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On April 16th, 2024, the 2024 federal budget proposed to increase the capital gains inclusion rate from 50% to 66.67% for corporations and trusts and from 50% to 66.67% on capital gains in excess of $250,000 for individuals beginning on June 25th, 2024. (Chapter 8: Tax Fairness for Every Generation | Budget 2024, 2024).
A capital gain can occur through the disposition of capital property. The Government of Canada website defines capital property as “Depreciable property, and any property, which, if sold, would result in a capital gain or a capital loss. You usually buy it for investment purposes or to earn income. Capital property does not include the trading assets of a business, such as inventory” (Capital Gains – 2023, 2024). Some common examples of capital property are land, buildings, vehicles, equipment used for rental operations or business purposes, and second homes such as vacation properties or cottages.
A capital gain occurs when the proceeds received from the disposition of the disposed asset are greater than the adjusted cost base (cost of the asset plus any expenses incurred to acquire it). A capital gain is calculated by taking the proceeds of disposition less the assets adjusted cost base and any expenses that were incurred to sell the property.
At this time, the inclusion rate is 50%, meaning that only 50% of any capital gain is taxable to an individual, corporation or trust.
Prior to June 25, 2024, only 50% of a capital gain is included when calculating the corporation or trust’s net income for tax purposes. The 2024 budget proposes that as of June 25th, 2024, 66.67% of the capital gain will be included when calculating your net income effectively resulting in a higher taxable income and higher taxes on the sale of capital property. For example, if a corporation sold land that had originally cost the corporation $200,000 for $300,000, with the 50% inclusion rate, only $50,000 of this amount would be taxable (($300,000-$200,000)*50%). With the new proposed inclusion rate of 66.67%, $66,670 of the capital gain will be taxable.
For individuals, as of June 25th, 2024, the current 50% inclusion rate will increase to 66.67% for any capital gain in the year that exceeds the limit of $250,000. This means that if your capital gains realized in the year are under the $250,000 limit, the 50% inclusion rate will still apply; but for any amount over $250,000, the 66.67% inclusion rate applies. The legislation does not allow for the averaging of capital gains over multiple years to stay under the $250,000 threshold or any carry-over of any unused threshold.
It is important to note that, the principal residence exemption remains unchanged, meaning that capital gains that arise when selling your principal residence, such as your house, remain exempt from tax and are unchanged.
For individuals, common examples where capital gains could apply are the sale of a second house such as a cottage or rental property, vehicles, and investments.
With the proposed change to the capital gains inclusion rate for all capital gains realized after June 24th, 2024, from 50% to 66.67% for corporations and for capital gains over $250,000 for individuals, we recommend reviewing your investments to determine if you have any unrealized gains. For most individuals, it will be important to manage these gains from year to year to ensure that you can keep them under $250,000 to avoid additional tax. But for corporations and trusts with accrued unrealized capital gains, it may be prudent to speak with your investment broker and tax advisors to determine if triggering some of these gains before June 25, 2024, to minimize the impact on your taxes on the eventual sale makes sense for you.
Note that there is no provision at this time for a deemed disposition election to trigger gains before the new rate applies. The actual disposition must occur.
Capital gains reserves will enter into income on the first day of the taxation year, meaning those starting before June 25, 2024, will be subject to the 50% inclusion rate. Later years will follow the prevailing rate of 66.67%. If you have a capital gains reserve that you are bringing into income, it will be important for you to discuss with your tax advisor the implications of continuing it going forward or realizing the remaining amount in 2024.
Under current rules, if you receive a stock option benefit, the full amount of that benefit is taxed as employment income in the year it is received; however, the employee may claim a deduction of 1/2 the stock option benefits if they meet certain conditions. Under the proposed changes, the stock option deduction will change from 1/2 to only 1/3 of the stock option benefit for any options exercised after June 24, 2024, with the $250,000 limit applied to the combined total of stock option benefits and capital gains.
