Year-end tax planner 2018: Corporate tax updates
TAX ALERT |
New Refundable Dividend Tax regime: Starting January 1, 2019, Canadian controlled private corporations (CCPC) earning investment income will be subject to a new set of complex rules relating to their refundable dividend tax on hand (RDTOH) balance. The new rules restrict the ability to recover RDTOH balance through payments of eligible dividend. This could increase the tax costs to individual shareholders when corporate funds are ultimately distributed from a CCPC. Consider paying eligible dividends prior to January 1, 2019 or consult with your tax advisor for other potential planning opportunities.
Tax on Split Income (TOSI): Taxpayers that are currently income splitting with family members will be subject to the new Tax on Split Income (TOSI) rules. Beginning January 1, 2018, any payments made to a spouse or children, regardless of age, will be subject to tax on the highest marginal rate unless certain criteria are met with respect to their contributions to the business. Impacted individuals are encouraged to review their situation with their tax advisor to determine if payments made to family members from private corporations are subject to new TOSI rules.
Accelerated tax depreciation: For capital asset acquisitions after November 20, 2018, taxpayers across all sectors of the economy 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 depreciation that could have been claimed previously for assets subject to the half-year rule, and
- up to one-and-a half times the tax depreciation that could have been claimed previously for assets not subject to the half-year rule.
The enhanced depreciation is also available on intangible property. Similar provisions will apply to oil patch investments in Canadian development and Canadian oil and gas property expenses. In addition, investments in manufacturing and processing machinery and equipment, and specified clean energy equipment purchased after November 20, 2018 are fully deductible in the first year of acquisition.
Provincial corporate tax highlights
Small business rate and thresholds
Manitoba’s budget increased the small business deduction limit from $450,000 to $500,000 as of January 1, 2019.
Quebec’s budget proposed that the small-business deduction rate will slowly rise until it reaches 4 per cent in 2021; thus, the tax rates for small and medium businesses in all sectors will become standardized.
Prince Edward Island’s budget proposes to reduce the small business corporate rate from 4.5 per cent to 4 per cent starting January 1, 2019.
New Brunswick’s small business tax rate was reduced from 3 per cent to 2.5 per cent.
Ontario’s small business tax rate changed from 4.5 per cent to 3.5 per cent.
Small business rate – The current rate of 10 per cent is proposed to be reduced to 9 per cent effective January 1, 2019. The bill (Bill C-74) regarding this measure has received royal assent on June 21, 2018. Consider deferring income to after 2018 by maximizing discretionary deductions.
Factual control – The proposed bill (Bill C-63) to extend the meaning of de facto control received royal assent on December 14, 2017. The amendment provides that all factors that are relevant in the circumstances must be considered in determining whether a taxpayer has factual control over a corporation. Keep this in mind when considering restructuring opportunities.
Billed-basis accounting – Budget 2017 proposed changes to remove the election to exclude work-in-progress (WIP) from taxable income for certain professionals. The proposed legislation also proposed to have a five-year transitional plan to reduce the burden of the elimination. The proposed bill (Bill C-63) to remove the election to exclude WIP from taxable income received royal assent on December 14, 2017. The changes will apply for taxation years beginning after March 22, 2017.
Eligible capital property rules – Effective January 1, 2017, the eligible capital property (ECP) regime has been eliminated and replaced with the new CCA class 14.1.
At-risk rules for tiered partnership - Under the old rules, limited partners may deduct their share of partnership losses allocated to them up to their at-risk amount. Generally, an at-risk amount of a limited partner is his/her invested capital that is at risk in the partnership.It is increased by income allocated to the partner from the partnership and is reduced by indebtedness owed to the partnership. Losses in excess of a partner’s at-risk amount are not deductible and become limited partnership losses, which may be carried forward indefinitely.
