Tax planning guide

Transcription

1 Tax planning guide

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3 Tax planning guide Introduction The edition of our planning guide is an upto-date reference on the latest business and individual tax developments. The planning suggestions in this guide are general in nature and should not be considered a substitute for the recommendations of your tax adviser. We hope you enjoy this year s edition.

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5 Table of contents Page Section I Businesses Are you self-employed? Taxing partnership income Rules for corporate partners Rules for joint ventures Which province gets your tax? Paying your spouse or common-law partner and/or children Employment Insurance (EI) and family members Calculating depreciation The half-year rule Available-for-use rules Special rules and restrictions Amortization and sale of eligible capital property The home office You re self-employed You re an employee Paying your dues Meals and entertainment (M&E) expenses Rules for long-haul truck drivers Convention expenses Canada Pension Plan (CPP) contributions Employer CPP remittances Deduction of health/dental insurance premiums Self-employed wage-loss replacement plans Deduction of life insurance premiums Deduction of fines and penalties Valuation of inventory Operating losses and prior years taxes Tax planning guide

6 20 Apprenticeship job creation tax credit Investment tax credit (ITC) for childcare spaces To incorporate or not to incorporate Transferring your business assets to the corporation on a tax-deferred basis Incorporating your professional practice The small business deduction Other corporate tax rates Personal services business Capital tax Associated-company rules Salaries and bonuses to shareholders Salary vs. dividends Salary deferral arrangements Directors fees Loans from your corporation Some exceptions apply Deemed interest benefit on excepted loans Taxable benefits Christmas parties and other special events Non-cash gifts and awards Employer-paid professional membership fees Group sickness or accident insurance plans Non-taxable benefits Employee loans Personal use of a company-owned automobile Operating costs Automobile expenses Self-employed persons and business use Tax-free travel allowances The taxation of stock options How is the benefit taxed? What if the stock declines in value? Public company stock options Tax planning guide

7 38 Qualified scientific research expenditures What can you deduct? Claiming SR&ED Investment tax credit (ITC) Proxy amount SR&ED contract payments Filing due date Shareholder agreements Reporting system for contractors What payments must be reported? What information must be reported? Farming businesses Methods of reporting income Farming losses Restricted farm losses Capital gains deduction for qualified farm property Intergenerational transfers Transfer pricing Withholding tax on interest payments to non-residents Payments to non-residents for services rendered in Canada The goods on the GST/HST GST/HST registration, collection and remittance New businesses When to report Input tax credits (ITCs) Employee reimbursements Allocation of tax between taxable and exempt supplies GST/HST streamlined accounting thresholds GST/HST and automobiles How much do you owe? Employee or partner expenses rebate Travel and other allowances GST/HST and real property sales Sales of real property to a registered purchaser Tax planning guide

8 51 GST/HST and buying and selling a business Section 2 Individuals Filing a tax return Your return is due GST/HST credit What s it worth? Eligibility for the credit Why buy an RRSP? Spousal plans How much can you contribute? RPP and DPSP members Age limits RRSP contribution limits RRSP overcontributions RRSP carry-forward rules Retiring allowances and RRSPs RRSPs and loans Transfer of pension income Using an RRSP to buy a home Persons with disabilities Using an RRSP to finance higher education Retirement and your RRSP How RRIFs work How annuities work Cash withdrawal from your RRSP Death and your RRSP Company pension plans Defined benefit plans Money purchase plans Deferred profit sharing plans (DPSPs) Pooled Registered Pension Plans (PRPPs) Individual pension plans (IPPs) What is an IPP? Tax planning guide

9 70 Tax-Free Savings Account (TFSA) Pension income splitting Old Age Security (OAS) clawback How it works Childcare expenses Who claims the childcare costs? How much can you deduct? Alimony and maintenance Agreements or court orders after April Registration of agreements Agreements or court orders prior to May Payments to a third party Deductibility of legal fees during separation or divorce Legal expenses incurred to obtain a lump-sum payment Legal expenses incurred to obtain periodic support payments Deductibility of other legal expenses Moving expenses Costs you can claim Other amounts received from your employer Student eligibility Optional method for claiming certain moving expenses Scholarship income What is a tax credit? Basic personal credit The spouse or common-law partner credit The eligible dependant credit Credit for children under age The infirm dependant credit The caregiver credit Family caregiver credit The age credit Disability tax credit Tax credits for charitable donations Tax planning guide

