- Corporate tax highlights
- Indirect tax, scientific research & experimental development and other credits/incentives highlights
- International tax highlights
- U.S. tax highlights
- Federal personal and small business owners’ tax highlights
- Provincial and territorial personal tax highlights
Federal corporate tax updates
Small business rate – The 2019 Federal Budget (Budget) does not propose any changes to corporate income tax rates. Rather it confirms the previously announced reduction of the small business tax rate in 2019 from 10 per cent to 9 per cent, leaving the general business tax rate at 15 per cent.
Small business deduction – farming and fishing – Specified Income of a corporation is excluded from the small business deduction (SBD) rate reduction. This includes income from the sale of product to a private corporation in which the Canada-controlled private corporation (CCPC) or certain other person holds either a direct or an indirect interest. The farming and fishing communities currently enjoy a carve-out of this limiting rule for income from sales to farming or fishing cooperatives.
The Budget includes a proposal to broaden the carve-out to include income from sales of farming or fishing products to any arm’s length purchaser corporation, with the change to be applicable to tax years that begin after March 21, 2016. Despite the proposal change, amounts allocated to a CCPC as patronage payments from a purchaser corporation will not be eligible for the SBD.
Scientific research & experimental development (SR&ED) – The SR&ED tax credit program currently provides an enhanced Federal refundable credit of 35 per cent to CCPC’s for qualifying SR&ED expenditures made up to $3,000,000 annually as well as a non-refundable 15 per cent tax credit to all other companies incurring qualifying SR&ED expenditures in Canada. Prior to Bill C-97, a company’s prior years taxable income exceeding $500,000 would reduce amounts that could be claimed as a credit, the credit was fully eliminated once prior years taxable income reached $800,000.
The government has now eliminated the taxable income threshold for accessing the higher credit to 35 per cent. The taxable capital threshold does however remain in place, such that companies with taxable capital of $10 - $50 million will continue to be impacted by the grind down of the exchanged credit and businesses with taxable capital of more than $50 million remain only eligible for the non-refundable 15 percent credit.
Zero-emission vehicles – The Budget proposes a full tax deduction for eligible zero-emission vehicles acquired and made available for use after March 18, 2019 but before January 1, 2028, with a phasing out of the deduction for vehicles made available between the end of 2023 and the start of 2028. Further, two new capital cost allowance (CCA) classes will be created: (1) Class 54 for zero-emission vehicles otherwise included in Class 10 or 10.1 and (2) Class 55 for zero-emission vehicles otherwise included in Class 16. The CCA claim on Class 54 for zero-emission vehicles is limited to $55,000 excluding sales taxes per vehicle.
‘Eligible zero-emission vehicles’ must be fully electric, a plug-in hybrid (with a battery capacity of at least 15 kWh) or fully powered by hydrogen fuel cells, including light-, medium- and heavy-duty vehicles that are purchased by a business. In addition, these vehicles should not be used before they are acquired by the taxpayers.
The Budget also proposes to introduce a new federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles under $45,000. However, vehicles purchased under the federal purchase incentive will not be eligible for the enhanced CCA rules.
Provincial corporate tax updates
Alberta 2019 – 2020 budget proposes to decrease the provincial’s general and M&P tax rate from 12 to 8 per cent over the next four years. Accordingly, the provincial corporate tax rate was reduced to 11 per cent on July 1, 2019 and will be reduced by 1 per cent point on January 1 of each year thereafter until January 1, 2022. See our previous Tax Alert for more details on the Alberta budget.
Enhanced Capital Cost Allowance – To promote competitiveness and encourage investment, Alberta will follow federal measures to enhance the CCA. Manufacturing and processing equipment (Class 53) and clean energy generation equipment (Class 43.1 and 43.2) are fully deductible in the first year the assets become available for use. Moreover, the accelerated investment incentive (AII) allows other eligible property currently subject to the half-year rule to qualify for enhanced CCA deduction equal to three times the normal first year deduction.
The resource sector will be able to claim a first year deduction of 1.5 times the amount of qualifying development expenses they would otherwise deduct. Consistent with the federal measures, the enhanced CCA program will begin to phase out in 2023 and will be completely phased out by 2027.
Elimination of tax credits – The Alberta Investor Tax Credit, the Community Economic Development Corporation Tax Credit and the Capital Investment Tax Credit, previously introduced on a temporary basis until 2021-22, are being eliminated ahead of schedule. The Interactive Digital Media Tax Credit was eliminated as of October 25, 2019, ending the brief 13 month life of the credit. This was a refundable credit for digital media companies equal to 25 percent of salaries and bonuses paid to Alberta-based employees, plus an additional 5 percent of salaries and bonuses paid to under-represented employees (women, Indigenous people and people with disabilities). The aforementioned measures can be implemented with no additional compliance or administrative burden.
The SR&ED will be eliminated starting in 2020. Eligible expenses incurred after December 31, 2019 will no longer qualify for this credit. For the other targeted credits, no new approvals will be granted after October 24, 2019. Businesses already approved under the Alberta Investor Tax Credit or the Community Economic Development Tax Credit have until December 31, 2019 to raise capital for these credits. Corporations and individuals will still be able to claim any unused credits, where applicable.
The Ontario budget indicates that the corporate income tax rates will remain unchanged; however, in the 2019 Fall Economic Statement, the Ontario government indicated plans to introduce in the 2020 budget a reduced small business rate from 3.5 per cent in 2019 to 3.2 per cent starting January 2020. Furthermore, the Ontario budget provides relief for businesses over six years through faster write-offs of capital investments under the Ontario Job Creation investment Incentives as well as introducing certain tax incentives in the cultural media and digital media spaces. For more discussion on the Ontario budget, please see our previous Tax Alert.
The small business limit – The Ontario budget will not parallel the federal passive income rules, which reduces or eliminates the small business deduction for CCPC’s that earn between $50,000 and $150,000 of passive investment income in a taxation year, for taxation years beginning after 2018.
Ontario interactive digital media tax credit – To qualify as a specialized digital game corporation, a company must spend at least $1 million in its taxation year on Ontario labour expenditures for eligible digital games. The Ontario budget proposes to reduce this minimum Ontario labour expenditure threshold from $1 million to $500,000. This proposal would be effective for taxation years commencing after April 11, 2019.
Ontario Job Creation Investment incentive – The Job Creation Investment Incentive parallels the immediate write-off measures of the Accelerated Investment Incentive that was announced in the federal government’s Fall Economic Statement 2018. Under these measures:
- Eligible manufacturing and processing machinery and equipment and specified clean energy equipment can be immediately written off in the first year that it becomes available for use; and
- Most other capital investments are eligible for an Accelerated Investment Incentive that provides a depreciation rate of up to three times the normal rate in the first year the asset is put into use.
These measures are in place for eligible depreciable property acquired after November 20, 2018 and available for use before 2028. This incentive will be phased out for property that becomes available for use from 2024 to 2027.
Review of cultural media tax credit certification – The Ontario budget provides that the government will review the Cultural Media Tax Credit Certification process to streamline administration and reduce application-processing times.
