Category Segal LLP Insider Current News

Budget 2017: Long On Individual Taxes, Short On Business Changes

Canada is 150 years old.Canada Savings Bonds are 71 years old. One of these won’t survive the year.(For full details see our;next article “Answers to Help Clarify the End of the Savings Bond Program”.)

Part of Budget 2017 kills off a staple of some grandparents’ birthday giving: it’s eliminating the Canada Savings Bond program, which was introduced in 1946.

At their height, Canada Savings Bonds accounted for 45% of the total marketable debt outstanding. Now, outstanding bonds make up less than 1% of total federal market debt at $5 billion.

“This decline in the program’s popularity can be attributed to the proliferation of higher-yielding alternative retail investment instruments, such as government of Canada-insured retail products,” states Chapter 4 of the budget documents entitled Tax Fairness for the Middle Class.

The demise of the bonds is just one of the headline takeaways from Finance Minister Bill Morneau’s second federal budget. Among other highlights:

  • Employment insurance premiums increase,
  • Taxes on alcohol and tobacco products rise,
  • Public transit tax credit eliminated, and
  • “Catalyst Initiative” to finance late-stage venture capital.

Here are details of major parts of the latest federal budget.

Business Tax Changes

Review of small-business tax benefits. The government is taking aim at tax-planning strategies common to private small business corporations, often owned by the wealthy, including:

  • Income “sprinkling” among family members through capital gains and dividends,
  • Holding a passive investment portfolio inside a private corporation, and
  • Converting salary or dividends into capital gains.

Professional practice “work in progress.” The budget eliminates the billed-basis tax accounting for accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors. This tax deferral let taxpayers recognize income when the work was billed. It ends for taxation years starting on or after March 22, 2017 (Budget Day).

Employment Insurance (EI). Premiums will rise 3% — or 5 cents to $1.68 for every $100 of insurable earnings. This is the maximum allowable increase under the Employment Insurance Act that governs EI.

Discovery wells. The budget changes the treatment of the costs of drilling an oil or gas well —or other expenses related to the well — that results in the discovery of a petroleum or natural gas reserve. After 2018, these expenses will have to be treated as Canadia Development Expenses (eligible for a deduction on a 30% declining balance basis).

Mineral exploration tax credit. The eligibility for the 15% mining exploration tax credit has been extended for an additional year. It applies to flow-through share agreements entered into on or before March 31, 2018.

Personal Tax Changes

Public transit credit. Since 2006, Canadians have been able to claim a 15% nonrefundable tax credit on the cost of monthly or annual public transit passes. No more. The government says “available evidence suggests that this credit has been ineffective in encouraging the use of public transit and reducing greenhouse gas emissions.”

Alcohol and cigarettes. The excise duty rate on cigarettes is increasing to $21.56 for every 200 cigarettes. The excise rate on alcohol is rising 2% and will be adjusted for inflation every April 1 starting in 2018.

Uber and ride sharing services. The definition of a taxi business is being amended to include commercial ride-sharing services facilitated by Internet applications, such as Uber and Lyft. As of July 1, 2017, rides by those services will be subject to an HST/GST charge.

Tuition tax credit. This tax break is being extended to fees charged for occupational skills courses that are not at a post-secondary level. Students must be least 16 years old before the end of the tax year. The credit is available starting with courses taken in 2017.

Caregiver credit. The current caregiver, infirm dependant and family caregiver tax credits are being combined into a 15% Canada Caregiver Credit. Taxpayers can claim up to $6,883 for the care of an infirm dependant relative and up to $2,150 for a spouse, common-law partner, an infirm dependant for whom an eligible dependant credit is claimed and a sick child under the age of 18. The credit starts to be phased out (dollar for dollar) when the dependant’s income is over $16,163 net income.

EI caregiving benefit. Eligible caregivers will be able to claim up to 15 weeks of EI benefits while they’re away from work to support or care for a critically ill or injured family member. Currently, this benefit is available only if a family member is dying.

Veterans’ education. A new program will provide as much as $40,000 of education or training benefits to veterans with six years of eligible service. Those with 12 years of service would be entitled to up to $80,000 in benefits. The program will begin in April 2018 for veterans honourably released on or after April 1, 2006.