10 Donating property instead of cash Art and other charitable donation arrangements Other receipting guidelines for charities Political donations Medical expenses Eligible expenses Medical expenses of dependants other than a spouse or common-law partner Refundable medical expense credit What you cannot claim as medical expenses Disability supports deduction (attendant care expenses) Attendant care in a retirement home Adoption expense credit Tuition fees, education and textbook credits Tuition tax credit Education tax credit Textbook tax credit Transfer of tuition, education and textbook credits Interest on student loan credit Pension credit Claiming your spouse or common-law partner s unused credits First-time home buyers tax credit Canada Employment Credit Working Income Tax Benefit (WITB) Public transit credit Children s fitness credit Children s arts tax credit Canada Child Tax Benefit (CCTB) Universal Child Care Benefit (UCCB) Child benefits in shared custody situations Taxation of common-law couples Tax planning guide

11 101 Special rules for artists and entertainers Apprentice mechanic deduction for tools Tradespeople s tool expenses Northern residents deduction Residency deduction Travel deduction Special rules for the clergy Taxation of emergency volunteers Tax credit for volunteer firefighters Principal residence rules Designating a principal residence Tax issues Homes for rent Selling personal-use capital property Transfers and loans to family members Transfers to a spouse or common-law partner Transfers to other family members Interest-free loans to family members Registered Education Savings Plans (RESPs) Contributions Transfer to an RRSP or RDSP Canada Education Savings Grants (CESGs) Canada Learning Bond (CLB) Registered Disability Savings Plan (RDSP) Grants and bonds available Payments End of plan Rollover of RDSP proceeds to an RRSP/RRIF Splitting CPP benefits with your spouse or common-law partner Income splitting with family members Permitted arrangements Income splitting using family trusts Retroactive lump-sum payments Some income is tax-free Tax planning guide

12 117 Taxation of non-competition payments Taking up Canadian residence Foreign pension plans Giving up Canadian residence Tax implications Reporting requirement Temporary assignments outside Canada Residency defined Canadian residents working in the United States Canadian tax obligations for non-residents Disposition of taxable Canadian property by non-residents US persons resident in Canada Filing your returns Ownership of registered savings plans by US persons US Social Security payments US real estate owned by Canadian residents Selling your US property Withholding tax on income from US sources US estate tax US residency regulations US financial reporting requirements Succession and estate planning Succession planning Estate freeze/refreeze Life insurance Asset transfers Alter-ego and joint-partner trusts Planned giving Will planning Deceased taxpayers Executor s responsibilities Instalments Canada Pension Plan (CPP) and Old Age Security (OAS) payments Gst/Hst credit Tax planning guide

13 Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) Tax filing obligations of the legal representative Income Capital properties Funeral and estate administration expenses Section 3 Investors Rental properties What can I deduct? Joint owner or partner? How much can I claim for depreciation? What happens if I sell? Terminal loss rules What about capital gains? When is a gain a capital gain? Identical properties Sale of stock option shares Lifetime capital gains deduction $100,000 capital gains deduction Qualified small business corporation (QSBC) capital gains deduction Election for private companies going public Qualified farm property capital gains deduction Qualified fishing property capital gains deduction Capital gains deferral for investments in small businesses Capital gains reserves Capital loss rules Allowable business investment losses (ABILs) Taxation of dividends Eligible-dividend rules Dividends and individuals Dividends and corporations Designating a dividend as an eligible dividend Foreign spinoffs Tax planning guide

14 144 Transfer of dividend income between spouses Taxation of interest income Canada Savings Bonds (CSBs) Treasury bills Mutual funds Segregated funds Income trusts and Real Estate Investment Trusts (REITs) Investment holding companies Cumulative net investment loss (CNIL) rules What is a CNIL? Deductibility of interest expense Resource sector as a tax shelter Mineral exploration tax credit Limited partnerships Taxation of personal trusts Flexibility in taxation The 21-year rule Foreign taxes on investment income Foreign reporting requirements Alternative minimum tax (AMT) Section 4 Everyone Understand the rules before you act The CRA s policy and what s really law T3s, T4s, T5s and other information slips EFILE and NETFILE EFILE for individuals NETFILE Electronic filing of GST/HST returns Internet filing for T3s, T4s, T5s and other information returns Corporation Internet filing Tax planning guide

15 162 Registering for online access to your CRA account Individual registration Registration is a three-step process: Representative registration My Account and My Business Account My Account My Business Account Represent A Client See It Online Do It Online Notice of assessment and your return Taxpayer relief provisions The CRA s collection procedures Limitation period for collection of tax debts Income tax refunds Income tax instalments Instalments for individuals Instalments for corporations Books and records Be aware of penalties and interest Even bigger penalties Voluntary disclosures Ministerial discretion to waive interest and penalties Tax preparer penalty Civil penalties for misrepresentation by third parties Reporting requirements for certain tax avoidance transactions Budget Glossary Locations Index Tax planning guide

