the same corporate group. This election facilitates domestic loss-consolidation transactions, which allow the losses of one group member to offset against the income of another group member.

Further, IFE incurred in respect of certain public-private partnership infrastructure projects (P3 projects), e.g., to design, build, finance, maintain, and operate, real or immovable property owned by the public sector authority, will be exempt from the scope of the rules. 

The group ratio method of calculating deduction capacity

Taxpayers who are members of an accounting consolidated group or would be if the group were required to prepare such statements under IFRS, can elect to deduct IFE based on a group ratio, which may be in excess of the fixed ratio. 

The maximum amount of IFE the consolidated group members are collectively permitted to deduct is generally determined as the lowest of: (i) the total of each Canadian group member’s ATI multiplied by the group ratio; (ii) the consolidated group’s net interest expense; and (iii) the total amount of ATI of each group member. The group may apportion this maximum deductible amount among its Canadian group members in its group ratio election. This flexible allocation mechanism allows taxpayers to redistribute the group ratio deduction capacity where it is most needed.

What should corporations do?

Once enacted, these rules will have a significant impact on the tax obligations of resident and non-resident taxpayers having IFE from arm’s length or non-arm’s length sources. Further, IFE paid before the enactment of these rules (i.e., during “pre-regime” years), including the present tax year, will affect the taxpayer’s beginning balance of carryforward deduction capacity. Therefore, taxpayers should carefully analyze the application of these rules along with other provisions in the Act on the deductibility of IFE. 

Rules for reporting income in the digital world and gig economy

The Department of Finance has released draft legislation to adapt the OECD’s “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy” for Canadian income tax purposes. The government sees these rules as necessary because the gig economy is causing a shift away from traditional employment relationships and, therefore, the traditional employer reporting obligations. Many of these gig economy businesses operate through online platforms – e.g., Airbnb and Uber – necessitating new reporting obligations.

These legislative changes will not create additional tax liability. Instead, the resulting reporting will provide the CRA with additional information to ensure tax compliance from those who use online platforms to provide goods or services. The draft legislation is slated to come into force on Jan. 1, 2024. 

Reporting entities 

The draft legislation introduces several new definitions and entities. For the purposes of this summary, below is a high-level overview of “reporting platform operator” and “seller”. Sellers are platform users registered on the platform during the relevant period to provide goods or services. This group is further subdivided into three categories: active sellers, excluded sellers, and reportable sellers. Reportable sellers are sellers that provide services or sell goods, receiving consideration for selling goods or providing relevant services during the period unless an exclusion applies. 

Reportable sellers face a penalty if they fail to provide their tax identification number, such as a business number, to the reporting platform operator unless they are exempted from providing the number.

A reporting platform operator is any platform operator other than an excluded platform operator that is either resident in Canada or facilitates activities by sellers resident in Canada or related to immovable property located in Canada.

Reporting and record-keeping requirements 

Reporting platform operators will need to file the prescribed form for the prior reporting period by Jan. 31 of each year unless another reporting platform operator satisfies the reporting requirement. The form will include information about the reporting platform operator, the reportable sellers, and business operations conducted through the platform. The same information must be provided to each reporting seller by Jan. 31. Consequently, the reporting platform operator is required to obtain the identifying information from each seller except excluded sellers who use their platform and keep records according to the requirements in the legislation. The information must be collected and verified by Dec. 31 of each year. 

This article was written by Yoni Moussadji, Nakul Kohli, Cassandra Knapman, Sigita Bersenas, Simon Townswend and originally appeared on 2022-11-08.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada 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 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.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

Reminder: New Accounting Standard for Agriculture under ASPE and ASNPO Released! How Will Your Financial Statements be Impacted?

Posted on by Edixon

The Canadian Accounting Standards Board (AcSB) has released a new accounting standard on agriculture. The new standard provides guidance on recognizing, measuring, and disclosure with respect to biological assets and harvested products of biological assets. This new standard could be a dramatic change for many agricultural producers preparing financial statements under Accounting Standards for Private Enterprises (ASPE) or Accounting Standards for Not-for-Profit Organizations (ASNPO)! Why do you ask? Previously there was no specific authoritative guidance for agricultural producers. Hence, this led to significant diversity in practice, which the AcSB is trying to rectify.

The new guidance comes into effect for fiscal years beginning on or after January 1, 2022. Therefore, you have time to prepare now. Understanding how this new standard impacts your entity’s financial statements will be key in preparing for this upcoming change.

Why Should I Start Preparing Now?

You may need to revise your existing accounting policies for recognizing and measuring biological assets and the harvested products of these assets. In addition, you may need to track information that was not previously retained in order to apply the new accounting requirements. Therefore, it is important to understand the requirements of the new standards. Here is a brief overview of the new standard, Section 3041 of the CPA Canada Accounting Handbook, to get you started.

Key Definitions

It is important to understand these key definitions since it affects how the biological assets and harvested products are measured and accounted for.

Agricultural producers are defined as enterprises that undertake agricultural production, such as those that engage in agriculture, apiculture, aquaculture, floriculture, or horticulture.

Agricultural production is defined as the development and harvest of biological assets for sale or for use in a productive capacity. Agricultural production covers a diverse range of activities, such as annual or perennial cropping, raising livestock or aquatic organisms, and cultivating orchards and plantations.

