Top Tax Tips Seminar
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Transcript of Top Tax Tips Seminar
TOP TAX TIPS
October 18, 2016
NEW RULES FOR ELIGIBLE CAPITAL PROPERTY: PLAN FOR SALE OF GOODWILL NOW! Helena Plecko, Vancouver
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BACKGROUND
Federal Budget 2016 proposes changes to the way goodwill and certain other assets that are “eligible capital property” (“ECP”) under the ITA are taxed
new rules to apply as of January 1, 2017 this is a big deal for Canadian-controlled private corporations (“CCPCs”) that
sell assets after 2016
Top Tax Tips Presentation - October 18, 2016
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BACKGROUND - WHAT IS ECP
what is ECP? intangible assets of a business with an unlimited life span such as
goodwill, customer lists, business processes, government rights there can be an acquisition cost for ECP (e.g. goodwill) or no such
cost because internally generated - consequences arise on sale current rules create a separate system for ECP (intangibles) that is
similar to depreciation rules of tangible property (CCA rules) but with some differences, in particular on a sale of ECP
Top Tax Tips Presentation - October 18, 2016
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CURRENT RULES: INCLUSION/DEDUCTION
purchase of ECP generally results in 75% of the cost to be recorded in an account that tracks, for tax purposes, all ECP acquisitions and dispositions “cumulative eligible capital (“CEC”) account)
7% of the balance in the CEC account can be deducted from income each year
Top Tax Tips Presentation - October 18, 2016
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CURRENT RULES - SALE OF ECP
sale of ECP results in: a 75% reduction of the CEC pool recapture of previously claimed CEC deductions 50% is active business income if proceeds > cost of ECP: 50% added to capital dividend account (can be
distributed tax free) example - sale of goodwill:cost: $0 (internally generated)proceeds: $1 million=> negative balance in CEC pool: $750,000=> active business income: $500,000=> CDA: $500,000
Top Tax Tips Presentation - October 18, 2016
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PROPOSED NEW RULES: INCLUSION/DEDUCTION
As of January 1, 2017, current ECP will become a new CCA class ECE will be added at 100% of their cost (vs. old rule 75%) to the new CCA
class annual depreciation rate will be 5% (vs. old rule 7% of 75% of ECE)
Top Tax Tips Presentation - October 18, 2016
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PROPOSED NEW RULES: SALE OF CLASS 14.1 PROPERTY
sale of class 14.1 property results in: recapture of previously claimed CCA capital gain if proceeds > cost : 50% added to capital dividend account (can be
distributed tax free) example - sale of goodwill:cost: $0 (internally generated)proceeds: $1 million=> taxable capital gain: $500,000 (treated as investment income)=> CDA: $500,000but note: subject to refundable dividend tax system so company, to reduce immediate tax hit by roughly 1/3, has to pay a dividend to the shareholder, i.e. deferral advantage is lost
Top Tax Tips Presentation - October 18, 2016
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TRANSITIONAL RULES
the taxpayer’s existing CEC pools will be transferred to the new CCA class (14.1)
for the first 10 years, depreciation rate will be 7% for expenditures incurred prior to January 1, 2017
applies also to taxpayers whose tax years straddle year end, but important to note: if there is a disposition of ECP before January 1, 2017, taxpayer can elect tax treatment: capital gain or business income
Top Tax Tips Presentation - October 18, 2016
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CONCLUSIONS
tax cost to CCPCs on a sale of ECP is higher post-2016: if business has considerable goodwill, consider selling prior to year end
hybrid sales are no longer attractive but share sales remain unaffected (except that it may be easier to find a buyer for assets!)
