Year-End Tax Planning Tips - 2022

While it is important to take care of tax-planning throughout the year, a strategic approach at the end of the year can help you make sure that you’re making the most of your tax situation and taking advantage of any year end tax planning opportunities available before the December 31st deadline. As we enter the final weeks of 2022, here are some tips to consider for your year end tax planning.

Personal Tax Tips

1) Accrued Capital Losses/Capital Gains

If you have investments that have decreased in value over the course of the year, ensure you trigger the disposition to create a capital loss before year end. This loss can then be used to offset any capital gains realized during the same calendar year, carried back three years or carried forward indefinitely to reduce capital gains in future years. In order for the loss to be available for 2022, ensure that the transaction settles before December 31st, which means that the last trade date should be no later than December 28, 2022.

If you purchased investments in a foreign currency, be mindful of the impact of the currency fluctuations on your capital gain or loss. In certain cases, the gain or loss may be larger or smaller than you anticipated.

Similarly, if you have accrued capital gains on your investments, consider delaying the sale until 2023 and thus deferring the capital gain. This could be advantageous if you anticipate your tax rate to be lower in 2023.

2) Set up a prescribed rate loan

A prescribed rate loan is a tax-effective strategy for transferring income from a person in a higher tax bracket to one in a lower tax bracket, such as your spouse, common-law partner, children or even a family trust. This type of loan involves lending funds to the recipient and charging interest at the rate of interest that is set every quarter by the Canada Revenue Agency (“CRA”), currently 3%. This is an excellent way for anyone with investment funds earning more than 3% and whose spouse is in a lower tax bracket than them to save tax.

Due to the latest interest rate increases, the prescribed interest rate will increase from 3% to 4% on January 1, 2023. As a result, if a loan agreement is entered into before December 31, 2022, the lower 3% prescribed interest rate will apply as long as the loan remains in good standing. To avoid attribution of income, interest on the loan must be paid each year at the prescribed rate by January 30th of the following year, and interest payment should be recorded.

If you want to read an in-depth analysis of how prescribed rate loans work, see our article, "Benefits of Using Prescribed Rate Loans to Save Tax".

3) Registered Retirement Savings Plan (RRSP) Contributions

Contributing to a RRSP can help reduce your taxable income, as well as provide tax-sheltered growth for the future. Contributions made by December 31st are eligible for deductions on your 2022 tax return. You also have the option to defer your RRSP contribution deduction if you expect to be in a higher tax bracket in the near future.

It is important to note that the deadline for making RRSP contributions for the 2022 tax year is March 1, 2023 and your maximum 2022 deduction is limited to 18% of income earned in 2021, to a maximum of $29,210 less pension adjustment.

If you turned 71 in 2022, you must make your final RRSP contribution by December 31, 2022, before your RRSP is converted into a RRIF or registered annuity. If you still have unused RRSP contribution room even after making the contribution to your RRSP in 2022, you have the option to use your contribution room after 2022 to make contributions to a spousal RRSP until the end of the year your spouse or partner turns 71. This will not work if your spouse has already turned 71.

4) Make Registered Education Savings Plan (RESP) Contributions

The deadline for making RESP contributions for the 2022 tax year is December 31, 2022. Contributions made before December 31st are eligible for the Canada Education Savings Grant (CESG). The CESG is an additional grant from the Government of Canada, equal to 20% of annual RESP contributions of $2,500 or maximum annual grant of $500 per child.

Hence, before December 31, take a few minutes to check your RESPs to make sure that you are on track to receiving the full CESG for the year. If not, consider making a catch-up contribution to ensure that you don't miss out on any free grant money. For more information on how you can maximize your RESPs, read our article, "How to Maximize your RESP?".

5) Pay tax-deductible expenses in 2022

Plan ahead to pay any deductible expenses before December 31st in order to reduce your taxable income for 2022 and claim these deductions and credits on your return. These include but are not limited to the following:

6) Plan your move to a different province or territory

For tax purposes, individuals are taxed on their income based on where they live on December 31st. If you are planning to move between provinces, consider:

Note that if you moved to be closer to work, your moving expenses may be deductible.

7) Pay your tax installments

If you are an individual and are required to make quarterly installments, make sure to review your 2022 tax liability and make your final tax installment on or before December 15th to avoid late interest charges.

If you have missed an earlier payment and need to catch up, make sure you do so before December 15th as the CRA will apply a late interest charge on any unpaid tax installments.

8) Review your income tax deductions at source

If you anticipate your taxable income to be lower in 2023 or will have excess tax deductions or non-refundable tax credits, you can request your employer to deduct less by filing federal Form 1213.

9) Income timing

You may want to consider deferring certain employment income from 2022, to 2023 if you anticipate your taxable earnings to be lower in 2023. This could include deferring bonus or commission income (if allowed by your employer).

Business Tax Tips

1) Pay your salaries and/or dividends

As a business owner, you should consider paying reasonable salaries to yourself and family members who work in your business before December 31, 2022. This will help to reduce your corporate income tax bill while providing your family members and yourself RRSP contribution room for 2022.