The following activities are not considered agricultural production therefore, they are not within the scope of this Section:

  • forestry;
  • harvesting from sources that are not owned or controlled by an agricultural producer (e.g., ocean fishing, hunting and trapping); and
  • raising or purchasing animals for competitive sport.•

Biological assets are defined as living animals or plants, and can be either agricultural inventories or productive biological assets. Examples of biological assets are sheep, beef cattle, wheat, and fruit trees/vines.

Productive biological assets are held for use in the production or supply of agricultural inventories or other productive biological assets, acquired or developed for use on a continuing basis with other than short productive lives, and not intended for sale in the ordinary course of business. Examples of productive biological assets are mature sheep, mature beef cattle, unharvested wheat, and producing fruit trees/vines.

Agricultural inventories are defined as biological assets, or the harvested products of biological assets, that meet one of the following criteria:

  • held for use in the ordinary course of business;
  • in the process of agricultural production to be held for sale or use in a productive capacity;
  • in the form of raw materials or supplies to be consumed in the enterprise’s agricultural production process; or
  • held for use in a productive capacity with short productive lives.

Example of agricultural inventories include wool, beef, harvested wheat, and harvested fruit.

Who Applies this New Standard?

An entity preparing financial statements in accordance with ASPE or ASNPO will account for its biological assets and harvested products of biological assets used in agricultural production under this new accounting standard as long as it meets the definition of an agricultural producer. Entities not subject to this new guidance will continue to account for biological assets and harvested product using other standards in ASPE and/or ASNPO, such as Inventories, S3031.

How are Agricultural Inventories Measured?

First, an agricultural producer makes an accounting policy choice to use either the cost model or the net realizable value model in measuring its agricultural inventories. If the cost model is used a further accounting policy choice is made to determine the cost of its agriculture inventories using either: (a) full cost; or (b) only input costs (cost of direct materials and direct labour).

The net realizable value model, however, can only be used when all of the following three conditions are met:

  • the product has a readily determinable and realizable market price;
  • the product has reliably measurable and predictable costs of disposal; and
  • the product is available for immediate delivery.•

An example of a type of agricultural inventory that might meet all three conditions is harvested wheat that is available for immediate delivery.

The accounting policy choice to use either the cost model or the net realizable value model must be applied consistently to all agricultural inventories having a similar nature and use.

Input costs of agricultural inventories comprise direct costs which include the purchase price, import duties and other taxes (other than those subsequently recoverable by the enterprise from taxation authorities), transport, handling, and other costs directly attributable to the acquisition of materials and services used in the development and harvest of biological assets. Trade discounts, rebates, and similar items are deducted in determining input costs.

Example of direct materials input costs for plants would include seeds or seedlings, fertilizer, and pesticides. Input costs for animals would include feed, vaccinations, and other veterinary costs.

Input costs of agricultural inventories also comprise direct labour, to the extent the cost of labour is readily determinable and is directly related to the items of agricultural inventories produced.

Alternatively, the cost of agricultural inventories measured at full cost includes all input costs (direct materials and direct labour) and a systematic allocation of fixed and variable agricultural production overheads and all other costs incurred in the development and harvest of biological assets.

Impact of Accounting Policy Choice for Cost Method

For entities that choose to use only input costs it is expected to reduce the cost and effort associated with measuring agricultural inventories at cost. Entities that choose to measure their agricultural inventories at full cost will likely incur a one-time cost to establish a methodology to allocate overhead costs.

How are Productive Biological Assets Measured?

Productive biological assets are initially measured at cost and are amortized over their useful lives. The costs of productive biological assets include all costs directly attributable to the acquisition, development or betterment of the assets, including delivery and establishing them at the location and in the condition necessary for their intended use (very similar to accounting standards for property, plant, and equipment).
There is one exception to amortization of productive biological assets. Some productive biological assets are managed on a collective basis to maintain their collective productive capacity indefinitely. Productive biological assets of this type are considered to have an indefinite useful life and are not subject to amortization.

An example of productive biological assets managed on a collective basis would be a herd managed collectively to meet a production quota indefinitely. Such a herd is considered to have an indefinite useful life and is not subject to amortization. The costs incurred in the maintenance of the service potential of the herd is a maintenance expenditure, not an addition to the biological assets.

Effective Date and Transition

Section 3041 applies to annual financial statements relating to fiscal years beginning on or after January 1, 2022. Earlier application is permitted. An agricultural producer is required to apply this new Section retroactively which means that the entity will need to restate the comparative information in its financial statements. There are certain transitional provisions that are meant to facilitate the adoption of this Section in a cost-effective manner that we can advise you on. There will also be added note disclosures and additional information that will be required to be disclosed in the financial statements. A new disclosure requirement for example is information regarding quantities of agricultural inventories and productive biological assets if readily determinable. For example, an agricultural producer with a cattle herd may track the number of cattle in its herd and would disclose this.

Next Steps

As noted, there is time to plan and transition for this new standard, but we recommend considering now how the impending changes will impact your financial statements prepared under ASPE or ASNPO. Financial covenants, debt agreements and /or other key metrics should be considered and discussed with users of the financial statement since banking agreements may need to be revised or waivers obtained if this new guidance creates violations.

Our team of experienced DJB advisors can help you assess the impact on your financial statements, and determine what information you need to gather in advance of applying this new standard for the first time.

Will you have to pay a new tax on your luxury items?

Posted on by Edixon

On Sept. 1, 2022, the Select Luxury Items Tax Act (the Luxury Tax Act), a part of Bill C-19, came into force. The Luxury Tax Act imposes a tax (the Luxury Tax) on the sale and import of certain vehicles, aircraft, and vessels (collectively referred to as subject items) exceeding a specified price threshold.

