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Individual tax instalment deadlines for 2018

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Millions of individual taxpayers pay income tax by quarterly instalments, which will be due on the 15th day of each of March, June, September, and December 2018, except where that date falls on a weekend or statutory holiday.

Tax instalment due dates for 2018 are as follows:

  • Thursday March 15, 2018
  • Friday June 15, 2018
  • Monday September 17, 2018
  • Monday December 17, 2018

Individual tax filing and payment deadlines in 2018

  • For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2017 tax year is Monday, April 30, 2018.
  • Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2017 on or before Monday April 30, 2018.
  • Self-employed taxpayers and their spouses must file a 2017 income tax return on or before Friday June 15, 2018.

Looking ahead to 2018

2018

For most Canadians, income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by their employer.

Each taxpayer’s situation is unique and so the employer must have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but minimally at the time employment commences. Each employee must, complete two TD1 forms – one for federal tax purposes and the other for provincial tax. Federal and provincial TD1 forms for 2018 list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount.

While the TD1 completed by the employee will have accurately reflected the credits claimable, everyone’s life circumstances change. Where a baby is born, or a child starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with their children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

It is a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

Where the taxpayer has available deductions, which cannot be recorded on the TD1, like RRSP contributions, deductible support payments or child care expenses, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect the employee’s tax liability for 2018. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2018 is filed with the CRA, the sooner source deductions can be adjusted, effective for all paycheques subsequently issued in that year. Providing an employer with an updated TD1 for 2018 at the same time will ensure that source deductions made during 2018 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

Changes Coming to the Voluntary Disclosure Program

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Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to prepare for the completion of their annual tax return or, more often, engage a professional accountant to do it for them.  Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not.

There are a lot of reasons why individual Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system.

Some taxpayers don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it’s also the case that it’s necessary to file to receive income-tested tax credits and benefits, including the HST credit, the Canada child benefit and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the CRA to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.

There are also some Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each instance of non-compliance simply aren’t available, especially since, in many cases, the amount recovered may be less than cost of recovering it.

With all of that in mind, several years ago the CRA instituted a program intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.

That program, the Voluntary Disclosure Program, has generally fulfilled its objectives but has been a target for criticism as being a means by which those who engage in deliberate tax avoidance can escape the consequences of their actions. The CRA recently announced that changes would be made to the Voluntary Disclosure Program, beginning on March 1, 2018, and that those changes would narrow the eligibility criteria for the program and impose additional conditions on participants, to avoid such effects.

To start, the basic requirements for participation in the VDP as of March 1, 2018 include the following. To qualify for relief, an application must:

  • Be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
  • Be complete;
  • Involve the application or potential application of a penalty and, for GST/HST application, the application or potential application of a penalty or interest; and
  • Include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due.

The basic change which will come into effect after February 2018 is that two tracks will be created for income tax disclosures — the Limited Program and the General Program.  The determination of whether an application should proceed under the Limited or the General Program will be made on a case-by-case basis. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

  • the dollar amounts involved;
  • the number of years of non-compliance; and
  • the sophistication of the taxpayer.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged, and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of returns required to be filed.

There are, as well, other changes to the administration of the Voluntary Disclosure Program. The most important of those, from a taxpayer’s point of view, are the following.

As of March 1, 2018, taxpayers who make an application under the VDP must pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement. Formerly, there was no requirement to pay outstanding taxes owed as a condition of participating in the VDP.

As well, taxpayers could formerly “test the waters” with respect to making a voluntary disclosure by making an anonymous (termed a “no-names disclosure”) disclosure and receiving an opinion on the likely outcome. That option will be discontinued after February 2018 and replaced by a “pre-disclosure discussion” service. That new service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion will not constitute acceptance into the VDP.

Income Sprinkling Draft Legislation – December 13, 2017

2018-tax-update

On November 21, 2017 Segal LLP prepared an update on the tax proposals based on a series of news releases provided by the Liberal government. On December 13, 2017 the government finally provided new draft legislation for the dividend / income sprinkling rules. The purpose of this article is to provide an overview of the new proposed legislation.

These rules will all apply as of January 1, 2018. However, certain rules with regard to share ownership will apply as of December 31, 2018. This means that, in certain situations, there may be ownership planning steps to be undertaken between now and the end of 2018

The general principal is still that any adult family member that is inactive will pay the top rate of tax on split income (TOSI). Split Income includes the following sources:

  1. Private company dividends
  2. Any income inclusion because of section 15 (shareholder benefits)
  3. Partnership Income
  4. Trust Income
  5. Interest Income on Debt- New
  6. Income or Capital Gains on Disposition of Property- New

Fortunately, the government has removed the proposal to apply TOSI to income on income – secondary income. As well, family will no longer include aunts, uncles, nieces and nephews in considering the source of the income.