Home relocation loans. The budget eliminates the deduction from taxable income of the portion of employer loans used to relocate more than 40 kilometres for your job. The change will be effective starting in the 2018 tax year.

Tighter rules on investment products. Anti-avoidance rules will be extended to Registered Education Savings Plans and Registered Disability Savings Plans. They include:

  • Advantage rules aimed at preventing shifting returns into registered plans from taxable investments,
  • Prohibited investment rules aimed at ensuring taxpayers hold only arm’s length investments in their registered plans, and
  • Non-qualified investment rules intended to restrict the classes of investments that can be held within registered plans.

These rules already apply to Registered Retirement Savings Plans, Registered Retirement Income Funds, and Tax-Free Savings Accounts.

Fertility treatments. Beginning with the 2017 tax year, you can claim the cost of such treatments as in vitro fertilization. You can also make a request to claim the expenses over the preceding 10 years.

Parental leave. Canadian mothers and fathers will be able to take an extended 18-month parental leave. However, EI benefits cover 55% of a salary over 12 months and that amount will have to cover those 18-month leave. Expectant mothers can claim maternity benefits up to 12 weeks before their due date, an increase from eight weeks.

In addition to what is listed above, the Budget includes many other changes that may affect your income or business tax returns. Consult with your tax advisor.

Help Pump up Business by Listing Yours on a Popular Federal Database

031017_Thinkstock_497366187_lores_kwSome Canadian companies and individuals seek opportunities to export their goods or talents. If you’re one of them, how do you get potential foreign business associates to notice you?

There are many ways you can drum up export business. You can make contacts in a foreign country starting with foreign consulates, find a local mentor or investor and develop a supply chain.

Or you can start more simply, by registering your company on the federal government-run Canadian Company Capabilities (CCC)

Canadian businesses have much to offer the world. We ranked second among 80 nations evaluated in the recently published 2017 Best Countries Report in U.S. News & World Report magazine. Canada is the largest trading partner of the United States. The biggest economic driver is the service sector, but it’s also a significant exporter of energy, food and minerals. Canada ranks third in the world in proven oil reserves and is the world’s fifth-largest oil producer.

The country’s top exports1 are:

1. Vehicles (16.5% of total exports)

2. Mineral fuels including oil (16%)

3. Machinery including computers (7.7%)

4. Gems and precious metals (4.8%)

5. Wood (3.4%)

6. Electrical machinery and equipment (3.2%)

7. Plastics and plastic articles (3.1%)

8. Aircraft and spacecraft (2.6%)

9. Pharmaceuticals (2.2%)

10. Aluminum (2.1%)

Clearly there is ample opportunity to provide goods and services beyond your borders, and CCC can help. (It can also be used to find suppliers, services and technology in Canada.)

The website houses an Industry Canada database of more than 60,000 Canadian businesses. Over 500,000 domestic and international companies browse the site each month looking for Canadian businesses that can fulfill their needs.

The database includes hundreds of specialized product, service and manufacturing directories. Each directory has an advanced search capacity and the business profiles contain comprehensive information on contacts, products, services, trade experience and technology.

Registration is free and the site lets businesses create profiles and custom printable reports. It’s specifically designed to help companies find enterprises that can supply the goods, services and technology they need.

The main page lists the 20 broad industries that the database includes, each with its own subcategories. Among the main industries, users will find:

Agriculture

Construction

Manufacturing

Wholesale Trade

 

Retail Trade

Finance and Insurance

Professional, Scientific and Technical Services

Arts, Entertainment and Recreation

Users can then search subcategories. For example, under the Professional, Scientific and Technical Services category, subcategories include:

Legal Services

Offices of Accountants

Architectural Services

Geophysical Surveying and Mapping Services

Computer Systems Design

Scientific Research and Development Services

Users may also browse by specialized directories, such as businesses owned by Aboriginals or women, Canadian social enterprises, Aerospace & Defence and aftermarket exporters, to name a few.

Searches can be refined by many factors including company name, province or territory, city, postal code, product or service, number of employees, total sales and export sales.

So, let’s say a company is looking for a business that supplies industrial moulds. That term can be entered into the search function on the site and an alphabetical list of links and brief descriptions of businesses pops up.

