Finance revisits tax reform proposals: Where are we now?

October 2, 2017 marked the end of the Liberal government's 75-day consultation period on proposed tax reform for private corporations. The reaction to this proposal was swift and may have caught the Liberals off guard. That's why it's not surprising that changes to the tax reform plan were announced only two weeks after receiving some 21,000 submissions!

We thought it would be useful to outline what has changed since the proposal was originally unveiled in July.

Small business tax rate

The Government has indicated that it intends to bring down the federal portion of the small business tax rate from 10.5% to 9%. This will be done over two years as follows:

January 1, 2018 - the rate will drop from 10.5% to 10%

January 1, 2019 - the rate will drop from 10% to 9%

Income sprinkling

The Government is moving forward with limitations on income sprinkling through dividends to family

members. However, the Government has emphasized that a family member who makes a meaningful contribution will still be entitled to receive a reasonable amount through dividends. "Meaningful contribution" and "reasonable amount" have yet to be defined. We expect that the specifics will be determined by future CRA interpretations, and ultimately the courts.

Access to the lifetime capital gains exemption

The Government will not limit access to the lifetime capital gains exemption. Consultations showed that there were unintended consequences for family groups. This is good news as many corporate structures have set up trusts in order to facilitate intergenerational family transfers or to tax effectively sell their corporation. Now these structures can remain in place.

Passive income investments within the private corporation

One of the most contentious changes was the intent to heavily tax passive income earned in a corporation on a go forward basis. The proposal was to grandfather in any existing surplus and tax any new surplus earned from active businesses invested in the corporation with an additional 38.3%. (This was handled by limiting the refundable tax when paid out as a dividend). The intent of this change was to eliminate any tax deferral advantage that came with investing in a corporation.

The Government determined that instead, there would be a safe harbour for the first $50,000 of investment income. This means that the proposed additional 38.3% tax would not apply to the first $50,000 of income in the corporation earned from investment income. This amount was chosen because it was determined to be equivalent to $1,000,000 invested, earning 5% interest annually. They will continue to grandfather existing investments.

What remains unclear is when the date of this change will take effect. Also not clear is how the $50,000 will be calculated. For example, capital gains have a 50% inclusion rate for income tax purposes, but does that imply you can earn $100,000 in capital gains as it is only $50,000 of income?

Regardless, now more than ever, it will be important for investment advisors and accountants to

communicate with respect to planning.

Converting dividends to capital gains

Stripping surplus out of a corporation and converting dividends to capital gains involves a number of tax planning steps. One of the proposed changes involved curtailing this planning.

However, the proposed changes had many unintended consequences, including significant negative impacts on estate taxes. As a result, the Government has decided not to proceed with the proposed changes and will allow this planning to continue for the time being.

Conclusion

These changes have created an environment with a large degree of uncertainty. We anticipate more

changes are coming. Should you want to discuss your situation and how the above may impact you or your business, please contact us to arrange a meeting.

Cloud Accounting

The traditional system of accounting involved software installed on a desktop or laptop with little to no remote access or integration. The new trend is a shift away from the one station operation to an online portal that is accessible from anywhere. The internet-based application provides vital information from virtually anywhere and can be integrated with various modules such as payroll, invoicing and budgeting. Typical features of these new systems include:

1. Integration with financial accounts – information from your bank accounts can be imported automatically without the burden of manual input or transfer.
2. Quick invoicing – allows the user to prepare, email the invoice, accept online payment and update the system once payment is received.
3. Expense tracking – importing banking information, credit card transactions or even photos of the bill will update the appropriate records and budgets to reflect the up to date figures.
4. Collaboration – aside from up to the minute bookkeeping, your accountant will be able to access your records at any time. Advice in a timely manner with reliable and current information would add substantial value for decisions that have to be made in a shorter span of time.
5. Security and updates – the information is kept remotely and thus is not subject to the power outage or any other event that could affect the local workstation. Because the software is hosted online, it can be updated instantaneously for any corrections or rate adjustments.

There are some drawbacks to the system as well, such as reliance on the third party provider to maintain your records. Depending on the provider, the data could be stored outside of the country and subject to foreign laws with regards to security and privacy. Another issue is the ability to access the information. The data is hosted online and therefore the Internet connection has to be of sufficient speed and reliability to ensure that the application is used smoothly. There is definitely some benefits to using cloud-based accounting however you have to ensure that the setup will meet your needs adequately.

No-name Voluntary Disclosure

One of the ways for a taxpayer to become compliant with something that was amiss in the prior period(s) is the voluntary disclosure program. It allows the taxpayer to file the additional documentation required without the application of penalties. The tax liability and interest will still apply however potentially onerous penalties are avoided. The voluntary disclosure is an all-in kind of program where the taxpayer discloses the information and leaves it up to the Minister’s discretion to waive the penalties.

Common situations when a voluntary disclosure may be required:

-Failing to file T1135 form to disclose foreign investments over $100,000

-Failing to report a capital gain on sale of investments or real estate

-Failing to report income from offshore investments

What happens if the submission is not eligible?

The taxpayer handed over the documentation to assess the additional tax and for whatever reason is not eligible for relief. In that case, the taxpayer has handed over the loaded gun to the agency in whose capacity it is to apply tax, interest and penalties as well as begin collection efforts upon completion of the assessment. When applying under this program the taxpayer either has to be really certain that he or she qualifies or they could pursue a no-name disclosure.

A no-name disclosure does not specifically identify the taxpayer but still identifies the situation. It is basically a question asked of the Minister “if someone were to be in this situation and provided this documentation, would they be eligible to apply for the program”. The response would be limited to the facts disclosed. If there were additional information that was not provided in the no-name disclosure then the Minister is not bound by its original answer and could change its decision. There is also a time limit (90 days from the day of the mailing of the response) to submit the full disclosure if the taxpayer wishes to rely on the response provided. There are some facts required to be identified about the taxpayer so that if the voluntary disclosure is pursued, the response to the no-name disclosure could be matched with the subsequent submission of the full disclosure.

Overall a no-name disclosure is a good way to test the waters to ensure that once all of the information is provided, the taxpayer is eligible for the waiver of penalties.

Happy New Year!

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McIntyre and Associates Professional Corporation

200 - 900 Morrison Drive

Ottawa, ON

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