PRINCE EDWARD ISLAND
Prince Edward Island’s 2019 – 2020 budget proposes to reduce the small business corporate rate from 3.5 per cent to 3 per cent beginning January 1, 2020. No changes are proposed to the general corporate tax rate. The $500,000 small business limit remains unchanged.
The corporate income tax rates will remain unchanged, but the Quebec budget provides tax measures for qualified small and medium businesses (SMBs) pertaining to a new refundable tax credit for employing experienced workers as well as a tax holiday for large investment projects. For more discussion on the Quebec budget, please see our previous Tax Alert.
Refundable tax credit for employing experienced workers – Qualified SMBs will be granted a refundable tax credit for employing individuals aged 60 or over who are subject to Quebec payroll taxes. The rate will vary based on the individual’s age and the corporation’s total payroll (between 50-75 percent). The tax credit will be calculated on the employer contributions paid by the corporation in respect of such employee and can total as much as $1,250-$1,875 annually per worker. The measurements will be applicable in respect of a taxation year that ends after December 31, 2018.
Reduction of the capital investment threshold to certain large investment projects – A corporation that carries out a large investment project in a designated region may claim a tax holiday in respect of the income from its eligible activities and from employer contributions to the Health Services Fund (HSF). The capital investment threshold that must be met for project qualification purposes is reduced from $75 million to $50 million.
The Bill (Bill C-26) received royal assent on November 7, 2019. The Bill reduces the small business corporate rate from 4 per cent to 3 per cent effective July 1, 2019.
Manitoba’s 2019-2020 budget announced no new changes to the corporate tax rates. For more discussion on the Manitoba budget, please see our previous Tax Alert.
Manufacturing investment tax credit – Effective for qualifying property acquired after June 30, 2019, the refundable portion of the Manufacturing Investment Tax Credit (MITC) is reduced from 8 per cent to 7 per cent. This change does not impact the tax credit on qualified property acquired before July 1, 2019. The 1 percent non-refundable MITC is not impacted by this change.
Proposed extensions – The Manitoba budget has extended the following tax credits scheduled to expire December 31, 2019 as follows:
- The Film and Video Production Tax Credit is made permanent with no fixed expiry date. This program promotes the growth of the Manitoba film and video production industry.
- The Small Business Venture Capital Tax Credit is extended for three years to December 31, 2022. This program supports individuals and corporations that acquire equity capital in eligible Manitoba enterprises.
- The Cultural Industries Printing Tax Credit is extended by one year to December 31, 2020. In addition, the annual maximum tax credit claim is capped at $1.1 million per taxpayer. This measure is effective for qualified expenditures as of the 2019 tax year.
- The Book Publishing Tax Credit is extended for five years to December 31, 2024. This program promotes the growth of the Manitoba book publishing industry.
New Brunswick 2019-2020 budget announced no new changes to the corporate tax rates.
Passive investment income and the small business deduction limit – As mentioned in our pervious Tax Alert, New Brunswick will not parallel the 2018 Federal Budget measure that phases out the $500,000 SBD limit for CCPCs that earn between $50,000 and $150,000 of passive investment income in a taxation year, for taxation years beginning after 2018. By not paralleling the federal measure, a CCPC could continue to save up to $57,500 in New Brunswick tax annually.
Nova Scotia 2019-2020 budget announced no new changes to the corporate tax rates. For more discussion on the Nova Scotia budget, please see our previous Tax Alert.
Innovation Equity Tax Credit – The previous year’s budget introduced the new Innovation Equity Tax Credit (IETC) only to individuals; budget 2019 extends the IETC to corporations as well. The IETC is designed to encourage investors to make equity investments in support of young, growing and innovative businesses.
Effective April 1, 2019, the IETC allows corporations to claim a 15 per cent non-refundable tax credit on their corporate investments on a maximum investment limit of $500,000.
Qualifying investments include common shares, preferred shares and convertible debentures. The minimum holding period for these investments is four years. There are several restrictions for these investments to be eligible for the IETC, including that the investment must be of a corporation that is less than 10 years old and is developing or implementing new technologies or applying existing technologies in a new way to create new products, services or processes.
Venture Capital Tax Credit – Effective April 1, 2019, the new Venture Capital Tax Credit (VCTC), a non-refundable 15 per cent income tax credit on qualifying investments, will be available for corporations who invest in a Venture Capital Corporation or Fund. This venture capital investment structure is ideal for investors who pool their investments with others and rely on professional fund management to select a portfolio of investment opportunities. Note that the venture capital fund must be based in Nova Scotia.
British Columbia 2019-2020 budget announced no new changes to the corporate tax rates. For more discussion on the British Columbia budget, please see our previous Tax Alert.
Small business venture capital tax credit – The British Columbia budget enhanced the small business venture capital tax credit. The maximum amount that eligible business corporations can raise through the tax credit program is increased to $10 million from $5 million effective February 20, 2019. Eligible business activities now also include advanced commercialization, but only for business outside the Metro Vancouver Regional District and Capital Regional District. Eligible small business corporations can engage in activities related to scaling up their business after two years in the tax credit program.
Saskatchewan announced in 2019 that the small business limit threshold will be increased to $600,000 while the small business rate of 2 per cent remains unchanged. Prior to the change, the excess income over $500,000, but not exceeding $600,000 was proposed to be taxed at a rate of 17 percent.
NEWFOUNDLAND AND LABRADOR
No changes are proposed to tax rates. The $500,000 small business limit also remains unchanged.
Business tax: reminders
Qualified small business corporation (QSBC) share status – A sale of QSBC shares will be eligible for the lifetime capital gains exemption of up to $866,912 in 2019, with the limit indexed for future years. Among other criteria, to maintain the QSBC share status, a corporation needs to have substantially all of the assets of the business used in an active business carried on primarily in Canada. Excess cash and passive investment assets may jeopardize the QSBC share status.
A cumulative net investment loss (CNIL) balance as well as a prior year claim of an allowable business investment loss (ABIL) may limit the individual taxpayer’s ability to claim the capital gains exemption on a sale of QSBC shares. Receiving dividend and interest income instead of a salary will reduce the CNIL balance and in turn help to preserve access to the capital gains exemption.
Refundable dividend tax on hand (RDTOH) – As mentioned in our previous Tax Alert, the 2018 Federal Budget split the existing RDTOH account into eligible RDTOH and non-eligible RDTOH pools. RDTOH created from passive income will accrete to a CCPC’s non-eligible RDTOH account. This will be the case with most passive income apart from eligible dividend receipts. Only non-eligible dividends will result in a refund of non-eligible RDTOH balances. Further, ordering rules will also provide that amounts cannot generally be refunded from a CCPC’s eligible RDTOH account until the non-eligible RDTOH balance has been fully refunded. The character of RDTOH paid on dividends received from a connected corporation would match their payer’s eligible/ non-eligible RDTOH accounts.
The above rules will apply to taxation years beginning on or after January 1, 2019 and transitional measures have been included to compute the opening eligible RDTOH and non-eligible RDTOH balances of a CCPC. The eligible RDTOH balance will be calculated as the lesser of:
- The existing RDTOH balance at the time of the transition; and
- 38 1/3 percent of the GRIP balance, at the time of the transition
Once the above allocation has been calculated, any remaining RDTOH would be allocated to the non-eligible RDTOH pool.