Each link takes you to that company’s profile page with more detailed information, including:

  • Mailing and location addresses,
  • Links to the business’s website and its president’s email, and
  • A description of the business that includes its age, whether it exports, its primary and alternate industries, total sales, export sales (if any) and number of employees.

Drill deeper and you can find information about a company’s product names, licenses and export experience, such as where it generally exports.

And it isn’t just businesses that list here. Under the category of Arts, Entertainment and Recreation, a single performer from Calgary, Alberta, lists himself as:

“A one-man physical comedy show performed around the world [that] has been booked on cruise ships, exhibition, festivals, county & state fairs. The United States is our main export … has also showcased his talents in Singapore, Asia and Europe. We also book other entertainment for a variety of events in Canada from coast to coast.”

Participation in CCC generally is open to all Canadian businesses and related organizations, although Industry Canada reserves the right to exclude enterprises that:

  • Are identified as ineligible for support, in particular projects or activities that provide or are likely to provide sexually exploitative or sexually explicit entertainment, products or services,
  • Market products or services that are illegal or restrained by court order (for example a court order regarding the right of a company to use a trademark),
  • Can’t be independently verified as a fully operational business in Canada, and
  • May be or whose activities may be inconsistent with or non-compliant with federal or provincial legislation, policies or programs.

Registration is simple. You first set up an Industry Canada account (the site supplies a link) and then create a CCC username and password. The accuracy and reliability of the information you provide is up to you and you’re expected to monitor it and modify it when necessary.

CCC also lists other company directories, including the Canadian Trade IndexContact CanadaFRASERSProfile Canada and Scott’s Canadian Business Directory and Database.

If you’re looking to expand your business, CCC could be a good place to start to make your company more noticeable and gather ideas for expanding its operations abroad.


1Source: World’s Top Exports, an independent education and research website.

Investment Expenses Can Lower Your Tax Liability

031417_Thinkstock_509536872_lores_kwAs an investor, you incur many expenses related to your investment activities.

Some of these costs are tied to the purchase and sale of securities and others are for maintaining and administering an account.

Basic Rules for Fee Tax Deductions

There are two main types of investment expenses that can be deducted. First, you can claim some, but not all, of the costs associated with investing, including some fees you pay your investment advisor and your accountant.

Much of the interest on investment loans can be deducted, provided the money is used to earn investment income. However, the interest isn’t deductible if your investments earn only capital gains.

Because investment income is added to your income, it makes sense to take advantage of these tax breaks. By reducing your taxable income, you might wind up in a lower tax bracket with a lower tax rate.

For 2016, the tax rates for individuals are:

Taxable Income Tax Rate (%)
First $45,916 15
Between $45,916 up to $91,831 20.5
Between $91,831 up to $142,353 26
Between $142,353 up to $202,800 29
More than $202,800 33
Marginal tax rate for dividends is a % of actual dividends received (not grossed-up amount). Marginal tax rate for capital gains is a % of total capital gains (not taxable capital gains).
Gross-up rate for eligible dividends is 38% Gross-up rate for non-eligible payouts is 17%.

As an example of how your tax bracket can be lowered, let’s say your taxable income is $150,000.

You would owe $43,500 in taxes, based on the 29% rate, before taking any tax credits or deductions. If you reduced your taxable income to $142,353, you reduce your tax rate to 26% and your tax liability to $41,282.

Understanding what Lies under the Fees

You can’t deduct just any fees. You need to understand what they are for.

For example, fees for advice on what to buy, sell or hold are deductible. But any portion that relates to financial planning doesn’t qualify. Fees you pay for retirement-planning advice aren’t deductible. Generally, you may claim fees to manage or take care of your investments (other than administration fees for your registered retirement savings plan or registered retirement income fund) and for certain types of investment advice (your advisor can guide you on this.

Commissions paid for the purchase or sale of securities are transaction fees that can’t be claimed. Commissions on stock purchases are added to the cost of the investment. Sales commissions reduce proceeds from the deal. Ultimately, however, commissions will reduce any capital gain or increase any capital loss you claim.

