What is an Estate Freeze?

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During July 2020, the Prime Minister and Finance Minister announced various updates on the measures the Canadian government is taking to support individuals and businesses.

Further changes to income tax filing and payment deadlines:

• The original income tax payment and filing extension to September 1, 2020 has been extended further to September 30, 2020
• The CRA has provided a dedicated web page that summarizes the new deadlines for all tax returns and tax payments: https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-filing-payment-dates.html

UPDATES FOR BUSINESSES

The Canadian Emergency Wage Subsidy 2.0 (CEWS 2.0) 

On July 17, 2020 the government announced an extension of the wage subsidy program to December 19, 2020. The program has very significant changes with expanded criteria to allow more businesses to qualify for wage subsidies.

Eligible employers include individuals, taxable corporations, and partnerships consisting of eligible employers as well as non‑profit organizations and registered charities.

The current update and details given:

• CEWS 2.0 will be available until December 19, 2020 but the exact details on the program are currently only available to November 21, 2020 (Period 9).
• The level of support received from CEWS 2.0 will be variable based on the percentage decrease in revenue; employers experiencing the greatest decrease in revenue being entitled to the largest subsidy.
• There is no longer a minimum revenue decrease (previously 30%) required to qualify for CEWS 2.0.
• The maximum support available under CEWS 2.0 will be gradually reduced between July and October 2020.
• CEWS 2.0 includes a base subsidy and a top-up subsidy.
• Safe Harbour rule:  There are rules for Periods 5 and 6 (July 5 – August 29, 2020) such that a company with a decrease in revenue of at least 30% will not receive less than what they were entitled to receive under the original CEWS rules.
• This subsidy will be available to eligible employers that see a drop of at least 30 percent of their revenue, year over year (i.e. March 2020 versus March 2019).
• Employers will need to attest to the decline in revenue and re-apply monthly.
• The subsidy will provide support of up to 75% of an employee’s wages for a 3 month period retroactive to March 15, 2020, to a maximum of $847/week (75% of the first $58,700 of an employee’s salary).
• More information related to the CEWS changes are outlined by the government here: https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-what-changes.html
• Businesses will need access to CRA’s My Business Account portal in order to apply.
• An official calculator was released on August 12, 2020 by CRA to assist and simplify the subsidy calculation for employers: https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-calculate-subsidy-amount.html
• Should you require assistance applying for CEWS from a Small Business Accountant please contact us

UPDATES FOR INDIVIDUALS

Canada Emergency Response Benefit (CERB)

CERB has been extended by 8 weeks to a total of 24 weeks of benefits, ending on August 29, 2020.

CERB is available to workers who:

• Live in Canada and are at least 15 years old
• Have stopped working because of reasons related to COVID-19, or are eligible for EI regular or sickness benefits, or have exhausted their EI regular or fishing benefits between December 29, 2019 and October 3, 2020
• Had employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application
• Have not earned more than $1,000 in employment and/or self-employment income per benefit period while collecting the CERB
• Have not quit their job voluntarily

CERB applications can be done online here: https://www.canada.ca/en/services/benefits/ei/cerb-application.html

The post August 2020 Update on Canada’s COVID-19 Economic Response Plan appeared first on Capstone LLP Chartered Professional Accountants.

On April 2, 2020, the Finance Minister announced various updates on the measures the Canadian government is taking to support individuals and businesses. These new measures, delivered as part of the Government of Canada’s COVID-19 Economic Response Plan, will now provide up to $82 billion in direct support to Canadians and Canadian businesses.

Changes to income tax filing and payment deadlines:

• The CRA has provided a dedicated web page that summarizes the new deadlines for all tax returns and tax payments: https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-filing-payment-dates.html

UPDATES FOR BUSINESSES

The Canadian Emergency Wage Subsidy (CEWS) 

The government announced a wage subsidy of 75% for qualifying businesses, for up to 3 months, retroactive to March 15, 2020.

Eligible employers would include individuals, taxable corporations, and partnerships consisting of eligible employers as well as non‑profit organizations and registered charities.

