top tax tips seminar

TOP TAX TIPS

October 18, 2016

NEW RULES FOR ELIGIBLE CAPITAL PROPERTY: PLAN FOR SALE OF GOODWILL NOW! Helena Plecko, Vancouver

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BACKGROUND

Federal Budget 2016 proposes changes to the way goodwill and certain other assets that are “eligible capital property” (“ECP”) under the ITA are taxed

new rules to apply as of January 1, 2017 this is a big deal for Canadian-controlled private corporations (“CCPCs”) that

sell assets after 2016

Top Tax Tips Presentation - October 18, 2016

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BACKGROUND - WHAT IS ECP

what is ECP? intangible assets of a business with an unlimited life span such as

goodwill, customer lists, business processes, government rights there can be an acquisition cost for ECP (e.g. goodwill) or no such

cost because internally generated - consequences arise on sale current rules create a separate system for ECP (intangibles) that is

similar to depreciation rules of tangible property (CCA rules) but with some differences, in particular on a sale of ECP


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CURRENT RULES: INCLUSION/DEDUCTION

purchase of ECP generally results in 75% of the cost to be recorded in an account that tracks, for tax purposes, all ECP acquisitions and dispositions “cumulative eligible capital (“CEC”) account)

7% of the balance in the CEC account can be deducted from income each year


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CURRENT RULES - SALE OF ECP

sale of ECP results in: a 75% reduction of the CEC pool recapture of previously claimed CEC deductions 50% is active business income if proceeds > cost of ECP: 50% added to capital dividend account (can be

distributed tax free) example - sale of goodwill:cost: $0 (internally generated)proceeds: $1 million=> negative balance in CEC pool: $750,000=> active business income: $500,000=> CDA: $500,000


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PROPOSED NEW RULES: INCLUSION/DEDUCTION

As of January 1, 2017, current ECP will become a new CCA class ECE will be added at 100% of their cost (vs. old rule 75%) to the new CCA

class annual depreciation rate will be 5% (vs. old rule 7% of 75% of ECE)


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PROPOSED NEW RULES: SALE OF CLASS 14.1 PROPERTY

sale of class 14.1 property results in: recapture of previously claimed CCA capital gain if proceeds > cost : 50% added to capital dividend account (can be

distributed tax free) example - sale of goodwill:cost: $0 (internally generated)proceeds: $1 million=> taxable capital gain: $500,000 (treated as investment income)=> CDA: $500,000but note: subject to refundable dividend tax system so company, to reduce immediate tax hit by roughly 1/3, has to pay a dividend to the shareholder, i.e. deferral advantage is lost


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TRANSITIONAL RULES

the taxpayer’s existing CEC pools will be transferred to the new CCA class (14.1)

for the first 10 years, depreciation rate will be 7% for expenditures incurred prior to January 1, 2017

applies also to taxpayers whose tax years straddle year end, but important to note: if there is a disposition of ECP before January 1, 2017, taxpayer can elect tax treatment: capital gain or business income


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CONCLUSIONS

tax cost to CCPCs on a sale of ECP is higher post-2016: if business has considerable goodwill, consider selling prior to year end

hybrid sales are no longer attractive but share sales remain unaffected (except that it may be easier to find a buyer for assets!)

loss of tax deferral advantage because of refundable tax system shareholders pay higher tax on dividends if the company’s tax year straddles the calendar year end: take advantage of

the election (business income vs. capital gain)


DIRECTOR LIABILITY: A REFRESHER (and some new developments) Adrienne Woodyard, Toronto

DIRECTOR LIABILITY: A BRIEF PRIMER

directors are jointly and severally liable (with the corporation) for certain tax debts (unremitted GST/HST, employee source deductions)

CRA must fulfil certain technical requirements before pursuing a director***

CRA Collections will invite submissions: “Tell us why we shouldn’t pursue you”

most common defences: 2-year resignation rule due diligence other options: challenge the underlying corporate assessment,

claim to never have been a director (no valid appointment)