16 Tables 2013 Corporate taxation Table 1 Business income eligible for SBD Table 2 Business income not eligible for SBD Table 3 Investment income Table 4 Sales tax Table 5 SR&ED Investment Tax Credits Table 6 Capital cost allowance rates Table 7 Canada Pension Plan Table 8 Employment Insurance Individual taxation The following tables are in each of the provincial taxation tables: Table 1 Tax table Table 2 Non-refundable tax credits Table 3 Marginal rates Table 4 Tax brackets 12 Tax planning guide

17 Abbreviations ABI ABIL ACB AMT CCA CCPC CCTB CDSB CEC CESG CLB CNIL CPP CRA CSB DPSP EI FMV GIC GRIP GST HBP HST IPP IRA active business income allowable business investment loss adjusted cost base alternative minimum tax capital cost allowance Canadian-controlled private corporation Canada Child Tax Benefit Canada Disability Savings Bond cumulative eligible capital Canada Education Savings Grant Canada Learning Bond cumulative net investment loss Canada Pension Plan Canada Revenue Agency Canada Savings Bonds deferred profit sharing plan Employment Insurance fair market value guaranteed investment certificates general rate income pool Goods and Services Tax Home Buyers Plan Harmonized Sales Tax individual pension plan individual retirement account Tax planning guide

18 ITC ITN LIF LRIP NCB OAS PA PAR PRPP PSPA QSBC RDSP REIT RESP RLIF RPP RRIF RRSP SBC investment tax credit or input tax credit (GST/HST) individual tax number Life Income Fund low rate income pool National Child Benefit Old Age Security pension adjustment pension adjustment reversal Pooled Registered Pension Plan past service pension adjustment qualified small business corporation Registered Disability Savings Plan Real Estate Investment Trust Registered Education Savings Plan Restricted Life Income Fund registered pension plan Registered Retirement Income Fund Registered Retirement Savings Plan small business corporation SR&ED scientific research and experimental development TFSA UCC UCCB WAC Tax-Free Savings Account undepreciated capital cost Universal Child Care Benefit web access code 14 Tax planning guide

19 Section I Businesses 1 Are you self-employed? If you re self-employed, you have many more options for tax planning than if you re an employee. However, determining whether you re self-employed or employed is not always cut and dried. It depends on your particular circumstances, and often comes down to how much control the person paying for your services exercises over your work. The Canada Revenue Agency (CRA) has published a guide to assist in determining employed vs. self-employed status. A copy of this guide ( RC4110 Employee or Self-Employed? ) can be found on the CRA s Web site at (see Forms and Publications ). 2 Taxing partnership income As a member of a partnership, you must report your share of the partnership s profit or loss for its fiscal period ending in While you can normally claim your share of partnership losses against your other sources of income, this may not always be the case if you re a member of a limited partnership (see topic 153). Certain expenses incurred outside the partnership may also be deductible. For example, if you borrowed money to invest in the partnership, the interest on that loan is generally deductible (see topic 150). Any expenses that you personally incur in the course of carrying on the partnership business (e.g., promotional and automobile expenses) are also deductible. However, meal and entertainment expenses are only partially deductible (see topic 11), and some automobile expenses may be limited (see topic 35). Although the Act requires that all Canadian partnerships file an information return (Form T5013), the CRA has previously administratively exempted certain partnerships from this requirement. Prior to 2011, a partnership with up to five partners was not required to file the prescribed Businesses L individu et sa famille éducation santé employés 1 Special rules for corporate partners are discussed below. Tax planning guide

20 I Businesses employés santé éducation L individu et sa famille Businesses information return (T5013) unless one of the partners was another partnership. The CRA s position has changed as follows for partnerships with fiscal periods ending after 2010: a partnership is required to file an information return if, at the end of its fiscal period, it has an absolute value of gross revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets. A return also has to be filed if, at any time during the fiscal period, the partnership is a tiered partnership; the partnership has a corporation or a trust as a partner; the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or if the CRA requests that a return be filed. As a result, although it s still a good idea to file the return, partnerships that have simple structures and modest financial activity are not required to file a partnership return. Rules for corporate partners In some cases, a partnership can be held by corporate partners. This type of structure used to allow for the deferral of tax where the partnership had a year-end that ended after the year-end of the corporation. Rules announced in 2011 have eliminated this tax-deferral strategy in a manner that will spread the one-time tax cost from the collapse of the deferral over a five-year period (15% in 2012, 20% in each of 2013, 2014 and 2015, and 25% in 2016). These rules apply where the corporate partner is entitled to more than a 10% income allocation from the partnership and are applicable to a corporation s first taxation year ending after March 22, These rules are extremely complex. If you have an interest in a corporation that is caught by these rules, you should consult with your tax adviser. 16 Tax planning guide

