Recent CRA Changes to Allow Businesses Electronic Distribution of T4 Slips

CRA has provided commentary on its website to discuss recent changes to allow the electronic distribution of T4 slips. In the past, an employer could provide a T4 electronically only with the employee’s consent. For 2017 and subsequent tax years, employers may also satisfy their obligations by providing electronic versions without specific consent, provided other criteria are met. The employer must provide the following by the last day of February following the calendar year to which the slip relates:

• a secure electronic portal through which the employee can access their T4 slip;
• a secure site for printing the slip; and
• an option to receive paper copies upon request.

Paper copies must be provided if:

• one of the above conditions are not met (unless employee consent has been received);
• the employee requests a paper copy;
• the employee is on sick leave or is no longer an employee of that employer; or
• the employee cannot be reasonably expected to have access to obtain the T4 slip electronically.

The above only applies to T4 slips. Employers cannot issue T4 slips by email due to insufficient security features.

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Income sprinkling and passive investments held inside a private corporation

The Liberal government released the new proposals on income sprinkling and passive investments held inside a private corporation. Based on our analysis, income splitting with your spouse is going to be seriously impacted by these changes.

With these new changes, we are now recommending that if you were planning on paying dividends to a non-active spouse or adult child, you should do that before December 31, 2017.

The $50,000 annual investment income threshold previously announced remains unchanged. However, investment income in excess of this limit will be subject to much higher taxes.

The following is a more detailed summary. Please do not hesitate to contact us if you have any questions.

Guidance on the application of the split income rules for adults

The Department of Finance consultation paper, Tax Planning Using Private Corporations, released on July 18, 2017, included proposed amendments to expand the existing tax on split income to restrict income sprinkling involving adult individuals. The consultation period for public comments on the paper ended on October 2, 2017. Based on the comments received during that period, revised draft legislative proposals were released on December 13, 2017 (the “Proposals”). These new rules are proposed to be applicable to the 2018 and subsequent taxation years.

Overview

The Proposals will expand the tax on split income to amounts received by an adult individual. In this context, “split income” will generally include dividends or interest, but not salary, paid by a private corporation directly or indirectly to an individual from a related business (“Related Business”) in respect of the individual and certain capital gains unless the amount falls within a specific exclusion (the “Excluded Amount” or “Excluded Amounts”).

Under the Proposals, the following will be Excluded Amounts from split income:

• • For adult individuals – amounts received from an excluded business (“Excluded Business”):
  • Excluded Business: amounts derived from a Related Business where the individual was actively engaged on a regular, continuous and substantial basis (“Actively Engaged”) in the activities of the business in the taxation year or in any five prior taxation years of the individual.
  • An individual will be deemed to be Actively Engaged if the individual works in the business at least an average of 20 hours per week during the portion of the taxation year of the individual that the business operates, or meets that requirement for any five prior years. The five taxation years need not be consecutive. In any other case, whether an individual is Actively Engaged will depend on the facts and circumstances of that case.
  • For individuals age 25 or over – income from or taxable capital gain from the disposition of excluded shares (“Excluded Shares”) or a payment that qualifies as a reasonable return (“Reasonable Return”):
  • Excluded Shares: shares of a corporation owned by an individual are excluded shares where:
    • less than 90% of the corporation’s business income was from the provision of services and the corporation is not a professional corporation;
    • the shares represent 10% or more of the votes and value of the corporation; and
    • all or substantially all of the income of the corporation is not derived from another Related Business in respect of the individual, and
  • Reasonable Return: payments that represent a reasonable return based on the following criteria (the “Reasonableness Criteria”):
    • the work performed in support of the Related Business;
    • the property contributed directly or indirectly in support of the Related Business;
    • the risks assumed in respect of the Related Business;
    • the total amounts paid or payable by any person or partnership to or for the benefit of the individual in respect of the Related Business; and
    • such other factors that may be relevant.
  • For more information, see the Reasonableness Criteria section.
  • For individuals between the age of 18 and 24 – return on property contributed in support of a Related Business that is a safe harbour capital return (“Safe Harbour Capital Return”) or a Reasonable Return having regard only to contributions of arm’s length capital to the business (“Arm’s Length Capital”):
    • Safe Harbour Capital Return: return on property contributed by the individual in support of the Related Business provided that such return does not exceed a prescribed capital return determined by formula, and
  • Arm’s Length Capital: property of an individual, other than property that is derived from property income in respect of a Related Business, that is borrowed under a loan, or that is transferred from a related person (other than inherited property).
  • For any individual – taxable capital gains realized on death or from the disposition of qualified farm or fishing property and qualified small business corporation shares.

  Where the individual acquired a property as a consequence of the death of another individual, special rules will apply for determining whether a payment from property is derived from an Excluded Business in respect of an individual, is a Reasonable Return on contributions made to a Related Business or is income from, or a taxable capital gain from the disposition of, Excluded Shares.

  Please contact any one of the partners if you have any questions.

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What’s a “Fair Market” Value for a Private Business?

Whether you are a business owner looking to sell a percentage (or all) of your business or an investor wishing to purchase a company, the first step is to arrive at a fair market value for the business. For every scenario, buyers and sellers need to quantify the worth of all, or part, of a business before the transaction can take place.

What is Fair Market Value?

Fair Market Value (FMV) is often simply thought of as what another person is willing to pay, when neither is acting under compulsion and both have reasonable knowledge of the relevant facts.

An obvious example of market value is the stock market, with the buying and selling of equity securities of publicly traded companies. Both the buyers and sellers have access to information that has followed established business standards and meets strict reporting requirements.

For private businesses, which don’t need to adhere to the same standards as a public company, it is often advantageous to get an independent and objective view.

What Factors Affect Fair Market Value?

Estimating a company’s worth is more complex than a simple review of the financial statements and book value of a business. In fact, the book value, which is an accounting value of a business, fails to recognize the true value of the business. Instead, it represents the current depreciated value of what was paid for an asset.

Arriving at a fair-market valuation needs to include other factors beyond those found on a balance sheet. Factors that can positively benefit the company like the income and earnings potential, the value of the brand and intellectual property need to be included. It’s also important to take into consideration risk factors like damage quantification and potential litigation. Quantifying the value of these factors requires specialized knowledge.

How is Fair Market Value Measured?

There are two basic approaches for value determination.

The first is the empirical approach, which relies on transactions involving similar businesses. It is useful when open market transactions are clearly identifiable and are, in fact, comparable to the business valuation being determined. However, it may be given more credibility than it deserves.

The second approach is the investment approach, which determines a business’s value through a detailed investment analysis. The techniques used are financial statement analysis and risk measurement theory. This approach is often used by sophisticated buyers and sellers in the open market, and therefore, the same technique can be used in the private market.

There are pitfalls and assumptions with both methods, which is why it’s advisable to employ a Chartered Business Valuator (CBV). CBVs are experts with specialized knowledge of businesses and their value, so they’re better able to quantify the worth of all, or part, of a business.