loss of tax deferral advantage because of refundable tax system shareholders pay higher tax on dividends if the company’s tax year straddles the calendar year end: take advantage of
the election (business income vs. capital gain)
Top Tax Tips Presentation - October 18, 2016
DIRECTOR LIABILITY: A REFRESHER (and some new developments) Adrienne Woodyard, Toronto
DIRECTOR LIABILITY: A BRIEF PRIMER
directors are jointly and severally liable (with the corporation) for certain tax debts (unremitted GST/HST, employee source deductions)
CRA must fulfil certain technical requirements before pursuing a director***
CRA Collections will invite submissions: “Tell us why we shouldn’t pursue you”
most common defences: 2-year resignation rule due diligence other options: challenge the underlying corporate assessment,
claim to never have been a director (no valid appointment)
12Top Tax Tips Presentation - October 18, 2016
PRACTICAL CHALLENGES: DOCUMENTING THE RESIGNATION
applicable corporate law will often determine whether a resignation is valid
Ontario first directors may be unable to resign OBCA, s. 119(1),(2) - directors named in articles hold office until first
shareholders’ meeting; cannot resign unless/until a successor is elected or appointed
corporate legislation of other provinces may operate to the same effect Alberta BCA: combined effect of ss. 101(2) and s. 106
must ensure resignation is “received by the corporation” (Chriss v. The Queen, 2016 FCA 236)
retain copy of resignation AND proof of delivery
13Top Tax Tips Presentation - October 18, 2016
PRACTICAL CHALLENGES: DE FACTO DIRECTORSHIP
effect of resignation may be completely negated by actions post-resignation
provisions of corporate law may deem someone a de facto director e.g., OBCA, s. 115(4): when all directors have resigned or been removed,
any person who “manages or supervises the management” of the corporation’s “business and affairs” = deemed a director(**exceptions apply)
CRA will look for hallmarks of directorship participation in board meetings, signing documents as director,
overseeing affairs
inform third parties of resignation; be cautious in dealings with CRA, signing documents on the corporation’s behalf, and making statements or representations inconsistent with resignation in other legal proceedings
14Top Tax Tips Presentation - October 18, 2016
DUE DILIGENCE: WHAT’S THE TEST?
Buckingham v. The Queen, 2011 FCA 142
post-Buckingham, directors may now be held to a higher standard
objective test: what would a “reasonably prudent person” have done in the circumstances?
context still important, but less leeway for inexperienced or “outside” directors
lack of experience/knowledge may no longer a valid defence
particularly relevant for family businesses with nominal directors
15Top Tax Tips Presentation - October 18, 2016
DUE DILIGENCE: WHEN IS IT TOO LATE?
Buckingham: due diligence relates to failure to prevent the failure to remit NOT attempts to remedy; however…
courts will weigh all relevant facts and circumstances awareness of and attention to remittances alert to signs of fiscal strain; appropriate inquiries about financial status segregation of remittances from operating funds
where no due diligence… indifference/carelessness; failure to take steps when financial concerns
arise failure to plan for foreseeable liabilities (self-supply rules for GST/HST) deliberate use of remittances to pay creditors, keep business afloat
directors may feel they have no choice but to stay the course often accrue unnecessary additional debt (“First Rule of Holes”) timing is key: know when to walk away
16Top Tax Tips Presentation - October 18, 2016
CHANGES TO THE SMALL BUSINESS DEDUCTION RULESMark Potechin, Montreal
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Private Corporation Canadian Corporation Not controlled by non-residents, public corporations or any combination
thereof
CANADIAN-CONTROLLED PRIVATE CORPORATION (“CCPC”)
Top Tax Tips Presentation - October 18, 2016
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Excludes: Income from specified investment business Income from personal services business
The federal corporate tax rate will be increased from 28% to 33% overall corporate rates will range from a punitive 44% to 49%
ACTIVE BUSINESS INCOME (ABI)
Top Tax Tips Presentation - October 18, 2016
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Business limit of $500,000 Associated corporations share one business limit
SMALL BUSINESS DEDUCTION (SBD)
Top Tax Tips Presentation - October 18, 2016
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Small Business Income up to
$500,000Active Business
Income Differential Savings
Provincial Rates
British Columbia 13.0 % 26.0 % 13.0 % 65,000
Alberta 13.5/12.5 27.0 13.5/14.5 65,000/72,500
Saskatchewan 12.5 27.0 14.5 72,500
Manitoba (up to $450,000)($450-500,000)
10.522.5
27.0 16.5/4.5 76,500
Ontario 15.0 26.5 11.5 57,500
Quebec 18.5 26.9/26.8 8.4/8.5 42,000/42,500