21 I Businesses 3 Rules for joint ventures For many years, the CRA administratively permitted a joint venture (JV) to have a fiscal period that was different from the fiscal periods of the JV participants. This policy allowed a JV participant to realize a tax deferral similar to that enjoyed by corporate partners of a partnership. The differences between a JV and a partnership are discussed in topic 133. Due to the rules to limit the tax deferral opportunities for certain corporate partners (discussed above), the CRA announced that for taxation years ending after March 22, 2011, JV participants will no longer be able to compute income as if the JV had a separate fiscal period. Instead, income from a JV will have to be calculated for each JV participant based on the fiscal period of the particular JV participant. Similar to the rules for partnerships, transitional relief is available to spread the additional income for the stub period over a five-year period i.e., 15% in 2012, 20% in each of 2013, 2014 and 2015, and 25% in Example Assume a JV had a fiscal period ending June 30 and XYZ Co., one of the JV participants, has a December 31 year-end. The JV s actual amount of its additional income for the period July 1, 2011 to December 31, 2011 was $200,000. Assuming a maximum reserve is claimed each year, the following additional amounts will have to be included in XYZ Co. s income for its fiscal periods ending in 2012 to 2016: 2012 $30, $40, $40, $40, $50,000 A JV participant who wanted to benefit from this transitional relief for the first taxation year ending after March 22, 2011, had to file an election in writing with the CRA, by no later than September 22, If the election Businesses L individu et sa famille éducation santé employés Tax planning guide

22 I Businesses santé éducation L individu et sa famille Businesses was not filed, the entire amount of the stub period income had to be included in income for the JV participant s first taxation year ending after March 22, Which province gets your tax? Employment and investment income are both taxed by the province in which you reside on December 31. This is the case even if the income was earned in another province. Business income, on the other hand, is taxed in the province where the business was conducted. If you carry on the same business through a permanent establishment in more than one province, a complicated formula is used to determine what portion of your business income is taxable in each province. Tax tip Unless you earn self-employed business income (see above), provincial tax is based on your province of residence on December 31. If you re transferring to a province with a lower tax rate, you should consider accelerating your departure to arrive before the end-ofyear deadline. Conversely, if a move to a province with a higher tax rate is in your future, consider postponing your relocation until after the year-end. 5 Paying your spouse or common-law partner and/or children Salaries paid to your spouse or common-law partner and/or children are tax deductible to your business as long as the wages are reasonable in relation to the services they have provided. As a rule, salaries are considered reasonable if they re representative of an amount that would be paid to an arm s-length party for similar services in other words, comparable to what you would pay an unrelated employee to do the same job. employés 18 Tax planning guide

23 I Businesses Tax tip There are many advantages to paying reasonable wages to family members for actual services rendered. A key benefit is that salaries will be taxed in their hands, and probably at rates lower than your marginal tax rate. This arrangement will also allow them to make their own RRSP and CPP contributions. Businesses 6 Employment Insurance (EI) and family members Employment Insurance (EI) premiums can constitute a considerable expense. There are various exemptions from having to remit EI premiums. For example, if you own more than 40% of the voting shares of a corporation, your employment is not subject to EI premiums. There s another exemption for employees who deal at nonarm s-length with their employer. The problem with this rule is that there s another rule stating that two related persons are deemed to deal with each other at arm slength if the circumstances of the employment are substantially similar to what they would be if an unrelated person were to perform the same job. Tax tip Consult your professional adviser to determine if there s any way you can structure the employment of your spouse or common-law partner or other family members to justify EI-exempt status. Your business and family members could also be eligible for a refund. 7 Calculating depreciation The cost of a capital asset is generally not deductible as an expense. However, you can depreciate certain business assets for tax purposes. The tax term for such depreciation is capital cost allowance (CCA). Depreciable assets are grouped into classes according to their type and use. There are more than 50 different classes, each with its own rate of depreciation. L individu et sa famille éducation santé employés Tax planning guide

