Category: General Business

Tax planning: 2022 year-end considerations for businesses and individuals

Posted on by Edixon

RSM Canada’s 2022 year-end tax guide summarizes the key federal, provincial and territorial tax updates that may create risk or opportunity for middle market taxpayers in 2022 and beyond.

Tax trends and topics discussed as the Canadian economy moves into 2023 include:

  • The excessive interest and financing expenses limitation (EIFEL) regime
  • Substantive Canadian-controlled private corporations
  • Updated foreign affiliate reporting and other international tax considerations
  • New mandatory disclosure rules

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.

Federal/provincial tax rates

Federal/provincial tax rates

Federal and provincial tax rates, limits and phase-outs directly affect your business and personal tax planning strategies. Keep our provincial rate cards handy to ensure you are using the most up-to-date information when making financial decisions.

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.

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/services/business-tax-insights/tax-planning-2022-year-end-considerations-for-businesses-and-individuals.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.

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.

How Does GST/HST Apply to Airbnb/Short-term Rentals?

Posted on by Edixon

The popularity of Airbnb, short-term rental pools for cottages and vacation properties continues to grow.  One aspect of venturing into the short-term rental game is how GST/HST applies.  The volume of rental income and the length of the rentals is the determining factor on whether you will need to charge GST/HST.

Essentially, long term-rentals are exempt from GST/HST, while short-term rentals are subject to the tax.

What is considered a short-term rental?

A short-term rental is generally one where the period of occupancy is less than one month and the consideration for the supply is more than $20 a day.

Am I considered a small supplier?

If you are supplying short-term rentals, you will need to determine if you are considered a small supplier for GST/HST purposes.  A small supplier is one whose worldwide annual GST/HST taxable supplies, (including zero-rated supplies and including the sales of any associated parties) are less than $30,000, or less than $50,000 for public service bodies (colleges, non-profit organizations, charities, hospitals).

One of the most common oversights we see is forgetting to include any other associated business revenue into the small supplier test.

Should I voluntarily register for GST/HST?

If you are under the $30,000 of taxable supplies for your associated group, you can elect to voluntarily register for GST/HST.  The benefits of this would be to enable the claim of any GST/HST paid on expenses related to your short-term rental income.  It may also permit you to recover some or all of the GST/HST you may have paid on the unit.

But be aware – if you choose to register, you will be required to collect and remit the GST/HST on your short-term rental income.

There are many factors to consider when venturing into this market; especially if you will be using a portion of your principal residence.

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.

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 – Bill 27: Working for Workers Act Policy on Disconnecting from Work

Posted on by Edixon

The Government of Ontario passed Bill 27: Working for Workers Act on December 2, 2021. The legislation includes among other things, the requirement that Ontario employers with 25 or more employees prepare a written policy on disconnecting from work by June 2, 2022.

Disconnecting from work under the Employment Standards Act, 2000 (ESA) is defined as not engaging in work-related communications, including emails, telephone calls, video calls, or the sending or reviewing of other messages, so as to be free from the performance of work. However, the ESA does not require an employer to create a new right for employees to disconnect from work and be free from the obligation to engage in work-related communications in its policies.

In developing a written policy, employers should ensure that the policy meets the following requirements:

  • pertains to disconnecting from work as defined in the ESA
  • includes the date it was prepared and where applicable, the date of any changes to the policy
  • covers all employees however you may have different policies for different groups of staff
  • is in place by June 2, 2022

Employers must provide a copy of the written policy to all employees within 30 calendar days of:

  • the policy being prepared
  • the policy being changed (if any changes have been made)
  • a new employee being hired

The employer may provide the policy to employees as:

  • a printed copy
  • an attachment in an email if the employee can print a copy
  • a link to the document online if the employee has a reasonable opportunity to access the document

Guidelines for the content of the policy have been left open-ended and are subject to the employer’s discretion. The Ontario Ministry of Labour provides some examples of what the policy may address related to employer communication with employees:

  • time
  • subject
  • who is contacting the employee
  • employer requirements regarding out of office notifications or voicemail messages

Applicable employers are encouraged to consider the circumstances surrounding their own workplace and ensure that an appropriate policy is implemented prior to the government deadline.

Need Further Assistance?

Contact djbhr@djb.com to connect with one of our HR Professionals to discuss this new Act and how it may apply to your business.