Below is commentary from MRSB Tax Partner, Terry Soloman on some initial thoughts on the federal government's most recent tax consultation announcement.
On Monday, October 16, 2017, the federal government provided some initial feedback on the actions they are considering resulting from the consultation period of the July 18, 2017 tax proposals. I have had numerous clients and others from my local business community ask me for my opinion on what today’s announcements mean for them. There is not enough information to make a definitive statement yet but here is a summary of what we know (or do not know):
1) A reinstatement of a previously announced plan to reduce the corporate tax rate on active business income, to be phased in by a one half of one percent decrease in 2018 followed by a further one percent decrease in 2019. This will reduce corporate tax rates on active income eligible for the small business deduction on PEI to 14.5% in 2018 and down to 13.5% in 2019.
While I will never complain about tax decreases on business income, wasn’t the difference between corporate rates and personal rates on business profits one of the reasons provided by government as to why the proposals issued this summer were required? All this change does is make the spread greater. However, any reduction to the corporate rate is a deferral of tax only due to Canada’s fully integrated tax system.
The reduction in the corporate tax rate on business profit does not deal with the much larger issue of applying TOSI rules to the distribution of this profit from the corporation as a dividend to family members, especially spouses, who contribute indirectly to the business success. This tax rate reduction (deferral) is minor and is really a distraction from the real issues at hand.
2) It appears, based on today’s update, that a reasonableness test is still part of the proposals but maybe the test will be less rigorous than initially suggested. I had hoped to see spouses excluded from TOSI rules and maybe limit the TOSI to adults up to age 24. This bright line test would have eliminated the need for the ridiculous amount of red tape and uncertainly a reasonableness test will create.
3) There were some comments that the proposals to limit the availability of the capital gains exemption have been abandoned. Does this mean TOSI will not apply to arms length capital gains? Will minors and non active adults be subject to a reasonableness test and still be restricted from claiming capital gains exemption on share sales? Will family trusts allocating capital gains still be targeted? Again, no details provided.
4) There was complete silence with respect to any update on the taxation of passive income, which in my view is the largest issue of all, effecting both business decisions of the private sector in the short and medium term as well as creating uncertainty over retirement strategies of Canada’s business sector. The business sector deserves better and need certainty in the rules they operate under. Unfortunately there was no update on this issue or on timelines for more clarity on any matters.
Frankly, with the consultation period having been closed only 14 days ago, and in excess of 21,000 submissions provided by Canadians to the Department of Finance, it is surprising that Finance officials would even have had the time to read and properly consider the volume and quality of submissions in such a short time frame, considering some submissions exceeded 150 pages of arguments. As always, the “devil is in the details” and we have not been provided with the details. It was interesting today that Prime Minister Trudeau was intent on answering all questions from the media and for the most part was not allowing the media to directly question Minister Morneau.
The government has committed to further updates and clarifications in the coming days, which many in the tax and business community will be closely watching with interest very closely.
In its 2015 Economic Action Plan budget, the federal government stated, “The Lifetime Capital Gains Exemption for farm or fishing property provides an incentive to invest in the development of productive farm and fishing businesses and helps farm and fishing business owners to accumulate capital for retirement.”
Fast forward to 2017 when times have changed. In its 2017 document Tax Planning Using Corporations, the federal government is proposing to tax part of this incentive back from the family farm, the backbone of our rural communities.
A segment of the document states, “specifically, individuals would no longer qualify for the capital gains exemption in respect of capital gains that are realized or that accrue before the taxation year in which the individual attains the age of 18.” Furthermore, the document states, “the second measure would introduce a reasonableness test for determining whether the lifetime capital gains exemption applies in respect of a capital gain” and “the third measure would no longer permit individuals to claim the lifetime capital gains exemption in respect of capital gains that accrue during a period in which a trust holds the property.”
The following examples illustrate how each of these proposed changes would affect the family owners of shares of a family farm corporation or interest in a family farm partnership:
- A farmer and spouse co-own a farm through a farm partnership or corporation. On disposition of their shares or partnership interest the spouse may lose all or part of their capital gains exemption if they do not meet a reasonableness test. Whether the reasonableness test is met or not will be determined by the Canada Revenue Agency (CRA). This test is based on the amount that would have been paid to an unrelated individual considering their labour contribution, past earnings, asset contributions and business risk. To add insult to injury, any portion of the taxable gain that is not considered reasonable will be taxed at the highest PEI rate of 51.37%. It is a well-known fact that the farm spouse contributes in many ways to the family farm operation and their involvement is critical to its success. However, this contribution may not meet the reasonableness test as it cannot always be assigned a dollar value and most farms would not be tracking this information.