12Top Tax Tips Presentation - October 18, 2016

PRACTICAL CHALLENGES: DOCUMENTING THE RESIGNATION

applicable corporate law will often determine whether a resignation is valid

Ontario first directors may be unable to resign OBCA, s. 119(1),(2) - directors named in articles hold office until first

shareholders’ meeting; cannot resign unless/until a successor is elected or appointed

corporate legislation of other provinces may operate to the same effect Alberta BCA: combined effect of ss. 101(2) and s. 106

must ensure resignation is “received by the corporation” (Chriss v. The Queen, 2016 FCA 236)

retain copy of resignation AND proof of delivery


PRACTICAL CHALLENGES: DE FACTO DIRECTORSHIP

effect of resignation may be completely negated by actions post-resignation

provisions of corporate law may deem someone a de facto director e.g., OBCA, s. 115(4): when all directors have resigned or been removed,

any person who “manages or supervises the management” of the corporation’s “business and affairs” = deemed a director(**exceptions apply)

CRA will look for hallmarks of directorship participation in board meetings, signing documents as director,

overseeing affairs

inform third parties of resignation; be cautious in dealings with CRA, signing documents on the corporation’s behalf, and making statements or representations inconsistent with resignation in other legal proceedings


DUE DILIGENCE: WHAT’S THE TEST?

Buckingham v. The Queen, 2011 FCA 142

post-Buckingham, directors may now be held to a higher standard

objective test: what would a “reasonably prudent person” have done in the circumstances?

context still important, but less leeway for inexperienced or “outside” directors

lack of experience/knowledge may no longer a valid defence

particularly relevant for family businesses with nominal directors


DUE DILIGENCE: WHEN IS IT TOO LATE?

Buckingham: due diligence relates to failure to prevent the failure to remit NOT attempts to remedy; however…

courts will weigh all relevant facts and circumstances awareness of and attention to remittances alert to signs of fiscal strain; appropriate inquiries about financial status segregation of remittances from operating funds

where no due diligence… indifference/carelessness; failure to take steps when financial concerns

arise failure to plan for foreseeable liabilities (self-supply rules for GST/HST) deliberate use of remittances to pay creditors, keep business afloat

directors may feel they have no choice but to stay the course often accrue unnecessary additional debt (“First Rule of Holes”) timing is key: know when to walk away


CHANGES TO THE SMALL BUSINESS DEDUCTION RULESMark Potechin, Montreal

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Private Corporation Canadian Corporation Not controlled by non-residents, public corporations or any combination

thereof

CANADIAN-CONTROLLED PRIVATE CORPORATION (“CCPC”)


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Excludes: Income from specified investment business Income from personal services business

The federal corporate tax rate will be increased from 28% to 33% overall corporate rates will range from a punitive 44% to 49%

ACTIVE BUSINESS INCOME (ABI)


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Business limit of $500,000 Associated corporations share one business limit

SMALL BUSINESS DEDUCTION (SBD)


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Small Business Income up to

$500,000Active Business

Income Differential Savings

Provincial Rates

British Columbia 13.0 % 26.0 % 13.0 % 65,000

Alberta 13.5/12.5 27.0 13.5/14.5 65,000/72,500

Saskatchewan 12.5 27.0 14.5 72,500

Manitoba (up to $450,000)($450-500,000)

10.522.5

27.0 16.5/4.5 76,500

Ontario 15.0 26.5 11.5 57,500

Quebec 18.5 26.9/26.8 8.4/8.5 42,000/42,500

New Brunswick (change of rate, April 1, 2016) 14.5/14.0 27.0/29.0 17.5/4.5 62,500/75,000

Nova Scotia (up to $350,000)($350-500,000)

13.526.5

31.0 16.0 68,000

Prince Edward Island 15.0 31.0 16.5 80,000

Newfoundland and Labrador 13.5 30.0 16.5 82,500

Territorial Rates

Yukon 13.5 30.0 16.0 82,500

Northwest Territories 14.5 26.5 12.0 60,000

Nunavut 14.5 27.0 12.5 62,500

FEDERAL AND PROVINCIAL / TERRITORIAL TAX RATES FOR INCOME EARNED BY A CCPC EFFECTIVE JANUARY 1, 2016 AND 2017


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If taxable capital $15M or more - no SBD Straight line phase-out between $10M - $15M of taxable capital

LARGE CORPORATIONS


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Specified partnership income (SPI) qualifies for the SBD First $500,000 of ABI allocated to the partners based on partnership interest SPI allocated to a CCPC partner counts towards the CCPC’s overall

$500,000 business limit

PARTNERSHIPS


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SPECIFIED PARTNER INCOME (SPI)

A Co B Co

$1M of Active Business Income

A B

A Co = SPI of: 250,000

B Co = SPI of: 250,000

500,000

50% 50%


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AVOIDING THE SPECIFIED PARTNERSHIP INCOME LIMIT

A Services Co.