Accelerated tax deduction – As mentioned in our previous Tax Alert, capital assets acquired after November 20, 2018 which became available for use before 2028, taxpayers will be able to take advantage of the accelerated investment incentive program, whereby
- the tax depreciation claimed in the first year of acquisition may be up to three times the tax deduction that could have been claimed previously for assets subject to the half-year rule and
- up to one-and-a half times the tax deduction that could have been claimed previously for assets not subject to the half-year rule.
The enhanced tax deduction is also available on intangible property. Similar provisions will apply to investments in Canadian development and Canadian oil and gas property expenses. These expenses are not subject to a half-year rule and, thus, will qualify for a first-year deduction equal to one-and-a-half times the deduction that would otherwise be available. In addition, investments in manufacturing and processing machinery and equipment and specified clean energy equipment purchased after November 20, 2018 and available for use before 2028 are fully deductible in the first year of acquisition with a phase out of property that becomes available for use after 2023.
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Indirect tax, scientific research & experimental development and other credits/incentives highlights
Cryptocurrency – The definition of ‘financial instrument’ in subsection 123(1) of the Excise Tax Act (ETA) was amended to add a ‘virtual payment instrument’ as a financial instrument. As a result, certain cryptocurrencies may be considered financial instruments for goods and services tax/ harmonized sales tax (GST/HST) purposes and supplies of these cryptocurrencies could be exempt for GST/HST purposes. The new rules do not include any rules for cryptocurrency mining. As a result, based on the changes to the definition of financial instrument, cryptocurrency miners could be considered to be engaged in exempt activities and not entitled to income tax credits (ITCs) for GST/HST paid on their acquisitions and imports.
Entitlements to ITCs – The Department of Finance proposed further amendments to previously-announced amendments to the rules for holding companies’ entitlement to ITCs. Under existing section 186 of the ETA, a holding corporation may be entitled to claim ITCs for GST/HST payable on property or services acquired or imported for consumption or use in relation to shares or debt of related operating companies engaged in commercial activities. In 2018, the Department of Finance initially proposed to amend to these rules, such that ITCs could only be claimed by holding corporations to the extent GST/HST was paid or payable on specific, enumerated expenses or, in some other cases, if all or substantially all of the property of the holding company was shares or debt of the operating corporations (the Property Test). In 2019, the Department of Finance proposed further amendments that resulted in a slight expansion of the entitlement to ITCs for holding corporations. Specifically, the Property Test was expanded in the further proposals to allow holding corporations to own other property used in commercial activities and still meet the Property Test. These rules apply to property and services acquired or imported on or after July 28, 2018. Furthermore, the rules were expanded to allow trusts and partnerships to be entitled to claim ITCs for property and services acquired on or after May 18, 2019, subject to the same rules that apply to corporations, provided that the trusts or partnerships own shares of corporations engaged in commercial activities.
Manitoba PST rate – Effective July 1, 2019, Manitoba’s provincial sales tax (PST) rate decreased from 8 per cent to 7 per cent. Additionally, the PST rate on electricity used in certain mining, manufacturing and processing operations decreased from 1.6 per cent to 1.4 per cent.
Requirement to register for QST – Non-residents of Quebec that operate in Quebec are required to register for Quebec sales tax (QST) regardless of whether the business has a permanent establishment in Quebec. Effective January 1, 2019, non-residents of Canada who are not registered for GST/HST are required to register for QST if they make supplies to individuals resident in Quebec who are not registered for QST and the supplies exceed a $30,000 threshold. These persons may be able to register for QST under the general rules or under the new specified registration system. If registered under the specified registration system, they will generally be required to charge and collect QST on supplies of services and intangible personal property, if the supply is made in Quebec to a person who is not registered for QST. Certain operators of digital platforms are generally also required, effective January 1, 2019, to register for QST if non-resident suppliers of Quebec make supplies on the platform. Note that there are specific requirements that need to be met in order for the operator of the platform to be required to register for QST. Similar rules took effect on September 1, 2019 for persons not resident in Quebec who are registered for GST/HST (including both residents and non-residents of Canada). These persons would generally be required to register for QST if making supplies to individuals in Quebec exceed a threshold of $30,000. These suppliers would generally be required to charge and collect QST on supplies of tangible personal property, services and intangible personal property made in Quebec to persons not registered for QST.
Gradual elimination of the ITC restriction in Quebec – Before 2019, large businesses ($10 million or more in gross revenue) and financial institutions were restricted from claiming ITCs for QST paid on certain expenses. Revenu Quebec is phasing out the restriction, allowing ITCs for 50 per cent of the amounts incurred in 2019, 75 per cent in 2020 and 100 per cent as of 2021.
Selected listed financial institution returns – For fiscal years beginning in 2019, investment limited partnerships may be regarded as selected listed financial institutions (SLFIs) and may have a requirement to file a SLFI return. The return is due six months after the year-end.
Canada Revenue Agency (CRA) auditors using data mining techniques – CRA is sending Requests for Information (RFI) to suppliers (Hydro-Quebec, The Home Depot, Rona, etc.) to data mine for information related to purchasers’ potential unreported GST/HST. Suppliers are required to provide the information to the CRA provided that the RFI relates to an ascertainable person or group and the RFI is made to allow the CRA to verify the person’s or group’s compliance with the ETA. For example, the CRA sent RFIs to The Home Depot and Rona requesting information related to purchases of roofing products and then used the information to extrapolate how much revenue a purchaser should earn based on its roofing supply purchases. Similarly, the CRA sent Hydro-Quebec an RFI to disclose information related to its business customers other than large-power customers (ore-mining companies or processing plants) to identify taxpayers that might be underreporting or not filing GST/HST. The CRA will continue using this methodology to attempt to uncover GST/HST non-compliance.
Refund of surtax paid on goods imported from U.S. – Businesses that imported certain goods from the U.S. between July 1, 2018 and May 20, 2019 were required to pay a surtax on the import duties. Businesses that paid the surtax may be eligible for a refund of the surtax paid or a reduction to duties to be paid.
Director liability for corporate GST/HST debt – Section 323 of the ETA allows the CRA to assess a corporation’s directors for failure to remit the corporation’s GST/HST as required. However, when a director resigns, the CRA has only two years from the resignation date to assess the former director for the corporation’s GST/HST debt. Under the Business Corporations Act (Ontario), a director’s resignation is effective as soon as the director delivers the resignation letter to the corporation, without requiring the director or corporation to file a Form 1 notice of change with the Ministry of Government Services. However, the CRA often takes the position that, without a Form 1 notice of change filed with the Ministry of Government Services, the resignation is invalid. In Singh v. The Queen, 2019 TCC 120, the Tax Court of Canada (TCC) held that a director’s resignation is not invalidated merely because the corporation failed to file the Form 1 notice of change with the Ministry of Government Services.
ITC eligibility – Principals may still be entitled to ITCs where the GST/HST was payable by the principals’ unnamed agents (Lohas Farm Inc. v. The Queen, 2019 TCC 197).