The TOSI will not be applied to several new circumstances not previously addressed in the old proposals:

  • Income on property transferred on a marriage breakdown
  • Taxable capital gain on the disposition of qualified farm or fishing property or qualified small business corporation shares (QSBC). This means that keeping a corporation qualified as a QSBC ensures that the ultimate sale of the shares will not result in TOSI. This applies even if the Capital Gains Exemption is not actually claimed.
  • Income or Gains on property inherited where there was no TOSI to the person who bequeathed the property

One of the key differences to the new proposals is that individuals within specific age ranges are treated differently:

  • Under 18 years old- no change to rules
  • Over 17 years old but under 25 years old
  • Over 24 years old
  • Over 64 years old

1. Income for those 65 years of age or older.

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There is a new rule that a shareholder can receive dividend income or incur a taxable capital gain, that would otherwise have been subject to TOSI, and the income or capital gain would be subject graduated tax rates if the shareholder’s spouse is 65 years or older and the shareholder’s spouse was an active shareholder in that corporation.

These rules appear to be aimed at critics who stated that it is unfair that a senior can split income on pensions but can’t receive dividend income from a corporation.

2. Over 17 years old but under 25 years old

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a. Income earned from a “related business” is subject to TOSI.  Related business is generally defined to be a company where a related person owns 10% or more. Where the income is from a partnership, a related person need only be a partner.  The percentage ownership or allocation of a partnership is not relevant.

b. Income earned from an “excluded business” is NOT subject to TOSI. An excluded business is defined to be a business where the individual taxpayer works on a “regular, continuous and substantial basis in the year” or for five previous years.  The Department of Finance has given some guidance that this would mean working an average of 20 hours per week “during the portion of the year in which the business operates”. This means that if the family member works in the business in the year, then TOSI would not apply to dividends in that year. Moreover, if the family member worked in the business for any five previous years (doesn’t have to be consecutively), the family member will never be subject to TOSI on the income paid from that business. How a person would prove they worked 20 hours a week is unclear. For example, if a daughter worked full time in a business from ages 20 to 25 years old, she could receive dividends, for the rest of her life, and not be subject to TOSI.

c. There is a new concept called “safe harbor capital return”. This allows a child in the above age range, to lend funds to the company and earn a rate of return at the prescribed rate (currently 1%) that is not subject to TOSI. There are no rules as to the source of these funds. That is, a father could lend funds to a child (18-24 years old) to make this loan.

d. The last exclusion is what the proposed rules call “a reasonable return” having regard to “arm’s length capital” of the individual. This would allow an individual who has accumulated funds on their own to advance funds to the corporation and earn a reasonable return based on the following:

  1. Work performed
  2. Property contributed
  3. Risks assumed
  4. Consideration of other amounts paid to the individual
  5. “other factors”

The funds advanced cannot be from a related party, cannot be borrowed and cannot be from income distributed by a company owned by family members. Though this is meant to be a relieving provision, there are very few circumstances where an 18-24 year-old has accumulated their own funds to lend to their parent’s corporation.

3. Over 24 years old

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For those family members over 24 years old, the rules related to a “related business” and “excluded business”, noted above in the 18-24 age range, will also apply. That is, if there is income from a related business it is subject to TOSI. If there is income from an excluded business, there will not be TOSI.

For this age group there are two additional exclusions from TOSI:

  1. Income or Taxable Gain from “Excluded Shares”.
  2. A “reasonable return” in respected of the individual.

a. Income or Taxable Gain from “Excluded Shares”

Excluded shares are a new definition. They have nothing to do with excluded business, but they are part of the definition of excluded amount.

Excluded shares are defined as a corporation that is owned by the taxpayer where the following conditions are met:

  1. It is NOT a professional corporation.
  2. Less than 90% of the business income from the most recent fiscal year is from the provision of services.

If these two tests are met, the next test is whether the individual taxpayer owns 10% or more of the votes and 10% or more of the value of the company.

Lastly, 90% of the income of the corporation must NOT come from other related businesses. There are many issues in this definition.

  • What is business income from the provision of services?
  • Is it a profit test or a revenue test?
  • What is service income? The only definition in the Income Tax Act for service income is for calculating foreign accrual property income – it would not be practical in this context. We are back to dealing with subjective analysis. This is something the government had suggested it was trying to avoid.
  • What if someone sells product and provides service?
  • How does a company track the allocation of that income if it is tied together?