The budget proposed that losses from a partnership incurred in a taxation year that ended prior to February 27, 2018, will not be available for carryforward to a taxation year ending on or after February 27, 2018, where the losses allocated for a particular taxation year, were allocated to a limited partner that is itself, another partnership. In particular, limited partnership losses of a limited partner that is itself a limited partnership, will not be eligible for indefinite carryforward. These losses will be reflected in the adjusted cost base of the partnerships interest in the lower-tier partnership. The budget also proposed that for a limited partnership that is a member of another limited partnership, the lower-tier partnership losses that can be allocated to its partners will be restricted by the upper-tier partnership’s at-risk amount in respect of the lower-tier partnership.
Reassessment period – Requirement for information and compliance orders - A requirement of information may be issued by CRA to require a person to provide any information or documents. A compliance order can be sought by CRA from the courts to compel a person to comply with an information request. Where a taxpayer contests a requirement for information, an application or a compliance order, the 2018 Federal Budget proposes to included a ’stop-the-clock’ rule similar to the existing rule that applies for the purposes of requirements for foreign-based information. The ’stop-the-clock’ rule will extend the reassessment period of a taxpayer by the period of time during which the requirement or compliance order is contested.
Tax proposal changes for private corporations
Passive investment changes
The federal government proposed a business limit reduction based on passive investment income earned by a CCPC and a change to limit certain tax advantages that can be obtained by a CCPC to access refundable taxes on the distribution of certain dividends.
Small business deduction limit
The government recently announced the reduction of the federal tax rate on income eligible for the small business deduction from 10 per cent to 9 per cent as of 2019. The small business deduction is available on active business earnings of up to $500,000, which must be shared by companies that are part of an associated group.
Active business earnings available for the small business deduction is reduced to the extent that an associated group of companies have a taxable capital in the immediate previous taxation year, in excess of $10 million. The 2018 budget also introduced a further grind to the $500,000 active business earnings limit for CCPC’s that have income from passive investment in excess of $50,000. The proposed rules do not allow for any grandfathering of current investment portfolios that private company owners have built up over the years and will apply to both current and future investments that earn passive income. The limit will be reduced by $5 for every $1 of investment income above the $50,000 threshold, thereby completely eliminating the small business deduction when investment income reaches $150,000.
The limits on the passive investment income and the taxable capital of a corporation earning active business income will work simultaneously to determine the small business deduction grind in a taxation year. Investments in corporations that do not have active business income, such as investment holding companies that are not associated with a corporation earning active business income or claiming the small business deduction, are not affected.
To determine what types of passive income will be subject to the new rules, investment income will be measured by a new concept referred to as adjusted aggregate investment income (AAII) for the purposes of computing the passive income threshold. AAII generally includes the following types of investment income:
- Taxable capital gains in excess of allowable capital losses of the current taxation year from the disposition of passive investments (excluding investment income incidental to the business)
- Portfolio dividends
- Dividends from foreign corporations that are not foreign affiliates
The definition of AAII is only applicable for purposes of this proposed clawback of the small business limit. It does not impact references to investment income for other purposes of the Income Tax Act, such as the definition of aggregate investment income under the refundable tax rules.
Refundable dividend tax on hand (RDTOH)
Under the old RDTOH regime, a private corporation could receive a RDTOH refund when it paid eligible dividends. Eligible dividends are generally paid out of a corporations General Rate Income Pool account (GRIP) which includes income that is earned from a business that was not eligible for the lower small business tax rate. In these circumstances, the individual shareholder receiving eligible dividend is subject to personal tax at a lower tax rate than if it had not been designated as an eligible dividend. This created an advantage in some cases were the total tax paid by the private corporation and its individual shareholders was lower than if the same income had been earned by the individual directly.
In order to deal with the concerns surrounding the advantages of earning passive income within private corporations, the government proposed a new system that will create eligible and non-eligible RDTOH accounts for dealing with the recovery of RDTOH and payment of eligible dividends. The system will allow a refund of the eligible RDTOH account on payment of an eligible dividend and a refund of the non-eligible RDTOH account on a payment of a non-eligible dividend.
Eligible RDTOH will track refundable taxes paid under Part IV of the Income Tax Act and the Non-eligible RDTOH will track refundable taxes paid under Part I of the Income Tax Act.