The current update and details given:

• This subsidy will be available to eligible employers that see a drop of at least 30 percent of their revenue, year over year (i.e. March 2020 versus March 2019).
• Employers will need to attest to the decline in revenue and re-apply monthly.
• The subsidy will provide support of up to 75% of an employee’s wages for a 3 month period retroactive to March 15, 2020, to a maximum of $847/week (75% of the first $58,700 of an employee’s salary).
• The subsidy is limited to the lower of the above and the pre-crisis remuneration for the employees, including non arms-length employees (i.e. owners and shareholders)
• More information related to the CEWS can be found on the Government of Canada’s website here.
• The Canada Revenue Agency (CRA) will coordinate the CEWS through an online portal that is expected to be available in 3 to 6 weeks.
• Businesses will need access to CRA’s My Business Account portal in order to apply.
• For employers that do not qualify for the CEWS, they can still qualify for the 10% Wage Subsidy announced on March 18, 2020.  More details on this subsidy can be found here.

The Canadian Emergency Business Account (CEBA)

The government will be extending $40,000 loans to qualifying businesses interest-free for one year, of which $10,000 will be forgiven if $30,000 is fully repaid on or before December 31, 2022.

• In order to be eligible the business must have had payroll in 2019 of $50,000 to $1 million
• Businesses must contact their existing financial institutions to apply; however, not all major banks have announced the details of their programs yet
• More details on this program can be found here.

GST/HST Remittance Deferral

To support Canadian businesses in the current extraordinary circumstances, the Minister of National Revenue will extend until June 30, 2020 the time that:

• Annual filers, whose GST/HST return or instalment are due in March, April or May 2020, have to remit amounts collected and owing for their previous fiscal year and instalments of GST/HST in respect of the filer’s current fiscal year.
• Quarterly filers have to remit amounts collected for the January 1, 2020 through March 31, 2020 reporting period; and
• Monthly filers have to remit amounts collected for the February, March and April 2020 reporting periods;
• More details on this program can be found here.

UPDATES FOR INDIVIDUALS

Canada Emergency Response Benefit 

This program will replace the previously announced Canada Emergency Care Benefit and Canada Emergency Support Benefit. Applications are set to become available April 6 through CRA’s My Account portal and will provide a $2,000 monthly benefit for 4 months to workers:

• Who must stop working due to COVID-19 and do not have access to paid leave or other income support.
• Who are sick, quarantined, or taking care of someone who is sick with COVID-19.
• Who are working parents and must stay home without pay to care for children that are sick or need additional care because of school and daycare closures.
• Who still have their employment but are not being paid because there is currently not sufficient work and their employer has asked them not to come to work.
• wage earners and self-employed individuals, including contract workers, who would not otherwise be eligible for Employment Insurance.

To be eligible for the CERB, applicants must have had at least $5,000 in employment income, self-employment income, or maternity or parental leave benefits for 2019 or in the 12-month period preceding the day they make the application.

CRA will begin to accept applications on April 6 and there are specific rules to follow when applying (i.e. based on the month you were born). Please review the details on the Government of Canada website here.

If you do not yet have access to CRA My Account for Individuals, we recommend that you set up your account as soon as possible, as the process can take 5-10 days. If you require assistance from an Accountant Toronto we would be happy to help.

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The post Canada’s COVID-19 Economic Response Plan: Support for Canadians and Businesses appeared first on Capstone LLP Chartered Professional Accountants.

Background and Overview

Due to significant opposition from the Canadian Small Business community, tax accountants, accounting firms, and other stakeholders, the original proposals from July 18, 2017 that the Department of Finance issued with regards to small business tax changes were subsequently revised and released on December 13, 2017.

The revised proposed rules were better accepted by the business community, but still represent a large shift in the existing tax planning methods, strategies and abilities to split income for private corporations in Canada. Nonetheless, the new rules took effect on January 1, 2018 and are applicable to the 2018 and subsequent taxation years.