Non-Registered Accounts

Another key element in the tax deduction of management fees is that they have to relate to advice only on  non-registered-account investments. Canada Revenue Agency (CRA) won’t allow any fee deductions that relate to Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans or Tax-Free Savings Accounts.

Another consideration is how you pay the fees. You don’t deduct mutual fund fees because they’re part of the management expense ratio. They’re deducted from the income reported on the annual tax slip the fund sends to you.

But it’s different if you invest in a wrap account, where brokerage account costs are “wrapped” into a single or fixed fee. Because you pay the fees directly, you can deduct them.

Tax Preparation

You may deduct fees for the preparation of income tax returns when they relate to accounting and to reporting various investment activities on the return. If you own a business, the fees are generally deducted when you calculate net business income. You may also deduct payments for advice and assistance when appealing a CRA assessment or reassessment of tax, interest or penalties.

The CRA requires that investment management fees be reasonable. Generally, fees that are based on a sensible percentage of the fair market value of investments are considered acceptable.

Also take into account the amount of time spent and type of work done by the person providing the investment services. Arm’s length terms and conditions also should apply to fees, although this doesn’t come into play if you have no familial or corporate relationship with the investment manager.

Documentation

Hold onto any proof you have of your expenses, including receipts, statements and bills — in case the CRA requests it later.

Deducting investment fees and expenses is complex. Consult with your tax advisor, who can help ensure you use those costs to your advantage.

2017 Federal Budget

On March 22, 2017, Finance Minister Bill Morneau, tabled the Liberals’ 2017 federal budget to the House of Commons.
For an executive summary on the budget prepared by the Segal tax team, click on the link below :

2017 Federal Budget Commentary

Get Your Tax Information to Your Accountant Early

030317_Thinkstock_493829487_kwIt’s tax season, so it’s time to gather that pile of documents from employers, banks, administrators and others. You need to check their accuracy and hand them off to your tax advisor.

Accuracy is critical, as errors on these slips of information can affect your tax liability. Here are details on what to expect and look for.

Generally, your accountant has until midnight April 30, 2017, to file your 2016 income tax return.

What’s the Difference between a Deduction and a Credit?

Deductions are taken off your gross, taxable income and are generated by various expenses you incur. Because they reduce your taxable income on your federal tax return, they can lower your marginal tax rate.

Tax credits are subtracted directly from the amount of tax you owe to the federal or provincial governments. They generally aren’t dependent on your tax bracket and come in two varieties:

1. Nonrefundable tax credits. If, when you claim these, you lower your tax payable to $0, you don’t receive a refund for any balance of the credit.

2. Refundable tax credits. Amounts are refunded to you if your tax payable reaches $0.

The value of tax credits depends on what they are for. Some are granted for specific situations or under certain classifications.

Pay Close Attention to Deductions

Many deductions are overlooked. Be sure you don’t forget to give your accountant documents and receipts related to these common deductions:

Health. Premiums for medical coverage, including private insurance and amounts taken for employer plans, can all be deducted.

Registered Retirement Savings Plan (RRSP). Contributions can be deducted from taxable income. The maximum limit you may deduct for the current tax year is 18% of your income for the previous year, or $25,370 for 2016. You may contribute more if you didn’t use your entire RRSP deduction limit for previous years and you can carry forward unused contributions for life.

Childcare. Working parents can claim childcare costs for babysitters or nannies. You can claim payments made to:

  • Caregivers providing child care services,
  • Day nursery schools and daycare centres,
  • Educational institutions, for the part of the fees that relate to child care services,
  • Day camps and day sports schools where the primary goal of the camp is to care for children (an institution offering a sports study program isn’t a sports school), or
  • Boarding schools, overnight sports schools, or camps where lodging is involved.

Self-employment. You can deduct expenses for the part of your home you use for business. If you own your home, you can claim part of your mortgage interest and property taxes. If you rent, deduct part of your monthly rent. You can also deduct the cost of:

  • Utilities,
  • Maintenance expenses for the percentage of your living space used for business,
  • Travel,
  • Insurance,
  • Supplies, and
  • Client entertainment

Interest and carrying charges. Mortgage interest isn’t deductible, but several expenses related to financing or investment may be deducted, including, among others:

  • Interest on loans for investments or to purchase income-producing assets, and
  • Interest on the purchase of Canada Savings Bonds through a payroll deduction plan.
  • Fees paid to accountants to prepare and file your tax and benefit returns, certain legal fees and certain expenses that go to managers of your investments can also be deducted in certain circumstances.