Before paying dividends to any other family members, speak with your tax advisor to review the possible application of the Tax on Split Income (TOSI) rules.

2) Declare your bonuses

Consider declaring your year-end bonuses before December 31st to take advantage of the corporate tax deduction in 2022. A bonus is generally deductible to the corporation in the year it is accrued, if it is paid within 179 days of the corporation's year-end and appropriate source deductions and payroll taxes are remitted on time following payment of the remuneration.

Also, it is generally taxable to the individual as employment income when it is received. Hence, since you will receive the bonus in 2023, the taxes on that bonus will be deferred by a year.

3) Repay your shareholder loans

If you have a shareholder loan from your corporation, ensure that you pay back the loan within one year following the end of the taxation year of the corporation in which the loan was made to avoid having a personal tax income inclusion. There are exceptions to these rules. For more information on the tax rules with respect to shareholder loans, read our article, "Shareholder Loans and Their Tax Implications".

4) Purchase capital assets for your business before December 31st

If your business needs new capital equipment, consider making those purchases before December 31st, so you can claim depreciation on the asset for tax purposes in 2022, provided that the assets are available for use in 2022.

5) Pay your final corporate tax balances

The deadline to pay your final corporate income tax balances is two months after year end for most corporations (three months for certain CCPCs). Please ensure you are caught up on your payments to avoid non-deductible interest charges.

It is important to review your strategies from year-to-year in order to keep up with changing regulations and understand how they may impact your specific tax situation. Be sure to consult a qualified tax professional before making any major financial decisions in order to ensure that you are getting the best advice tailored to your personal situation.  

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Benefits of Using Prescribed Rate Loans to Save Tax

If you are looking for ways to lower your family’s income tax bill, you may want to consider using prescribed rate loans. Prescribed rate loans are loans made at a rate of interest that is set every quarter by the Canada Revenue Agency (“CRA”). Generally, the prescribed rates are lower than those rates offered by banks or other financial institutions. As such, they can be a great tax planning tool to income split and transferring income from high-income family members to lower-income family members to reduce total income taxes for the family unit.

Attribution Rules

Before we go further into how this type of tax planning can work in your situation, taxpayers should first be aware of the attribution rules under the Income Tax Act (“ITA”) that limit or prevent income splitting among family members in lower tax brackets. Attribution rules apply whenever a property is transferred or loaned at less than the prescribed rate by:

Where such gifts or loans are made, any income or capital gains arising from the gifted or loaned property will be attributed back to the taxpayer who transferred the property and then taxed at the higher marginal tax rates of the taxpayer. However, in the case of a transfer to a minor child, the income will be attributed back to the taxpayer but any capital gains arising from the property will be taxed in the hand of the child. The following rules do not apply to gifts intended for adult family members who aren’t your spouse or common-law partner.

Prescribed rate loans

A simple approach to avoid these attribution rules is to use a prescribed rate loan.  If a taxpayer makes an investment loan to a spouse, adult family member, minor child or family trust, and charges interest on the loan at the prescribed interest rate, then any income they earn on the funds will be taxable to the recipient family member and not to the taxpayer.

When an appropriate strategy is used, these plans can be successful. When the investment rate of return generated is greater than or equal to the prescribed interest rate charged on the loan, they function effectively. Because the income earned on the rate difference will be taxed at a lower marginal tax rate for family members in such circumstances, a net benefit will be realized. It is also vital to note that, once a loan has been granted, the initial rate stated at the time of the loan remains in force for the duration of the loan, even if subsequent rates are increased or decreased.

Due to the latest interest rate increases, the prescribed interest rate will increase from 1% to 2% on July 1, 2022. As a result, if a loan agreement is entered into before July 1, 2022, the lower 1% prescribed interest rate will apply as long as the loan remains in good standing.

How can I use prescribed loans for income splitting and tax planning?

Prescribed rate loans can be beneficial for lowering your family’s income tax bill because it allows income splitting and avoids the income and capital gains attribution rules. One way to do this is by giving loans to a spouse or a trust for the benefit of a spouse at the prescribed interest rate. This allows the higher income spouse to split income with a lower-earning spouse (married or common law), resulting in tax savings based on the difference in marginal tax rates between spouses. This is an excellent way for anyone with investment funds earning more than 1% and whose spouse is in a lower tax bracket than them to save tax.

Another common way prescribed loans are used is for inter vivos family trust planning, where a family member who is the high-income earner, makes a loan to the trust. It is advantageous to provide a loan to a trust with minor children or grandchildren beneficiaries, who usually have a significantly lower marginal tax rate than the person loaning the funds. The trust income can be distributed to these minor beneficiaries and used for expenses like school tuition, education expenditures, and camp fees. Each minor beneficiary will be taxed at their lower marginal rate on the income used for their benefit.

Essentially, this type of trust and loan planning benefits anyone in a high tax bracket whose spouse is in a lower tax bracket or who has children or grandchildren at school and extracurricular expenses and who would like to decrease their overall family income tax burden.