Beginning January 1, 2018, certain income distributions made to a spouse or children, regardless of age, will be subject to tax on the highest marginal rate unless certain criteria are met with respect to their contributions to the business.
The new TOSI rules will essentially apply to any income that is included in the definition of “split income”. In very general terms, split income includes taxable dividends received directly or indirectly from a private corporation, shareholder benefits conferred directly or indirectly on the specified individual in respect of shares of a private corporation, and income from a partnership or trust that is derived directly or indirectly from related businesses in respect of the individual. Split income also includes:
- interest income earned on a debt obligation of a private corporation, partnership, or trust (subject to certain exceptions), and
- income or taxable capital gains arising if income from the following properties would be split income in the hands of the specified individual:
- the disposition of shares of a private corporation, or
- an interest in a partnership or trust, or
- certain debt obligations.
Ontario: The corporate income tax rates will remain unchanged, but the budget provides tax measures to increase tax credits for the Ontario Innovation Tax Credit (OITC) and Ontario Research and Development Tax credit for qualifying corporations
Ontario has announced that it will parallel the federal changes, which are aimed at extending the TOSI to adult family members who are not active in the business, with certain exceptions, beginning with the 2018 taxation year. Therefore, the top Ontario rate of 20.53 per cent will apply to split income received by an adult family member.
The small business limit
Ontario has announced that it will not parallel the federal changes to phase out the limit on small CCPC’s that earn between $50,000 and $150,000 of passive investment income in the taxation year.
Ontario innovation tax credit (OITC)
For companies whose ratio of research & development (R&D) expenditures to gross revenues is 10 per cent or less, the company will remain eligible for the OITC rate of 8 per cent. However, companies whose ratio of R&D expenditures to gross revenues is between 10 per cent and 20 per cent, the OITC rate will increase from 8 per cent to 12 per cent on a straight line basis as the ratio increases from 10 per cent to 20 per cent. For R&D expenditures to gross revenues in excess of 20 per cent, the OITC rate will be 12 per cent.
For the purposes of this calculation, both the gross revenues and R&D expenditures must be attributable to Ontario operations. Gross revenues and R&D expenditures attributable to Ontario operations of associated corporations would be aggregated.
The rate enhancement will be prorated for taxation years straddling March 28, 2018.
Ontario interactive digital media tax credit (OIDMTC)
Ontario will extend the eligibility of this credit to film and television websites purchased or licenced by a broadcaster and embedded in the broadcaster’s website. The amendment would apply to websites that host content related to film, television or internet productions that have not received either a certificate of eligibility or letter of ineligibility before November 1, 2017.
Manitoba: Manitoba’s 2018-2019 budget announced no new changes to the corporate tax rates.
Small business deduction:
The eligible small business deduction limit will rise from $450,000 to $500,000; this is as of Jan. 1, 2019. CCPC that qualify for the small business deduction pay a 0 per cent rate of Manitoba corporation income tax. The savings for a corporation as a result of this enhancement are up to $6,000 per year.
New child care centre development tax credit
A new refundable corporation income tax credit - Child care center development tax credit is being introduced to stimulate the creation of licensed child care centers in workplaces. The tax credit will be available for private companies that create new child care centers for a total benefit of $10,000 per new infant or preschool space created, claimable over five years. The credit would be available for licenced spaces created by a taxable corporation that is not primarily engaged in child care services effective after budget date and before 2021.
Small business venture capital tax credit
Effective as of the budget date, the $15 million revenue cap on the size of an eligible corporation and the investment minimum is lowered from $20,000 to $10,000.
Rental housing construction tax credit
The rental housing construction tax credit will be eliminated as of Jan. 1, 2019. Projects that are currently under provincial review or approval are not impacted. No new project applications will be processed after 2018 and any future projects must be available for use before 2021.
Labour sponsored fund tax credit
The labour sponsored fund tax credit will no longer apply for shares acquired after 2018.
Both the cultural industries printing tax credit and the Manitoba book publishing tax credit have been extended to December 31, 2019.
Alberta: Alberta’s 2018-2019 budget announced no new changes to the corporate tax rates.
