INCOME TAX AND

ACCOUNTING STANDARDS UPDATE                                                                                                                                                                                       

JULY 18, 2017 TAX PROPOSALS

In October 2017, our firm issued a Tax Alert advising you of the proposed income tax changes and draft legislation released by the department of Finance in July 2017. An update respecting the proposed changes is summarized below.

Capital Gains

Since the July 18, 2017 proposals, the Department of Finance has decided they will not be proceeding with the provisions restricting the use of the capital gains exemption.

Income “Sprinkling”

The Department of Finance is moving forwardwith the proposed changes for income sprinkling, which extend the “kiddie tax” or “TOSI” to adult shareholders who are related to the primary shareholder of a private corporation.

The TOSI (tax on split income) rules are effective January 1, 2018; however, they have been modified such that individuals who fall into one or more of the following categories will not be subject to the highest marginal tax rate (TOSI) on income received from the private corporation:

  • Individual spouse of the business owner, where the business owner is over the age of 65 and has “meaningfully”contributed to the business.
  • Individual over the age of 18 who is actively involved in the business (i.e., an average of 20 hours per week) in the current year or during any five preceding years.
  • Individual over the age of 24 who owns “Excluded Shares” of the corporation. Excluded shares are defined as:
    • Direct ownership of shares accounting for at least 10% of the votes and value of the corporation.
    • The corporation must earns less than 90% of its income from the provision of services and cannot be a professional corporation.
    • Substantially all (greater that 90%) of the income earned by the corporation must be earned from sources other than “related” businesses.
  • Individual who recognizes a capital gain from the disposition of Qualified Small Business Corporation shares, or Qualified Farming or Fishing Property.
  • Individual over the age of 24 who receives income that could be considered a reasonable return. The reasonableness criteria are listed below:
    • Labour contributions
    • Property contribution
    • Risk incurred
    • Historical payments
    • Any other factors that may be relevant

The proposals relating to taxing compound income have been eliminated.

If a taxpayer restructures their corporation in order to meet the excluded share definition by the end of 2018, this exception will be available to them for the entire 2018 taxation year.

Please refer to the attached 2018 Federal Budget Commentary for specific details regarding the proposed provisions.

 

Corporate Reinvestment

The 2018 Federal Budget proposes two sets of new provisions to tax corporate passive investment income earned by corporations, in order to equate the tax consequences of investing through a corporation to those of an individual investing outside of a corporation.

The proposed provisions, in summary, are as follows:

  • Business limit reduction – the first proposal will reduce an associated group’s $500k small business limit on a straight line basis when the group earns adjusted aggregate investment income between $50,000 and $150,000.
    • The reduction will be $5 for every $1 of investment income.
    • A group’s business limit will be reduced to zero in the year if its adjusted aggregate investment income is $150k or more.
  • Changes to Refundable Dividend Tax on Hand (RDTOH) – the second proposal will restrict a CCPC to recovering RDTOH only on the payment of non-eligible dividends.
    • An exception applies to RDTOH arising from payment of Part IV tax on eligible dividends received. Such RDTOH can be recovered through payment of eligible dividends to shareholders.

The above measures will apply to taxation years that commenceafter 2018.

Please refer to the attached 2018 Federal Budget Commentary for specific details regarding the proposed provisions.

 

OTHER INCOME TAX MATTERS

New Small Business Deduction (SBD) Rules

The Small Business Deduction (SBD) is a tax advantage available to Canadian-controlled private corporations (CCPCs), which provides for favorable small business income tax rates on eligible active business income up to a federal SBD limit of $500,000 (currently 10.5% vs. the general corporate rate of 15%).

Under the new rules, active business income (ABI) that would normally qualify for the SBD, will not be entitled to the SBD under the following scenarios, unless another entity assigns a portion of their business limit, or the corporations are associated (as associated corporations must already share the small business limit):

  • ABI earned from a partnership in which the corporation or its shareholder holds a direct or indirect interest, or a person that holds such interest does not deal at arm’s length with the corporation, and the corporation does not earn substantially all of its income from arm’s-length customers.
  • ABI earned from another corporation in which the corporation, its shareholder, or a non-arm’s length person holds a direct or indirect interest, and the corporation does not earn substantially all of its income from arm’s-length customers.
  • ABI that is earned from a non-CCPC or a CCPC that elected to not be associated for tax purposes

As the new SBD rules are quite complex, please feel free to contact our office if you feel your business may be affected by these changes.