Please note that the tax on split income (TOSI) rules will also have to be considered if a trust, partnership, or private corporation is part of the strategy. These rules are highly complex and may result in no advantage if they apply.

How do I set up a prescribed rate loan?

The critical thing to remember with prescribed rate loans is that they must be structured correctly to be considered a prescribed rate loan by the CRA. In addition, there are a few things you’ll need to do to set up a prescribed rate loan:

If you are looking for ways to reduce your family’s income tax bill, prescribed rate loans can be an effective tool. However, the prescribed rate rules can be complex and should be reviewed carefully before implementing any tax planning strategies. If you have any questions about prescribed rate loans and how you can take advantage in your specific situation, please contact us.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Tax Obligations as a Non-Resident of Canada

Non-residents of Canada are subject to different tax rules than residents. Generally, Canadian tax residents pay tax on worldwide sources of income. By contrast, if you are a non-resident of Canada, you are only liable to pay tax on income or gains from Canadian sources. The amount of tax you owe will depend on your residency status and the type of income you receive.

There are two types of taxes that non-residents may be subject to: Part XIII tax and Part I tax. Part XIII tax is a withholding tax that is deducted from certain types of income, such as interest and dividends, rental payments and pension. Part I tax is a general income tax that applies to all forms of income, including employment income, business income, and capital gains.

This article will go over the basics of when you are considered  a non-resident for Canadian income tax purposes, as well as outline your tax obligations as a non-resident. Furthermore, we will provide a brief overview of when and how a non-resident  can elect to file a return in Canada.

What does residency status mean?

Residency status is used to determine whether an individual is considered a resident or non-resident of Canada for tax purposes. An individual’s residency status is determined by a number of factors, including the length of time they have been in the country, their ties to Canada, and their intention to live in the country permanently.

Who is a Non-Resident of Canada for tax purposes?

An individual may be considered a Non-Resident for income tax purposes if they:

The most important thing to consider when determining your residency status for income tax purposes is whether or not you have, or are establishing, significant residential ties with Canada.

Significant residential ties to Canada include:

Secondary residential ties that may be relevant include:

If you are unsure of your residency status, or if you require assistance in determining your tax obligations as a non-resident of Canada, we recommend that you consult with a qualified tax professional. Alternatively, it is also a good idea to contact CRA prior to filing your return to ensure you are declaring the proper status. You can visit the CRA website or complete the NR74 Determination of Residency Status (entering Canada) form or the NR73 Determination of Residency Status (leaving Canada) form and send it to the International tax and non-resident enquiries office to get an opinion from the CRA about your residency status.

Do Non-Residents need to pay taxes in Canada?

Non Resident Taxes
Tax Obligations As A Non-Resident Of Canada 2

As a non-resident, you are subject to Canadian income tax on most Canadian-source income paid or credited to you during the year unless all or part of it is exempt under a tax treaty. Tax calculated on the income of a non-resident of Canada is known as non-resident tax.

In general, non-resident income is subject to Part XIII tax or Part I tax in Canada. If you own a business in Canada or earn employment income in Canada, your income is subject to Part I tax. Part XIII tax applies to dividends, rental payments, old-age pensions, retirement income payments, and annuity payments as well as other types of investment income.

Part XIII tax

Part XIII is a non-resident withholding tax charged at a rate of 25% and is deducted from the type of incomes listed below. However, if there is a tax treaty between Canada and your country or region of residence, the terms of the treaty may reduce the rate of non-resident withholding tax.  Hence, to ensure that the correct Part XIII tax is deducted at source, it is important to tell Canadian payers from which you receive the following income that you are a non-resident of Canada, and also inform them of your country of residence.

If the correct amount of Part XIII tax has been deducted from your income by your Canadian payer, you are not required to submit an annual Canadian income tax return. In that case, the Part XIII tax withheld would be considered your final tax obligation to Canada on that income.

If the correct Part XIII tax has not been withheld, you may choose to voluntarily disclose this information and make the necessary tax payment. In certain circumstances, it will be beneficial for you to file a elect to file a special return to recover some of the Part XIII tax withheld or to eliminate your Canadian non-resident tax owing. Refer to Elective Returns below for more information.

The most common types of income subject to Part XIII are:

Part I tax

Part I tax is a general income tax that applies to all forms of income, including employment income, business income, and capital gains. The most common types of income that may be subject to Part I tax are:

This type of tax is generally deducted at source by the payer. You may be entitled to claim certain deductions from income to arrive at the taxable amount when you file your Canadian tax return. You can also claim a credit for any tax withheld at source or paid on this income. Similar to Part XIII tax, if there is a tax treaty between Canada and your country or region of residence, the terms of the treaty may reduce or eliminate the tax on certain types of income.

Do Non-Residents need to file a tax return in Canada?

Once you have determined that you are in fact a non-resident of Canada, either through assessment by CRA or consultation by a tax accountant, you may be required to file a Canadian income tax return to calculate your final tax obligation to Canada on:

As a result of filing the return, you can either receive a refund of some or all of the tax withheld or have a balance of tax owing for the year.