Application

The Luxury Tax applies to the supply and sale of subject items in Canada exceeding the threshold of $100,000 for vehicles and aircraft and $250,000 for vessels. However, not all vehicles, aircraft and vessels exceeding these thresholds are captured by the Luxury Tax. There is an exemption for subject aircraft and some subject vessels that are used at least 90% of the time for certain qualifying purposes, which are designed to encompass purposes other than leisure, recreation, sport or other enjoyment of the owner or their guests.  

The amount of the Luxury Tax is the lesser of (i) 10% of the total “taxable amount” of a subject item, or (ii) 20% of the amount by which the taxable amount of a subject item exceeds the Luxury Tax threshold ($100,000 or $250,000). In the case of the sale of the subject item, the taxable amount generally consists of the consideration and any amount paid for the improvements. Similarly, when imported, the taxable amount is the sum of the value of the subject item as determined under the Customs Act and the amount of any duties and taxes (other than the GST/HST) that is payable upon importation. Any modifications made to the subject items within 12 months of purchase may also be subject to self-assessment of the tax where certain conditions are met. Accessibility modifications are generally excluded. 

The Luxury Tax is generally payable by the vendor at the point of sale, except in situations where the vendor is a federal or provincial government or agency, an indigenous governing body or a diplomat, the purchaser must pay the tax. 

Registered Vendors

Under the Luxury Tax Act, ‘registered vendors’ are those that, in the course of their business activities, manufacture, wholesale, retail, or import subject items priced over the thresholds. 

Specifically, a person that is required to register as a registered vendor of a luxury item must apply with the CRA by the earlier of:

  • The day the sale is completed, where a sale first triggers the requirement to register, and
  • The day the subject item is accounted for in accordance with the Customs Act, where an importation first triggers the requirement to register.

However, a registered vendor can purchase subject item(s) from another registered vendor in regards to the same type of select good without any Luxury Tax obligation. To avail this exemption, the purchaser needs to provide an exemption certificate to the seller.

In contrast, non-registered persons, i.e., individual consumers, that acquire or import subject items for their personal use or enjoyment are also required to pay the Luxury Tax and should fulfill the reporting requirements stated below.  

Reporting requirements 

Under most circumstances, the reporting periods under the Luxury Tax are calendar quarters. Registered vendors are required to file a Luxury Tax return with the CRA for each reporting period. On the other hand, non-registered vendors are required to file the return only for the reporting period(s) where they have Luxury Tax payable. The Luxury Tax return must specify the total Luxury Tax payable for the particular reporting period. Returns are due at the end of the month following the quarterly reporting period. The first reporting period is Sept. 1, 2022, to Dec. 31, 2022, and hence, the first return is due Jan. 31, 2023.

If there is an amount of Luxury Tax owing for a particular reporting period, the taxpayer is required to pay that amount to the Receiver General on (or before) the same day that the related return is required to be filed with the CRA. The payment must be made electronically if the amount to be paid exceeds $10,000.

This article was written by Sigita Bersenas, Chetna Thapar, Clara Pham and originally appeared on 2022-09-15 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/will-you-have-to-pay-a-new-tax-on-your-luxury-items.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada 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 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.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

On Again Off Again – A Review of the Immediate Expensing Rules upon Coming into Force

Posted on by Edixon

On April 18th, 2021, the Minister of Finance announced measures that would allow businesses to immediately write off the full cost of capital assets purchased in a given tax year, starting with the 2021 tax year for Canadian Controlled Private Corporations (“CCPCs”). 

The rules, while announced, had not been drafted into a notice of ways and means.  The tax community anticipated that the law would be implemented as announced and tax software providers implemented the changes into their software for the 2021 tax returns.  There is a general understanding with Canada Revenue Agency (CRA) that returns can be filed on the basis of proposed legislation.  However, due to the lack of a notice of ways and means being tabled, and said legislation not being tabled in the house for a first reading, the CRA did not allow the immediate expensing to be utilized.  This prompted some backpedalling in the tax community, and returns were henceforth filed without immediate expensing, and software providers removed the ability to apply the immediate expensing rules.

This changed on April 28, 2022, when proper legislation was tabled in the House of Commons, and Bill C-19, which included the immediate expensing measures, received its first reading in the House of Commons.  Since then, taxpayers were able to file based on the tabled and proposed legislation and tax software providers have responded by adding the ability to make an immediate expensing claim on tax returns for 2021 and later years.  Bill C-19 received royal assent on June 23rd, 2022.  Now that taxpayers have the ability to use the immediate expensing rules announced back in April of 2021, it is worthwhile to revisit how they apply.

The rules provide that, for capital properties that became available for use after April 18th, 2021, for CCPCs, or for purchases of capital properties that became available for use after December 31, 2021, for individuals and partnerships, the full cost of the capital asset can be expensed if it is property of a prescribed class.  However, capital cost allowance (“CCA”) classes 1 to 6, class 14.1, class 17, class 49, and class 51 are not eligible for immediate expensing.  The class 1 exclusion is understandable as allowing buildings to be immediately expensed would add fuel to the hot real estate market, and buildings in general are long-lived assets that tend to appreciate in value.  The exception for the other classes are due to their very low CCA rate as they are also long-lived assets. 

