Instalment reminder and recent tax announcements
September 15 Instalment Reminder
Please ensure you pay your personal income tax instalments no later than September 15 if you are required to make instalment payments.
Prescribed Rate Loans
Prescribed rate loans can be a highly effective tax planning strategy to reduce your family’s combined tax bill by allowing you to split income with a spouse or another eligible individual in a lower tax bracket. As the Bank of Canada continues to increase interest rates to combat inflation, the prescribed rate will be increasing for the second consecutive quarter. The rate will increase from 2% to 3% effective October 1, 2022.
The benefit of this income splitting strategy is reduced as the prescribed rate increases. To benefit from the current 2% rate, a written agreement should be in place prior to October 1 which clearly states the prescribed rate and the effective date of the loan. The 2% prescribed rate will remain in effect throughout the term of the loan. Please contact us to discuss this strategy further if you think it may be beneficial to you.
Draft Legislation
On August 9, 2022, the Department of Finance released draft legislative proposals. These proposals addressed many of the income tax measures from the 2022 federal budget and included many key details which may be applicable to you or your business. The proposals are open for comment until September 30, 2022. Below are a few of the key measures addressed in the proposals.
Residential property flipping rule
Residential real estate located in Canada that is owned less than 365 days will be subject to full taxation as business income for dispositions after December 31, 2022. The disposition of these properties will not be eligible for preferential capital gains tax rates or the principal residence exemption. Certain exceptions may apply for life events such as the death of the taxpayer or a related person, illness or disability, separations, employment changes or involuntary dispositions.
First-time home buyers’ tax credit
The first-time home buyers’ tax credit amount will be doubled from $5,000 to $10,000 for qualifying home purchases on or after January 1, 2022. The tax credit is calculated as 15% of the amount so the maximum credit available will be $1,500.
Tax-Free First Home Savings Account (FHSA)
The tax-free FHSA is expected to be available at some point during 2023 to help prospective home-buyers purchase their first home. Eligible individuals include Canadian resident individuals who are at least 18 years of age and have not owned a home that they resided in during the previous calendar year or the four preceding calendar years.
There will be an $8,000 annual contribution limit and a $40,000 lifetime contribution limit. Contributions to the account will be tax deductible in the calendar year of the contribution or can be carried forward indefinitely.
Qualifying withdrawals will be non-taxable, including the original contributions to the account and any income earned within the account. A qualifying withdrawal must be used to purchase a housing unit in Canada that the taxpayer intends to occupy as their principal residence. Non-qualifying withdrawals will be subject to tax in the year of withdrawal. An FHSA can only be open for 15 years and the account holder must be less than 71. Any savings not used to purchase a qualifying home could be transferred on a tax-free basis to an RRSP or RRIF (subject to contribution limits).
The Home Buyers’ Plan (HBP) available from Registered Retirement Savings Accounts will continue to be available, but a taxpayer will not be able to make both a HBP withdrawal and FHSA withdrawal for the same qualifying home purchase.
Small business deduction
Canadian-controlled private corporations (CCPCs) may be eligible for the small business deduction up to a maximum business limit of $500,000 which is shared amongst associated corporations. The business limit is currently reduced on a straight-line business when the combined taxable capital employed in Canada of all associated corporations is greater than $10,000,000 and is eliminated when the taxable capital exceeds $15,000,000. The draft legislation proposes to increase this upper limit to $50,000,000 for tax years ending on or after April 7, 2022. The increased limit will expand access to lower corporate income tax rates to many CCPCs for future tax years.
Substantive CCPCs
CCPCs are subject to additional refundable taxes on investment income. Other private corporations are not subject to this refundable tax regime. The concept of a substantive CCPC has been proposed for tax years ending on or after April 7, 2022. This is an anti-avoidance measure intended to prevent the organization or reorganization of a corporate structure in a manner intended to avoid CCPC status.
A substantive CCPC is based on the concept of de facto control. These are corporations that are controlled by Canadian resident individuals, whether directly or indirectly, even if the majority of the voting shares are owned by non-resident taxpayers. Substantive CCPCs will be taxed in the same manner as a CCPC on investment income earned.
These corporations will continue to be treated as non-CCPCs for all other purposes, such as not having access to the small business deduction or enhanced scientific research and development tax credits.
Reporting requirements for trusts
As previously announced, trusts will be subject to enhanced reporting requirements for taxation years that end on or after December 31, 2022. These reporting requirements include additional disclosures regarding the identity of trustees, beneficiaries, and settlors of the trusts. The recent draft legislation has not included an exception for bare trusts and these trusts will be subject to these additional disclosures as a result. A bare trust is an arrangement in which trust holds legal title to property that is beneficially owned by the beneficiary. These trusts are commonly used to facilitate property transfers and avoid land transfer taxes or probate fees. A trust return including all applicable disclosures will need to be submitted within 90 days of the year-end if the legislation is enacted as currently drafted.
Federal payments over $10,000
The 2021 federal budget proposed that all federal payments greater than $10,000 must be made electronically. Legislation recently passed and payments not made electronically may be subject to a penalty of $100. This applies to all taxpayers, including individuals, corporations, partnerships, and trusts. It also applies to all payments, including income tax, GST/HST and payroll remittances.
Please contact us if you would like to discuss any of the above further and we would be happy to assist you.
NOTE: Please understand that any posts written in the past may not be reflective of the current applicable obligations, rights and benefits.