HODGE PODGE

December 2016

INCOME TAX UPDATE
In the past year, there have been a large number of changes and some of these changes may have a significant impact on your returns for 2016 and future years.
 
Canada Child Benefit - In July 2016, the Canada Child Tax Benefit and the Universal Child Care Benefit programs were replaced with a new system called the Canada Child Benefit.  If you were previously receiving benefits from the old programs you would have been automatically transferred into the new program. Visit http://www.cra-arc.gc.ca/bnfts/ccb/menu-eng.html for more details on the new program. 
 
Also, as part of the implementation of the new Canada Child Benefit program, the following child tax incentives were eliminated:
  • Family tax cut - eliminated in 2016
  • Children’s Fitness Credit - reduced by 50% in 2016 and eliminated in 2017
  • Children’s Art Credit - reduced by 50% in 2016 and eliminated in 2017
  • Additional Fitness and Art amounts of $500 for disabled children remain unchanged for 2016 but will be eliminated in 2017
School Supplies Tax Credit - This is a new credit for accredited teachers and early childhood educators.  The credit available is 15% of up to $1,000 of eligible expenditures purchased on or after January 1, 2016.  Eligible amounts include consumable supplies or books, games and puzzle, containers, or educational support software and must be used in an elementary or secondary school or a regulated child care facility.  The amounts cannot have been reimbursed or be otherwise deductible.  You must be able to provide a certificate from your employer attesting to the eligible expenses.
 
Education and Textbooks Tax Credit Eliminated - The credit of $400 per month ($65 per month for part time students)  has been eliminated effective January 1, 2017.  Any amounts carried forward from previous years will still be allowed.  It is intended that students from low- and middle-income families will qualify for increased grants under the Canada Student Loans Program.
 
Taxation of Life Insurance - There were several significant changes with respect to corporate owned life insurance policies with respect to transfers of life insurance and the capital dividend account.  Due to the complexity of the these changes they will not be discussed in this newsletter but if you would like further details, please contact our office.
 
Eligible Capital Property - The eligible capital property rules have been repealed effective January 1, 2017.  Eligible capital property include intangible assets such as goodwill, franchise fees, quotas, etc.  Any balance in the existing cumulative eligible capital pool will be transferred to a new capital class 14.1.  There are transition rules in place that may allow for an accelerated write off of any existing balance.  Any new purchases after 2016 will be added to the class 14.1 pool.  The CCA rate for Class 14.1 is 5%.  Generally, sales of eligible capital prior to January 1, 2017 were taxed at 50% of the gain at active business income rates.  Sales of assets included in the new class 14.1 after January 1, 2017 will be taxed at the higher capital gains tax rate. 
 
Incorporation Costs - To the extent that they are not otherwise deductible, incorporation costs of up to $3,000 will be deductible.  Previously these amounts were added to eligible capital property.
 
Ontario Tax Changes - Tuition and education credits were eliminated effective September 4, 2017.  Unused tuition and education tax credits will be eligible for a carry-forward if the student was a resident of Ontario on December 31, 2017.  In addition, the Ontario Children’s Activity Credit and the Ontario Healthy Home Tax Credit were both eliminated for years ending after 2016.
 
Principal Residence Exemption -  Beginning in 2016, all sales of principal residences must be reported to CRA.  CRA has said that they will amend Schedule 3 to report the disposition of a principal residence and that the T2091 will only be required if all of the gain is not exempt.  If the disposition of the principal residence is not reported on your tax return then the year is not time-barred in respect of the disposition.  If it is late filed, it will be time barred three years after the filing of the form (late filing penalties will apply).  Also, for years after 2016, only certain trusts will be eligible to claim the principal residence exemption and the “1+” rule in the formula will only apply if the taxpayer was a resident of Canada during the year the property was acquired.
 
Small Business Tax Rate - The 2016 federal budget froze the corporate small business rate at 10.5% after 2016.  The reductions in the small business rate legislated for 2017, 2018 and 2019 were deferred.  The dividend tax rates were also frozen to preserve the integration of the personal and corporate tax systems. 
 
Year-end Reminders
  • If you reached the age of 71 in 2016 you must convert your RRSP to a RRIF or Annuity by December 31st.  The minimum payment from the RRIF may be postponed until 2017 if desired.
  • If you are planning to sell an investment at a loss in order to offset it against capital gains this year, or the past three years, the settlement date must fall in 2016.  For most investments, you will need to place this request by December 23rd in order to ensure the trade settles in 2016, and your capital loss applies to 2016.
  • Charitable donations must be made by December 31st to qualify for a tax receipt for 2016.  If you are planning to make a donation before the end of the year, consider donating publicly traded securities or mutual funds that have appreciated in value.  The gift will provide you with a donation receipt equal to the value of the investment at the time of the donation and the resulting taxable capital gain is exempt from tax.
  • Take advantage of both new and expiring tax credits.  The Child Fitness Tax Credit (limit of $500 of expenses per child) and Child Arts Credit (limit of $250 of expenses per child) will no longer be available for amounts paid after 2016.  Also, if you qualify, consider making additional purchases for the new school supplies tax credit (limit of $1,000 of expenses).
Canada ranks ninth among the top-20 countries worldwide with the greatest number of high-net-worth individuals with the wealthiest Canadians primarily located in Toronto, Montreal, Calgary and Vancouver.  The typical millionaire living in Canada has a vastly different profile from a scene of a TV show in 1953 to today.  Today's millionaires are considered private, hardworking, rarely extravagant and probably take the garbage out themselves; today's millionaire could very will be that unassuming neighbour next door. 
Stefanac, R., & Ueland, J. (2016). The New Millionaires. CPA Magazine: October 2016.
SPECIFIED CORPORATE INCOME
For many years, the business world has worked to set up ownership of businesses to allow the multiplication of the small business limit and thus tap into the low corporate tax rates available to those with earnings less than $500,000.  And for equally as many years, the government has attempted to tighten the reins to eliminate the multiplication of this limit.  Due to this fact, the corporate structures have become increasingly complex and finally the government has decided once again to try and shut down these structures and reduce the number of business limits allowed between related and associated groups.
 