The property must be previously unused by the eligible person, and the property must not have had CCA claimed in respect of it by any other person for a tax year prior to the year it was acquired by the eligible person (in general new property even if purchased from a related party).  Or, if the property was previously used, it cannot have been obtained on a rollover basis (section 85) and cannot have been obtained from or previously used by a non-arm’s length person.  These rules are intended to prevent abuse where existing properties are sold to members of a related group to try to get an immediate write-off, or where there is a sale and buyback from a third party to get an immediate write-off of an existing asset.  The immediate expensing option ends for assets that became available for use after December 31, 2023, for CCPCs and after December 31, 2024, for individuals and partnerships.

The amount of capital property that can be immediately expensed is limited to $1.5M for any given tax year.  A short tax year will see this limit prorated accordingly.  If the taxpayer is a person or partnership that is associated with other eligible person(s) or partnership(s), the annual limit of $1.5M must be shared and allocated amongst the associated group.  For the purposes of these rules, the concept of association is extended to include partnerships and individuals, as well as corporations.  For example, a sole proprietor with their own business would be required to share the limit with a CCPC of which they are only a 30% shareholder, where a family member such as a parent or sibling controls the corporation, even if the sole proprietor is not active in the affairs of the corporation.

The ability to immediately expense a ‘luxury’ passenger vehicle has prompted some unique rules around immediate expensing designed to deal with the way such vehicles are handled for purposes of capital cost allowance (CCA).  Passenger vehicles with a capital cost of $34,000 or higher are restricted in the amount of CCA that can be claimed and are referred to class 10.1 vehicles referring to the CCA class to which they belong.  The addition to the undepreciated capital cost pool is limited to $34,000 plus HST.  A unique aspect of the class 10.1 is that in the year of disposal, a ½ CCA claim is allowed, and any remaining undepreciated capital cost (“UCC”) is Nil and no further deduction is allowed.  Class 10.1 does not have the recapture and terminal loss rules that apply to most other CCA classes. 

Consider the Following Scenario

In year one a passenger vehicle costing $70,000 is purchased.  The taxpayer disposes of the vehicle for $34,000 in year five.  Using the special rules for class 10.1 assets, the following would result.  A total CCA of $25,574 would have been claimed.  The remaining UCC of $8,425 at the end of year five would be deemed to be nil at the end of year five.  The net deduction to the taxpayer is $25,574.    

If recapture applied to class 10.1 assets as it does to most other classes, the taxpayer would report proceeds of $34,000 (being the lesser of cost and proceeds) and the result would be full recapture in year five of $25,574, completely reversing all prior deductions for the automobile.  This would be an unfair and illogical result, so as a compromise, the legislation does not provide for terminal losses or recapture on disposals of class 10.1 vehicles, but any remaining UCC is lost.

This can cause problems with the immediate expensing rules.  Using an extreme example, assume a passenger vehicle costing $70,000 is purchased in year one but sold in year two for $50,000.  Without adjustments to the immediate expensing rules, the taxpayer will be able to claim CCA of $34,000 in year one while only selling the vehicle for $20,000 less than the original purchase price.  This result allows the taxpayer to expense $34,000 even though the actual economic cost was only $20,000.  This scenario, while once considered unlikely, is more common in the post-COVID used vehicle marketplace, where used vehicles are sometimes selling for the same price or more than new vehicles due to extreme constraints on the supply chain.

In order to address this undesirable result, the rule that restricts any resulting recapture on a class 10.1 vehicle from coming into the taxpayer’s income is deemed not to apply where the automobile was designated as immediate expensing property in the year.  Instead, the proceeds on the sale of the vehicle are deemed to be a prorated amount in the proportion that the deemed capital cost is of the purchase price adjusted for government assistance. So in our example $50,000 multiplied by $34,000 divided by $70,000.  This will yield a result of $24,286 which would be the lesser of capital cost or proceeds. The recapture would work out to be $24,286.  The result is a net CCA claim to the taxpayer of $9,714 which is a more fair and logical result.

Note that where the sale is to a related person, the proceeds are not prorated, and instead are deemed to be the actual proceeds received on the disposition.  In most cases, the lesser of capital cost and proceeds will be the deemed capital cost, and full recapture will result. However, the related party will have a class 10.1 addition at $34,000.  This result is unavoidable when selling to related persons and occurs even where the sale is conducted at fair value and using arm’s length terms.

It is important to remember, that while there has been much talk about immediate expensing in the tax community, the immediate expensing rules are not providing any actual tax savings over time.  It is merely an acceleration of deductions that would have been claimed in the following years.  Using the immediate expensing option will mean that deductions for CCA claims in the future will be reduced, resulting in more tax in the future.  The benefit is a deferral of tax.

The opportunity for true savings might exist in the following scenario.  There are new rules to adjust the upper end of the taxable capital grind to the Small Business Deduction (SBD) for CCPCs from $15 million to $50 million.  Some CCPCs whose taxable capital is hovering around $15 million to $30 million may find themselves in a position where they are not able to claim the SBD in 2022 but may be able to claim the SBD in futures years once the changes to the SBD grind are effective.  In this scenario, using the immediate expensing in 2022 will save tax at the general rate; while a reduced deduction in future years could mean higher taxable income in years where the SBD is available.

Similarly, the opportunity for a true tax cost is also possible.  Tax rates might not remain the same. The government spent a lot of money providing assistance to Canadians during the COVID-19 pandemic.  It is not hard to imagine that in an effort to balance the budget, the Minister of Finance could consider increasing corporate tax rates, which are currently at historical lows.  If corporate tax rates were to go up in future years, using the immediate expensing option in an earlier year could be to the taxpayer’s long-term detriment.