Interactive digital media tax credit
This refundable tax credit will provide eligible interactive digital media companies with a benefit worth 25 per cent of eligible labour costs incurred after April 1, 2018. A diversity and inclusion credit enhancement, worth up to an additional 5 per cent, will be available to companies that employ workers from under-represented groups. Further details on the enhancement will be provided when the regulations are brought forward.
Alberta investor tax credit (AITC)
This program provides a 30 per cent tax credit to individuals and corporate investors who make equity investments in Alberta businesses that undertake research, development or commercialization of new technology, products or processes. It is also available to businesses engaged in interactive digital media development, video post-production, digital animation or tourism. The credit was planned to operate for three years. The budget extended the credit until 2021-2022. In addition, investors will also be eligible to receive an additional 5 per cent credit if they invest in eligible business corporations that meet the diversity and inclusion credit. The overall maximums for the AITC remain the same, with individual investors still limited to claiming a maximum of $60,000 in one year, and up to $300,000 over five years.
The capital investment tax credit (CITC)
This program provides a 10 per cent non-refundable tax credit of up to $5 million for a corporation’s eligible capital expenditures on manufacturing, processing and tourism infrastructure. The CITC was planned to operate for two years. To continue to encourage companies to invest in Alberta, the credit will be extended until 2021-22.
Quebec: The budget includes standardization of tax rates for all small and medium businesses – The small business deduction rate will slowly rise until it reaches 4 per cent in 2021; thus, the tax rates for small and medium businesses in all sectors will become standardized.
Harmonization with federal measures from the 2018 Federal Budget
The province will adopt (with necessary modifications) the taxation of income sprinkling rules proposed by the Department of Finance Canada in 2017. In addition, the provincial legislation will be amended to harmonize with other various tax measures regarding foreign affiliates, artificial losses using equity based financial arrangements and stop loss on share purchase transactions.
Enhanced capital cost allowance
The capital cost allowance will increase from 35 per cent to 60 per cent for new manufacturing, processing or general-purpose electronic data processing equipment acquired before April 1, 2020
Broadening of tax holiday for large investment projects
The 2014 Budget introduced a tax holiday for large investment projects. A corporation that carries out a large investment project in Quebec may, under certain conditions, claim
- a tax holiday in respect of the income from its eligible activities relating to the project and
- a holiday from employer contributions to the health services fund relating to the portions of wages paid to its employees that is attributable to the time they devote to such activities.
This tax holiday lasts 15 years. Budget 2018 proposes to grant tax holiday status to large investment projects that develop an eligible digital platform. An eligible digital platform is a computer environment, with the purpose of enabling content management or content use, that serves as an intermediary in accessing information, services or property supplied or edited by the corporation or by a third party.
New refundable tax credit for digital transformation
This refundable tax credit of 35 per cent will provide assistance of up to $7 million annually in respect of expenditures related to the digital transformation of their print media activities. The credit will apply for eligible expenditures incurred before Jan. 1, 2023.
Prince Edward Island: Prince Edward Island’s 2018-2019 budget proposes to reduce the small business corporate rate from 4.5 per cent to 4 per cent.
Small business investment grant
The budget proposes to introduce a small business investment grant that will provide companies with a 15 per cent rebate on qualifying business investments of up to $25,000.
Saskatchewan: The Saskatchewan 2018-2019 budget announced no new changes to the corporate tax rates
Saskatchewan technology start-up incentive
To encourage business investment in early stage technology start-ups, Saskatchewan is introducing an incentive to increase the availability of patient and risk tolerant seed capital. The Saskatchewan technology start-up incentive (STSI) builds on the best practices in other Western Canadian jurisdictions to address the capitalization challenges faced by Saskatchewan technology start-ups. The STSI will provide a non-refundable tax credit equal to 45 per cent of qualifying new investments made in eligible small businesses.
A sale of QSBC shares will be eligible for the lifetime capital gains exemption of up to $848,252 in 2018, 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.
