Tax Season 2019: What to know this year

Tax season - Calgary, Alberta

As the holidays are over and winter sets in we all know in the back of our minds that tax season is approaching.

The deadline for filing T4 and T5 slips is February 28. The deadline for filing T3 slips is March 31. If you are a corporate client, we will mail you your T4 and T5 slips in February with instructions for completing personal taxes.

The deadline for filing your personal tax returns is April 30 for most individuals. If you earn self-employed income that deadline is pushed out to June 15. If you are not sure if you qualify for the extension, it’s best get in contact with us. We will start the process of completing personal taxes in late March.

There are a few key changes with this tax season to be aware of:

  • There have been changes to the tax on split income and passive income rule changes for corporate clients. You can see our article posts on these topics titled “Income Sprinkling Rule Changes” and “Budget 2018: Passive Investments and More.” Please inquire with us on how these changes impact distributions from your corporation.
  • The Public Transit credit is no longer applicable for personal tax returns.
  • New in the prior year but an important reminder are the changes to the Canada caregiver tax credits for infirm dependents. Reach out to us for more information if you have infirm dependents you support.
  • If you sold a principle residence, even though the gain is tax free (subject to certain conditions) you still have to report it on your tax return. Please keep these details on hand so they can be properly reported. With that said, the penalty for unreported dispositions is quite high so it is important this is not missed.

Please contact us for a copy of our personal tax checklist for this season. Also, feel free to reach out if you have any questions or concerns.

Shareholder Compensation

Meeting of shareholders

As an owner-manager of a corporation, there are two methods of shareholder compensation:

  1. Salary – an employment compensation that is paid from net income.
  2. Dividends – an investment compensation that is paid from retained earnings in a company.

Salary is deducted when arriving at taxable income in the company and is subject to personal tax based on the bracket you fall into. Dividends, on the other hand, are not deducted in arriving at taxable income in the company meaning you would pay corporate and personal tax on the dividends. Because of this, dividends are eligible for a dividend tax credit so that, at the end of the day, the total income tax you are paying in either scenario ends up to be nearly the same. The Canadian tax system was designed with this goal, and is known as tax integration.

That said, there are some key considerations that do differentiate the options. Salary is subject to CPP (Canada Pension Plan), while dividends are not. Because an owner-manager is paying both the employer and employee portion, this could mean up to a 9.9% payment into CPP. You are generally eligible to receive CPP payments after the age of 65 years, with an option to receive payments earlier or later. Based on the historic rate of return in which the government pays for CPP, many owner-managers would rather save the 9.9% and invest it within their company.

Salary also creates room for RRSP contribution, beneficial in the sense that an  owner-manager can then invest in their RRSP plan and claim a deduction on their own personal tax return. RRSP plans grow tax free, but the funds are fully taxed on your personal return when withdrawn. In comparison, to save for retirement, those who take dividends often elect to save and invest their money in a corporate investment account by retaining a portion of their earnings in the corporation. There is often an investment advantage by doing this because the funds will only be subject to the investment income corporate tax rates rather than the personal tax rate, which typically are lower.  Amounts invested in a corporation have the strong advantage of being eligible for favourable corporate tax rates and deferral advantages on any investment earnings. Therefore, a strong argument can be made for electing to invest in a corporation.

When investing in a corporation, it is often desirable to pay out dividends and claim back “refundable tax”. This is a tax on the investment income earned in a corporation which is refunded on the payment of dividends out of that corporation. This is another reason dividends may be preferred.

Dividends also present the option of sprinkling income to other shareholders who are family members, which could result in significant tax savings. See our December 14, 2017 article on the income sprinkling rule changes for more information on eligibility. Salaries paid to family members must be reasonable for the work performed, equivalent to what a third party would be paid.

A final consideration is the administration associated with paying a salary. Salary payments require tax withholdings and remittances made to the CRA (payroll taxes). This requires some up-front planning and organization to ensure that you do not miss payments, which would result in penalties down the line. Dividends do not have withholding tax requirements when paid to owner-managers in Canada, which often can result in less administrative burden.

At Kapasi, we often employ a combination of salary and dividends, depending on both the corporate tax picture and the personal tax picture of the owner-manager and his or her family. Feel free to reach out to us to learn more about how this applies to your tax situation.