Moving costs. You can claim eligible expenses if you moved and established a new home to work or run a business or if you moved to be a full-time student in a post-secondary program at a university, college or other educational institution. To qualify, your new home must be at least 40 kilometers (by the shortest usual public route) closer to your new work or school. Eligible expenses include moving costs, travel, accommodations, temporary living arrangements and the costs involved in selling your previous residence.

Union or professional dues. If you belong to a union or professional organization, you may deduct all amounts you paid related to your employment, including union dues, professional membership fees or premiums for professional liability insurance.

Tax Credits Add Up

Be sure your accountant is aware of any tax credits that may apply to you. Your eligibility can change on an annual basis. Here are some of the more common tax credit areas:

Disability. You can claim substantial credits provided you expect the disability to last at least 12 months. The disability tax credit is a nonrefundable credit for disabled persons or their supporting persons. Individuals may claim the $8,001 disability amount once they’re eligible for the credit. If they qualify for the disability amount and were under 18 years of age at the end of 2016, they may claim up to an additional $4,667.

If you missed taking the disability amount in the past, you can amend filed tax returns. If you don’t need to use some or all of the tax credit because you have little or no income, you may be able to transfer all or part of it to your spouse, common-law partner or other supporting person.

Medical benefits. If you paid for hospital services, paid to live in a nursing home, or bought medical supplies such as pacemakers, vaccines or walking aids, you may be able to claim a nonrefundable tax credit. Married taxpayers can maximize the medical credit by pooling nonreimbursed, eligible expenses on the tax return of the lower-earning spouse or common-law partner. Claim expenses for any consecutive 12-month period that ends in the year of the tax return. Your accountant can help you choose the best period to maximize the benefit of this credit.

Most provinces and territories also offer nonrefundable medical tax credits. When an insurance plan reimburses expenses, only those not covered by the plan can be claimed.

The list of medical expenses eligible for the credit is extensive and includes costs incurred outside Canada. Your tax specialist will know them all.

The following are some of the expenses you can’t claim as medical expenses:

  • Athletic or fitness club fees,
  • The cost of blood pressure monitors,
  • The cost of organic food, and
  • The cost of over-the-counter medications and supplements, even if they were prescribed by a medical practitioner

Equivalent-to-spouse. An individual may claim, under certain circumstances, the “amount for an eligible dependant” non-refundable tax credit for a dependent child or other dependent relative. The $11,474 credit for 2016 is reduced by income earned by the dependant and can be claimed by only one person. It can’t be claimed:

  • If you claim the spousal amount tax credit, or
  • The claim is for a child for whom you were required to make support payments during the year. If you and your spouse were separated for part of the year due to a breakdown in your relationship, you can still claim the credit, as long as you don’t claim any support amounts paid to your spouse, and as long as the child was under 18 years of age or mentally or physically impaired during the separation.

Charitable donations. There’s a credit for charitable donations that increases the more you give. In any one year, you may claim:

  • Donations made by December 31, 2016,
  • Any unclaimed donations made in the previous five years, and
  • Any unclaimed donations made by your spouse or common-law partner in the year or in the previous five years.

You can claim eligible amounts of gifts to a limit of 75% of your net income. For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income.

More about Credits

Education. Many people miss the chance to transfer credits when their children attend college or university. Make sure students file their own tax returns. If they don’t need all their tuition or education credits, they can transfer them to parents, grandparents, a spouse or common-law partner.

Pensions. If you receive eligible pension, superannuation or annuity payments you may claim a credit of as much as $2,000. The credit is nonrefundable and may not be carried forward. Canada Pension Plan (CPP), Old Age Security (OAS) or Guaranteed Income Supplements (GIS) aren’t eligible for the credit, but you can transfer it to your spouse or common-law partner.

Your accountant will help ensure that you get the most out of your available tax breaks, as long as you provide the necessary information and documents.