After waiting for the immediate expensing legislation in Bill C-19 to receive royal assent, it is now in force and despite a long time span from when the measures were announced, taxpayers can now use the immediate expensing option for capital properties acquired over the next couple of years. 

Should you wish to know more about the immediate expensing rules and how they may affect you or your business, please contact one of our tax professionals.

Crisis Proofing Your Business

Posted on by Edixon

The events over the past two and a half years have taught us many lessons in life and business. Whether preparing to expect the unexpected, adapting to rapidly changing laws and regulations, or feeling a direct impact on sales and profitability, these events caught many by surprise.

While no one could have fully prepared for the pandemic’s extent and impact, those who had planned for some form of disruption undoubtedly fared better than those without such planning. Every business, including yours, is unique and should have a plan in the event of a disaster or other business interruptions. This plan should include things like information technology requirements, human resources issues, client relationships, cash flow management, business continuity/ succession planning, contingency planning, and more.

Developing a plan to mitigate these potential risks in the event of unforeseen circumstances should be considered by all business owners specific to the needs of their business. Still, there are a few common risks that all company owners face. For example, even successful business owners don’t always have fail-safes in place to protect their business if a key stakeholder dies, becomes disabled, or retires. Without adequate planning, many businesses do not survive these events.

Let’s look at two businesses to see how their situation impacted them.

Business 1 – SARA’S VETERINARY CLINIC

Sara is a veterinary school graduate and has worked at a veterinary clinic for the past few years. The owner, who was retiring, offered Sara the opportunity to purchase the practice. Sara took the plunge, and the dream of owning her practice was now a reality.

Sara was excited but also worried since she had never been in this much debt. After all, she still owed her parents for student debt and was now responsible for a substantial business loan. With new responsibilities as a business owner, she didn’t have much time to think about the financial burden.

Soon after, Sara began having health issues and was eventually diagnosed with Multiple Sclerosis. She was devastated by the news but determined to work through it. Over time, Sara’s health suffered, as did her practice. Key employees quit due to uncertainty, some clients left, and as a result, revenues fell. Unfortunately, by the time Sara realized the stress of running her business was too much, the damage had already been done. With no contingency plan in place and only limited income available through her association plan, Sara had to sell her practice for less than she paid. As a result, she had to deal with a serious illness, significant debt to the bank and her parents, and little means to pay it off. These events shattered her dreams.

How her story could have been different

Suppose Sara had a contingency plan to replace her income and cover her business expenses; she could have taken time off work to deal with her illness and looked for a purchaser while her business was still healthy, stable, and profitable.

Things Sara should have thought about
  • What happens if I, or a key employee become disabled or seriously injured and can no longer work?
  • What happens if a key employee or I pass away?
Key takeaways from this story

Consult with your dedicated professionals about implementing a disability and life insurance strategy (buy-sell agreements, key employees).

Business owners have several insurance strategies to help financially protect the business should a key employee, or themselves, suffer a severe injury, illness, or pass away.

Business 2 – Daniel’s Family Construction Business

Daniel joined the successful family construction business with his dad and uncle John. Daniel worked hard, anticipating that one day he would take over his dad’s share of the business when he was ready to retire.

Suddenly, John died from a heart attack. With no shareholder agreement in place and no buy/sell agreement, his uncle’s share of the business passed to Daniel’s aunt, with whom Daniel had a great relationship. Although a kind and generous woman, Daniel’s aunt had little business experience but wanted to honour her husband’s legacy and give her teenage children the opportunity to take over their dad’s share of the business when they got older.

While Daniel and his father had focused on the construction side of the business, his uncle had been responsible for sales, which began dwindling immediately after his passing. They tried to hire salespeople but couldn’t find someone with the same experience, knowledge, and commitment. Sales continued to lag while the business declined until the doors were closed a few years later. The family was splintered, each blaming the other for the failure.

How their story could have been different

Alternatively, if Daniel’s father and uncle had a funded shareholders’ agreement or a funded buy/sell agreement, Daniel’s aunt would have been compelled to sell her husband’s share of the business to Daniel’s father, who would have had to purchase the shares for the agreed value. As a result, with a succession plan, the construction business and the two families would have had the opportunity to survive and thrive after this devasting event.

Things Daniel’s father and Uncle should have thought about
  • Who will be responsible for taking over if one of us suddenly becomes ill or dies?
  • What happens to the shares of the business?
Key takeaways from this story

Consult with your dedicated professionals about estate planning for business continuity, including Shareholders’ (buy-sell) Agreements, Wills, and Powers of Attorney.

Help maintain family harmony and increase the chances of a successful succession to the next generation by guiding ownership, decision-making, conflict resolution, and, importantly, the distribution of money within the family.

So what’s the lesson here?

Don’t leave the survival of your business to chance. Working with a team of dedicated professionals, such as your Accountant, Lawyer, and Certified Financial Planner, you can be sure that you’ll have the fail-safes in place to protect your financial future and the ongoing success of your business, should disaster strike.

Updated: Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Agreement – Debt or Equity?