Phasing out of recaptured input tax credits (RITCs) in Ontario – When HST in Ontario was established on July 1, 2010, large businesses were required to recapture the provincial part of HST in respect of the acquisition, importation, or bringing of specified property or services into Ontario. The agreement with the province foresaw a ‘phase-out’ of RITCs, to commence five years after inception. The recapture rate decreased as follows in the previous years:
- From 100 per cent to 75 per cent on July 1, 2015
- From 75 per cent to 50 per cent on July 1, 2016
- From 50 per cent to 25 per cent on July 1, 2017
The recapture rate was completely phased out in Ontario as of July 1, 2018
Voluntary disclosure program changes – Significant changes to the voluntary disclosure program (VDP) were proposed in 2017 and apply to VDP applications received on or after March 1, 2018. CRA’s GST/HST Memorandum 16.5 discusses these changes in greater detail. In brief, VD applications relating to GST/HST made after March 1, 2018 will be processed under three separate categories or 'tracks':
- Track 1 – GST/HST wash transactions: registrants’ applications which involve ‘wash transactions’ are eligible for a 100 per cent relief from penalties and interest under this new pro
- Track 2 – General program: for disclosures of non-compliance or reasonable errors such as accounting errors, the new GST/HST VD program will provide for 100 per cent penalty and 50 per cent interest relief.
- Track 3 – Limited program: for applications that disclose non-compliance where there is an element of intentional conduct on the part of the registrant or a closely related party, including a case where GST/HST was charged or collected, yet not remitted. Under the limited program there will generally be no relief from penalties or interest, except from the gross negligence penalty.
Investment limited partnership - On September 8, 2017, the Department of Finance released draft GST/HST legislation introducing the newly defined investment limited partnership (ILP). It also provided legislative amendments that will apply thereto. The proposals came into effect the same day, making management or administrative services provided to an ILP by its general partner subject to GST/HST. CRA’s GST/HST Notice 308, released in July 2018, explains the proposed changes and provides a general overview of the GST/HST rules that would apply to ILPs, including the rules that would apply where ILPs qualify as selected listed financial institutions (SLFIs) and distributed investment plans. The SLFI rules and compliance requirements may apply to ILPs effective January 1, 2019 or any reporting period that begins on or after January 1, 2018 if the ILP makes an election.
‘Netflix tax’ in Quebec – The Quebec Minister of Finance through budget provisions tabled on March 27, 2018 introduced new measures targeted primarily at e-commerce but more broadly at non-residents of Quebec making supplies to consumers, who are residents of Quebec. Under these new measures, non-residents of Quebec making supplies in Quebec (including operators of certain digital platforms for the distribution of property or services) will be required, under certain circumstances, to register under a new specified registration system:
- effective January 1, 2019 in the case of non-QC resident suppliers outside Canada, and
- September 1, 2019, in the case of non-QC resident suppliers located in Canada.
Non-resident suppliers registered under the specified registration system will be required to collect QST on taxable supplies made to specified Quebec consumers in Quebec. A specified Quebec consumer for the purpose of the specified registration system means a person who is not registered for the QST and whose usual place of residence is located in Quebec. Non-QC resident suppliers registered under the new specified registration system will not be entitled to claim Input Tax refunds (ITRs) in respect of QST incurred on their inputs.
GST/HST holding corporation rules – On July 27, 2018, the Canadian Department of Finance released draft legislative proposals including draft amendments to the holding corporation rules under section 186 of the Excise Tax Act. These amendments broaden the ‘commercial operating corporation test’ that an operating corporation must meet for the parent to benefit from the holding corporation rules and also specify certain circumstances under which the parent can claim an ITC. In addition to the draft proposals, the Department of Finance released a consultation paper on July 27, 2018 seeking input on two proposals. First, to replace the requirement that the parent corporation and the operating corporation be related (i.e., one corporation controls the other corporation) with a requirement that they be closely related, meaning there is at least 90 per cent common ownership among the corporations. Second, it is considering whether to extend the application of the holding corporation rules to include partnerships and trusts since such entities may effectively function as parent corporations. Interested parties were invited to provide comments on the consultation paper by September 28, 2018.