The following are some examples where individuals or corporations will require non-resident tax services:

When can I elect to file a Non-Resident tax return?

In addition to the instances when you must file a non-resident tax return, there are times when you can elect to file a non-resident tax return.

Elective returns can be filed under sections 216, 216.1, 217, and 218.3 of the Act. When you file under these sections, you have the option of paying tax on certain types of Canadian-source income using an alternative tax method. This means that you may receive a refund for some or all of the non-resident tax withheld.

The most common situations where you might choose to file an Elective Non-Resident tax return would include where Part XIII tax was deducted on:

Summary

In summary, as a non-resident of Canada, you are still required to comply with Canadian tax law. This includes filing a Non-Resident tax return and paying any taxes owing. Non-compliance can result in significant penalties, so it is important to ensure that you are up-to-date on your tax obligations.

If you have any questions about your specific tax situation, we recommend speaking with a qualified tax professional. You can also contact us  and we can help guide you through the complexities of non-resident tax.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How to Withdraw Funds From Your Business

If you’re running a business, there may come a time when you need to withdraw funds from your business. Many business owners put their salaries, dividends, or other compensation on hold during the early phases of their business in order to reinvest the gains in the company to help it expand. At some point though, the business owner would want to take some cash out for personal needs as the business becomes more established.

However, withdrawing funds from your business is not as simple as it sounds and can have tax consequences. Though there are tax efficient ways to take money out of your business, but it will differ for each business owner depending on their specific situation. Several factors may influence which method is better, including the tax rates where you reside, the tax rates where your business operates, and whether the corporation has certain tax attributes that can be utilized to minimize tax. In addition, while some methods of withdrawing cash from your corporation are taxable, some could be tax-free. Each option, however, has its own advantages and disadvantages which we will explore below.

Salaries and bonuses

Generally, the most common method owners will use to withdraw funds from their business is via a salary which is similar to an employee being remunerated. In addition, other family members that are working for the business can also be paid a salary as long as the amount is reasonable.

From a tax perspective, at the corporate level, the business is able to deduct the salary expense from its taxable income and lower the corporate tax rate. However, for a salary or bonus payments to be deductible for the corporation, the amount paid must be reasonable. Based on Canada Revenue Agency (“CRA”). a reasonable salary would be equivalent to the amount the business would pay a third party for the same work activities. Note that there is an exception for salary paid to owner-managers. The CRA would not question the amount of salary paid by a Canadian Controlled Private Corporation to its Canadian resident owner who actively participates in the operations of their company. Another thing to consider at the corporate level is the additional employer cost associated with payroll taxes such as CPP/QPP contributions and employment insurance (EI) premiums.

At the individual level, the taxpayer or business owner will be fully taxed on the salary amount at their personal marginal tax rates that are applicable based on the jurisdiction in which they live. In addition, payment of salary or bonus is considered earned income for the purpose of generating Registered Retirement Savings Plan (RRSP) contributions room for the individual.

Taxable dividend

Taxable dividends can also be used to withdraw funds from your business. Dividends are the profits a company keeps after paying off taxes from its net profits. They’re paid out to shareholders of the company, thus you, your spouse, and your children must own shares of your corporation directly or indirectly (i.e., through a trust or a holding company).

At the individual level, dividends are taxed more efficiently than a salary since the tax rate depends on the characteristics of the dividend (i.e., eligible or non-eligible). However, in contrast to salary, dividends can result in a larger reduction to Old Age Security benefits because of the dividend gross-up mechanism. At the corporate level, the payment of dividends will not be deductible to the corporation. In addition, payroll taxes such as CPP/QPP contributions and employment insurance (EI) premiums will not be an added cost to the corporation or the shareholder.

Under this option, consideration should also be given to both the tax on split income (TOSI) rules and corporate attribution rules before any distribution is made. Generally, taxable dividends from a private corporation to family members who don’t contribute to the business will be taxed at the top marginal rate under the TOSI rules. Similarly, corporate attribution rules under the Income Tax Act (“ITA”) can also apply when an individual tries to income split with family members  in lower tax brackets by transferring or lending property to a corporation. For corporate attribution to apply, the main purpose of the transfer or loan would be to reduce the income of the transferor or to benefit a designated person such as spouse or minor child, thus resulting in the income being attributed back to the transferor.

Capital dividend

Another tax-efficient way to withdraw funds from your business is to pay yourself a dividend through the corporation’s capital dividend account (CDA). The CDA is a notional account that tracks the non-taxable portion of the capital gains and the non-allowable portion of capital losses that is earned by a private corporation. In addition, other amounts such as capital dividends received or paid by the corporation and certain life insurance proceeds received in excess of the policy’s adjusted cost base are also included in the CDA calculation.