Posted on by Edixon

The Accounting Standards Board has amended Section 3856 Financial Instruments to restrict instances in which preferred shares that were issued in a tax planning agreement (Income Tax Act Sections 51, 85, 85.1, 86, 87, or 88) are recorded at stated or assigned value.  These shares are now referred to as retractable or mandatorily redeemable shares (ROMRS). Instead, these shares would now be presented as a liability (likely a current liability classification) and measured on initial recognition at the redemption amount.  These amended rules came into effect for fiscal years beginning on or after January 1, 2021.  The December 31, 2021, financial statements are the first time we will be seeing the impact of these new rules.

This will result in material changes to many company’s balance sheets as a new (potentially significant) liability will be recognized, with a corresponding reduction to equity. The equity section would specifically identify this component of equity to enable users to isolate and evaluate the impact of the new rules. In addition, specific disclosures relating to the transaction that resulted in the reduction of equity and recognition of liability would also be required.

There are a few exceptions to these new rules which will allow your company to continue to classify these preferred (ROMRS) shares as equity. For shares issued on or after January 1, 2018, all three of the below criteria need to be met in order to maintain the current equity classification:

  • Retention of Control – Control of the organization must be retained by the party receiving the ROMRS issued in a tax planning agreement. The shareholder receiving the ROMRS should have the ability to control the strategic operating, investing, and financing policies of the company before and after the transaction. If control is maintained, the shares can continue to be classified as equity as long as the next exceptions are met as well.  This is measured on an individual-by-individual basis and not by a related group of shareholders. 
  • No Redemption Schedule – If there is a written or oral arrangement surrounding a redemption schedule, then the shares must be treated as a liability. Even if the redemption schedule is an informal agreement, the shares must be presented as a liability and measured at their redemption value. These liabilities will typically be reported as a current liability (there may also be a portion that can be reported as long term depending on the redemption schedule).
  • No Consideration Other Than Shares Exchanged – If there was any non-share consideration received by the shareholder on the transaction (other than nominal consideration) when the ROMRS were issued then the shares must be presented as a liability and measured at their redemption amount.

It is important to note that the exceptions noted above must be reviewed at each financial statement date. If conditions have changed from the prior year, it may be that the exception is no longer relevant thereby requiring reclassification from equity to liabilities. Shares originally recognized as liabilities cannot subsequently be classified as equity.

If these three conditions are not met, then you must classify the shares as a liability at the redemption amount. Any resulting adjustment is debited to retained earnings or a separate component of equity (i.e. separate account) which will be presented on the balance sheet as a separate component in the equity section.

It is important to note that for shares issued prior to January 1, 2018, only two of the three conditions need to be met in order to maintain equity classification. The condition of only share for share exchange is excluded for ROMRS issued prior to January 1, 2018, meaning ROMRS issued in an asset rollover will qualify for equity classification provided the other two conditions are met.

Transitioning to the New Presentation Rules

Assuming you need to reclassify your ROMRS from equity to liabilities, the new standards allow for two alternative transitional provisions.

Option 1

The cumulative effect of applying the amendments is recorded in opening retained earnings or in a separate component of equity of the earliest period presented. For example, for fiscal December 31, 2021, the cumulative adjustment is recorded as of January 1, 2020. Note, retrospective adjustment is not required for ROMRS that were extinguished prior to the beginning of the fiscal period in which amendments are first applied (i.e. January 1, 2021). For example, assume ROMRS classified as equity are redeemed in May 2020 and amendments adopted January 1, 2021. If those shares do not meet the classification exception, the entity will not be required to apply the new accounting to those redeemed shares in the 2020 financial statements.

Option 2

Apply at the beginning of the fiscal year in which the amendments are first applied.

With this option, the cumulative effect of applying the amendments is recorded in opening retained earnings or separate component of equity as of January 1, 2021. This option was given to help with the challenges that some ROMRS may have been issued many years ago and we may not have all the details from way back when. These transitional provisions therefore consider control at the adoption date (e.g. January 1, 2021) rather than at the time of the original transaction.

Other Reporting Implications

If you are required to treat ROMRS as a liability, any dividend paid on those shares will be reported as an interest expense on the income statement. This will also still be treated as a dividend for filing your income tax return which will cause differences in your taxable income calculation and other reporting requirements with Canada Revenue Agency (i.e. dividend versus interest on a T5).

What impact does this have on my company, my financial statements, and my ability to borrow?

It is prudent to analyze your company’s balance sheet to determine if any issued ROMRS will require a reclassification to liabilities when the standards become effective for your company or if the exceptions noted above change in the future. If so, the sooner you determine the impact it will have on your balance sheet, the sooner you can start to have conversations with your financial statement users to ensure they are aware of the upcoming changes to your liabilities and equity sections.  This will allow you to have an open dialogue with your financing partners to ensure your banking covenant calculations are revisited to ensure the reclassification will not result in a covenant breach.

If you have questions about these new standards or require assistance in determining the impact it will have on your company’s financial statements, please contact your DJB advisor.

DIGITAL ADOPTION PROGRAM: Grants, Loans, and Professional Assistance

Posted on by Edixon

On March 3, 2022, the Canada Digital Adoption Program (CDAP) was launched and opened for application. This $4 billion program provides funding through two initiatives.

Grow Your Business Online Initiative

This initiative provides $2,400 micro-grants and access to e-commerce advisors to help applicants adopt digital technology. Grants can cover costs such as website development, search engine optimization, subscription fees for e-commerce platforms, and social media advertising. To be eligible, businesses must be for-profit (including for-profit social enterprises and co-operatives), be registered or incorporated, have at least one employee, commit to maintaining a digital adoption strategy for six months after participation and partake in post-program surveys, share information with the government (e.g. Statistics Canada) and allow the business’ name to be published as a recipient of funding. Corporate chains, franchises or registered charities, representatives of multi-level marketing companies, and real estate brokerages are ineligible.