Maintaining proof of sales outside of Canada – Persons who do not charge GST/HST on goods delivered or made available outside of Canada could be liable for failing to charge and collect GST/HST if they are unable to provide sufficient evidence to show the goods were actually exported (Nwaukoni v. The Queen, 2018 TCC 252).
New residential rental property rebate developments – When purchasing a new residential real property where a new housing rebate for GST/HST is available, the taxpayers should ensure that they apply for the correct rebates. Where a taxpayer purchases new residential rental property for the purpose of leasing the property to others, the taxpayer generally is not entitled to assign its rebate to the builder of the home. Rather, the taxpayer is generally required to pay the full amount of the GST/HST to the builder and thereafter apply for, what is generally referred to as, the New Residential Rental Property Rebate (NRRP Rebate). The NRRP Rebate application must be made within two years of when the GST/HST became payable. In 2019, there were several cases where the taxpayer applied for the wrong rebate and after being assessed for claiming the wrong rebate, the time limit for claiming the correct rebate, the NRRP Rebate, had expired (Poirier v. The Queen, 2019 TCC 8 and Lalwani v. The Queen, 2019 TCC 180).
CRA publication regarding medical research and SR&ED – In September 2019, the CRA released a document confirming that medical research can qualify as SR&ED and issued a document clarifying (1) the rules regarding eligibility, (2) whether the physician or the professional corporation is eligible to claim the work and (3) which expenses qualify as SR&ED. Of particular interest is the CRA’s guidance on whether the physician or the professional corporation is entitled to the SR&ED claim: in other words, whether the physician completed the SR&ED-eligible work on the professional corporation’s behalf or on his or her own behalf. If on the physician’s own behalf, the physician’s salary or management fee will not be an eligible SR&ED expense, as it would be an expense of the professional corporation only. The CRA document suggests that the contracts and the legal relationships between the physician and the health care entities will play a significant role in determining whether the physician is performing the SR&ED work on the professional corporation’s behalf. It is prudent for physicians to review their contractual agreements with health care entities to ensure that the professional corporations are the contracting parties and, therefore, are the entities completing the SR&ED-eligible work.
Alberta scrapping SR&ED program – The 2019 Alberta budget, released in October, cancelled the SR&ED program in Alberta. Expenses incurred after December 31, 2019 are not eligible for a credit. In these circumstances, taxpayers should look to incur SR&ED-eligible expenses before December 31, 2019 (where practical) to preserve entitlement to the provincial SR&ED credit.
Budget proposal – The Budget proposed phasing out the use of taxable income in determining the eligibility for the 35 per cent refundable tax credit for CCPCs, starting in taxation years ending on or after March 19, 2019. Under the old rules, the SR&ED credit program provided that CCPCs were eligible for a 35 per cent refundable tax credit (as opposed to a 15 per cent non-refundable tax credit) on the their first $3 million in qualifying expenditures. However, the old rules provided that, for every dollar of taxable income in the prior year over $500,000, the qualified expenditure limit was reduced by $10 (eliminated when taxable income hit $800,000). Under the new rules, a CCPC will not face a reduction to the 35 per cent refundable tax credit unless the CCPC’s taxable capital exceeds $10 million.
SR&ED jurisprudence – Taxpayers were not overly successful at the TCC in SR&ED appeals in 2019. The following are two key principles from the jurisprudence:
- When the alleged SR&ED activities involve system uncertainty (integrating two existing technologies), expert evidence is needed to address whether the integration of the technologies constitutes SR&ED (Dock Edge + Inc. v. The Queen, 2019 TCC 11).
- Trial and error testing to overcome a problem does not constitute SR&ED. This is the case even if the taxpayer has identified a technological uncertainty that cannot be overcome by routine engineering. Instead, to qualify as SR&ED, a taxpayer must use the scientific method, which includes (1) formulating a hypothesis, (2) using trained and systematic observation, (3) conducting careful measurements and experimentation of the hypothesis and (4) modifying the hypothesis based on the experiment results (Kam-Press Metal Products Inc. v. The Queen, 2019 TCC 246).
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FOREIGN AFFILIATE DUMPING (FAD) RULES
The foreign affiliate dumping rules are intended to counter the erosion of Canadian tax base resulting from transactions in which a corporation resident in Canada (CRIC), which is controlled by a non-resident, invests in a foreign affiliate using borrowed or surplus funds. In absence of these rules, the foreign parent is able to repatriate funds from the CRIC as a return of capital and free of dividend withholding tax.
Currently, the FAD rules only apply to a CRIC which invests in a foreign affiliate of the CRIC and is controlled by a non-resident corporation. The rules generally result in a reduction in the paid-up capital of certain shares of the CRIC (or related Canadian corporation) and/or a deemed dividend subject to non-resident withholding tax.
The Budget proposed to amend the FAD rules by extending the application to CRICs that are controlled by a non-resident individual, a non-resident trust or a group of persons that do not deal at arm’s length and are comprised of non-resident corporations, non-resident individuals or non-resident trusts.
The Budget also extends the meaning of ‘related’ with respect to these rules to certain non-resident trusts and their beneficiaries.
The proposed changes apply to transactions and events that occur on or after March 19, 2019.
CROSS-BORDER SECURITIES LENDING ARRANGEMENTS
The Budget proposed changes to cross-border Securities Lending Arrangements (SLAs), which involve a non-resident lending a security to a Canadian resident who agrees to return an identical security to the non-resident in the future. Under the terms of SLAs, the Canadian resident typically provides collateral and is obligated to make payments for any dividends paid by the issuer of the lent share (as dividend compensation payments). Essentially, the non-resident retains the same economic exposure as if it had continued to hold the share.
Under the current rule, a dividend compensation payment under a ‘fully collateralized’ SLA (meaning the collateral provided by Canadian resident, in the form of money or government debt obligations, has a value of 95 per cent or more of the lent share) is deemed to be a dividend which is subject to withholding tax. If the arrangement is not ‘fully collateralized’, the payment is deemed to be an interest payment and therefore is exempt from withholding tax.
The Budget proposed to treat all dividend compensation payments made under SLAs as dividends for withholding tax purposes, regardless of whether the arrangement is fully collateralized. The proposed rules also propose to prevent taxpayers using equity-based financial arrangements to realize artificial losses. This measure will apply to compensation payments that are made on or after March 19, 2019. For securities loans that were in place before this date, the amendments will apply to compensation payments that are made after September 2019.
The Budget proposed to exempt withholding tax on dividend compensation payments that are made under a fully collateralized SLA, provided the loaned security is a foreign share. The proposed changes apply to dividend compensation payments that are made on or after March 19, 2019.
MULTILATERAL INSTRUMENT (MLI)
On June 21, 2019, Bill C-82 - The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also known as the Multilateral Instrument or MLI, received Royal Assent. The MLI is a global initiative developed by over 100 jurisdictions to counter tax avoidance strategies that lead to base erosion and profit shifting (BEPS). The MLI will allow Canada to modify its existing tax treaties to include measures developed under the Organisation for Economic Co-operation and Development (OECD)/G20 BEPS project without having to individually renegotiate those treaties, allowing the measures to be implemented in a synchronized and efficient manner.