A positive balance in a corporation’s CDA is usually a result of net capital gains and can be distributed to Canadian resident shareholders as a tax-free dividend. However, because the CDA is calculated on a cumulative basis, a capital dividend must be paid as soon as capital gains incur to avoid the realization of capital losses. Capital losses incurred after paying a capital dividend will not retroactively affect the tax-free distribution previously received, even if the loss is carried back. Accordingly, it is advisable to pay out the balance of the CDA as soon as it becomes available.

Having said that, calculating the CDA can be complex. In addition to rules regarding what is allowed and what is not allowed in the CDA, timing considerations must also be taken into account when calculating the CDA balance. For these reasons, it is imperative that you speak to a tax professional in advance of paying a dividend from your corporation’s CDA.

Paid-up-capital

The paid-up capital (PUC) of your shares represents the consideration your corporation received in return for the shares it issued. In some cases, your corporation can return the PUC to you tax-free as return of capital . This may be a good strategy if you have a high PUC on your shares and the corporation no longer requires the funds.  In this case, you can take out a tax free distribution by reducing the PUC on your shares.

Obtaining shareholder loans

Another option to withdraw funds from your business is by obtaining a shareholder loan from your corporation. Shareholder loans can be a useful way to manage short-term personal cash needs. However, the ITA contains very specific rules limiting the ability of a shareholder to borrow funds from their corporation. The general rule is that if you borrow funds from your corporation and the loan is not repaid, the amount borrowed is included in your personal income in the year you borrowed the money, unless the loan meets certain exceptions.

The most common exception is if the loan is repaid within one year after the end of the taxation year of the corporation in which the loan was made. However, this exception will not apply if the repayment was part of series of loans and repayments.

Generally, if the business owner needs a short-term loan for less than a year, a shareholder loan could be an easy way to obtain the funds. If used properly, shareholder loans are a great tool for tax planning and cash management.  However, the shareholder rules under the ITA are complex, so speak to a tax professional to avoid negative tax consequences. For more details on shareholder loans, read our article titled “Shareholder loans and their tax implications.”

Repaying shareholder loans

Unlike the option above, if the shareholder has loaned funds to their company, there would be no tax consequences if they want the corporation to repay a portion or all of this loan.  Any amount the shareholder receives as settlement for the shareholder loan will be considered a tax-free distribution.

­­­The most important thing when withdrawing funds from your business is to take the time to properly plan how you are going to withdraw the funds to ensure you are paying the minimum amount of tax. The most tax efficient way to extract funds depends on your unique situation and various factors can influence the end result. The above-mentioned options are available as a general guideline but the best possible solution can be determined with the help of a tax professional as different options can have different tax consequences. If you need help to create a strategy that works best for you, please contact us.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Tax Advantages of a Canadian Controlled Private Corporation (CCPC”

If you plan on starting a Canadian business, you can choose from many different kinds of corporation structures. For tax purposes, the corporation type determines whether or not the corporation is entitled to certain rates and deductions at the end of the tax year. One of the most popular and tax efficient corporations is the Canadian Controlled Private Corporations (CCPCs). In the section below, we will discuss the many tax benefits available to CCPC’s due to their status.

What is a CCPC and how to qualify for CCPC status?

CCPC definition under the Income Tax Act is a private corporation that is Canadian and not controlled by non-residents or public corporations. To qualify as a CCPC, a corporation must meet the following criteria:

  1. The corporation needs to be private, which means that its shares cannot be listed on a designated stock exchange;
  2. The corporation needs to be a Canadian corporation, which means that it is incorporated in Canada and thus is deemed a resident of Canada; and
  3. The corporation cannot be controlled by non-residents or public corporations, meaning that non-residents or public corporations cannot directly or indirectly control the company.

As long as your corporation fits within this definition, it will maintain its CCPC status and continue to reap the tax benefits listed below.

Tax advantages of a CCPC

The Canadian government wants to incentivize Canadian residents to start local businesses in Canada. One of the ways it does this is by offering several tax incentives for CCPCs such as small business deduction, lifetime capital gain exemptions, enhanced investment tax credits for expenditures on scientific and experimental research, and employee stock option benefits. Simply put, CCPCs are eligible for more tax credits and typically pay lower taxes on their taxable income than other corporations.

Please note that to take advantage of these benefits, the corporation needs to ensure that they maintain or retain their CCPC status as set out above. A change of corporation type may result in significant tax consequences.

Small Business Deduction

The most advantageous benefit of a having a CCPC status is access to the small business deduction (“SBD”) that significantly reduces the corporate tax the corporation would otherwise pay on their active business income up to $500,000. For example, on the first $500,000 of active business income of a CCPC claiming the SBD, the federal tax rate is 9% while Ontario is 3.2%, making the total CCPC tax rate to be 11.2%. In contrast, for a corporation that is not a CCPC, the federal tax rate is 15%% while Ontario is 11.5%, thereby making the total tax rate to be 26.5%.

Refundable Investment Tax Credits under the Scientific Research & Experimental Development (SR&ED) Program

To promote technology advancement in Canada, the government of Canada has an SR&ED program that allows corporations to claim investment tax credits on certain qualifying expenses up to a certain specified limit. However, for certain corporations, the investment tax credits are fully refundable; for others, the non-refundable portion is carried forward for a specified number of years.

