quadrantadmin, Author at Quadrant

‘Will provide a lot of relief:’ Ottawa’s passive investment tweaks to ease

Amid the controversial proposed tax on passive investment income, the Finance Minister has recently made a decision to soften the changes by not subjecting the first $50,000 of passive investment income earned by private corporations to the new tax. Given that just 3 percent of Canadian businesses earned above the threshold in 2015, this means that 97 percent of private corporations in Canada will not be affected. Only the remaining 3 percent, which make up 88 percent of taxable income, will be affected. It will go a long way to quelling the criticism about the proposed changes, but it still leaves questions about how future gains on these investments will be treated.

Tax Changes to Reporting WIP for Dentists, Lawyers, Doctors, & Other Professions

In the past, taxpayers in certain designated professions (i.e., accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors) may have elected to exclude the value of work in progress (WIP) in computing their income for tax purposes. This essentially enabled these professionals to defer tax by permitting the costs associated with WIP to be expensed without including the matching revenues.

However, the 2017 Federal Budget proposed to eliminate this election, effective for the first tax year that begins after March 22, 2017. Transitional rules have been introduced to implement the change over two years. Once fully implemented, WIP, which is valued at the lower of cost or fair market value, will need to be included in income each year.

At present, many professionals either do not account for WIP in their financial accounts or account for WIP at its expected billing amount, using staff and partner billing rates rather than cost. These professionals will be required to determine the cost of their WIP in order to comply with these new provisions. There has been some uncertainty expressed regarding how the cost of WIP is properly calculated.

CRA has stated that the proposed changes are not expected to have any impact on bona fide contingency fee arrangements. That said, some practitioners have expressed concern that this concession has little or no basis in law.

Feds say employee discounts won’t be taxed after CRA document suggests they will

The Trudeau government recently said that employee discounts will not be taxed despite a CRA document, which stated that they would indeed be taxed. The Retail Council of Canada, political rivals and business lobby groups have voiced a very strong concern that the new wording found in a government document could impact retail workers in a negative way. Retail workers, who already receive low wages, could see higher taxes if this change to employee discounts was implemented.

Employee Discounts on Merchandise is Now a Taxable Benefit

Historically, CRA has stated that an employee enjoying a discount on the purchase of merchandise from their employer is only taxable if a limited number of specified situations exist, such as where the employer makes a special arrangement with the employee or group of employees to buy the merchandise at a discount; the employee buys the merchandise for less than the employer’s cost; or the employer makes a reciprocal arrangement with another employer so that the employees of one employer can buy merchandise from the other at a discount.

While the above guidance is still published in certain CRA documents, CRA has recently released updated guidance which appears to limit this administrative position. In CRA Folio S2-F3-C2, CRA noted that where an employee receives a discount on merchandise because of their employment, the value of the discount is generally a taxable benefit. This would apply regardless of whether the discount was provided by the employer or a third-party.

This updated guidance appears to be consistent with a number of Court decisions.

Proposed Tightening to Voluntary Disclosure Program for Businesses

The Voluntary Disclosure Program (VDP) provides taxpayers (individuals, corporations, partnerships, trusts, etc.) the opportunity to fix incorrect or incomplete previously filed tax returns (or returns that should have been filed) with a reduction to penalties and possibly interest.

CRA recently released fairly substantial proposed changes to the current program, effective January 1, 2018. The proposals are expected to be finalized in the fall of 2017.

The proposals will create two tracks for income tax disclosures.

General Program (GP)

The GP is similar to the current VDP. Penalties will be waived, subject to the usual ten-year limit, criminal prosecution will not be considered and interest relief will be considered for years preceding the most recent three years, with 50% of interest generally being waived. Interest for the most recent three years will not be waived.

Limited Program (LP)

The LP will be applicable for disclosures of major non-compliance and will provide reduced relief. Examples of situations where the LP would apply include where there are: active efforts to avoid detection through the use of offshore vehicles or other means; large amounts involved; multiple years of non-compliance; sophisticated taxpayers involved; disclosures after CRA communications such as official statements regarding its intended compliance focus, or following CRA campaigns or correspondence; and other circumstances where a high degree of taxpayer culpability contributed to the non-compliance.

Under the LP, gross negligence penalties will be waived, and criminal prosecution will not be considered. However, all other penalties will be assessed. No interest relief will be provided.