The MLI does not amend treaties like an amending protocol. Instead, it operates alongside such treaties in accordance to a jurisdiction’s policy preferences to replace, modify or supplement their provisions. The two main, mandatory and minimum standards that Canada has adopted relate to (1) treaty abuse and (2) dispute resolution procedures. Canada also adopted a few of MLI's optional provisions relating to multinationals’ efforts to avoid or reduce taxation in inappropriate circumstances; these optional provisions relate to withholding tax rates, capital gains exemptions, dual residency and allowing treaty partners to move to a foreign tax credit system.
The MLI will enter into force for Canada on December 1, 2019. As a result, the MLI will enter into effect for Canada’s tax treaties with many countries (a) on January 1, 2020 for withholding taxes and (b) for other taxes (including capital gains taxes), for tax years beginning on or after June 1, 2020 (which for calendar year taxpayers would be January 1, 2021). It should be noted that the U.S. has chosen not to participate in this initiative.
TRANSFER PRICING MEASURES
The Budget proposed an ordering rule to clarify that adjustments resulting from the transfer pricing rules will apply in priority to other provisions of the Income Tax Act. A previous provision of the act provided similar guidance, however it was restricted to a narrower number of tax provisions. The Budget expands this understanding to all provisions of the Income Tax Act. The government confirmed that the proposed ‘Order of Application’ rules will not impact the exceptions provided to Canadian resident corporations that have an amount owing from or have extended a guarantee in respect of an amount owing by, controlled foreign affiliates.
The second proposal related to transfer pricing rules apply the broader transfer pricing definition of a ‘transaction’ to the extended three-year reassessment period. The normal reassessment period was extended by three years in addition to the existing three years statute (four years in the case of larger companies) for CRA to have more time to scrutinize the transaction with non-arm’s length and non-resident person.
The proposed changes apply to taxation year that begin after March 18, 2019.
While an ongoing international campaign exists to address perceived shortcomings in taxing digital companies, the recently elected Liberal Party platform includes a 3.0 per cent tax on income of large digital companies operating in Canada. Therefore, digital companies that have relied on the arm’s length principle for determining reasonable profitability for Canadian subsidiaries should be mindful of the proposed digital tax regime and continue to monitor its development.
Other key international tax matters and compliance
Loans with foreign corporations – There are complex rules associated with loans made from and to non-resident corporations and certain non-arm’s length persons. Therefore, it is highly recommended that a comprehensive review of the financing arrangements with related parties should be undertaken on a regular basis. Relevant tax implications should be carefully considered before implementing cross-border financing arrangements and a tax professional should be consulted whenever in doubt.
Thin capitalization – The thin capitalization rules were introduced to prevent the erosion of the Canadian tax base by restricting the deductibility of interest on a loan due to a specified non-resident shareholder (which is defined to be a shareholder who holds 25 per cent or more, by vote or value, of the issued shares or the fair market value of the shares of a Canadian corporation) and if the amount of the outstanding debts to specified non-residents exceeds 1.5 times the Canadian resident corporation’s equity amount. The result of the rules is that the interest expense that exceeds the debt-to-equity ratio limit is not deductible and is considered to be a deemed dividend, subject to applicable withholding taxes. It should be noted that any denied interest expense is not available to be carried forward.
Back-to-back (B2B) rules – If an intermediary is set up in a foreign jurisdiction such that the interest payment on cross-border loans is subject to lower or no withholding tax or to avoid the thin capitalization rules, the arrangement may be caught by the B2B rules. The rules target ‘relevant funding arrangements’ and look up the chain of ‘relevant funders’ to identify the ‘ultimate funder’ of such arrangement. If hypothetical interest paid to the 'ultimate funder' would result in a higher withholding tax, the payment is deemed to have been paid to the 'ultimate funder'. Therefore, the taxpayer (borrower) will be liable for a higher withholding tax on the payment. Recent changes in the legislation have made this rule even broader to capture leasing and licensing arrangements as well as shareholder loan benefits. These rules do not supplant the MLI rules discussed above.
Upstream loan rules – A loan made from a foreign affiliate to a Canadian taxpayer or a related person (except for certain controlled foreign affiliates) is subject to the upstream loan rules if the loan will not be repaid within two years of the day the loan was made. As a result, the principal amount of the loan is required to be included in income of the Canadian taxpayer in the year the loan was made. If the foreign affiliate and its subsidiaries has sufficient tax attributes (surplus balances or cost basis), the Canadian taxpayer would be able to claim a deduction to offset the income inclusion as if a hypothetical dividend was paid by the foreign affiliate to the Canadian taxpayer. However, the same tax attributes that are used to offset the income inclusion will not be available to support dividends paid from the same foreign affiliates.
Shareholder loan – Where a Canadian resident corporation lends money to a non-resident at no interest or less than ‘reasonable’ interest, and the loan is outstanding for more than a year, the Canadian resident corporation is deemed to have received interest income on the loan computed at a prescribed rate in excess of interest already paid by the non-resident.
If a loan is made from a Canadian resident corporation to its non-resident parent or related non-resident companies and has been outstanding for more than one year after the first balance sheet date, the entire outstanding balance is deemed to be a dividend for the purpose of imposing withholding tax. The Canadian corporation can elect out of the deemed dividend by making a pertinent loan or indebtedness (PLOI) election which requires that the Canadian corporation includes interest income on the loan at the prescribed rate (currently 5.65 per cent). Loans made by, or to, certain partnerships may also be eligible for the election.
Foreign and non-resident information returns
- Canadian resident taxpayers must file Form T1135 Foreign Income Verification Statement, when the cost amount of their foreign property exceeds $100,000 at any time during the year.
- Corporations must report their non-arm’s length activities with non-residents on Form T106, Information Return of Non-Arm’s Length Transactions with Non-Residents, if the total amount of such transactions exceeds $1,000,000.
- Both forms mentioned above are due the same time as the tax return and any late filing or non-filing may result in substantial penalties and charges.
- Canadian taxpayers that own shares of a non-resident corporation that is a foreign affiliate in the year must file Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates. A Form T1134 is not required if the total cost amount of the interest in all foreign affiliates was less than $100,000 AND the foreign affiliate is ‘dormant’ or ‘inactive’ (with gross receipts of less than $25,000 and at no time had assets with a total fair market value of more than $1,000,000) for the affiliate's taxation year ending in your taxation year. The form is due 15 months after the Canadian corporation’s year-end. The filing deadline will be shortened to 12 months for the tax year starting in 2020 and to 10 months for tax years starting after 2020.
Payments to non-residents
- Withholding tax at 25 per cent applies to interest (other than interest paid to arm’s length non-residents), dividends, rents, royalties, branch remittance, certain management and technical service fees and similar payments pays or credits to non-residents. The rate of withholding tax can be reduced under relevant tax treaties.
- The amount withheld needs be remitted to the CRA on or before the 15th day of the month following the month the amount was paid or credited to the non-resident.
- NR4 Information Return in respect of the amount paid or credited is due on or before March 31 following the calendar year to which the information return applies. In the case of an estate or trust, the information return is to be filed within 90 days from the end of the taxation year.
- Non-residents may file forms NR301 (individual, corporation, trust), NR302 (partnership) and NR303 (hybrid entity) if the non-resident is eligible for the reduced withholding tax rates on payments under a tax treaty.