In the case of CCPCs, the federal government has a very generous program that allows CCPCs to earn refundable investment tax credits at an enhanced rate of 35% on qualifying expenditures up to a maximum limit of $3 million (i.e. up to $1,050,000 of refundable tax credit). Over the $3 million SR&ED expenditure threshold, the credit rate is reduced to 15% for CCPCs, of which 40% may be refundable while the non-refundable portion can be carried forward 20 years. In contrast, a non-CCPC is eligible for a non-refundable federal credit at a rate of 15%.

Lifetime Capital Gain Exemption

Another significant tax benefit of a CCPC is the lifetime capital gains exemption (“LCGE”) available to CCPC shareholders. LCGE provides Canadian resident individuals with a considerable tax benefit when disposing of qualified small business corporation shares (“QSBCS”).

To meet the definition of a qualified small business corporation, the corporation must first qualify as a CCPC. In addition, the shares must be held for 24 months or more. Upon disposal, 50% of the LCGE is netted against the taxable capital gain, eliminating some or all of the taxable capital gain. For 2022, the lifetime capital gains exemption limits is $913, 630. This means that a CCPC shareholder that meets all the conditions of QSBC shares can shelter their taxable gain up to the LCGE limit. Please note that the LCGE limit is indexed to inflation every year.

Employee Stock Option Benefits

Employee stock options are another area where a CCPC status benefits tax treatment. Generally, when an employee stock option is issued, there are no tax implications for either the employer or employee. However, a tax benefit arises under the income tax act when the employee exercises the stock option.

Upon exercising the stock option, a non-CCPC employee will have incurred a taxable benefit and must include that in their taxable income. The amount of the benefit to be included is equal to the fair market value of the shares purchased minus the amount paid by the employee to the corporation for the shares, and minus the amount (if any) paid by the employee to acquire the stock options.

Conversely, a CCPC employee does not have to include a benefit amount in their income when exercising their stock option. Instead, they only need to pay tax when they dispose of their shares for a gain, allowing them to defer tax until the disposition of their shares.

Extension of the payment deadline

Most other corporations make monthly tax installments and pay their remaining balances within two months after year-end. But CCPCs are eligible for quarterly installments and an extra month at year-end. To qualify, they need to be a CCPC for the entire tax year, claim the full small business deduction, and have a perfect tax payment record for the year.

If you are planning to incorporate a Canadian business, a CCPC corporation could be the right choice. Even though it offers significant tax advantages, it’s advisable to review its nature and scope before making a choice. For more information and additional questions, please  contact us.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Federal Budget 2022 – Highlights

The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, delivered the 2022 Federal Budget on April 7, 2022: A Plan to Grow Our Economy and Make Life More Affordable.

The measures announced focus on economic growth, affordable housing, climate change, and public healthcare.

Below are some of the highlights:

Corporate Tax Measures

Small Business Deduction

Budget 2022 expanded the eligibility to allow more medium-sized Canadian-controlled private corporations (CCPCs) to access the small business deduction. Currently the small business rate of 9% versus the general federal corporate rate of 15% is available on the first $500,000 of active business income. However, access to the small business rate is reduced when a business has taxable capital greater than $10 million and is eliminated at $15 million. The budget has proposed new phase out range of the taxable capital to be $10 million to $50 million, which means small business limit would now be completely reduced at $50 million instead of $15 million. Therefore, this means that more capital intensive businesses that often aren’t eligible could now have access to the small business rate.

Preventing the Use of Foreign Corporations to Defer Canadian Tax on Passive Income

Presently, some people are manipulating the Canadian-controlled private corporation (CCPC) status of their corporations to avoid paying the additional refundable corporate income tax that they would otherwise pay on investment income earned in their corporations. For example, this includes moving a corporation into a foreign low-tax jurisdiction, using foreign shell companies, or  moving passive portfolios to an offshore corporation.

The Federal budget introduces measures to prevent taxpayers from restructuring CCPCs to avoid the refundable tax regime. This will be achieved by introducing the concept of a “substantive CCPC” to which the same refundable tax regime would effectively apply. This measure would apply to taxation years that end on or after April 7, 2022.

Housing Owned by Corporations

The Government announced a federal review of housing as an asset class to better understand the role of large corporate players and their impact on Canada’s residential housing market. This will include the examination of a number of options and tools, including potential changes to the tax treatment of large corporate players that invest in residential real estate. Further details on the review will be released later this year, with potential early actions to be announced before the end of the year.

Tax Credits (Budget 2022)

Personal Tax Measures

Home Buyers’ Tax Credit

Currently, first -time home buyers are eligible to claim a non-refundable tax credit of $5,000. The Federal budget proposes to increase this amount to $10,000. The enhanced credit will provide up to $1,500 in tax relief to eligible first-time home buyers.

This measure will apply to homes purchased on or after January 1, 2022.