It appears that the taxpayer must own these shares directly in order to fit into the exclusion. Therefore, to own these shares through a trust would not work. If the excluded share test is not met, TOSI could still be avoided through the excluded business test (discussed above) or reasonable return test (discussed below).

This ownership test (10% of votes and 10% of value) must be met by December 31, 2018 in order to apply for the full 2018 year and onwards. This provides time for taxpayers to change their ownership to give family members, who are older than 24, ownership of 10% of the votes and value. In those situations where a freeze has been done in the past, there could be challenges with transferring 10% of the value on a tax-free basis. Any transactions between parents and children are at fair market value. There are opportunities to transfer frozen shares to a spouse tax free. However, the attribution rules will attribute back any income or gains from the transfer unless the spouse pays fair market value for the shares. This would include an actual cash payment or a note payable with the prescribed interest rate whereby the interest is paid by January 30th after each year. Bottom line, it’s complicated and will only be available in very specific situations.

b. A “reasonable return” in respect of the individual

This is the second test. This test has nothing to do with the first test. That is, a family member can still receive income that is not subject to TOSI if this test is met. This is similar to the test noted above in that the amount paid to the individual that is reasonable having regard to the following factors relating to the relative contributions of the taxpayer.

  1. Work performed
  2. Property contributed
  3. Risks assumed
  4. Consideration of other amounts paid to the individual
  5. “other factors”

One big difference from before is that this is no longer an arm’s length analysis. It is an analysis of the relative contribution of the individual. The problem is how does one determine an appropriate amount. It is all subjective (again). The government has added in “other factors” to be considered. At first blush, one would think that this allows taxpayers some leeway with regard to justifying contributions. However, this could be of advantage to CRA when they make their determination of a reasonable amount. That is, they could consider other factors that support their claim that the amount being paid is not reasonable.

Capital Gains

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Capital gains on the sale of shares or fishing properties that qualify for the Lifetime Capital Gains Exemption (LCGE) are not subject to TOSI. It is not dependent on claiming the LCGE, only that the LCGE could be claimed. In brief terms, the LCGE is available for shares of Canadian Controlled Private Corporations (CCPC) where 90% of the corporate assets are active Canadian business assets at the determination time and 50% of the assets were active Canadian business assets in the preceding 24 months before the determination time.

Where there are gains on shares that don’t qualify for the LCGE, the tax treatment depends on whether the vendor is over 17 years old or under 18 years old. Where the vendor, directly, or through a trust, is over 18 years old, the gain is subject to TOSI and taxed at the top rates. Where the vendor is under 18 years old, the gain is treated as dividend and subject to TOSI at the top rate. The dividend is 100% of the gain and not 50%.

Clearly, it becomes very important to ensure that shares in a CCPC qualify for the LCGE. This means ensuring that non business assets do not accumulate in the company.

Summary

In summary, the government has attempted to give a few more situations where TOSI won’t apply. Specifically, to seniors and family members who have worked in the business for a period of time. However, there are still very few situations where a family member would fit into one of the exclusions. The rules are still very complicated and open to subjective determinations. Determining a “reasonable return” will likely take many court cases until there is clearer guidance to both tax practitioners and taxpayers. This is the beginning of the process.

It is important that you speak to your Segal LLP advisor to determine how these rules affect you and if there are any planning opportunities or changes required in 2018.

Update on July 18, 2017 Tax Proposals

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The last few months have been a very tumultuous time for Canadian tax practitioners and taxpayers. Proposals were made by the federal Liberal government on July 18, 2017 that had some of the most significant changes to the taxation of Canadian private corporations since the early 1970’s.

The government promoted these changes as “tweaks”, however, as details emerged, they revealed themselves as fundamental changes to how income was taxed for private corporations. There was a dramatic and strong negative reaction to these proposals from tax practitioners, taxpayers and the business community. In response to the mounting concerns directed to Finance Minister Bill Morneau’s proposals, the government has since made pronouncements by news release that will adjust the original proposals.

The original proposals from July 18th, 2017 are summarized below with updates from the most recent news releases from the federal government including discussion of those that are still on the table. For clarity – there has been no new draft legislation since the July 18, 2017 proposals. There remains a great deal of uncertainty as to what the actual rules will be as of January 1, 2018.

The July 18 amendments can be summarized under the following headings:

  1. Multiplication of capital gains exemption;
  2. Conversion of income into capital gains;
  3. Dividends / income sprinkling;
  4. Taxation of passive income.