Regulation 105 and exemption – payments to non-resident for services rendered in Canada - This regulation requires every taxpayer, including non-residents of Canada, paying to a non-resident person fees, commissions or other amounts for services rendered in Canada, to withhold and remit 15 per cent to CRA. The remittance is due on the 15th day of the month following the month in which the fee was paid. For services performed in Quebec, an additional 9 per cent withholding tax rate applies. However, the regulation does not apply to certain reimbursements.
A T4A-NR Information Return should be filed with T4A-NR slips to report the payments made, taxes withheld and any reimbursement of expenses. Form T4A-NR is due at the end of February of the year following the calendar year in which the payment was made to report all amounts paid to non-residents for services performed in Canada. A non-resident may apply for a regulation 105 waiver 30 days before the start of the services in Canada or 30 days before the initial payment for the services, if the non-resident is a resident of a treaty country with Canada and does not carry on business through a permanent establishment in Canada. If a treaty-based waiver is not available, an income and expense waiver may be available to apply to reduce the withholding requirement.
Regulation 102 and exemption – Remuneration paid to employees - Remuneration that is paid to non-resident employees for work performed in Canada is subject to tax in Canada, unless the non-resident employee is exempt under the relevant tax treaties. Under most treaties, many of these workers would not have had to pay tax in Canada, when the number of days or the amount of Canadian-source income is below the threshold as stated in the respective treaties unless the payment is borne by a permanent establishment in Canada.
Non-resident employers who send employees to work in Canada are required to withhold and remit taxes under Regulation 102 for Canadian-source income to the CRA, unless a waiver of withholding tax (Form R102-R, treaty-based waiver) is completed and filed with the CRA 30 days before either the start of the employment services in Canada or the initial payment for the employment services. Note that the former Form R102-J, is no longer in use since 2017.
If no waiver was granted, a voluntary disclosure may be available to eliminate penalties and reduce accrued interest although the payroll taxes must still be remitted by the payer.
Non-resident employers, who apply for the non-resident employer certification, will not have to withhold and remit tax from salary, wages and other remuneration that the employer pays to non-resident employees (if certain requirements are met). Accordingly, this will eliminate the need for the non-resident employees to request a Regulation 102 waiver, where applicable. The non-resident employer certification will be valid for up to two calendar years.
Disposition of taxable Canadian property – When non-residents dispose of their taxable Canadian property (TCP), such as real estate, interest in partnerships or trusts and shares of corporations that own substantial real estate (e.g., more than 50 per cent of their value), they are liable to report and pay tax on the gains or income from the sale. The buyer is liable to withhold tax from the gross amount of the sale and remit the tax within 30 days from the end of the month in which the sale occurred. Exemptions or reduction from withholding apply when a clearance certificate is obtained or when there was no reason to believe that the vendor was not a resident of Canada after reasonable inquiry. For example, the tax may be exempted or reduced under the tax treaty between Canada and the non-residents’ home countries.
Transfer pricing – Canadian taxpayers transacting with non-arm’s length non-residents (i.e., related parties in other countries) need to consider their Canadian transfer pricing compliance and governance on a yearly basis. Generally, Canadian taxpayers are expected to maintain and update contemporaneous transfer pricing documentation annually.
Failure to do so can result in inefficient tax positions, exposures to penalties and costly tax authority audits. Entities considering exit transactions should carefully review their historic governance and consider updating their compliance in any prior years that were missed.
Country-by-country reporting – Large multinational entities with consolidated group revenue over Euro 750 million in their most recent preceding fiscal year are now required to file country-by-country reports (CbCR) to include information on their global allocation of income and taxes, as well as the nature of their global business activities. CRA and other tax authorities have reached agreements to exchange these reports between signatories of BEPS project.
The CbCR is another important part of the BEPS project. With CbCR, tax administrations would have access to more information to facilitate an assessment of taxpayers’ transfer pricing risks. Entities filing CbCR need to clearly follow the guidance provided by BEPS and CRA to disclose complete and accurate information and be ready with transfer pricing documentation to defend their positions if challenged.
The first exchange of these reports occurred in 2018; Canada is currently participating in a review of the CbCR standards with other OECD members. This review is expected to be completed in 2020.
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U.S. tax reform
On November 2, 2017, the House of Representatives released the legislative text of H.R. 1, the ‘Tax Cuts and Jobs Act’ or the ‘TCJA’. Over the next few weeks, the proposed legislation was marked-up by both the House and Senate. The House version of the legislation passed the House on November 16, 2017 and the Senate version passed the Senate on December 2, 2017. These versions went on to a committee conference where a unified bill would pass.
On December 22, 2017, the TCJA was signed into law by President Trump.
The TCJA looks to permanently modify business taxation, while most changes to individual taxation are generally set to expire after December 31, 2025. The Joint Committee on Taxation estimates that the net tax reduction will be approximately $1.4 trillion over the next ten years.
A few provisions of the TCJA include changes or an introduction to:
Federal tax rates – For U.S. C-Corporations, the federal tax rate is a flat rate of 21 per cent. Prior to tax reform, C-Corporations were subject to graduated tax rates, with the highest marginal federal corporate income tax rate being 35 per cent.
For U.S. citizen individuals, the top marginal federal tax rate is 37 per cent. Prior to tax reform, an individual’s top tax rate was 39.6 per cent.
Interest expense limitation – The new section 163(j) enacted limits the deduction of business interest to the sum of the taxpayer’s business interest income and 30 per cent of the taxpayer’s adjusted taxable income.
Bonus depreciation – One-hundred per cent additional first-year bonus depreciation is available for qualified property acquired and placed in service after September 27, 2017. U.S. Tax Reform expanded bonus depreciation to qualifying used property.
Global intangible low-taxed income (GILTI) – This rule introduced under U.S. Tax Reform requires certain shareholders of foreign corporations to include their share of GILTI into current income. U.S. shareholders of non-U.S. entities should assess whether they may have exposure to this new income inclusion.
SOUTH DAKOTA V. WAYFAIR SUPREME COURT DECISION
For about 50 years, sales tax nexus has been based on a concept of ‘physical presence’ as most recently confirmed in Quill in 1992. Simply put, businesses selling taxable products or services must be physically present in a state before that state can obligate the business to collect sales tax. Remote sellers, therefore, were not obligated to collect and remit sales tax if they were not physically present in that state.
On June 21, 2018, the U.S. Supreme Court overruled Quill in a 5-4 decision. The Quill physical presence standard was overturned. This shift in focus from physical to economic presence represents a significant shift for nexus analysis and can have a large impact on any businesses making sales or purchases across state lines.
It has been a year-and-a-half since the decision was made and as of October 1, 2019, 44 of the 46 state sales and use tax jurisdictions either enforce or have provided an enforcement date for economic sales tax nexus.
All businesses selling inbound into the U.S. should assess their activities in the U.S. and consider the impact these developments. This decision does not only impact U.S. domestic entities but also foreign entities and new collection, remittance and reporting requirements can arise for those that have not done so historically.
