The government is proposing a review of tax planning strategies in three areas:

  • Income sprinkling using private corporations
  • Converting a private corporation’s income into capital gains
  • Holding a passive investment portfolio inside a private corporation
  • Income sprinkling using Private Corporations

    Income sprinkling, also known as income splitting or shifting, generally occurs when income that would otherwise be earned by a high tax rate family member is taxed in the hands of family members who are taxed at lower marginal rates of tax.  The income sprinkling is often achieved by the use of a private corporation and has, until recently, been a perfectly legal and acceptable tax planning strategy.

    The Income Tax Act presently contains rules which are aimed at preventing income sprinkling in certain circumstances – attribution rules and the kiddie tax rules (tax on split income, or TOSI).

    Expanding the tax on split income (TOSI) rules:

    Existing rules

  • Prevent transfer of certain types of income from high-income earning individuals to their children under 18 by taxing it at the top federal income tax rate.
  • Types of income
  • Dividends received from a private corporation of a related individual
  • Income from a partnership or trust derived from a business or rental activity of a related individual.
  • Presently do not apply not adult children.
  • Presently do not apply to wages and salaries (except for a reasonableness test).
  • Proposals

    Extend the TOSI rules to apply to any Canadian resident individual, regardless of age, to the extent that the split income is determined to be unreasonable.

  • Extend the meaning of a specified individual to include adults (18 and over).
  • Creates two categories of specified individuals (SI): minor SI’s and adult SI’s. The distinction between minors and adults will be relevant in applying a reasonableness test to determine whether the TOSI rules would apply to an adult SI.
  • Reasonableness Test

  • Subject the adult individuals’ split income to a reasonableness test that considers the individual’s labour and capital contributions to the corporation as well as previous dividends and remuneration received.
  • The test would be subject to stricter tests for individuals 18-24 years of age.
  • Labour Contributions - are they actively engaged on a regular and continuous and substantial basis in the activities of the business – for those over 25 years of age it will be sufficient to show the specified individual was involved in the business.

    Capital Contributions - reasonableness test for SI’s between 18-24 will be set at a legislatively prescribed maximum in respect of an allowable return on assets contributed by the individual in support of the business.

    For those SI’s over 24, the reasonableness test will consider the extent that the individual contributed assets, or assumed risk, in support of the business and will consider all previous amounts paid or payable to the individual in respect of the business.

    If the amount is determined not to be reasonable then the top marginal tax rate will apply to the amount.

    New definition of “connected individual” – proposed as a means of determining whether an adult specified individual’s income from a corporation (or trust of a partnership in certain circumstances) is to be treated as split income.

    Proposals are to also expand TOSI to include:

  • Income from certain debt obligations,
  • Capital gains from the sale of shares the income from which is subject to TOSI, and
  • Compound income on property that is the proceeds from income previously subject to the TOIS rules or the income attribution rules (this will only apply to individuals under the age of 24.
  • The above is proposed to be effective after 2017.

     

    After a very busy first half of the year, we've earned some downtime to enjoy the warmer weather!  So, effective July 4, our office will be closing an hour earlier each day.  Our Summer and Fall office hours will be 8:00am - 4:00pm, Monday through Friday.

    nesteggThere are many fraud types, and new ones are invented daily. Some are imaginative, some are aggressive, and some appear legitimate!
    Be vigilant if you receive, either by telephone, mail, text message, or email, a communication that claims to be from the Canada Revenue Agency (CRA) requesting personal information such as a Social Insurance Number, credit card number, bank account number, or passport number.
    These scams may insist that this personal information is needed so that you can receive a refund or a benefit payment. Cases of fraudulent communication could also involve threatening or coercive language attempting to scare you into paying a fictitious debt to the CRA. Other communications may urge you to visit a fake CRA website where you are then asked to verify your identity by entering personal information. These are scams and you should never respond to these fraudulent communications or click on any of the links provided.
    Canada Revenue Agency will never:
    • Send email with a link and ask you to divulge personal or financial information;
    • Ask for personal information of any kind by email or text message;
    • Request payments by prepaid credit cards;
    • Give taxpayer information to another person, unless formal authorization is provided by you;
    • Leave personal information in a voice mail;
    • Threaten or use nasty language.
    If you are in doubt about the validity of a communication claiming to be from the CRA, don’t panic! Ask your accountant to verify the information given, or call CRA at 1-800-959-8281 (individuals) or 1-800-959-5525 (businesses) to verify. Don’t call the number displayed as it may be fraudulent.
    If the communication is a scam, you can report it to the Canadian Anti-Fraud Centre online, or by calling 1-888-495-8501.

    With the announcement regarding the 2017 Federal Budget, there are a number of changes that may affect you, your family, or your business. Please review the commentary here for all the details and contact us for assistance: 2017 Federal Budget Commentary

    Since 1971, Canadians have been taxed on the gain realized when capital assets – real estate, stocks and mutual funds and other investments – are sold.  There are a few exceptions, and the one we are most familiar with is the sale of a residence.

    The sale of a “principal residence” is specifically exempted from tax in the Income Tax Act.  Here are a few things to keep in mind when selling your home or vacation property.

    “Principal” does not mean “primary”.  Vacation properties, including those in other countries can qualify, as long as they were not used to earn income.  So a gain on the sale of the Arizona condo or the cottage at the lake can be sheltered from tax as well.

    There is a catch – since 1982, each couple can designate only one property as a principal residence.  This designation can be split between properties.  An extra year is added to each calculation to account for the year of a move.

    If you own two properties that qualify for the principal residence exemption, it is a good idea to do some tax planning to determine where the exemption should be used.

    For example, Mr. and Mrs. Owner bought their home in Red Deer in 1965 for $10,000.  In 1971, which is the first year that Capital Gains were taxed in Canada, it was worth $12,000, and today, it is worth $450,000.  In 1978, they purchased a cottage in the Okanogan for $20,000.  It is now worth $750,000.  They are anticipating selling both properties in 2017 and moving into a condominium.

    If they designate the Red Deer property as a principal residence for all years, the taxable income would be:

      Red Deer property BC property
    Proceeds on sale $450,000 $750,000
    Cost of property (for tax) 12,000 20,000
    Gain on sale 438,000 730,000
    Sheltered by Principal Residence Exemption 438,000  (all years of ownership)  (Pre 1982 years of ownership:  1978 – 1981 +  1 year )   730,000 x 6/40 = $109,500 
    Capital gain for tax 0 620,500

    If they designate the BC residence as a principal residence for all years, the result is:

      Red Deer property BC property
    Proceeds on sale $450,000 $750,000
    Cost of property (for tax) 12,000 20,000
    Gain on sale 438,000 730,000
    Sheltered by Principal Residence Exemption (Pre 1982 years of ownership:  1971 – 1981 + 1 year )      438,000 x  12/47 = $111,830 730,000  (all years of ownership)
    Capital gain for tax 326,170 0

    The tax difference, at the highest marginal rate, would be $66,000.

    In order to allocate the exemption, you must complete a designation form and submit it to Canada Revenue Agency with your personal tax return.

    Starting with the 2016 tax year, Canada Revenue Agency is requiring all individuals to report the sale of a principal residence, even if the gain is completely sheltered by the principal residence exemption.

    At Pivotal, we can help you with your tax planning needs and help you maximize your principal residence exemption.