Passive Investment Rule Changes and More

Well dressed Chartered Professional Accountant

On February 27, 2018 the federal government released the 2018 budget. Here are some take-away tax measures that may impact your business for passive income and health & awareness Trusts. As always, the actual rules can be quite complex so further guidance from us related to your specific situation is recommended.

Passive income rules:

-Corporations gain tax advantages by holding corporate income inside their corporation and re-investing it within the corporation, as it is taxed at lower rates than personal income.

-Corporations that are Canadian controlled private corporations also gain access to a small business deduction which further reduces the rate to 12% in Alberta for income up to $500,000 per fiscal year.

-The original proposals, which, in certain situations, could have resulted in up to a 72% tax on passive income on eventual flow out, have been backed away from. The government has moved away from these very punitive proposals when earning passive income in a corporation.

-The proposals aim to limit the small business deduction eligibility. You begin to lose the deduction if you earn over $50,000 in investment income in a year, and you lose it completely if you earn $150,000 or more. The new definition of what is considered an investment income for this calculation will determine whether this impacts your company.

-Currently, when you earn investment income in a corporation it generates a “refundable tax pool”, which is an additional tax that is paid and received back when dividends are flowed out of the corporation. The proposals have introduced a second measure where the type of dividend (non-eligible or eligible) impacts whether a refund from the pool is available.

-In general, the above measures aim to further limit access to the small business rate, as well as align the refund of taxes on investment income with the dividends paid out of that income.

-The new proposals are applicable for taxation years after 2018, so they will not apply until year ends falling into the 2019 year.

In conclusion, the above changes may impact corporations that 1) earn over $50,000 in investment income, and 2) regularly pays eligible dividends.

Health and Welfare Trusts:

Some of our clients may be impacted by changes to the Health and Welfare Trust rules. The new budget requires Health and Welfare Trusts in a corporation be converted to a Employee Life and Health Trust. Health and Welfare Trusts had little statutory guidance, and with these changes we have more clarification regarding these rules.

If you have been self administering a Health and Welfare Trust through your company please talk to us about transitioning this to an Employee Life and Health Trust.

The above is not a comprehensive analysis of the budget but only some considerations for further discussion. For more detailed explanations and consideration to your specific situation please contact us to discuss the above changes and how it may apply to you.

 

 

Income Sprinkling Rule Changes

Questions about your business or personal taxes

The liberals have released their new proposals (on December 13, 2017) on income sprinkling (or income splitting) from private corporations. These rule changes have potentially large impacts on those corporations that practice income sprinkling. These rules are collectively referred to as Tax On Split Income, or “TOSI” rules.

The effective date of the changes is for 2018 and subsequent years. Year ends up to December 31, 2017 are under the old regime and not impacted by the rule changes.

The rules are fairly complex and the below is not a comprehensive analysis of all the ins and outs. The purpose here is to explain where the rules may apply to your situation and to prompt you to seek further guidance for your specific situation.

-The “split income” generally refers to dividends received from private corporations, but also includes capital gains on the disposition of shares and income allocations from a family trust.

-If you are caught under the new TOSI rules, the receiving individual is taxed at the highest marginal rate on that income, regardless of the actual marginal tax rate they fall into.

-For children below the age of 18, the TOSI rules will generally apply to income allocated to these individuals, except in very specific cases such as marital breakdown, death, or sale of a business. These rules were previously known as “kiddie tax” rules and have not changed considerably.

-For individuals between the age of 18-24, they may be subject to TOSI unless they have worked in the business in the current or five preceding years at an average of 20 hours per week through the year. There are some exceptions based on capital contributions to the business and related business rules which are quite technical and beyond the scope of this post.

-For individuals over 24, the TOSI rules may apply unless: 1) the 20 hours per week threshold described above is met, OR 2) less than 90% of the business income is from providing services, the business is not a professional corp and you own more than 10% of the shares of the business. If either of these do not apply than there is still some ability to sprinkle the income to these individuals if it is considered a reasonable return based on the contributions of that individual, the details of which are technical and beyond the scope of this post.

-There is an exception for those that are the age of 65 or older and are the person who contributed to the business. In this case you can split with a spouse, even if that spouse is under 65 years of age.

The above points are not all comprehensive and there are many other considerations to plan for. We are happy to discuss your personal situation and what the best strategy is going forward.