IMPORTANT FILING DUE DATES
The filing due date for U.S. federal individual tax returns, calendar year U.S. federal corporate tax returns and Report of Foreign Bank and Financial Accounts (FBAR) is April 15, 2020. Note that for C corporations with a fiscal year ending on June 30, 2020, the filing due date is September 15, 2020. Calendar year U.S. federal partnership returns are due March 16, 2020. Taxpayers may be permitted to extend the filings of these returns and reports up to six months provided the appropriate extension form is filed.
FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT OF 1980 (FIRPTA)
Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), upon disposition of U.S. real property interests (USRPI) by a foreign individual or entity, the purchaser must withhold 15 per cent of the total sales price. There are exceptions to FIRPTA withholding.
FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)
The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law that requires U.S. persons, including individuals who live outside the U.S., to report their financial accounts held outside of the U.S. It also requires foreign financial institutions to report certain organizational and financial information to the Internal Revenue Service regarding their U.S. clients. Congress enacted FATCA to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts and shell corporations. Non-compliance could attract 30 per cent withholding taxes from all US-sourced payments.
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Small business owners and entrepreneurs
Tax liabilities – Consider paying the final corporate tax balance and all other corporate taxes within two months after the year-end and within three months after year-end for CCPC.
Dividends or salaries – Owner-managers must ascertain the most tax effective salary-dividend mix to minimize overall taxes for the corporation and all affected individuals. Consider a tax-deferred planning opportunity by retaining income in the corporation if the corporate tax rate is lower than the individual tax rate and the individual does not need cash.
Family members in lower tax brackets and who provide services can be paid a reasonable salary. Paying salaries rather than dividends allows family members to earn income for childcare expenses, registered retirement savings plan (RRSP) and Canada Pension Plan (CPP) purposes. Dividends can also be paid to adult family members who are shareholders and in a lower tax bracket. However, consider the tax on split income (TOSI) rules when paying dividends to family members.
Consider the impact of alternative minimum tax (AMT), RRSP contribution room ($151,278 of earned income in 2019 is required to maximize the RRSP contribution room in 2020), personal marginal tax rates, the corporation’s tax rate, CPP contributions, provincial health and / or payroll taxes as well as other personal deductions and credits which may be utilized.
If the shareholder is subject to personal dividend tax at a rate exceeding the corporate dividend refund rate — currently 38.33 per cent — then distributing dividends that trigger a refund of refundable tax on hand may not provide a tax benefit.
Splitting income with adult family members – Prior to 2018, income splitting rules generally only applied to individuals who were under the age of 18. The new TOSI rules can now also apply to all individuals regardless of age. Where an individual receives ‘split income’, this income is taxed at the highest marginal tax rate unless one of the exclusions apply. Income splitting, which refers to the shifting of income from a high-rate individual to a lower-rate family member, may cause income to be taxed at the highest marginal rate under the TOSI rules. Consideration must be given to whether non-salary amounts received by both minor and adult family members are subject to TOSI.
Please refer to our previous Tax Alerts for more details on the new TOSI rules.
Shareholder loans from/ to corporations – Subject to certain conditions, loans from corporations must be repaid no later than one tax year after the end of the tax year in which the money was borrowed to avoid an income inclusion to the shareholder. For loans provided to corporations, consider whether the interest on such loans is tax deductible and whether payment of interest is more beneficial than payment of salaries and / or bonuses that may be subject to payroll taxes.
Remuneration accruals – Bonuses accrued at year-end must be reasonable, properly documented and paid within 179 days following the year-end so that the corporation can deduct such bonuses earned during a tax year. All applicable source deductions and payroll taxes must be remitted on time.
Depreciable assets – In order to enhance access to capital cost allowance (CCA), purchase equipment before the end of tax year and keep in mind the available for use rules. Please see available for use rules from the Government of Canada’s website. Also, a special election exists whereby leased fixed assets can be treated as purchases under a financing arrangement.
Taxable capital – If the CCPC and its associated companies’ taxable capital for federal tax purposes exceeds $10 million in 2019, it will begin to lose access to the SBD and the enhanced 35 per cent refundable ITC for SR&ED expenditures in 2020.
Also see RSM’s updates on the SR&ED tax credit program in the indirect tax section above.
Business income reserve – If a taxpayer sold goods or real property in 2019 and if the proceeds of disposition are not due until after the year-end, the taxpayer may be able to defer tax on the profits by claiming a reserve over a maximum of three years.
Capital gains reserve – If a taxpayer sold or will sell capital property in 2019, and if the proceeds of disposition are not due until after the year-end, the taxpayer may be able to defer tax on the capital gain by claiming a capital gains reserve over a maximum of four years, which results in the capital gains being included in income over a period of five years.
Employee stock options – The Budget included a $200,000 limit on the amount of employee stock options that may vest in an employee in a year and continue to qualify for the stock option deduction (SOD). The limit will not apply to CCPCs or corporations that meet prescribed conditions (details have not yet been shared by the government, however the exemption will likely be provided for start-up and emerging companies). The $200,000 limit will generally apply to all stock option agreements between the employee and the employer or any corporation that does not deal at arm's length with the employer.
Please refer to RSM’s previous Tax Alerts for more details on the proposed stock option rules.
Corporate-owned vehicle – An individual taxpayer who uses a corporate-owned vehicle can minimize operating cost benefit and / or standby charge benefit in the following manner:
- Reduce personal driving time to less than 50 per cent of the total driving time, if possible; and
- Reimburse employer for part or all of the personal use portion of the actual operating costs — make sure the payment is made by February 14, 2020.
To minimize or eliminate standby charge benefit, a taxpayer can:
- Stop personal driving;
- Have the employer sell the automobile and repurchase it or lease it back or choose a less expensive car;
- Choose a less expensive vehicle; and
- Limit access to the vehicle
Employment-related courses – A taxpayer should ask their employer to pay directly for educational courses that relate to their job.
Gifts and awards – Non-cash gifts and non-cash awards with an annual value of $500 or less may not be taxable if given to a taxpayer as personal gifts.
Employee loans – Minimize taxable benefit on employee loans by paying the interest from 2019 on or before January 30, 2020.
Home office – A taxpayer should ask their employer to complete form T2200, which allows them to claim expenses related to the maintenance of their home office.
FAMILY, HEALTH AND CHILD CARE
Registered Education Savings Plan (RESP) – Plan RESP contributions to take advantage of the maximum lifetime Canada Education Savings Grant (CESG) of $7,200, which depends on the amount of annual RESP contributions and the beneficiary’s age.
Medical Expense Tax Credit — Cannabis – The Medical Expense Tax Credit is a 15 per cent non-refundable tax credit that recognizes the effect of above-average medical or disability-related expenses on an individual’s ability to pay tax. Effective in 2019, taxpayers can claim eligible medical marijuana expenses together with other eligible medical expenses for medical expense tax credit. This credit applies to eligible medical marijuana expenses incurred on or after October 17, 2018.
Family Medical Expense – Claim tax credits for eligible medical expenses that exceed the lower of three per cent of the net income or $2,352 in 2019. Eligible medical expenses can be claimed for any of the 12-month period that ended within the calendar year (extended to 24 months when an individual dies in the year). Unclaimed eligible medical expenses prior to 2019 can be claimed in 2019 as well.