Boost Your Business Technology Initiative

This initiative provides Canadian-owned small and medium-sized enterprises grants to develop a digital plan and leverage funded work placements to help applicants with their digital transformation. The grant can cover up to 90% (to a maximum of $15,000) of the cost of developing a digital adoption plan. Businesses can also apply for an interest-free loan of up to $100,000 from the Business Development Bank of Canada. Eligible businesses must be a Canadian sole proprietor or corporation, be a for-profit privately owned business, have between 1 and 499 full-time employees and have had an annual revenue of at least $500,000 in one of the three previous tax years.

Applicants will also need to complete a digital needs assessment that will generate a report outlining the applicant’s digital maturity and compare it to an industry-specific benchmark. Once the assessment is completed, applicants can select a digital advisor from those registered with CDAP and determine the specific terms of work and cost for the digital application plan. Once the advisor has completed the digital application plan, it can be submitted for grant payment. Organizations that meet specific criteria to deliver digital advisory services can register with CDAP to provide these services to eligible applicants.

ACTION ITEM: Review eligibility for these supports to help with digital commerce and apply as soon as possible.

Estate Planning – Don’t Forget About the Tax Clearance Certificate!

Posted on by Edixon

If you are an executor of an estate, one of the last questions that you will need to consider is applying for a Tax Clearance Certificate.

What is a Tax Clearance Certificate? 

A Tax Clearance Certificate issued by the Canada Revenue Agency (CRA) confirms that all amounts owing to the CRA by the deceased and the deceased’s estate have been paid.  The executor is free to distribute all assets of the estate.

What happens if you don’t have a Tax Clearance Certificate?

If the executor distributes the estate assets to the beneficiaries without obtaining clearance, the CRA can hold the executor of an estate personally liable for any unpaid tax debts up to the amount distributed.  This includes unknown taxes that come to light because of a future tax audit.  For example, the CRA could decide to audit that unreported transfer of the family cottage to the next generation (which actually happened 15 years ago).  If a clearance certificate has been issued then the executor is free and clear.  If not, the CRA would then try to collect the unpaid taxes from the executor.

When should you ask for clearance? 

When an estate is ready for final distribution.  This means that all tax returns for the deceased and the deceased’s estate have been filed, (re)assessed, and that any outstanding tax balances owing have been paid in full.  Only then should the final Tax Clearance Certificate be requested.

The final Tax Clearance Certificate covers the period up to the designated tax wind-up date (date of the final T3 estate tax return).  A final Tax Clearance Certificate covers both the deceased’s T1 tax returns and the estate T3 tax returns.

If T3 estate tax returns were not required, then you can request and obtain a date of death Tax Clearance Certificate.  As the name suggests, a date of death Tax Clearance Certificate covers the period up to the date of death.  It may be desirable in some circumstances to obtain a date of death Tax Clearance Certificate or an “interim” Tax Clearance Certificate where the final distribution of estate assets will not occur for several years.

How do you request a Tax Clearance Certificate?

To request a Tax Clearance Certificate, complete Form TX19 – Asking for a Clearance Certificate and send it with the appropriate documentation to your local tax services office, “Attention:  Audit – Clearance Certificates”.  An authorized representative, such as a DJB accountant, can complete and file the TX19 on behalf of the executor(s).

As part of the TX19 submission, the following items are required by the CRA:

  • a completed and signed copy of the taxpayer’s will, including any codicils, renunciations, disclaimers, and all probate documents if applicable. If the taxpayer died intestate (without a will), attach a copy of the document appointing an administrator;
  • a detailed list of the assets that were owned by the deceased at the date of death, including all assets that were held jointly and all registered retirement savings plans and registered retirement income funds (including those with a named or designated beneficiary), their adjusted cost base (ACB) and fair market value (FMV);
  • a copy of Schedule 3, Capital Gains or Losses from the final tax return of the deceased;
  • a list of all assets transferred to a trust, including description, ACB and FMV;
  • a detailed statement of distribution of the assets of the deceased’s estate to date;
  • a statement of proposed distribution of any holdback or residual amount or property;
  • the names, addresses, and social insurance numbers or account numbers of any beneficiaries of property other than cash; and
  • a completed Form T1013, Authorizing or Cancelling a Representative, signed by all executors, authorizing a representative such as an accountant or notary to act on behalf of the executor(s) and/or if the executor(s) want the CRA to send the clearance certificate to a different address.
Choosing not to have a Tax Clearance Certificate

Even though in the majority of cases a Clearance Certificate is warranted, there are some situations where the executor(s) may be willing to live with the risk of not asking for clearance.  After all, asking for clearance is inviting the CRA to review the tax filings.  Where the executor is the sole beneficiary and confident that there are no potential tax issues, the executor may decide not to seek clearance.  This is often the case when one spouse dies leaving their entire estate to the surviving spouse who also is the sole executor.  There may be similar situations depending on the family dynamics and their tolerance for risk.

If you have any questions about this topic or any other estate matters, please do not hesitate to contact a DJB professional, we would be happy to answer your questions.

2022 Ontario Budget Commentary

Posted on by Edixon

On April 28, 2022, Ontario’s Minister of Finance, Peter Bethlenfalvy, tabled the 2022 Budget, entitled Ontario’s Plan to Build. As the name suggests, the budget displays a focus on rebuilding the economy and infrastructure for families, seniors and workers.