When a taxpayer incurs a business investment loss from the disposition of shares or debts from a small business corporation or the deemed disposition of bad debts or shares of a bankrupt small business corporation, they have been able, under the current rule, to deduct 50% of that loss against other income (such as employment, business and property income) and carry it back 3 years or forward 10 years. Beginning June 25, 2024, ABILs will be deductible at 66.67% even if the amount is carried back to a period prior to June 25, 2024.
For 2024, the tax year will be split into two periods for applying different inclusion rates:
Taxpayers will need to net capital gains against capital losses for each period to determine the applicable inclusion rates.
If you would like us to review your investment portfolio or if you have further questions regarding the capital gains inclusion rate changes, please contact our office.
*The information contained in this post reflects the proposed change at the date posted and may or may not be relevant at future dates
Capital Gains – 2023. (2024, January 23). Canada.ca. Retrieved June 7, 2024, from https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html
Chapter 8: Tax Fairness for Every Generation | Budget 2024. (2024, April 16). Canada.ca. Retrieved June 7, 2024, from https://budget.canada.ca/2024/report-rapport/chap8-en.html
How do you calculate capital gains and capital losses? (2024, January 23). Retrieved June 7, 2024, from https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/publicly-traded-shares-mutual-fund-units-deferral-eligible-small
Tax Fairness for Every Generation. (2024, April 16). Canada.ca. Retrieved June 7, 2024, from https://www.canada.ca/en/department-finance/news/2024/04/tax-fairness-for-every-generation.html
In our experience as an accounting firm based in Alberta, we have noticed that many of our clients are not fully aware that they can claim the provincial portion of the Harmonized Sales Tax (HST) as an Input Tax Credit (ITC) when HST is paid on goods.
This lack of awareness can lead to missed opportunities, especially when dealing with transactions involving provinces where HST is applicable. Understanding these nuances is crucial for businesses in Alberta to ensure that all GST/HST Input Tax Credits are claimed appropriately.
It is important note that HST and Provincial Sales Tax (PST) are not the same. The HST merges the federal Goods and Services Tax (GST) with PST, applied in provinces like Ontario and Nova Scotia, and administered federally by the Canada Revenue Agency (CRA). Conversely, the PST, separate from GST and known as QST in Quebec, is levied in provinces like British Columbia and Saskatchewan, with each province setting its rates and handling its administration. The primary difference lies in HST’s amalgamation and federal oversight, contrasting with PST’s independent provincial management.
Firstly, it’s important to know which provinces charge HST and their respective rates. As of now, the following provinces have HST:
| Province | HST Rate |
| New Brunswick | 15% |
| Newfoundland and Labrador | 15% |
| Nova Scotia | 15% |
| Ontario | 13% |
| Prince Edward Island | 15% |
For businesses in Alberta (which typically have GST at 5%) the tax implications can be complex, especially when transactions involve provinces that do.
A common scenario to consider is when goods are purchased from an HST province (New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, or Prince Edward Island) and delivered to Alberta. This situation should prompt a review of the source documentation to determine if HST (and not just GST) was paid on the invoice.
What type of sales tax (GST or HST) is charged is determined generally by the place of supply. The place of supply is determined on where legal delivery of the goods occur. When legal delivery of the good occurs is typically outlined in the terms of the agreement for the sale of goods.
A manufacturer in Ontario sells a good to a corporation in Alberta. Legal delivery of the good occurs in Ontario at the manufacturer’s premises as per the terms of the sales agreement. The corporation regularly purchases goods from the manufacturer and establishes freight terms with a common carrier for the regular transportation of goods from the manufacturer’s premises to Alberta whenever required. The corporation instructs the manufacturer to contact the carrier directly to advise the carrier whenever goods are ready for pick-up. The carrier invoices the corporation for any transportation service that is provided pursuant to their arrangement.
The good is delivered to the purchaser in Ontario. Therefore, the supply is made in Ontario and is subject to HST at a rate of 13% all of which can be claimed as an ITC.