A common tax minimization strategy used by many incorporated small businesses and common among professionals with Professional Corporations, was to effectively reduce the overall tax burden by issuing shares and paying dividends to family members, who often had little involvement in business operations, and minimal investment in the business as well. The new TOSI (tax on split income) rules were intended to effectively remove the ability for many small business owners to split income and thereby remove their advantage over Canadian employees who are not able to use these types of tax planning strategies.

Revised TOSI and Income Sprinkling Proposals

The revisions that were released in December provided more insight into how the government planned to police these new rules, and also included a number of potential exclusions from the new rules as well.

Some of the tests to determine when TOSI will apply are subjective; however, the overall idea of TOSI, the new definitions and the new tests all add to the complexity of tax planning and the ability of small business owners to understand what may apply to them and their small business.

The bright side for some small business corporations is that the TOSI rules will not apply in situations where payments (i.e. dividends, interest and certain capital gains) are within the specified exclusions, also known as an “Excluded Amount”.

Excluded Amount Explained

1. For all adults in Canada, any amount received from an “excluded business” will not be subject to the TOSI rules. Excluded Business is defined as:

Amounts are derived from an excluded business where the individual was actively engaged on a regular, continuous and substantial basis (“Actively Engaged”) in the activities of the business in a taxation year or in any five prior year taxation years of the individual.

In order to be considered “Actively Engaged” an individual would need to work in the business a minimum of 20 hours per week during the portion of the year when the business is operating (i.e. seasonal businesses may not operate for a full year) or has met that requirement of 20 hours per week in any of the five prior years; they do not need to be consecutive. If this test is met, the individual would be exempt from TOSI permanently on a go-forward basis under the new proposal.

If the individual does not make the 20 hours per week test, the individual may still meet this exclusion test. This would vary on a case by case basis upon further investigation by the CRA, if applicable.

2. For individuals age 25 and over, TOSI will not apply on income from (or taxable capital gains from) the disposition of Excluded Shares” or a payment that qualifies as a “Reasonable Return”.

Excluded Shares would be defined as:
Shares of a corporation owned by an individual are and all the following conditions are met:

• Less than 90% of the corporation’s business income was from the provision of services;
• The corporation is not a Professional Corporation, i.e. physician, dentist, lawyer, chiropractor, etc.;
• The shares represent 10% or more of the votes and value of the corporation; and
• All or substantially all, of the income of the corporation is not derived from another Related Business in respect of the individual.

The specific requirement of the shares to be held by an individual means that any shares held through a Family Trust structure for the benefit of the individual would not qualify as an Excluded Share.

Reasonable Return would be defined as (for individuals age 25 and over):

• The work is performed in support of the Related Business;
• The property contributed directly or indirectly in support of the Related Business;
• The risks assumed, in respect of the Related Business;
• The total amounts paid or payable by any person or partnership to, or for, the benefit of the individual, in respect of the Related Business; and
• Any other such factors that may be relevant.

In assessing a Reasonable Return, the CRA has provided the following criteria to provide some clarity on how they will evaluate the payment:

• Labour Contribution – the work performed (tasks, hours, wage in comparison to industry, education, knowledge of individual, etc.) by the individual in support of the Related Business before the amounts became paid;
• Property Contribution – the property contributed (loans, capital, any collateral, opportunity costs, past contributions, etc..) by the individual in support of the Related Business;
• Risks Incurred – the risks (exposure to the liabilities of the business, personal reputation or goodwill at risk, extent contributions made at risk, etc.) assumed by the individual in respect of the Related Business;
• Historical Payments – the total amounts paid by any company or partnership to, or for, the benefit of the individual in respect of the Related Business; and
• Such other factors that may be relevant.

3. For individuals between the ages 18 and 24, TOSI will not be applied to a return on property contributed in support of a Related Business that is a “Safe Harbour Capital Return” or, a Reasonable Return having regard only to contributions of “Arm’s Length Capital” to the business.