This time however the rules are more complex and wide sweeping than they have ever been in the past.  The concept of the small business limit remains in place, but there is now a new twist.  Effective with year ends beginning after March 21 2016, all related party corporate to corporate transactions will be classified as specified corporate income (SCI).  Such income will not be eligible for the small business deduction unless the payor company allocates some of its small business limit to the recipient corporation.  You may say 'so what', and really what is the difference between this and the allocation of the small business limit.  Well on the surface it would seem not to be a large issue, and for some there will be little to no change, but for others it will be significant.
 
The reason for the significance is the fact that you are now looking at related party transactions and not just associated group transactions.  What this means is that the sweep of income is much broader.  Two companies that have never been associated in the past for income tax purposes, but are related for tax purposes now have to look at their transactions and determine if an allocation of the small business limit will be made.

To better demonstrate the impact, let’s look at an example:

Corp A is owned by brother A and nets for tax purposes $450,000 per year before any transactions with Corp B.  Corp B is owned by brother B and nets $550,000 per annum from its operations before any transactions with Corp A.  Corp A is a tool and die fabricator. Corp B is mechanical shop.  Corp B acquires from Corp A new tools for $100,000 to allow it to produce its product.  Under the old tax rules, Corp A and Corp B would be not be associated for income tax purposes and therefore eligible for the $500,000 exemption each.    They would both be able to pay the low rates of corporate tax.  Under the new tax rules, the additional $100,000 of income for Corp A would be taxed at the top corporate rate as it would be considered to be specified corporate income.  Such income does not fall into the small business limit category.  The only way for that income not to be taxed at the top rate, would be for Corp B to allocate $100,000 of its small business limit to Corp A.  This would allow Corp A to use its small business limit to shelter its regular income and then to also shelter the related party income with the allocation.  Corp B however would have a reduction in its small business limit as it has now allocated $100,000 to Corp A and therefore it would pay tax at the high rate on this exposed income of $50,000 (represented by $550,000 less $100,000 in expense less small business limit now available of $400,000).  You should note that Corp B has no obligation to allocate the $100,000 to Corp A and therefore it would not have any issue with rates if it had not. 
The above example is a simplified transaction, but what it highlights is the need for all companies to identify their related parties and then to segregate those related party transactions from all other transactions.  Once that is completed, the entities need to correspond with each other as to allocations, if any, they are willing to provide to each other and complete the necessary paperwork when filing their corporate tax returns.   
 
The government will require full disclosure of the related parties on the corporate tax returns as well as the completed specified corporate income allocations.  Additional complexity will arise when the year ends of the related corporations do not match.   
 
In summary, any corporate entity with related party transactions will need to increase their accounting systems to capture the SCI. Corporate tax compliance work will also increase to capture and allocate expenses associated with SCI to mitigate the impact of the higher tax rates on SCI.
CHANGES TO RECORD KEEPING AND FORFEITURE OF CORPORATE PROPERTY LAWS IN ONTARIO
On December 10, 2016, changes to the Ontario Business Corporations Act (the "OBCA") regarding record keeping and forfeiture of corporate property will come into force.  The changes will require corporations to maintain a new record called a "register of ownership interests in land in Ontario".  Also, there are changes that will also affect the law relating to a corporation's personal and real property that is forfeited to the Crown following the dissolution of the corporation.  The forfeiture of corporate property changes will not likely impact many corporations, but the record keeping changes must be adopted by all corporations incorporated in Ontario.
The amendments to the law require that a corporation shall prepare and maintain a register of ownership interests in land.  A corporation shall prepare and maintain at its registered office a register of ownership interests in land in Ontario which shall:
  • identify each property; and
  • show the date the corporation acquired the property, and, if applicable, the date the corporation disposed of it.
As supporting documents for this new register, the corporation shall keep with the register a copy of any deeds, transfers or similar documents that contain any of the following with respect to each property listed in the register:
  • the municipal address, if any;
  • the Registry or Land Titles Division and the Property Identifier Number;
  • the legal description; and
  • the assessment roll number, if any.
The new register may be kept in a bound or a loose leaf book or may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device.

For corporations that were incorporated before December 10, 2016, the corporation has two years to comply with the new record keeping requirements, that is, until December 10, 2018.  For corporations incorporated on or after December 10, 2016, the real property register requirements apply commencing on the date of its incorporation.
We wish everyone a wonderful holiday season and a prosperous 2017.
Our office will be closed for the holidays from December 26th until January 2nd.
KD Wray Professional Corporation
22 Paris Street- P.O. Box 519
Alliston, ON L9R 1V7
Phone: 705-435-7227
Fax: 705-435-0917

Email: info@wrayca.com






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KD Wray Professional Corporation · 22 Paris St · Box 519 · Alliston, Ontario L9R 1T6 · Canada

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