Tax-Free First Home Savings Account

Budget 2022 proposes the new Tax-Free First Home Savings Account (FHSA) to help first-time home buyers save for a home. FHSA will be similar to a registered retirement savings plan, where the contributions will be tax deductible and income earned would not be subject to tax. And any amounts withdrawn would be non-taxable so as long as the funds are withdrawn for the purpose of buying a first home.

To open an FHSA, you must be a Canadian resident, at least 18 years of age, and you can’t have lived in a home that you owned either in the year you open the account or during the prior four calendar years. The annual contribution limit under FHSA is $8,000 and the lifetime limit is $40,000.

Please note that the Home Buyers Plan (HBP) will still be available; however, individuals will only be permitted to make a withdrawal under either FHSA or HBP, in respect of the same qualifying home.

Multigenerational Home Renovation Tax Credit

There is a new Multigeneration Home Renovation Tax Credit that is a refundable tax credit, aimed at providing relief for constructing a secondary dwelling unit for a senior or a person with a disability. Eligible expenses would include up to $50,000, thereby providing up to $7,500 in tax relief. The credit is available for qualifying expenses or work performed on or after January 1, 2023.

Home Accessibility Tax Credit

Under the existing rules, the Home Accessibility Tax Credit (HATC) is a non-refundable tax credit that is available for expenses incurred in connection with alteration of a home to make it more accessible for a qualifying individual. Currently, the maximum expense limit on this tax credit is $10,000 but Budget 2022 proposes to increase this amount to $20,000 for 2022 and subsequent taxation years. This means that eligible individuals can receive a tax credit of up to $3,000 (previously $1,500).

Residential Property Flipping

The Government continues to be concerned with individuals who purchase real estate with the intention of “flipping” or selling it within a short period of time. Under the existing tax rules, profits from flipping real estate are to be taxed as business income instead of capital gain tax rates.

To ensure that individuals are not receiving the capital gain tax treatment on these sales, the Government has introduced a new deeming rule to ensure that profits from flipping are subject to full taxation. Effective Jan 1, 2023, profits from the sale of residential real estate, including rental property, that was owned for less than 12 months would be deemed business income.

The exception to this rule would apply to Canadians who sell their home due to a life event, including death, disability, the birth of a child, a new job, separation, personal safety, insolvency, or an involutory disposition such as an expropriation.

Medical Expense Tax Credit for Surrogacy and Other Expenses

The budget is expanding the list of medical expenses for 2022 and subsequent taxation years to include a variety of expenses related to the areas of surrogacy, sperm, ova or embryo donations.

Labour Mobility Deduction for Tradespeople

The Federal budget introduces a new Labour Mobility Deduction for tradespeople and apprentices in the construction industry to deduct certain travel and relocation expenses incurred in the course of employment for eligible temporary relocations. This measure will provide a deduction of up to $4,000 per year and will apply to 2022 and subsequent taxation years.

Sales Tax Measures

Taxing Assignment Sales

Currently, when a person makes a new home assignment sale, Goods and Services Tax / Harmonized Sales Tax (GST / HST) may or may not apply, depending on the situation. To address the perceived non-compliance of the current rules by housing speculators, the Federal budget proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST / HST purposes, effective May 7, 2022.

Other Tax Measures

Ban on Foreign Investment in Canadian Housing

The Federal budget announces the government’s intention to propose restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non- recreational, residential property in Canada for a period of two years. However, exemptions would apply to refugees, international students on the path to permanent residency and individuals on work permits who are residing in Canada.

National dental care program

Budget 2022 proposes to provide a national dental care plan for families with less than $90,000 annual household income.

Reporting requirements for RRSPs and RRIFs

Budget 2022 proposes to increase the required reporting to the CRA by financial institutions for RRSP and RRIF accounts. Beginning with the 2023 tax year, financial institutions will be required to annually report the total fair market value of RRSP and RRIF accounts as at December 31, in addition to the current reporting of contributions and withdrawals

Summary

To sum up, the Federal budget includes various measures that impact individuals and businesses. However, some of these measures were introduced with varying level of details and certainty. As more information is released in the coming months with respect to some of the measures introduced, it is important to contact us to determine the impact to you and your business. For a detailed summary of the summary, click here.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Should I Incorporate?

Should I incorporate? This is a question that is often asked by many of our clients. As a business owner, at some point in your business life cycle, you will have questions about whether you have the right structure in place to support your business and its expansion.

Most small businesses start out as a sole proprietorship but as they grow, this arrangement can become less beneficial. The right structure can help you save on taxes and allow you to do planning that is otherwise not available as a sole proprietorship. Generally speaking, incorporating your business provides greater advantages than operating as a sole proprietorship to both owners and the business itself.

What does it mean to incorporate?

Before one decides to incorporate their business, it is important to understand what “incorporating” means. Essentially it is the process of establishing a new legal entity that is separate from you as an individual owner. Legally, corporations possess the same rights and responsibilities as individuals. This means that they can enter contracts, carry on business, own assets, incur liabilities, hire employees, and pay taxes.