The Elimination of Billed Basis Accounting

Taxpayers are generally required to include the value of work in progress in computing their income for tax purposes.  However, taxpayers in certain designated professions (i.e., accountants, dentists, lawyers, medical doctors, and chiropractors) may elect to exclude the value of work in progress in computing their income.  This election effectively allows income to be recognized when the work is billed (billed-basis accounting).

The government’s concern with the above practice is that billed-basis accounting enables taxpayers to defer tax by permitting the costs associated with work in progress to be expensed without the matching inclusion of the associated revenues. The intent of eliminating billed-based accounting for designated professionals, is to better match expenses with the related revenues.

The new rules take effect for all taxation years ending after March 22, 2017. There is a transition period that will spread the recognition of income in 20% increments over the next five taxation years.

 

ACCOUNTING STANDARDS UPDATE

A New Standard for Review Engagements

FHB and all other practitioners have been performing Review Engagements under standards that have been in effect for many years.  To address what are recognized as outdated standards, to encourage consistency in practice, and to align with international standards, a new Canadian standard for Review Engagements was developed.  This new standard is effective for Reviews of financial statements for periods ending on or after December 14, 2017.

Under the old standard of Review Engagements, the practitioner exercised professional judgment in deciding which items on the financial statements needed to be reviewed.

The new standard now requires that the practitioner explicitly:

  • Design and perform inquiry and analytical procedures to address all material items in the financial statements, including disclosures.
  • Identify and focus on areas in the financial statements where material misstatements are likely to arise (these areas could include items that are less than materiality but require focus due to qualitative considerations or potential omission from the financial statements).
  • Inquire regarding specific areas, including but not limited to: related parties, significant estimates, the going concern assumption, fraud, and non-compliance with laws and regulations.

As a result of these changes in Review Engagement standards, our firm will be required to incur a significant increase in the level of work and cost required to adhere to the new standards. Businesses requiring annual Review Engagement financial statements will in turn experience a substantial increase in their year-end fees for year-ends commencing December 2017.

If you are currently having Reviewed financial statements prepared annually for your business, and are not requiredto have Reviewed statements for banking, bonding, or any other purpose for 2017 or in the foreseeable future, you may wish to consider reducing your year-end engagement to a compilation (Notice to Reader) in order to reduce your year end accounting fee.

Please contact our office should you wish to discuss this further.

Employee Share Purchase Tax Credit

The Employee Share Purchase Tax Credit is a Manitoba tax credit that offers current employees financial support to buy in and own a portion of a business by which they are employed, in order to support business growth, facilitate succession planning of family owned businesses, and avoid business closures in Manitoba.

FHB has been actively involved with Manitoba Finance in obtaining the Employee Share Ownership Plan (ESOP) Tax Credit to assist many of our clients with their succession plans.

Types of Assistance

Employees may buy shares from their employer and receive a tax credit, if the business has a registered ESOP.  Canadian-controlled private corporations with assets used in active business of up to $25 million and which pay at least 25% of their remuneration to employees who are Manitoba residents, are eligible to register ESOPs to raise up to $10 million in equity capital.

An employee investment for succession, takeover, or buyout purposes are eligible for a tax credit of up to $202,500 annually (equal to $450,000 in shares purchased).  The first $27,000 of the tax credit is refundable to the employee.  The remaining tax credit amount is claimable against Manitoba personal income tax incurred in either the three years prior to the share purchase year or the following 10 years,

Employee investments to promote employee ownership or to establish a workers co-op are eligible for a fully refundable tax credit of up to $27,000 annually (equivalent to $60,000 in shares purchased).

If you are considering retiring and/or selling your business in the near future, please contact our office to discuss your business’ eligibility for the ESOP program.

 

Contact Us

E: info@fhblack.com
P: 204-949-9113
F: 204-949-0497
36 Roslyn Road
Winnipeg, MB R3L 0G6

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Contact Us

E: info@fhblack.com
P: 204-949-9113
F: 204-949-0497
36 Roslyn Road
Winnipeg, MB R3L 0G6

Follow Us

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