A corporation in Ontario sells a good to a purchaser in Alberta. Based on the terms of delivery in the agreement for the supply of the good, legal delivery of the good to the purchaser occurs in Alberta.
Because legal delivery of the good to the purchaser occurs in Alberta, the supply is made in Alberta and is subject to GST at a rate of 5%.
*Note – the above place of supply rules do NOT apply to specified motor vehicles. Specified motor vehicles are generally all motor vehicles except racing cars and any prescribed motor vehicles.
For specified motor vehicles, the place of supply is determined by where the vehicle was registered (other than on a temporary basis).
If HST is paid by a registrant business or individual in Alberta and it was incurred for commercial goods used in a commercial sense, then the HST (including the provincial portion) can be claimed as an Input Tax Credit (ITC). This is a significant aspect for businesses as it allows for the recovery of HST paid on business-related purchases.
-Always review source documentation for transactions involving provinces with HST to determine tax implications.
-Generally, where the good is legally delivered is the place of supply and that is the relevant GST/HST tax rate that should be used.
-If you are a GST/HST registrant and have paid HST on a business-related item you can claim the full amount of HST (including the provincial portion) on your GST return.
For any further questions or clarifications, please contact our office at 780-532-4641 or e-mail office@fulcrumgroup.ca
A personal services business (PSB) exists where the individual performing the work would be considered to be an employee of the payer if it were not for the existence of the corporation. A corporation may be a PSB if the following criteria are met:
Tax Implications for Personal Service Businesses and its Owner:
Risk Mitigation Strategies:
Conclusion:
Operating a personal service business in Canada comes with unique tax implications and potential risks due to the distinct tax treatment. To mitigate these risks, it’s essential to diversify your client base, document your relationship, consider offering goods alongside services, manage your compensation wisely, and focus on business growth. Feel free to contact our office if you have any questions about personal service businesses or feel you may be at risk.
In Budget 2021, the Canadian government introduced the Underused Housing Tax (UHT), a 1% annual tax on the value of non-resident, non-Canadian-owned vacant or underused residential real estate. In response to feedback on the onerous filing, the government is proposing significant changes to streamline compliance. These changes have not yet been passed with federal legislation but are expected to be passed and enacted in the coming months.
One notable proposal is the elimination of filing requirements for certain owners. “Specified Canadian corporations,” partners of “specified Canadian partnerships,” and trustees of “specified Canadian trusts” are slated to become “excluded owners,” relieving them of UHT reporting obligations. The government aims to expand these definitions to include a broader range of Canadian ownership structures, reducing the compliance burden for eligible entities starting from the 2023 calendar year.
This means that most Canadians should not have to file a UHT return in 2023.
To further ease the transition, the government is also suggesting a reduction in minimum failure-to-file penalties. The minimum penalties for individuals and corporations for late filing UHT returns are proposed to decrease from $5,000 to $1,000 and from $10,000 to $2,000, respectively, beginning in 2022.
The requirement to file UHT returns for 2022 under the original legislation will continue and the deadline has been extended to April 30, 2024. If you have not filed your UHT returns yet or are unsure if you have a filing obligation, please contact Fulcrum Group.
*The information contained in this post reflects the standards and rules applicable at the date posted and may or may not be relevant at future dates
The Canada Revenue Agency (CRA) recently released technical interpretation UHTN-15, which discusses co-ownership of residential rental properties and its potential impact on the filing requirements for the Underused Housing Tax (UHT).
In accordance with UHTN-15, the term “partnership” for UHT purposes is not explicitly defined in the Underused Housing Tax Act (UHTA). Instead, the CRA relies on the definition provided by provincial partnership legislation, which is consistent with the legal understanding of a valid partnership.
The key criteria for a relationship to be considered a partnership for UHT purposes are:
These three criteria closely mirror the fundamental elements required for a valid partnership under provincial partnership legislation. If any of these criteria are not met, the relationship would not qualify as a valid partnership for UHT purposes.