No Relief

In addition to current ineligible submissions, a number of situations will no longer be eligible for the VDP, including, for example where there is: income from proceeds of crime; a disclosure from a corporation with gross revenue in excess of $250 million in at least two of its last five years; and a disclosure related to transfer pricing adjustments or penalties.

Conditions for Valid Disclosure

The current requirements that any disclosure be voluntary, complete, involve a penalty or potential penalty, and include information at least one year past due will remain unchanged. Some further conditions, such as the requirement that the applicant pay the estimated taxes owing on application are proposed. Payment arrangements supported by adequate security may be accepted.

Ottawa’s new tax proposals: Slow down and get them right

There has been unprecedented opposition to the tax changes that were proposed on July 18, 2017. Despite the criticism and concerns, the Liberal government is still trying to sell the proposals as tweaks to the existing tax system that will only target the rich. The media and business owners of all sizes are concerned that changes are problematic, are significant changes and have other adverse consequences. Given that there was only a short 75-day consultation period, there is a need for Ottawa to slow down the process of reforming the tax system and thoroughly investigate the tax proposal in order to get it done right.

A plan for handover of your business can pay for itself many times over

When entrepreneurs are building their businesses, they do not usually think about their end game. Especially at the beginning, you’re usually in a good place with your business partner. Nevertheless, over time disputes and disagreements can happen, and that’s when an agreement for the planned transfer of ownership for a business is necessary. While you may not want to focus on how it will end at the beginning, if you are an owner of a small to medium business, then preparing for the worst is in your best interest. And, having an agreement in place beforehand, will help protect you and your investment.

Key Takeaways:

An agreement allows the business to continue to be successful, and for as seamless a transition as possible.
A well-drafted agreement will cover what will happen after events like death, disability, divorce and retirement, and a poorly drafted one can be worse than not having one at all.
Buy-sell agreements are crucial for any privately owned business with more than one owner or shareholder.

“Having a buy-sell agreement becomes even more critical as the value of the business, and the wealth of the owners, increases.”

Look At The Numbers: There’s No Justifying A Tax Hike On Employers

Canadian Finance Minister Bill Morneau proposes changes to taxing small businesses that can cause businesses to close or force owners to spend their savings. This will cause business to raise their costs, ultimately forcing Canadian citizens to pay more money for goods and services. The proposed changes don’t accurately represent the facts of how they will impact Canadians. As the author says, “In many cases you’re not simply changing the rules; you’re changing the entire game.” There’s a big difference between an employee and someone who has taken a chance to start a business. The current system has worked for 45 years, and we should continue to honour this system because it recognises those differences.

Morneau’s tax changes will hurt those Liberals claim to help

Finance Minster Bill Morneau has released his plans to crack down on what the government calls “tax loopholes.” The victims in this are millions of Canadian small-business owners. The government views the lesser taxation on small business as unfair, and they wish to eliminate legislation that previous governments put in place to help small businesses grow and to help mitigate some of the much higher risk that entrepreneurs take on when starting a business. The result would be that even big business will be on the same playing field as small businesses. In specific, they’re looking at the practice of income sprinkling (where a family member receives a salary or dividend to reduce the business’ total tax burden); passive investment retention (where a owner’s investment that isn’t immediate reinvestment into the business); and income conversion to capital gains (declaring income in a lower tax form). There will be unintended collateral damage due to Morneau’s proposed changes.

Private corporation tax proposals unquestionably harm “middle-class” business owners

While the stated intention of recent tax cuts proposed by the Government is to close loopholes that benefit high-income earners, these proposals are actually an attack on all entrepreneurs. In the example of a small business owned by a family and wife, the new tax proposals would not only force them to enact expensive tracking procedures, but would also hamper the growth of their business. Essentially, they and many other Candadian small business owners would be forced to shut down.

Key Takeaways:

The effects of the Liberal Government’s tax proposal will harm middle-class businesses maybe more than high-income individuals.
Tax planning will be overly complicated and expensive, so all business will need to restructure to comply with the new rules, and companies without access to third-party financing are disadvantaged.
After complying with the new rules, businesses will be less protected for business-cycle downturns and less able to expand in the future.

“The new rules, if enacted, will also require complex tracking systems in order to properly account for the new passive income rules.”