$250,000Service Revenue

A Co B Co

B Services Co.


$500,000 of ABI

A B

A Co = SPI of: 250,000 B Co = SPI of: 250,000

A ServiceCo = ABI of: 250,000 B ServiceCo = ABI of: 250,000

500,000 500,000

50% 50%


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CCPC provides services or property to partnership CCPC not a member of the partnership A shareholder of CCPC holds a direct or indirect interest in the

partnership, or (i) CCPC does not deal at arm’s length with a person who holds a direct or indirect interest in the partnership and (ii) CCPC does not derive 90% or more of its active business income from arm’s length persons or partnerships

For these purposes non-arm’s length partnerships are those (i) receiving property or services from the CCPC or (ii) in which a person non-arm’s length with the CCPC holds a direct or indirect interest

DESIGNATED MEMBER


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Income of a designated member of a partnership will be considered SPI Designated member does not have any partnership income allocated to it

since not a partner: therefore no specified partnership business limit A member of the partnership can allocate specified partnership business limit

to a designated member prescribed form required certain conditions to be met

EXTENDED DEFINITION OF SPI


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DESIGNATED MEMBER REVENUE

Accounting Co$30,000 service revenue

from partnership$250,000 service revenue from arm’s length clients

A Co B Co

B Services Co.


$500,000 of ABI

Mr. A B

Specified Partnership Business Limit of $250,000 for A Co and Accounting Co. Same for B Co and B Services Co.

50% 50%

Mrs. A


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DESIGNATED MEMBER REVENUE

Lawyer Co

Law Partnership

Lawyer A

$500,000 service revenue

1%


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CCPC, one of its shareholders or anyone related to them holds a direct or indirect interest in a private corporation

The CCPC provides services or goods to the private corporation (“specific corporation”)

The CCPC does not earn 90% or more of its income from arm’s length persons or partnerships- the specific corporation is not considered arm’s length

A CCPC can assign business limit to another CCPC in respect of SCI each of the CCPC’s must file a prescribed form

SCI can be reduced to an amount the Minister of Revenue determines to be reasonable in the circumstances

SPECIFIED CORPORATE INCOME (SCI)


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SPECIFIED CORPORATE INCOME (SCI)

Accounting Co Manufacturing Co

Mrs. AMrs. X’s

father-in-law

95% 5%

Mrs. X

5%


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For taxation years that begin on or after March 22, 2016

EFFECTIVE DATE OF APPLICATION OF NEW FEDERAL RULES


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For taxation years starting after December 31, 2016 SBD only available to CCPCs whose employees have worked at least 5,500

hours in total (this is equivalent to 3 full time employees) Previous year consolidated basis test- a total of at least 5,500 hours was

worked by CCPC’s employees and employees of associated corporations in the previous year.

Maximum hours per week per employee cannot exceed 40 Hours worked must be paid at date SBD is claimed Shareholder employee hours will be counted even if not remunerated SBD is reduced on a straight line basis between 5,500 and 5,000 hours Corporations whose activities are at least 50% in the primary or

manufacturing sectors will not have to meet the 5,500 hour threshold. If the activities are between 25-50% in those sectors SBD reduced on a straight line basis.

QUEBEC TAXATION ACT - SMALL BUSINESS DEDUCTION CHANGES


SUBSECTION 55(2) - INTER-CORPORATE DIVIDENDS MAY NO LONGER BE TAX FREE Sandra Mah, Calgary

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Mischief:

PURPOSE OF SS. 55(2) - PREVENT CAPITAL GAIN STRIP

HoldCo

OpCo

1) OpCo pays dividend to HoldCo as a tax free intercorporate dividend

2) HoldCo sells the shares of OpCo for a lesser price

Consequences: Intercorporate dividend deemed not to be divided and to be proceeds of the share sale.