What are the key advantages of incorporating?

Limited liability

This is probably the greatest advantage of incorporating. Limited liability means that that the owner doesn’t assume personal responsibility for the obligations of the corporation compared to a sole proprietorship. Thus, when you are operating your business through a corporation, it makes it more difficult for someone to go after your personal assets if the business defaults on its debts. Thus, even if a corporation goes bankrupt, shareholders losses are limited to the amount invested in the corporation.

Easier access to capital

Similar to an individual, corporation can obtain financing from financial institutions. Some lenders view corporations as more stable and credible than unincorporated businesses and for this reason, it is easier for them to get financing. A corporation also has the ability to raise capital through issuing shares or bonds to investors.

Continuous existence

Another key advantage of a corporation is that it continues its existence regardless of what happens to the shareholder. Under a sole proprietorship, the business dissolves or stops existing when the proprietor passes away. In comparison, as the corporation is a separate legal entity, it has an infinite lifespan. Essentially a corporation continues its existence until it has been dissolved.

Lower tax rates

Operating your business through a corporation gives access to various tax planning opportunities and tax savings, including:

What are the disadvantages of incorporating?

Lenders may require personal guarantee

If your corporation has few assets, a lender of business loans may require shareholders to provide personal guarantees. As part of the personal guarantee agreement, a lender can take possession of the shareholder personal assets, thereby defeating the protection of liability under a corporation.

Additional filings required

Operating through an incorporated entity requires filing of annual corporate tax returns and maintaining corporate records annually which gives rise to annual legal and accounting costs.

More expensive to set up

“Should I incorporate” is a question that should only be answered after taking the advantages and disadvantages outlined above into consideration. If you’re still unsure, contact us.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Shareholder Loans and Their Tax Implications

Shareholder loans are a common business practice that gives shareholders the flexibility to borrow from their corporation when they need cash. While these types of transactions are not uncommon, shareholders need to be aware of the potential tax consequences that result when the shareholder has a balance owing to the corporation.

Under the Canadian Income Tax Act (ITA), there are complex rules surrounding the tax implications of shareholder loans. The purpose of these rules is to ensure individuals do not try to take funds out of their corporations on a tax free or tax-deferred basis.

Generally, shareholders are taxed on any amounts received from a corporation. Based on Subsection 15(2) of the ITA, if you are a shareholder of a corporation and you receive a loan or otherwise become indebted to the corporation, the amount of the loan is to be included in computing income of the shareholder, unless the loan meets certain exceptions. The same tax treatment would also apply to anyone who was non-arms length with the shareholder such as their spouse, children and siblings. To avoid the income inclusion, there are a number of exceptions in the ITA.

Exceptions

Loan repaid within one year

The most common exception is if the shareholder loan is repaid within one year after the end of the taxation year of the corporation in which the loan was made. However, this exception will not apply if the repayment was part of series of loans and repayments. This means that if a shareholder repays the loan by the due date and borrows a similar amount shortly after, the CRA would view this as part of a series and would include the full principal amount of the loan in the income of the shareholder. The purpose of this rule is to prevent business owners from providing themselves or other shareholders long term loans that effectively allow them to use corporate funds for personal purchases while deferring their tax obligations. For illustration purposes, lets look at an example.

Joe has a corporation with a year end of December 31. Joe takes out a shareholder loan from the corporation for $100,000 on September 10, 2021, Joe has until December 31, 2022, to repay the loan to fall within the exception noted above. If Joe does not repay one year after the year-end (December 31, 2022), CRA will include the shareholder loan in his taxable income for 2021. If the loan is repaid at a later date (i.e 2023), the repayment allows Joe to claim a deduction in his personal tax return for 2023.

Another point to note is that for the shareholder loan not to be considered income, there must be interest charged by the corporation to the shareholder at a prescribed rate on the loan amount.  To see the current CRA prescribed interest rates on shareholder loans, click the link here.

Shareholder employee exception

Another exception applies where:

a) you received the loan in your capacity as an employee of the corporation rather than in your capacity as a shareholder and;

b) at the time of the loan, bona fide arrangements were made to repay the loan to the corporation within a reasonable time.

Specified employee

To make things more complicated, the above exception applies differently if you are a specified employee vs a non-specified employee. A specified employee is one that owns more than 10% (either direct or indirect) of any class of shares of the corporation.

Hence if you are a specified employee, the above exception will only apply to you if the loan is going to be used to:

In addition, the specified employee will still need to meet the condition of receiving the loan because of employment and not shareholder status and showing repayment arrangements that are reasonable and well documented.

If you are not a specified shareholder employee, you only need to meet the above conditions under a) and b). Thus you can use the loan for any purposes and still fall within this exception.

Conclusion

If used properly, shareholder loans are a great tool for tax planning and cash management. However, there are complex rules in the Income Tax Act that should be considered before you take any money out of your corporation to avoid negative tax consequences. If you have any questions about shareholder loans, please contact us.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.