- Another common structure is where a family trust owns the shares of the family farm corporation. Even where the farmer is the main beneficiary of the trust, on the disposition of the shares by the family trust, capital gains exemption would no longer be allowed.
We would encourage all farmers to contact their local MP. These MPs have to stand up for the farm community who are being unfairly targeted by these proposals.
One of the services we offer within our firm is bookkeeping services. Quite simply, bookkeeping is the record-keeping aspect of accounting regarding the transaction and financial activities of a business. Keeping accurate bookkeeping information is crucial to any business, but ironically, often overlooked. It is a service that is often lumped together with another employee's role (i.e. administrative assistant or a business owner taking on the responsibility themselves). This can lead to delays and getting behind, getting pulled into other tasks or uncertainty about certain aspects of bookkeeping recording.
Here's a look at a few of the advantages of outsourcing your bookkeeping needs:
- The bookkeeper you hire is paid by the amount of work that gets done. Their sole focus for you is on your books, nothing else. They will not be pulled into other company matters and can diligently work in an effective time period.
- There is flexibility in hiring someone outside - the hired bookkeeper can work remotely or as part of an integrated team. They work according to what works for you - whether it's once a week, once a month, a few hours a week or month, etc. The frequency depends on your need.
- There are no overhead costs to you - the bookkeeper comes prepared with their own infrastructure and assets to perform the job. You do not have to look at creating office space for a bookkeeper. You are paying them for only one job, and don't have to get into mandatory employee deductions.
- We get it, bookkeeping is not always the most exciting task, but it is what we do, we know the rules and we're experts in it. We have seen many instances where an employee was tasked with bookkeeping duties and they get in to a monotonous routine, stop learning, which leads to boredom and either end up doing lots of complaining or ultimately, resigning from the company. Because an external bookkeeper works for multiple businesses, there is never time for boredom.
- An external bookkeeper provides outside perspective on your business. They are not involved in the day to day operations, nor are they involved in a common habit, "well we've always done it this way". Hiring externally can bring new insights without emotional or historical ties and a clear perspective on your bookkeeping processes.
It is important for any business owner to find a bookkeeper that fits your needs and brings the best value and expertise. Trusting an expert to help you through this saves both time and money for a crucial part of your business.
If you've got questions on our bookkeeping services, contact Lisa Gallant for more information.
Congratulations! If you have a new baby or a baby on the way, there are many benefits and credits you may be eligible to receive, and tax changes to consider.
Apply for child benefits
With the Automated Benefits Application (ABA), you can automatically apply for child benefits when registering the birth of your new baby. If you live in a province that has ABA and give your permission, you will automatically be applying or registering for:
- the Canada child benefit (CCB)– A tax-free monthly payment made to eligible families to help them with the cost of raising a child under 18
- the goods and services tax/harmonized sales tax (GST/HST) credit - A tax-free quarterly payment that helps families and individuals with low and modest incomes offset all or part of the GST or HST that they pay
- any related provincial programs – Most provinces and territories also have child and family benefits and credits, which families can receive in addition to the CCB and the GST/HST credit
If you live in a territory that does not have ABA, you can apply for child and family benefits using the “Apply for child benefits” service through My Account or by completing and mailing Form RC66, Canada Child Benefits Application to your tax centre.
Can you claim the working income tax benefit?
Your baby is considered an eligible dependent, which means you may now claim the working income tax benefit (WITB), or the amount you claimed before might increase. The WITB is a refundable tax credit that provides tax help for working low-income families and individuals. Eligible individuals and families may be able to apply for WITB advance payments, which are paid quarterly.
Save for your child's education
It's never too early to start saving for your child's future education by contributing to a registered education savings plan (RESP). Programs such as the Canada education savings grant (CESG) and the Canada learning bond (CLB) are other reasons for creating an RESP for your child. These programs may provide incentives for using an RESP to save for a child's education after high school (post-secondary education).
For more information on child and family benefits, go to cra.gc.ca/benefits.
For more information contact any member of our tax team.
This information was made available at: http://www.cra-arc.gc.ca/nwsrm/txtps/2017/tfsk6-eng.html