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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

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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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Many small business owners in Canada are unaware of the various deadlines for filing and payment of taxes for their corporations. It is important to ensure that deadlines are met in order to avoid interest and penalties.

Something that may be helpful is that the Canada Revenue Agency (CRA) has a Business Tax Reminders mobile app to help small and medium-sized businesses remember their tax deadlines. The mobile app lets business users create custom reminders and alerts for key CRA due dates related to instalment payments, returns and remittances.

We have also outlined the 2019 deadlines for you below:

Important Dates for Canadian Small Businesses in 2019

Corporate Tax

General Corporations: Balance of corporate taxes payable two months after your corporate fiscal year-end. If your corporation is expected to be taxable in the fiscal year, the CRA must have received the installments required throughout the year, and the estimated balance amount is due by this date, otherwise interest will accrue on any balance due and not paid.

Canadian Controlled Private Corporations (CCPCs): Balance of corporate taxes payable is due three months after your corporate fiscal year-end. If your corporation qualifies for the small business deduction and is expected to be taxable in the fiscal year, the CRA must have received the installments required throughout the year with the balance amount due by this date, otherwise interest will accrue on any balance due and not paid.

All Corporations in Canada: Corporate tax returns (T2) must be filed within six months of your corporation tax year-end. Returns filed after this date with taxes owing will be assessed a penalty on amounts owing as well as late filing penalties.
 

Payroll

Payroll remittances due on the 15th day of the following month for corporations with less than $25,000 in monthly withholding. If your withholding amount exceeds $25,000 then you may be required to remit on an accelerated schedule, more frequently.
 

GST/HST

The due date of a GST/HST return is determined by the reporting period.

Monthly or quarterly reporting period: the GST/HST return must be filed, and any amount owing must be remitted, no later than one month after the end of the reporting period.

Annual reporting period: the GST/HST return must be filed and any amount owing must be remitted no later than three months after the end of the fiscal year.
 

Information Returns and Slips

Information returns that include T4, T4A, T4A-NR, and T5 must be filed on or before the last day of February in each year and shall be in respect of the preceding calendar year. If the due date falls on a Saturday, Sunday, or public holiday, the information return is due the next business day.
 
If you need accounting or corporate tax assistance and require a Small Business Accountant Toronto please contact us.

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Many small business owners are unfamiliar with the tax changes taking place in 2018, especially the changes related to the refundable dividend tax on hand (RDTOH).

What is RDTOH?

RDTOH is a tax mechanism used under the Canadian tax system that is built on the concept of “integration”. The purpose of the integration is for investment income to be taxed at the same rate, whether the income is earned personally or initially by the corporation. Generally, passive investment income, such as interest, rental income, taxable capital gains and portfolio dividends from foreign companies, earned by a Canadian controlled private corporation (CCPC) is taxed at a higher rate than active business income, and a portion of the higher tax can be refunded to the corporation when it distributes taxable dividends to the shareholders.

How Does it Work Currently?

Passive income earned by CCPC is taxed at a high combined corporate tax rate, 50.17% in Ontario. A portion of the taxes (i.e. 30.67% of investment income) is refundable and added to the corporation’s RDTOH account. A tax refund is also allowed on the taxable dividends paid out, at the rate of 38.33%, up to the balance of the RDTOH account. The refund rate on taxable dividends is the same regardless of whether the dividends paid out are eligible or non-eligible.

What are the New Rules?

Effective taxation years that begin after 2018, the existing RDTOH will be divided to two pools: eligible and non-eligible.

The eligible RDTOH account will be deemed to be the lesser of the existing RDTOH balance and 38.33% of the balance of the general rate income pool (GRIP). Any remaining amount of the existing RDTOH balance will be allocated to the non-eligible RDTOH.

The “non-eligible RDTOH” pool will track the refundable Part I tax on investment income, and Part IV tax on non-eligible intercompany dividends. The “eligible RDTOH” account will be created to track only the refundable Part VI tax on eligible dividends.

Here are some points of note:

• An RDTOH refund will only be available when the corporation pays out non-eligible dividends, with an exception for the RDTOH resulted from eligible portfolio dividends received by the corporation.
• Ordering rule: a payment of non-eligible dividend will first generate a refund from the non-eligible RDTOH account, then the eligible RDTOH account.
• Non-eligible dividend payment result in a refund from the eligible RDTOH account only when there is no balance left in the non-eligible RDTOH account.
• No dividend refund is allowed when the corporation with only the non-eligible RDTOH pays eligible dividend.

