Seven changes to Canadian tax
Source: CPA Canada
From the totally personal to the all-business, CPA Canada’s Bruce Ball walks us through the most significant tax changes of the year.
In 2017, Canadians saw substantial change in how they are taxed. On the personal front, federal arts and fitness credits were eliminated on January 1, as were federal education and textbook credits. With the March 2017 budget, the Canada Caregiver Credit also replaced three existing and related credits. But what about business taxes? Bruce Ball, vice-president of Taxation for CPA Canada, reveals seven of the biggest announced moves—for this year and beyond.
1. PRIVATE CORPORATION TAXATION
“The biggest development was the announcement in the 2017 budget that the federal government was going to undertake a consultation on three key areas of private corporation taxation,” says Ball, who joined CPA Canada in September after more than 25 years with BDO Canada. Ball says that the three areas the government was initially focused on were income splitting, conversion of income and dividends into capital gains, and corporations earning passive income from investments. After substantial public feedback, however, the government decided to pull back on some of those plans, including restricting the withdrawal of funds from a corporation as a taxable capital gain (rather than the higher-taxed dividend). “It would have had a significant impact on intergenerational transfers,” he says.
2. CORPORATE SMALL BUSINESS RATE REDUCED
In the wake of the consultation process for private corporation changes, the federal government announced that the small business rate would drop from 10.5 per cent to 10 per cent, effective January 1, 2018, and from 10 to nine per cent, effective January 1, 2019. Combine that with changes to the small business rate in Canada’s commercial heartland, Ontario—which is dropping its rate from 4.5 to 3.5 per cent on January 1—and the impact will be broadly felt. “So that’s 2.5 per cent on up to a maximum of $500,000,” notes Ball. “If the company is based in Ontario, making $500,000, that’s worth $12,500 a year to them.” New Brunswick and Saskatchewan also announced changes that will reduce tax on small business income in 2018.
3. TAXATION OF A PROFESSIONAL’S WORK IN PROGRESS (BILLED BASIS ACCOUNTING)
In general, when calculating the income of a professional, the cost of work that has been performed but not billed is recognized as inventory at year-end, thereby increasing a professional’s income. Under the old rules, certain professionals (accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors) were allowed to essentially value inventory at $0, says Ball, meaning that all costs incurred during the year were deductible. Under the proposed change, introduced with the March 2017 federal budget—and to be phased in over five years—professionals are now required to value inventory at the lower of cost and fair market value. “This change could have a significant impact on some professionals, and lawyers and accountants in particular.”
4. SMALL BUSINESS DEDUCTION RESTRICTIONS
Canadian-controlled private corporations are entitled to claim a small business deduction on active business income earned in Canada. New rules for small business deductions became effective within the past year—and, generally speaking, these rules will have an impact in situations where structures are put in place that multiply access to small business tax rates (generally, associated corporations must share the benefit). “People were setting up structures that technically didn’t fall into the association and other tax rules,” explains Ball, “but they often still had an element of common control and were designed to take advantage of these rules.” Unfortunately, the changes proposed were broad and complex, and may have an adverse impact on some businesses where a full small business deduction would be appropriate.
5. ELIGIBLE CAPITAL PROPERTY RULES
On January 1, 2017, eligible capital property, such as goodwill and other intangibles, became part of the capital cost allowance system. A number of rules applied for the conversion. The goal of the change, says Ball, was to make the treatment of these assets more consistent when compared with tangible capital property. “Essentially, what they’re doing is merging it in with the capital cost allowance rule,” he notes. “That’s fairly significant because it really brings the three main types of tax expenditures down to two.” He adds that it primarily will affect businesses that buy or sell goodwill and other intangibles, including farm quotas in the agricultural sector.
6. ELECTRONIC DISTRIBUTION OF T4 SLIPS
What might sound like a bit of CRA housekeeping is actually rather a big deal: in the 2017 budget, it was announced that employers will be allowed to distribute T4s electronically to active employees—without having to obtain express consent from the employee in advance. (Paper copies will have to be provided where asked for.) The change is effective for those T4s issued for 2017 and beyond. “The employees still have to be part of your organization somehow,” adds Ball. “In other words, if they’re on maternity leave for example, you may not be able to distribute the slip electronically if they will not have access to your systems.”
7. VOLUNTARY DISCLOSURE PROCESS
In 2017, the CRA proposed significant changes to the voluntary disclosure program. Generally speaking, the rules will be more restrictive about how you report delinquent returns and other tax irregularities (and potentially avoid penalties)—and the program will not be available to corporations with more than $250 million in revenue. One concern with the proposed changes is that existing “no-names” disclosure rules—which allowed an advisor or individual taxpayer to “come clean” on unreported income—will be replaced with a non-binding pre-disclosure discussion. Under the existing process, the CRA would look at a situation and have everything except for the identity of the person—and make a decision as to whether they’d give the taxpayer relief. Generally, once they did, the decision was binding. “It appears the CRA wants to try to make the system more restrictive,” offers Ball, “but the flip side is a lot of people are wondering if it will mean that some people won’t come forward once the rules change.”