Month: February 2019

TAX TICKLERS… some quick points to consider…

 

• A large amendment to a T4 slip may trigger a payroll audit. Ensure that T4 slips are as accurate as possible at the outset.
• CRA may request taxpayer information from third-parties. A recent project using third-party data identified $86 million of unreported income and attracted over $19 million in additional taxes. CRA stated additional projects began in late 2017.
• A recent poll found that 51% of Canadians have no will, and only 35% have one that is up to date. Quebec and B.C. lead the provinces (58% and 54% respectively), with the less than 50% in all other provinces.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

2018 Remuneration

Higher levels of personal income are taxed at higher personal rates, while lower levels are taxed at lower rates. Therefore, individuals may want to, where possible, adjust income out of high income years and into low income years. This is particularly useful if the taxpayer is expecting a large fluctuation in income, due to, for example, an impending

• maternity/paternity leave;
• large bonus/dividend; or
• sale of a company or investment assets.

In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may receive reduced Canada Child Benefit (CCB) payments. Likewise, excessive personal income may reduce receipts of OAS, GIS, GST/HST credit and other provincial/ territorial programs.

There are a variety of different ways to legally smooth income over a number of years to ensure an individual is maximizing access to the lowest marginal tax rates. For example,

• Taking more, or less, earnings out of the company (in respect of owner-managed companies).
• Realizing investments with a capital gain/loss.
• Deciding whether to claim RRSP contributions made in the current year, or carry-forward the contributions.
• Withdrawing funds from an RRSP to increase income. Care should be given, however, to the loss in RRSP room based on the withdrawal.
• Deciding on whether or not to claim CCA on assets used to earn rental/business income.

Note that for the 2018 year, the tax cost of dividends paid out to shareholders of a corporation that do not “meaningfully contribute” to the business may increase.

Also note that the tax cost of any non-eligible dividend will increase in 2019. As such, some may consider declaring non-eligible dividends in 2018 to access current tax rates. Changes in provincial/ territorial rates may also impact the above decision.

Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:

1)      Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the personal tax is paid when cash is withdrawn from the company).

          The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares where large amounts of capital have accumulated.  In addition, changes which may limit access to the small business deduction where significant corporate passive investment income is earned should be reviewed.  

2)      Consider paying taxable dividends to obtain a refund from the “Refundable Dividend Tax on Hand” account in the corporation.

3)      Individuals that wish to contribute to the CPP or a RRSP may require a salary to generate “earned income”. RRSP contribution room increases by 18% of the previous years’ “earned income” up to a yearly prescribed maximum ($26,230 for 2018; $26,500 for 2019).

4)      Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby potentially providing greater access to the capital gain exemption.

5)      Recent tax changes may make it costlier to earn income in a corporation from sales to other private corporations in which the seller or a non-arm’s length person has an interest.  As such, consideration may be given to paying a bonus to the shareholder and specifically tracking it to those higher taxed sales.  Such a payment may reduce the total income taxed at higher rates.

6)      Proposed changes to the tax regime will likely require more careful tracking of an individual shareholder’s labour and capital contribution to the business, as well as risk assumed in respect of the business. Inputs should be tracked in a permanent file.

7)      If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the corporation as a Personal Services Business. There are significant negative tax implications of such a classification. In such scenarios, consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated employee) with your professional advisor.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

FEDERAL CARBON TAX: Costs and Rebates

On October 23, 2018, draft amendments to the Federal Fuel Charge Regulations and the Greenhouse Gas Pricing Act were released. As of April 1, 2019, a federal carbon tax is scheduled to be imposed in respect of Ontario, New Brunswick, Manitoba, and Saskatchewan. The federal backstop legislation will be partially used in Prince Edward Island, Yukon, and Nunavut. The other provinces and territory are not subject to this regime as they have, or are, instituting their own custom carbon pricing structures.

In the first year, the federal tax will, for example, subject gasoline purchases to a 4.42 cents/L tax while 3.91 cents/cubic meter will be assessed on marketable natural gas. The rates will be increased annually until 2024.

According to a Government Backgrounder entitled “Ensuring Transparency” the direct proceeds from the federal carbon tax will be returned to the territory or province of origin. For the provinces subject to the federal carbon tax, approximately 90% of funds will be returned directly to individuals and families through a Climate Action Incentive (CAI) payment. The remainder will be returned through electricity generation support in remote communities; support for small and medium enterprises; and support for municipalities, universities, schools, colleges, hospitals, non-profit-organizations, and indigenous communities.

The following are sample published payout amounts and estimated costs for 2019.

 

Province	Climate Action Incentive Payments ($)					Carbon Tax Cost ($)
	Family of 4	Avg. House-hold	1st Adult	2nd Adult	Each Child	Avg. House-hold
Ontario	307	300	154	77	38	244
Manitoba	339	336	170	85	42	232
Saskatchewan	609	598	305	152	76	403
New Brunswick	256	248	128	64	32	202

 

Also note that a 10% top-up will apply for those residing in rural areas.