Some Tax Planning Points

• Maximize eligible dividends paid prior to changes to the highest extent possible
• Pay by way of a promissory note if the company does not have sufficient cash flow to pay out eligible dividends
• Increase investment in CCPCs to create ERDTOH
• Generate more capital gains to pay out capital dividends

If you require any assistance with your corporate tax and accounting needs, contact your Accountants Toronto.

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When running a small business in Canada, most entrepreneurs are savvy enough to know that when revenues (for taxable supplies) exceed $30,000 in any four consecutive quarters, it is time to register for and collect GST/HST. This also means that you’ll need to file GST/HST returns annually, quarterly or monthly, depending on your specific scenario and selection.

These are some common areas that we find small business owners who try to prepare or file their sales tax returns on their own make mistakes that can be costly:
 

Meals and Entertainment

A very common error that can occur is related to expenses and input tax credits (ITCs) related to meals and entertainment. For tax purposes, the allowable portion of the tax deduction for meals and entertainment expenses is 50% of the expense. Similarly, it is important to note that the ITC that can be claimed must follow suit, and only 50% of the GST/HST paid on meals and entertainment expenses are eligible to be claimed as ITCs.

Secondly, in relation to meals and entertainment expenses, when a tip is left for the server, there is no ITC related to the tip, and it is important to ensure that the ITC claim matches the actual allowable portion of the GST/HST paid.
 

Automobile Expenses

As many business owners know, when using a personal vehicle for business purposes, the prorated portion of any business-related expenses can be deducted against income. This would include items such as fuel and maintenance. However, a common oversight is that the ITC claim is not prorated by the respective business use portion as well. It is important to track this closely and ensure consistency between the prorated amount used for the tax deduction claim and the ITC claim.
 

Inter-Corporate Revenues and Expenses

There are often scenarios where a parent company or holding company will charge fees to a subsidiary (or operating company), for taxable supplies such as, for example, rent or management fees. It is common to forget that this is, after all, a commercial transaction, and there should be an agreement or invoice generated, and sales tax must be charged and paid (except for those companies that are eligible and have elected out of GST/HST in such transactions).
 

Summary and Recommendations

Software is available (such as QuickBooks Online and Xero) that can assist with calculating GST/HST collected and the ITCs to be claimed when filing. However, it is important to note that the software is not perfect and may not catch issues such as those noted above. It is always recommended to consult a professional accountant prior to filing anything with the Canada Revenue Agency to ensure that your risk of errors is minimized as much as possible. If you need any assistance with corporate tax or GST/HST filings please contact us.

The post Common GST / HST Filing Errors That Can Cost You 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.

Having your business evaluated by a Chartered Accountant provides you with an accurate picture of what it is worth in the current market. A business valuation is important for business owners if you are looking to make any changes. Professional Chartered Business Valuators can give you an independent and fair valuation of your business to help with the process. Here is when you should get your business valuated:

Selling
If you are looking to sell your business you want to make sure that you know how much it is worth. Getting a business valuation can help you determine what valuation you should sell it at. The option for what to sell it at is up to you then, either at the valuation, below it, or above it. Having a valuation done is also a good negotiating factor because you can physically show buyers what your business is worth rather than having them just go on your word.

Buying/Expanding
If you are considering expanding or buying another business, start off by getting a business valuation of what you already have. This could help with securing loans for expanding. It will also help determine if now is a good time for growing your business. If you are acquiring another business consider doing your own independent valuation of it. They may or may not have gotten one done but hiring someone you trust to evaluate on your behalf is always a good idea, especially for such a big decision.

Reorganization
Businesses, big or small, go through reorganization from time to time. If you are adding shareholders or new partners a valuation might be in order. When you know how much your business is worth you can judge what percentage to give to shareholders, partners, or investors based on how much they invest. If you think your business is worth $100,000 but your partner thinks it is worth $50,000, when they invest $5,000 you will end up arguing about what percentage they own. A valuation helps settle those disputes.

Estate Planning
Everyone at some point in their life will settle down to organize and plan their estate. This is usually done for the purposes of a will. As a business owner, you have the option to leave your ownership to someone else upon your death. It’s important to know how much your business is worth while you are planning this out especially if you are giving it to multiple people.

Matrimonial Separation
Unfortunately, marriage does not always work out. During a matrimonial separation, all assets are assessed and discussed. If you own a business, whether you own it together or separately, it will likely be up for discussion. Most likely you will get a business valuation done on it to determine how much it is worth. In most divorces assets are divided somewhat evenly, but that doesn’t mean everyone gets half of everything. If you want full ownership of your business you might exchange it for other assets of equal value.

Conclusion
Having an up to date and fair valuation of your business is never a bad idea. It gives you a good look at how much the business you spend your time running is worth. Contact us today if you would like to set up a business valuation.

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