The following is a summary of the key business and personal income tax measures, and indirect tax measures in the budget.

Business income tax measures

No changes were proposed to Ontario’s corporate income tax rates or the $500,000 small business limit. 

Extending the Regional Opportunities Investment Tax Credit

The Budget proposes to extend the 10% increase to the Regional Opportunities Investment Tax Credit (ROITC) to Jan.1, 2024. 

Budget 2021 temporarily increased the ROITC from 10% to 20% for qualifying expenditures between $50,000 and $500,000 for properties that become available for use in the period from March 24, 2021, to Jan. 1, 2023. 

The ROITC is a refundable corporate income tax credit available for Canadian-controlled private corporations (CCPCs) that make qualifying investments in eligible geographic areas of Ontario. 

Extending the film and television tax credits

The government proposes to extend the eligibility of two of the major media tax credits: (i) the Ontario Film and Television Tax Credit (OFTTC) and (ii) the Ontario Production Services Tax Credit (OPSTC).

OFTTC is a refundable tax credit based on eligible Ontario labour expenditures incurred by a qualifying production company with respect to an eligible Ontario production. Similarly, OPSTC is a refundable tax credit based upon Ontario qualifying production expenditures (labour, service contracts and tangible property expenditures) incurred by a qualifying corporation with respect to an eligible film or television production. 

Updates to the Ontario Book Publishing Tax Credit

The Ontario Book Publishing Tax Credit (OBPTC) provides a refundable tax credit based on qualifying expenditures incurred by a qualifying corporation with respect to eligible book publishing activities and expenses related to publishing an electronic or digital version of an eligible literary work.

To be eligible for the OBPTC, one of the requirements is that the literary work must be published in an edition of at least 500 copies of a bound book. To help companies overcome the printing delays due to COVID-19, the government is permanently removing the 500-copy minimum threshold to be eligible for the credit for the 2022 taxation year.

Personal income tax measures

No changes were proposed to Ontario’s individual income tax rates.

Strengthening the Non-Resident Speculation Tax

Effective March 30, 2022, the government implemented several amendments in relation to the Non-Resident Speculation Tax (NRST). The NRST is a tax on the purchase or acquisition of an interest in residential property located provincewide by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees.

The changes include (i) an increase to the NRST rate from 15% to 20%, (ii) an expansion of the NRST’s application provincewide, and (iii) an elimination of two rebates specific to international students and foreign nationals working in Ontario.

Agreements of purchase and sale entered into on or after March 30, 2022, will be subject to these changes. Rebates remain available for foreign nationals who become permanent residents of Canada within four years after the tax became payable if eligibility criteria are met. 

Supporting lower-income individuals and families

To help more individuals and families, the Ontario government is proposing to enhance the non-refundable Low-Income Individuals and Families Tax (LIFT) Credit. 

Starting in 2022, the enhanced LIFT Credit would be calculated as the lesser of:

  • $875 (up from the current $850); and
  • 5.05% of employment income.

Individuals would be able to claim at least some of the LIFT credit if they have a net income up to $50,000 (up from $38,500), while for families their net income could be up to $82,500 (up from $68,500).

Helping Ontario’s seniors

The government is proposing a new refundable personal income tax credit to help seniors with

eligible medical expenses, including expenses that support aging at home. Eligible recipients of the

new Ontario Seniors Care at Home Tax Credit would receive up to 25% of their claimable medical expenses up to $6,000, for a maximum credit of $1,500.

Starting in the 2022 tax year, the proposed credit would support a wide range of medical expenses to help low- to moderate-income senior families age at home. Eligible taxpayers are those who reside in Ontario and turned 70 years or older in the year.

The proposed credit could be claimed in addition to the non-refundable federal and Ontario medical expense tax credits for the same eligible expenses. As such, the new credit would even assist seniors who do not owe any personal income tax.  

Indirect tax measures

On April 14, 2022, the Tax Relief at the Pumps Act, 2022 (Bill 111) received Royal Assent, introducing amendments to the Gasoline Tax Act and Fuel Tax Act to temporarily reduce the gasoline tax and the fuel tax to 9 cents per litre from July 1, 2022 to Dec. 31, 2022. Currently, the gasoline tax rate is 14.7 cents per litre and the current fuel tax rate is 14.3 cents per litre. The reduction will not apply to leaded gasoline.

A mechanism has been designed to refund importers, wholesalers and retailers who may have inventories of gasoline or fuel for which tax was pre-collected at the higher rates. Under this process, importers, wholesalers and retailers who hold inventory purchased at the higher rate would be required to take inventory at 12:01 a.m. on July 1, 2022, and suppliers up the supply chain should then issue tax adjustments in the form of credits to accounts based on inventory reported. The request for a refund must be made to the supplier on or before Oct. 31, 2022, or some later date that the Minister may prescribe. Additionally, the Minister may allow a late refund application if there were mitigating factors that prevented a timely application. 

The measure mirrors those in Alberta and will reduce the cost of fuel for Ontarians.

There is no provision in the Bill that addresses how the supplier will obtain credit for the amount of the refund that they provided to their customer. There will also be an increased risk to the suppliers if the Minister believes that the refund was not appropriate.  

This article was written by Dan Beauchamp, Chetna Thapar, Sigita Bersenas and originally appeared on 2022-05-05 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/2022-ontario-budget-commentary.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada 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 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.

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