New Brunswick (change of rate, April 1, 2016) 14.5/14.0 27.0/29.0 17.5/4.5 62,500/75,000
Nova Scotia (up to $350,000)($350-500,000)
13.526.5
31.0 16.0 68,000
Prince Edward Island 15.0 31.0 16.5 80,000
Newfoundland and Labrador 13.5 30.0 16.5 82,500
Territorial Rates
Yukon 13.5 30.0 16.0 82,500
Northwest Territories 14.5 26.5 12.0 60,000
Nunavut 14.5 27.0 12.5 62,500
FEDERAL AND PROVINCIAL / TERRITORIAL TAX RATES FOR INCOME EARNED BY A CCPC EFFECTIVE JANUARY 1, 2016 AND 2017
Top Tax Tips Presentation - October 18, 2016
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If taxable capital $15M or more - no SBD Straight line phase-out between $10M - $15M of taxable capital
LARGE CORPORATIONS
Top Tax Tips Presentation - October 18, 2016
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Specified partnership income (SPI) qualifies for the SBD First $500,000 of ABI allocated to the partners based on partnership interest SPI allocated to a CCPC partner counts towards the CCPC’s overall
$500,000 business limit
PARTNERSHIPS
Top Tax Tips Presentation - October 18, 2016
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SPECIFIED PARTNER INCOME (SPI)
A Co B Co
$1M of Active Business Income
A B
A Co = SPI of: 250,000
B Co = SPI of: 250,000
500,000
50% 50%
Top Tax Tips Presentation - October 18, 2016
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AVOIDING THE SPECIFIED PARTNERSHIP INCOME LIMIT
A Services Co.
$250,000Service Revenue
A Co B Co
B Services Co.
$250,000Service Revenue
$500,000 of ABI
A B
A Co = SPI of: 250,000 B Co = SPI of: 250,000
A ServiceCo = ABI of: 250,000 B ServiceCo = ABI of: 250,000
500,000 500,000
50% 50%
Top Tax Tips Presentation - October 18, 2016
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CCPC provides services or property to partnership CCPC not a member of the partnership A shareholder of CCPC holds a direct or indirect interest in the
partnership, or (i) CCPC does not deal at arm’s length with a person who holds a direct or indirect interest in the partnership and (ii) CCPC does not derive 90% or more of its active business income from arm’s length persons or partnerships
For these purposes non-arm’s length partnerships are those (i) receiving property or services from the CCPC or (ii) in which a person non-arm’s length with the CCPC holds a direct or indirect interest
DESIGNATED MEMBER
Top Tax Tips Presentation - October 18, 2016
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Income of a designated member of a partnership will be considered SPI Designated member does not have any partnership income allocated to it
since not a partner: therefore no specified partnership business limit A member of the partnership can allocate specified partnership business limit
to a designated member prescribed form required certain conditions to be met
EXTENDED DEFINITION OF SPI
Top Tax Tips Presentation - October 18, 2016
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DESIGNATED MEMBER REVENUE
Accounting Co$30,000 service revenue
from partnership$250,000 service revenue from arm’s length clients
A Co B Co
B Services Co.
$250,000Service Revenue
$500,000 of ABI
Mr. A B
Specified Partnership Business Limit of $250,000 for A Co and Accounting Co. Same for B Co and B Services Co.
50% 50%
Mrs. A
Top Tax Tips Presentation - October 18, 2016
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DESIGNATED MEMBER REVENUE
Lawyer Co
Law Partnership
Lawyer A
$500,000 service revenue
1%
Top Tax Tips Presentation - October 18, 2016
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CCPC, one of its shareholders or anyone related to them holds a direct or indirect interest in a private corporation
The CCPC provides services or goods to the private corporation (“specific corporation”)
The CCPC does not earn 90% or more of its income from arm’s length persons or partnerships- the specific corporation is not considered arm’s length
A CCPC can assign business limit to another CCPC in respect of SCI each of the CCPC’s must file a prescribed form
SCI can be reduced to an amount the Minister of Revenue determines to be reasonable in the circumstances
SPECIFIED CORPORATE INCOME (SCI)
Top Tax Tips Presentation - October 18, 2016
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SPECIFIED CORPORATE INCOME (SCI)
Accounting Co Manufacturing Co
Mrs. AMrs. X’s
father-in-law
95% 5%
Mrs. X
5%
Top Tax Tips Presentation - October 18, 2016
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For taxation years that begin on or after March 22, 2016
EFFECTIVE DATE OF APPLICATION OF NEW FEDERAL RULES
Top Tax Tips Presentation - October 18, 2016
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For taxation years starting after December 31, 2016 SBD only available to CCPCs whose employees have worked at least 5,500
hours in total (this is equivalent to 3 full time employees) Previous year consolidated basis test- a total of at least 5,500 hours was
worked by CCPC’s employees and employees of associated corporations in the previous year.