Multiplication of Capital Gains Exemption

In the initial proposals, there were rules that would eliminate the ability for family members to claim the capital gains exemption on shares of a private corporation where those family members were not active in the business. By way of news release, these proposed rules have been removed.

Conversion of Income into Capital Gains

There were a number of rules that proposed to re-characterize capital gains into income. As well, they affected the ability to pay out a capital dividend account when assets were sold to a related corporation.  Both of these proposed rules have been removed by way of news release.

Dividend/Income Sprinkling

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These rules are some of the most detailed and far ranging rules that we have ever seen.

The goal of these rules is to tax family members at the highest marginal tax rate on dividends or income received from certain private corporations. In the past, dividends to minors were taxed at the highest tax rate. The new proposals are to tax family members up to 24 years old as well as all family members who have not worked in the business or contributed capital to the business.

These new rules propose a “reasonableness” test to determine if the amounts paid to the family members should be taxed at the highest tax rate or not. This concept is called tax on split income (“TOSI”).

If an individual is subject to the TOSI then that individual will pay tax at the highest marginal tax rate and will not be allowed any deductions against that income.

Previously, this tax was only applied to dividends, shareholder benefits, and certain partnership and trust income. The rules are now being expanded to include income from loans to certain corporations, partnerships and trusts and the disposition of shares in private corporations. Moreover, there is now a proposal to tax investment income earned on the initial income that was taxed at the highest tax rate. That is, if an individual earned $100 and was taxed at the highest tax rate and then invested that $100, the income earned on that investment would still be subject to the TOSI rules and be taxed at the highest marginal tax rate.

The notion of reasonability is being proposed to include all sources of income from the corporation to determine if the dividend income or interest income would be reasonable with regard to the entire remuneration. This obviously is very subjective and we have many concerns about how these rules would be applied.

In the draft legislation, these rules were to be effective January 1, 2018. As a result, we are suggesting that clients consider paying larger than usual dividends to any family member that is over 18 years old in order to maximize the funds available to the family members as of December 31, 2017. The actual amount of dividends should be determined in consultation with your Segal tax advisor.

Taxation of Passive Income

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In the past, an active business could accumulate funds after paying corporate tax and invest those funds in whatever manner decided upon by the shareholders. The new rules are proposing to set a limit on the amount of investment income that can be earned using active business income. At present, the government has proposed a $50,000 annual limit. It must be stressed, that there has been no draft legislation on this matter. As well, the government has indicated that they will table the draft legislation in their 2018 budget. The date of this is unknown.

The general concept is that the income on any assets owned before the rules come out would not be subject to these new rules. At this point, there is no clarity from the government on what the cutoff time will be. We are suggesting that clients maximize their retained earnings and assets as of December 31, 2017 to maximize the amount of investment income that can be earned on these assets in the future. This suggestion is in contradiction to the suggestion above of paying larger than normal dividends to family members. An analysis must be done to determine what the actual dividends should be and what the maximum amount of assets that should be retained in the corporation.

The details of how the income will be taxed are not available. The general idea is that if capital has been injected into the company from personal assets, then these rules would not apply. However, if the capital to invest in the business has been accumulated because the company or its subsidiaries engaged in an active business then these rules will apply.

The proposed rules would be that there is a tax of approximately 50% in the corporation and then full personal dividend tax upon payment out of the corporation. The difference between the proposed rules and the current rules is that under the current rules, the corporation would get a refund of a portion of the corporate taxes paid when dividends are paid. The net effect is that an individual taxpayer would be indifferent to earning investment income in a corporation versus personally. Each province has different tax rates and therefore there is not perfect integration. However, under the new rules the effective tax rate in Ontario, would go from 56% to 73% when considering the corporate and personal taxes.

Given the extremely high tax rate noted above, there has been a significant response to the government about changing these rules. However, there is currently no draft legislation and there is no effective date.

As of now we are waiting for the rules on dividend/income splitting in “the fall” from the government. The passive income rules may not be released until March or April 2018.

Other Changes

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The federal and the Ontario government have both announced corporate tax rate reductions for small business corporations. The Ontario rate will decrease by 1%, effective January 1, 2018. The federal rate will decrease by 0.5% effective January 1, 2018 and by an additional 1% effective January 1, 2019. Although these tax cuts will benefit small business corporations, they will have a detrimental effect to the shareholders. To maintain integration, there will be a corresponding increase in the personal tax rates on dividend income. Consequently, individual shareholders receiving dividends after 2017 will be facing a higher personal tax rate.