Given the self-assessment nature of Canada’s tax system, it is crucial for co-owners to determine whether their residential rental property arrangement meets these criteria. Should the co-ownership structure align with the conditions outlined in UHTN-15, filing a UHT return as a partnership may be necessary. The deadline to file is Oct 31, 2023, for 2022 returns and will be April 30 for future years. The late filing penalty is $5,000 per form.
To ensure compliance and explore any potential implications for your specific situation, contact our office and/or schedule a meeting at your earliest convenience. This will allow us to discuss the particulars of your residential property holdings and formulate a tailored strategy to address any UHT filing requirements that may arise.
As a shareholder of your corporation, your shareholder’s loan is an important account that indicates how much the company owes to you or how much you owe to the company. It is important to know how the shareholder’s loan works and how it can affect your personal taxes. You should ensure that you are aware of what transactions impact your shareholder’s loan balance and where the balance is at the end of every year.
When an owner takes cash out of the company, it is considered to be an owner withdrawal and is money that is owed back to the company if not repaid. If, as a shareholder, you use company funds to make a personal purchase, the purchase price is considered a withdrawal of company funds for personal use and is also owed back to the company.
Sometimes the company will not have enough cash to operate. If this is the case, the shareholder may lend money to the company. These amounts are owed back to the shareholder and can be repaid at any time. There are no personal tax consequences to repaying them. The contributions can also offset any personal withdrawals of company funds. If, as a shareholder, you were to contribute or sell equipment to the company without receiving any reimbursement directly, it would also be considered a contribution.
If at the end of your fiscal year, your shareholder’s loan is overdrawn, the overdrawn amount must be repaid by the end of the following year. If you intend to repay the overdrawn amount by the end of the following year, no additional steps may be necessary. Alternatively, if you choose not to or are unable to repay the overdrawn amount, a dividend can be issued to clear up the shareholder’s loan balance. These dividends are reported on a T5 slip and are included as taxable income on your personal tax return in the year they are declared.
If the overdrawn shareholder’s loan is not repaid by the end of the following year and dividends are not recorded, CRA could consider this to be personal income and require an adjustment to your personal tax return for the year in which the amount became overdrawn. If, in later years, you repay any portion of the overdrawn amount, you can record a deduction equal to the amount repaid to offset your income in that year. This scenario can often result in significant tax in the year of income inclusion and include additional interest and penalties, so it is best to avoid this scenario if possible.
Something to be aware of is that you cannot repay an overdrawn shareholder’s loan at your year-end date and then take the money back out the following day. CRA will consider this to not be repaid and taxation can still occur. For example, if you have a December 31st year-end and repay the overdrawn amount on December 31st but then take it back out again on January 1st, CRA will likely consider it to not have been repaid.
If you feel like you may be running into a shareholder’s loan issue, or would like to learn more about how it works, please contact us to discuss how it may impact you.
Passing on businesses to family members or employees in Canada has historically come with tax challenges. Budget 2023 introduced new tax rules to address these issues, making it easier for business owners to transfer their businesses. This post aims to explain these changes in simple terms and how they might affect business succession from 2024 onwards.
Family Business Transfers:
Before Bill C-208, there was a tax difference between selling a business to a family member and selling it to someone unrelated. Selling to a family member could result in higher taxes due to certain rules. Bill C-208 aimed to fix this disparity by excluding certain transactions from these tax rules. Budget 2023 builds on these changes and sets conditions for a “genuine intergenerational business transfer” to qualify for tax benefits (Bruce Ball, 2023).
Budget 2023 proposes several conditions for such transfers, including immediate transfers made within 36 months and gradual transfers made over 5 to 10 years (Bruce Ball, 2023). If the conditions are met and an election is made, the transfer would be exempt from certain tax rules.