Maximum hours per week per employee cannot exceed 40 Hours worked must be paid at date SBD is claimed Shareholder employee hours will be counted even if not remunerated SBD is reduced on a straight line basis between 5,500 and 5,000 hours Corporations whose activities are at least 50% in the primary or
manufacturing sectors will not have to meet the 5,500 hour threshold. If the activities are between 25-50% in those sectors SBD reduced on a straight line basis.
QUEBEC TAXATION ACT - SMALL BUSINESS DEDUCTION CHANGES
Top Tax Tips Presentation - October 18, 2016
SUBSECTION 55(2) - INTER-CORPORATE DIVIDENDS MAY NO LONGER BE TAX FREE Sandra Mah, Calgary
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Mischief:
PURPOSE OF SS. 55(2) - PREVENT CAPITAL GAIN STRIP
HoldCo
OpCo
1) OpCo pays dividend to HoldCo as a tax free intercorporate dividend
2) HoldCo sells the shares of OpCo for a lesser price
Consequences: Intercorporate dividend deemed not to be divided and to be proceeds of the share sale.
Top Tax Tips Presentation - October 18, 2016
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1. Safe income exception;2. Part IV exception (dividend was subject to tax under Part IV);3. Related party exception;4. Butterfly exception.
OLD SAFE HARBOURS - SS. 55(2)
Top Tax Tips Presentation - October 18, 2016
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Three Purposes Tests
1. To effect a significant reduction in a capital gain;2. A significant reduction in the FMV of any share;3. A significant increase in the cost of property held by the dividend recipient.
AMENDMENTS APPLICABLE TO DIVIDENDS RECEIVED AFTER APRIL 20, 2015: SS. 55(2) HAS BROADER APPLICATION
Top Tax Tips Presentation - October 18, 2016
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1. Safe income applies only if there is an accrued gain;2. Part IV tax exception - no longer applies if refund on dividend to individual;3. Related party exception - applies only to deemed dividends.
CHANGES TO SAFE HARBOURS - SS. 55(2)
Top Tax Tips Presentation - October 18, 2016
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DEPARTMENT OF FINANCE EXAMPLE
HoldCo
OpCo
FMV/ACB $1M
HoldCo
HoldCo2
OpCo
FMV/ACB $1M
HoldCo
HoldCo2OpCo
FMV/ACB $1M FMV $nil
ACB $1M
FMV/ACB $1M
Top Tax Tips Presentation - October 18, 2016
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1. Standard in-house loss consolidation(CRA Doc. No. 2015-0610671C6, Nov. 24, 2015)
2. “Normal course dividends”(CRA Doc. No. 2015-0613821C6,Nov. 17, 2015)
CRA HAS TWO ADMINISTRATION POSITIONS WHERE SUBSECTION 55(2.1) DOES NOT APPLY
established dividend policy does not exceed reasonable dividend income
return on a comparable listed share issued by a comparable payer corporation in the same industry
Practical: Taxpayer should (1) document all of the purposes and reasons for the dividend; (2) how and why the dividend was determined and (3) retain evidence regarding use of dividend.
Top Tax Tips Presentation - October 18, 2016
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Dividend paid to fund shareholders or corporate expenses or debt repayment
CASE STUDY #1INTERCORPORATE DIVIDEND
Shareholders
HoldCo
OpCo
Does 55(2) apply? Question of fact unless dividend is paid (TEI Question on section 55):
1. pursuant to a well established policy;2. does not exceed reasonable dividend income return on a comparable listed
share issued by a comparable payer corporation in the same industry.
Top Tax Tips Presentation - October 18, 2016
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Dividend paid for creditor proofing
CASE STUDY #2CREDITOR PROOFING
HoldCo
OpCo
CRA’s position: ss. 55(2) applies. Sole purpose is creditor proofing which decreases the FMV of OpCo’s shares.