The Safe Harbour Capital Return is defined as a return that does not exceed a prescribed capital rate of return based on the highest prescribed rate under the Income Tax Act for the particular year. Currently this rate is at 2%, which would be applied to the Arm’s Length Capital invested by the individual to determine the maximum Safe Harbour Capital Return.

Arm’s Length Capital is property of an individual, other than property that is derived from property in respect of a Related Business, that is borrowed under a loan, or that is transferred from a related person (other than inherited property).

4. For all individuals the taxable capital gain realized on death, from the disposition of qualified farm, fishing property, or qualified small business corporation shares, will be excluded from TOSI.

5. For individuals age 65 or over, all amounts received by the individual spouse will not be subject to TOSI if the amount would have been an Excluded Amount had it been included in the individual’s income. This means that as long as the individual was active in the company in the past, once they reach the age of 65 they will be allowed to split income to their spouse and do not have to worry about the TOSI rules.

Summary

Although this draft legislation narrows the focus, and addresses many of the issues and concerns brought up by the various stakeholders, the revisions remain quite complex. The changes will certainly result in additional compliance costs for many small businesses and may result in a significantly larger tax burden for small business owners who have previously been income splitting with family members.

If you need assistance with any small business accounting or TOSI related matters, please feel free to contact us.

The post Impact of TOSI Income Sprinkling Rules on Canadian Small Business appeared first on Capstone LLP Chartered Professional Accountants.

What happens if you missed the 2017 tax deadline? The Canada Revenue Agency (CRA) puts hefty penalties on those that file their taxes late. That is why Chartered Accountants always recommend filing and getting started on your taxes as early as you can. However, if you do file late, what exactly happens?

2017 Tax Deadlines

Mark it on your calendar, April 30th. That is the deadline that income tax returns have to be filed by. Any balance owed to the CRA also has to be paid by that date too. Any payment sent in the mail needs to be postmarked on or before that date also. For self-employed individuals, there is a bit more room. You have until June 15th to file your taxes. There’s a catch, though. Any balance owed still has to be paid at the normal time, April 30th.

Penalties for Filing Taxes Late

There are penalties for filing late, and they can be pretty steep for those that owe a balance. The CRA will charge you a penalty of 5% of your owed balance plus an additional 1% for every month that your tax return is late. These penalties can go up too, doubling in fact, if you continuously file late. Even if you cannot afford to pay the entire balance owed to the CRA, Chartered Accountants recommend paying at least a portion to avoid late filing penalties. It is always a good idea to file your taxes on time even if you cannot pay on time to avoid some of the penalties.

Benefit Interruption

In additional to financial fees and penalties, people that file late may have their government benefits interrupted. To receive certain federal or provincial benefit payments one has to file an annual return. If you file late, or not at all, these payments may be interrupted. Taxes are used to assess eligibility for programs so if you file late your information won’t be processed in time meaning you will receive your benefits later.

Programs that are affected by this include:

•    Canada Child Tax Benefit
•    Universal Child Care Benefit
•    Working Income Tax Benefit
•    Guaranteed Income Supplement
•    GST/HST Benefit
•    Ontario Trillium Benefit

I Filed Late: Now What?

File your taxes as soon as possible once the deadline has passed. Your penalties get steeper each day past the deadline. Make sure that all of your information is correct to avoid causing even more trouble. There is something called voluntary disclosure. It means that if you did not file in the past or filed late and then submit the forms before the CRA audits you or asks for the documents, you will not get in as much trouble. In this case, you will only be required to pay the amount owed plus interest.

How to Avoid Being Late

The best thing is to avoid filing taxes late at all costs, as there are heavy penalties for those that do. Start getting all the information you need for taxes early to avoids stress and last minute scrambling. Do not wait for the deadline either – file your taxes as soon as you are ready and able. Hiring a Tax Accountant is always a good idea as well. They can help you find the right documents, make the calculations, and make sure you make the deadline.

 
Contact us today if you have any questions, concerns, or are interested in our tax filing services.

The post What Happens If You File Your Taxes Late? appeared first on Capstone LLP Chartered Professional Accountants.