Budget 2023 also suggests other changes to simplify the process, such as eliminating the need for independent assessments and affidavits, extending timeframes for capital gains exemptions, and introducing joint and several liability for tax payment under certain circumstances (Bruce Ball, 2023).
Employee Ownership Trusts (EOTs):
Existing tax rules have made it challenging to create Employee Ownership Trusts (EOTs) in Canada (Bruce Ball, 2023). However, Budget 2023 proposes new rules to overcome these obstacles and offer a succession planning option for business owners.
An EOT involves selling a business to employees through a trust that holds the shares on their behalf. This simplifies matters compared to each employee owning shares individually.
How do Employee Ownership Trusts work?
Here is a simplified explanation of the EOT process (Bruce Ball, 2023):
Budget 2023 proposes new rules to allow the creation of EOTs in Canada. The rules specify conditions for the trust’s holdings, employee eligibility, distribution limitations, and trustee appointments.
Tax Benefits of EOTs:
The proposed EOT rules offer the following tax benefits (Bruce Ball, 2023):
Future Steps:
If approved, the new tax rules for family business transfers and EOTs will come into effect from January 1, 2024 (Bruce Ball, 2023).
Conclusion:
Budget 2023 introduces important tax changes to facilitate the transfer of businesses to family members and employees. The new rules aim to promote fair transfers and simplify the establishment of EOTs as a succession planning option. While this approach focuses on removing tax barriers, it still offers a valuable alternative for business owners. By understanding these new tax rules, business owners can make informed decisions when planning for business succession in 2024 and beyond.
Stay Informed:
For assistance or further information on this topic please reach out to our office at 780-532-4641 or e-mail office@fulcrumgroup.ca.
References
Bruce Ball, FCPA, FCA, CFP (2023, May 16). Business succession — New tax rules to consider for family business transfers. Retrieved from Chartered Professional Accountants Canada: https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/~/link.aspx?_id=51946591F32B45D39E7EB58FD292CF71&_z=z
Blog Post Contributed by Matthew Kozlowski, CPA
As part of the 2022 federal budget, the government passed the new Underused Housing Tax Act. This legislation creates a new 1% tax on the value of ‘underused housing’. While the underused housing tax (UHT) is intended to target foreign ownership, many Canadians through partnerships, trusts and small businesses will be required to file an annual return (Form UHT-2900) even though there are many exemptions from the tax itself. If you own residential property other than your principal residence, it will be essential to review any filing obligations.
Residential property of is defined as one of the following:
Unaffected property includes properties with 4 or more dwellings such as 4-plexes and apartments.
There are two types of owners in regard to the UHT. Type of ownership is based on December 31 of the calendar year.
These are owners that DO NOT have to file the UHT-2900 and include:
These are owners that MUST FILE the UHT-2900 regardless of tax obligation and include:
All Affected Owners MUST file a separate return for EACH property even if they are exempt from the tax. Similarly, EACH member of a partnership MUST file a separate return for EACH property.
***Rental properties owned jointly with spouse (common-law partner). There is a possible obligation to file returns for personally owned property including property owned jointly with your spouse. Depending on circumstances, this arrangement can be considered a partnership. We encourage you to consult with your Fulcrum Group advisor to determine your filing obligations.
****Property held in trust (cosigning and estate planning). There is an obligation to file a return when you are listed as the legal owner of a property but do not have beneficial ownership and are then deemed to own the property in trust. Below are two common examples of this but other do exist. Please consult Fulcrum staff if you might be a trust owner.
Scenario 1
A child is unable to qualify for a mortgage and a parent cosigned. Banks requires cosigners to be on title so now the parent is listed in fact as a legal owner. The child is the beneficial owner. The parent owns the property in trust and is deemed to be a trustee. The parent must file a UHT-2900 return (but will generally be exempt from tax). The child does not have a filing obligation for their personal residence.