Child-care expenses – Boarding school and camp fees qualify for the childcare deduction, with certain restrictions. A taxpayer should pay 2019 childcare expenses by December 31, 2019, and keep their payment receipts
Moving expenses – A taxpayer may be able to deduct moving expenses, provided they moved:
- To a home which is at least 40 kilometers closer to a new work location or school;
- To a new house to work, to run a business or to pursue education.
Charitable Donations – Donations tax credits are offered by both the federal and the provincial governments which can result in tax savings of around 50 per cent of the value of the donation in 2019 depending on the province or territory in which the taxpayer resides. December 31 is the last day to make a donation and get a tax receipt.
PROFESSIONAL DEVELOPMENT, EDUCATION AND TUITION TAX CREDITS
Canada Training Credit – The Budget introduced a new refundable tax credit. It allows eligible individuals who are residents of Canada, to accumulate $250 each year if they are at least 25 years old and less than 65 years old, filed the tax return for the year and have earnings in excess of $10,000. The taxpayer’s net income cannot exceed the third top of the tax bracket ($147,667 for 2019). This tax credit is equal to the lesser of half of the eligible tuition and fees paid for the taxation year and the taxpayers’ notional account balance for the taxation year. The maximum amount the taxpayer can claim over a lifetime is $5,000.
Interest on Student Loans – A non-refundable tax credit can be claimed in 2019 for the amount of interest paid by December 31 on student loans received under the Canada Student Loans Act, Canada Student Financial Assistance Act, the Apprentice Loans Act or a similar provincial or territorial government law.
Lifetime Learning Plan (LLP) – A withdrawal from RRSP can be made tax-free to purchase full-time education for the taxpayer, their spouse or common-law partner. For students who meet one of the disability conditions, part-time education is also an option. Withdrawals up to $10,000 in a calendar year and up to $20,000 in total are allowed.
OLD AGE AND DISABILITY
Registered Disability Savings Plan (RDSP)
If the taxpayer’s child is eligible for the disability tax credit, it is recommended that the taxpayer:
- Create an RDSP to qualify for the Canada disability savings bond, which provides a maximum lifetime of amount $20,000 per child;
- Regularly add savings to an RDSP to qualify for the Canada disability savings grant, which offers families a maximum lifetime amount of $70,000 per child.
An RDSP would be considered for a beneficiary who is eligible for the Disability Tax Credit (DTC). As proposed in the Budget, the RDSP may remain open even if the beneficiary is no longer eligible for the DTC. In addition, to keep an RDSP open, it no longer requires a medical certification for an individual who might become eligible for the DTC in the future.
Pooled Registered Pension Plan (PRPP) – If the taxpayer does not have access to an employer-sponsored pension plan, joining a PRPP is a viable option. PRPPs are voluntary savings plans much like defined contribution RPPs or RRSPs.
Tax-Free Savings Account (TFSA)
Eligible investments that are subject to higher tax rates (i.e., interest and foreign dividends) can be held in this vehicle. Any Canadian resident aged 18 or older can open and contribute up to $6,000 to a TFSA in 2019. Withdrawals and income earned are not taxable; neither are contributions. If funds are required in early 2020, consider withdrawing them from the TFSA before December 31, 2019 as amounts withdrawn are not added to the contribution room until the beginning of the following year. Carefully monitor any over-contributions as penalties may apply.
RRSPs, RPPs and DPSPs – If the taxpayer decides not to contribute maximum RRSP allowance for 2019, the unused contribution room can be accessed in addition to their normal contribution room in a following year. However, even if the taxpayer does not need the deduction in 2019, it is worth contributing if they have excess funds. These funds then begin to grow on a tax-deferred basis and they are able to claim the deduction in any future year.
The taxpayer can withdraw funds from an RRSP without current tax implications under the Home Buyer’s Plan. The withdrawal limit increased from $25,000 to $35,000 if it was made after March 19, 2019.
Registered plans — contribution limits
Basis for deduction
Dollar limits 2019
Dollar limits 2020
18 per cent of earned income in the previous year
Defined contribution registered pension plan (RPP)
18 per cent of the pensionable earnings for the year
Deferred profit-sharing plan (DPSP)
Planning for retirement
RRSP – If the taxpayer turned 71 in 2019, their RRSP needs to be wound up. They may:
- Defer taxes on all or part of the amount in RRSP by moving the funds to a registered retirement income fund (RRIF);
- Add savings to RRSP only until December 31, 2019, if they have RRSP contribution room available or earned income from the previous year;
- Contribute to their spouse’s RRSP up until the end of the year the spouse reaches age 71 provided the taxpayer had unused RRSP contribution room or earned income in the previous year.
Canada Pension Plan (CPP) – A taxpayer between the ages of 65 and 70 can elect to stop contributing to the CPP. The CPP benefits may start to reduce if the taxpayer starts collecting them before they turn 65.
Pension plans – A taxpayer with a defined benefit RPP must begin making minimum withdrawals once they are over the age of 71.
Income from pensions – A taxpayer 65 or older will require at least $2,000 of pension income to maximize their pension credit. Consider splitting up to 50 per cent of the pension income if one spouse or common law partner is not fully utilizing the pension credit.
Old Age Security (OAS) – OAS starts when a taxpayer reaches the age of 65 years. If a taxpayer’s income exceeds a certain threshold, they are required to repay some or all of the OAS pension received. For 2019, the income threshold is $77,580.
Taxpayers should explore options to manage their income (i.e., through a corporation), in order to avoid the OAS clawback. Some other planning techniques include splitting pension income with a spouse, triggering capital gains before turning 65 years or considering TFSA to generate investment income.
Estate planning – Consider if the will is current and the estate plan meets the current needs as well as any future objectives. Consider a succession plan to ensure the business is transferred to the children, key employees or outside party in a tax efficient manner. TOSI rules should be considered when reviewing the succession plan.
Lifetime capital gains exemption – In 2019, up to $866,912 can be claimed as lifetime capital gain exemption if the taxpayer sells qualified small business shares and meets certain requirements. Since a taxpayer must own the shares for at least 24 months to qualify for the exemption, the taxpayer should consider exercising any options sooner in order to meet this holding period test.
Trust reporting requirements – The 2018 Federal Budget proposed that as of 2021 and subsequent taxation years, express trusts residing in Canada (i.e., trusts created with the express intent of the settlor) and non-resident trusts must file an annual T3 return. No further updates were provided by the government relating to these proposed rules in Budget.
Please refer to our Tax Alert on the Budget for a detailed commentary and the key changes introduced in 2019.
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Please refer to our 2019 Provincial and Territorial Budget Tax Alert for details on the below listed provincial tax planning measures.
- Professional development, education and tuition tax credits
- Low-income individuals and families tax (LIFT) credit
- Childcare access and relief from expenses (CARE) credit
- New Alberta child and family benefit (ACFB)
- Professional development, education and tuition tax credits
- New BC child opportunity benefit
- Medical Services Plan premiums
- Annual climate action tax credit
- Small business venture capital tax credit program
- Professional development, education and tuition tax credits
- Childcare contribution
- New electric vehicle rebate
- Professional development, education and tuition tax credits
Prince Edward Island
Personal tax credits/amounts