The legislation does not set out the amounts of the payments. Rather, it provides that the amounts for each year may be specified by the Minister of Finance. Absent amounts specified for any specific province, the amounts are nil. It is not clear whether the amounts included in the above release are estimates, or are the amounts specified in accordance with this provision. Payments are expected to increase annually to reflect increases in the federal carbon tax, until at least 2022.

 

The Government of Canada website (https://www.canada.ca/en/

environment-climate-change/services/climate-change/pricing-

pollution-how-it-will-work.html) provides additional information specific to each jurisdiction.

 

The other provinces which are not subject to the federal program generally have similar systems in place which include the collection of levies, and a partial refund to individuals, with the remainder being used to fund the programs or other credits and direct expenditures. For example, in Alberta, the carbon levy is applied at a rate of $30/ton in 2019 to diesel, gasoline, natural gas and propane at the gas station and on heating bills. It does not apply to electricity. A carbon rebate valued at $300 for the first taxpayer, $150 for the spouse, and $45 for each child will be available with the payments beginning to be phased out at an income of $47,500 for individuals ($95,000 for families).

 

ACTION ITEM: Review the above website to review exposure and potential rebates in your particular jurisdiction. Businesses may want to budget for increased costs to operate.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

TAX TICKLERS . . . at a glance

 

• The annual TFSA contribution limit for 2019 will be increased to $6,000 (from $5,500) due to indexation. For those who have been eligible to build contribution room since inception of the program in 2009 and have never contributed, the total maximum room as of January 1, 2019 is $63,500

 

• For 2019, the Employment Insurance premium rate is reduced to 1.62% (from 1.66%). The maximum insurable earnings is $53,100 (from $51,700), resulting in a maximum employee premium of $860 (a net increase of $2) and maximum employer premium of $1,204 (a net increase of $3).

 

• Registered charities will now be able to pursue their charitable purpose by engaging in non-partisan political activities in the development of public policy without limitation. These rule charges are largely retroactive to January 1, 2008. Previously, a registered charity must have limited their non-partisan political activities to 10% of their resources.

 

• CRA recently opined that investment management fees in respect of tax-sheltered accounts (like RRSPs, RRIFs and TFSAs) paid outside of the account (e.g. management fees charged to a non-registered account), would be subject to a 100% advantage tax. That is, a tax equal to the full value of the management fee would be levied. It was recently announced that the implementation date of this policy was extended indefinitely until a review had been completed.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

CHILDCARE COSTS: Art, Sport and Educational Camps

A September 11, 2018 Tax Court of Canada case examined the eligibility of a number of child care costs with a recreational and educational component. The taxpayer and his spouse worked full time and had two children, aged 10 and 12.

The Court acknowledged two separate lines of cases related to eligibility of child care expenses (all informal and, therefore, not binding on CRA).

The first set, argues that the definition of a “child care expense” is restrictive such that recreational or educational activities do not qualify. The reasoning is that expenses to develop the physical, social and artistic abilities of the child would have been incurred whether or not the parents had been working.

The second line of cases requires that one evaluate whether the purpose of the expense was to allow the parent(s) to work. A bona fide expense would not be denied solely because the activity was recreational or educational in nature.

 

Taxpayer Wins, Mostly

The Court accepted the second set of cases as guidance, noting that if Parliament had intended to limit such activities, it would have said so in more specific and restrictive language. As such, the Court accepted the majority of the taxpayer’s child care expenses that contained a recreational and educational component.

Parental Discretion

The Court found that the taxpayer’s decision to engage university students, who were paid $5/hour more than what was paid to high school students, was irrelevant as “it is not for the state to decide who minds the appellant’s children as long as the expenses are reasonable.” In other words, it is the parents that are responsible for choosing who they wish to use, and they do so, based on the child’s needs; this choice is an exercise of parental discretion.

The Minister also suggested that the child who was 12 years of age in the year may not have needed some of these expenditures due to his age, to which the Court responded that Parliament grants child care expenses for eligible children up to age 16 – it is up to the parent to decide whether a child 12 or older should stay home alone.

 Limitations

Costs related to activities on a Saturday, and during school hours, were denied as they did not facilitate the taxpayers’ ability to work. Amounts related to camp were limited to a weekly amount of $125 (as the child was over 7), as specifically provided for in the Income Tax Act. Camp costs for children under 7 are limited to a weekly amount of $200. A higher amount may be available for those with a disability.

CRA Administrative Policy

As this case was informal, it is not precedential. While it may provide a filing position, CRA may still challenge these types of child care expenses. CRA’s webpage continues to state that fees for leisure or recreational activities, and fees related to education costs, cannot be claimed as a child care expense.

 

ACTION ITEM: If incurring child care costs with a recreational or educational component, consideration

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.