Top Tax Tips Presentation - October 18, 2016
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OpCo pays a dividend to shareholder (HoldCo) to purify OpCo before a sale of shares to 3rd party Purpose of dividend is to access the lifetime capital gains deduction CRA: No published position
CASE STUDY #3 - PURIFICATION DIVIDEND
Dad
Opco
HoldCo
Top Tax Tips Presentation - October 18, 2016
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the LCGD is not a factor in the calculation of the gain LCGD is a deduction from capital gain no purpose to reduce capital gain
Query: If dividend is greater than amount necessary to get QSBCS? What if majority of shareholders have used most of the LCGD?
TAXPAYER POSITION
Top Tax Tips Presentation - October 18, 2016
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CASE STUDY #4 - FREEZE - PART IV EXEMPTION
Dad
HoldCo
OpCo
P/S C/S
Dividend Part IV tax refunded
Redemption of P/S (assume Part IV tax
applies)
Part IV tax exemption no longer applicable to dividends paid to individualHoldCo deemed dividend recharacterized as capital gainIssue: timing of recharacterization and circularity of calculations if CDA election filed late
Top Tax Tips Presentation - October 18, 2016
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1. Intercorporate loans provided there is a way to repay the loan without lumpy dividends
2. Partnerships3. Deemed Dividends - reorganization for shares to be
redeemed4. Safe income calculations
OPTIONS TO CONSIDER
Top Tax Tips Presentation - October 18, 2016
GST UPDATEDennis Yee, Vancouver
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Recent Notices and Bulletins referring to changing GST reporting obligations for: Pension Plans Pension Plan Master Trusts Investment Plans (Nov. 15, 2016 deadline) Credit Unions Group Trusts for RESPs
GST REPORTING CHANGES
Top Tax Tips Presentation - October 18, 2016
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GST jargon contained in notices: Selected Listed Financial Institutions (SLFIs) Special Allocation Method (SAM) calculation Provincial Attribution Percentages 33% rebates Elections for nil consideration
GST REPORTING CHANGES
Top Tax Tips Presentation - October 18, 2016
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Takeaway Message Clients with large dealings in financial services and investments must
monitor whether they are compliant with the changing reporting obligations.
GST REPORTING CHANGES
Top Tax Tips Presentation - October 18, 2016
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Broad Explanation GST is a recoverable flow-through cost for most businesses and is non-
recoverable for financial services businesses. Financial institutions (FIs) often do a combination of financial services
business and other businesses. Complicated FI reporting rules to determine appropriate amount of GST recoverable.
Financial services business can set up office in any province and could service customers in other provinces. Complicated SLFI reporting rules to determine appropriate amount of GST vs HST payable.
Court decision and subsequent legislation regarding appropriate amount of GST for business with pension plan.
GST legislation lists the type of taxpayers subject to these reporting rules -- list is ever expanding.
GST REPORTING CHANGES
Top Tax Tips Presentation - October 18, 2016
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GST exemption for issuing of financial instrument, and the arranging for 2010 amendments retroactive to the 1991 start of GST to exclude from
exemption administrative type services “to clarify the tax treatment of financial services…”
Broker/Dealers Finder’s Fees Certificates of Insurance
CRA Rulings Possible indication of how CRA will audit and assess 2016 Ruling: Dealer services in relation to Certificates of Insurance is GST
taxable.
GST EXEMPTION FOR FINANCIAL SERVICES
Top Tax Tips Presentation - October 18, 2016
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Changes to Reporting Obligations Background
2009: HST announcement for BC and ON Agreements entered into before announcement were grandfathered
Reporting obligations, penalties for non-compliance Originally mechanism: obligations based on whether purchaser entitled to
new housing rebate (dependent on $450,000 threshold and use) New mechanism: obligations based on $450,000 threshold only
Election to fall under new mechanism Avoid penalty risk that comes from mechanism based on purchaser use Election available to projects already sold and ongoing projects Deadline based on reporting period; Dec. 31, 2016 for many builders
HST GRANDFATHERED NEW HOUSING BUILDS
Top Tax Tips Presentation - October 18, 2016
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Effective Oct. 1, 2016 Joins rest of Atlantic provinces Charge the correct GST or HST rate
“Place of Supply” rules different for different types of goods and services
PEI HST INCREASED TO 15%
Top Tax Tips Presentation - October 18, 2016
THANK YOU