24 I Businesses employés santé éducation L individu et sa famille Businesses The government also adjusts CCA rates to provide economic incentives or to better reflect the useful life of the property. The following are some of the more significant examples: Manufacturing and processing (M&P) machinery and equipment that would otherwise qualify for a 30% CCA (Class 43) will, for a limited time, qualify for an accelerated write-off. Eligible purchases acquired before 2016 will qualify for a 50% straight line accelerated CCA rate and will be placed in Class 29. Buildings acquired after March 18, 2007 and used for M&P in Canada qualify for a CCA rate of 10% as opposed to 4%. To claim the 10% rate, at least 90% of the floor space must be used in manufacturing or processing in Canada. Other non-residential buildings acquired after March 18, 2007 that are not used 90% for M&P may qualify for a CCA rate of 6% as opposed to 4%. To claim the higher CCA rate, the taxpayer must elect to include the building in a separate prescribed class (Class 1). This election is made by attaching a letter to the taxpayer s income tax return for the tax year in which the building is acquired. The CCA rate for computer hardware and systems software has gradually increased from 30% to 55%, except for a temporary period from January 28, 2009 until January 31, 2011 when such property was eligible for a 100% writeoff. Such purchases are now placed in Class 50, which is eligible for a 55% CCA rate. Most classes of assets are depreciated on a decliningbalance basis. Some of the more common CCA classes and their applicable CCA rates are noted in the tables at the back of this book. The amount of depreciation you can claim for a year is determined by multiplying the remaining balance in the asset class by the specified percentage rate for that specific class (generally pro-rated for short taxation years). The remaining balance, referred to as the undepreciated capital cost (UCC), is calculated on a continuous basis. 20 Tax planning guide

25 I Businesses Each year (subject to the available-for-use rules see below), you add the cost of assets acquired in the year to the previous year s closing balance. If you have disposed of an asset, you subtract the proceeds up to the original cost of the asset. The amount of CCA determined by this method represents the maximum amount that can be claimed. You do not have to claim the maximum amount. For example, if your business is in a loss position, you may decide not to claim depreciation for that particular year. The half-year rule Most depreciable assets are subject to a rule that reduces the maximum depreciation claim in the year of purchase to half the net additions made to the specified class. This half-year rule doesn t apply to the acquisition of certain capital property, such as tools costing less than $500. Such assets can be written off 100% in the year of purchase. Available-for-use rules The available-for-use rules determine the taxation year in which an amount can first be claimed for depreciation and whether the half-year rule will apply. Rules with respect to the acquisition, construction and/or renovation of a building are especially complex. It s best to ask your tax adviser about the rules in this area. However, the general rule is that property may be depreciated for tax purposes at the date it s first used to earn income, or the second taxation year following the year of acquisition, whichever is earlier. Special rules and restrictions Some depreciation restrictions apply to rental property (see topic 133). Others apply to depreciation claims arising from certain tax shelters in which the investor is not active in the day-to-day operations of the business. Depreciation claims by taxpayers who lease certain types of property are also subject to certain rules. Since the rules do not apply to all leasing properties, your tax adviser is in the best position to determine if you re affected by these rules. Businesses L individu et sa famille éducation santé employés Tax planning guide

26 I Businesses employés santé éducation L individu et sa famille Businesses 8 Amortization and sale of eligible capital property Eligible capital property includes such things as goodwill and other nothings, the cost of which neither qualifies for CCA (see topic 8) nor is deductible in the year of its acquisition as a current expense. For example, if you purchase goodwill (the intangible value of a business, such as a recognized name and reputation), you re permitted to amortize three-quarters of its cost on a declining-balance basis at the rate of 7%. When the goodwill is sold, three-quarters of the proceeds are credited to the unamortized pool at the time of sale and, if the balance of the pool becomes negative, an amount has to be reported as business income. This amount is split between the recapture of amounts previously claimed as amortization and, if the proceeds exceed the original cost, an amount that represents the equivalent of a capital gain. When there s only one asset in the cumulative eligible capital (CEC) pool, any gain on the disposition of eligible capital property after the recapture of amounts previously deducted is taxed like a capital gain: The amount by which the proceeds exceed the original cost is taxed at 50% of the rate applicable to ordinary income. When there are other assets in the pool, the rules are more complicated. There are further adjustments when the taxpayer previously claimed the capital gains deduction with respect to the property disposed of (see topic 135). If the disposition relates to the sale of qualified farm or fishing property, such as the sale of a quota, all or a portion of the negative balance may qualify for the capital gains deduction provided a special election is made (see topics 137 and 138). 9 The home office If you work out of your home you may be able to deduct a portion of your home office expenses. However, there are a number of rules, and the rules differ depending on whether you re self-employed or an employee. 22 Tax planning guide