Scenario 2
An aging parent is now the sole owner of their home. In order to simplify the estate a child/children are added to the title of the home. This is often done so the property can avoid probate. The child/children are now legal owners of the property but beneficial ownership is still solely that of the parent. The child/children have become trustees and must file a UHT-2900 return (but will generally be exempt from tax). The parent does not have a filing obligation for their personal residence.
Affected owners have several exemptions that will remove any tax obligations. However, even where exemptions apply, the affected owner will still be required to file the UHT-2900 return. The exemptions are classified in 3 parts as defined on Form UHT-2900.
The property must be the primary place of residence for any of the following:
The property must have one or more qualifying occupancy periods totaling at least 180 days where each day is part of increments of at least 1 month. (Short term rentals do not qualify for this exemption).
You will need to provide the total number of days on UHT – 2900 if claiming one of the following exemptions.
For individual owners who are neither Canadian citizens nor permanent residents, if between you and your spouse you own multiple residential properties, your ownership may not qualify for Part 4 or Part 5 exemptions. You and your spouse must each file an election with the CRA to designate only one property (the same property) for the purposes of the Part 4 and Part 5 exemptions.
If you qualify for any one of the part 4, part 5 or part 6 exemptions, then there is no tax obligation.
If you do not qualify for an exemption, you must calculate the tax owing for the calendar year.
Taxable value of the residential property x 1% x ownership %
Taxable value of the property is determined as follows:
Greater of:
Assessed value (obtain from property tax assessment)
OR Most recent sale price on or before December 31 of the calendar year
A Fair Market Value election can also be done to use the fair market value of the property rather than the taxable value. The amount reported as the fair market value of the residential property must be supported by a written appraisal prepared by an accredited real estate appraiser that was done specifically for the purposes of the UHT. This appraisal must be prepared between January 1 and April 30 of the following year.
The filling deadline for all UHT-2900 forms is April 30th of the year following; however, an extension was granted for all 2022 returns to October 31, 2023. For future years, the deadline will remain April 30th.
Several pieces of information are needed to file your UHT return, including a valid CRA tax identifier number (such as Social Insurance Number or Business Number). Corporations will also need to register for an Underused Housing Tax (RU) program account identifier code.
If you engage Fulcrum group to file the UHT 2900 on your behalf we will need the following for each property you or your spouse or common-law partner own:
A separate UHT-2900 return will be required for each property in which you have affected ownership. The forms can be submitted to CRA either through your CRA My Account or by mail to your designated tax centre (Winnipeg Tax Centre for Alberta residents).
[i] Fair rent is 5% of the taxable value of the residential property for the calendar year
[ii] A specified Canadian partnership is where all partners are either an excluded owner, and would be an excluded owner if they were not part of a partnership, or specified Canadian corporations (below)
[iii] A specified Canadian trust is a trust were each beneficiary on December 31 of the calendar year is either an excluded owner or a specified Canadian corporation.
[iv] A specified Canadian corporation is a corporation incorporated under federal or provincial laws in Canada and at least 90% of the equity and voting shares are owned by Canadian citizens, permanent residents or specified Canadian corporations.,
Happy Holidays from Fulcrum Group! If you are considering giving your employees a gift this Christmas, it is important to ensure your gifts meet the criteria set out by CRA, so that it is not considered a taxable benefit to the employee.
In order for a gift or award to your employee to be tax-free, it needs to meet the following criteria:
Prior to this update, CRA always deemed gift cards to be a taxable benefit when gifted or awarded to employees. Under recent changes, gift cards will not be considered a taxable benefit if all of the following apply:
This includes gift certificates, chip cards, and electronic gift cards. If the gift card meets all these conditions, it is considered non-cash for the purpose of the CRA’s administrative policy and is not a taxable benefit to the employee. If the card does not meet these conditions, it is considered a near-cash benefit and is taxable.
For more information visit: CRA Policy on Gifts and Awards
Phone: 780-532-4641
Fax: 780-532-4947
Toll Free: 1-800-422-6093
Email: office@fulcrumgroup.ca
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Grande Prairie, AB
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