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1. Safe income exception;2. Part IV exception (dividend was subject to tax under Part IV);3. Related party exception;4. Butterfly exception.

OLD SAFE HARBOURS - SS. 55(2)


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Three Purposes Tests

1. To effect a significant reduction in a capital gain;2. A significant reduction in the FMV of any share;3. A significant increase in the cost of property held by the dividend recipient.

AMENDMENTS APPLICABLE TO DIVIDENDS RECEIVED AFTER APRIL 20, 2015: SS. 55(2) HAS BROADER APPLICATION


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1. Safe income applies only if there is an accrued gain;2. Part IV tax exception - no longer applies if refund on dividend to individual;3. Related party exception - applies only to deemed dividends.

CHANGES TO SAFE HARBOURS - SS. 55(2)


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DEPARTMENT OF FINANCE EXAMPLE

HoldCo

OpCo

FMV/ACB $1M

HoldCo

HoldCo2

OpCo

FMV/ACB $1M

HoldCo

HoldCo2OpCo

FMV/ACB $1M FMV $nil

ACB $1M

FMV/ACB $1M


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1. Standard in-house loss consolidation(CRA Doc. No. 2015-0610671C6, Nov. 24, 2015)

2. “Normal course dividends”(CRA Doc. No. 2015-0613821C6,Nov. 17, 2015)

CRA HAS TWO ADMINISTRATION POSITIONS WHERE SUBSECTION 55(2.1) DOES NOT APPLY

established dividend policy does not exceed reasonable dividend income

return on a comparable listed share issued by a comparable payer corporation in the same industry

Practical: Taxpayer should (1) document all of the purposes and reasons for the dividend; (2) how and why the dividend was determined and (3) retain evidence regarding use of dividend.


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Dividend paid to fund shareholders or corporate expenses or debt repayment

CASE STUDY #1INTERCORPORATE DIVIDEND

Shareholders

HoldCo

OpCo

Does 55(2) apply? Question of fact unless dividend is paid (TEI Question on section 55):

1. pursuant to a well established policy;2. does not exceed reasonable dividend income return on a comparable listed

share issued by a comparable payer corporation in the same industry.


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Dividend paid for creditor proofing

CASE STUDY #2CREDITOR PROOFING

HoldCo

OpCo

CRA’s position: ss. 55(2) applies. Sole purpose is creditor proofing which decreases the FMV of OpCo’s shares.


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OpCo pays a dividend to shareholder (HoldCo) to purify OpCo before a sale of shares to 3rd party Purpose of dividend is to access the lifetime capital gains deduction CRA: No published position

CASE STUDY #3 - PURIFICATION DIVIDEND

Dad

Opco

HoldCo


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the LCGD is not a factor in the calculation of the gain LCGD is a deduction from capital gain no purpose to reduce capital gain

Query: If dividend is greater than amount necessary to get QSBCS? What if majority of shareholders have used most of the LCGD?

TAXPAYER POSITION


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CASE STUDY #4 - FREEZE - PART IV EXEMPTION

Dad

HoldCo

OpCo

P/S C/S

Dividend Part IV tax refunded

Redemption of P/S (assume Part IV tax

applies)

Part IV tax exemption no longer applicable to dividends paid to individualHoldCo deemed dividend recharacterized as capital gainIssue: timing of recharacterization and circularity of calculations if CDA election filed late


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1. Intercorporate loans provided there is a way to repay the loan without lumpy dividends

2. Partnerships3. Deemed Dividends - reorganization for shares to be

redeemed4. Safe income calculations

OPTIONS TO CONSIDER


GST UPDATEDennis Yee, Vancouver

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Recent Notices and Bulletins referring to changing GST reporting obligations for: Pension Plans Pension Plan Master Trusts Investment Plans (Nov. 15, 2016 deadline) Credit Unions Group Trusts for RESPs

GST REPORTING CHANGES


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GST jargon contained in notices: Selected Listed Financial Institutions (SLFIs) Special Allocation Method (SAM) calculation Provincial Attribution Percentages 33% rebates Elections for nil consideration



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Takeaway Message Clients with large dealings in financial services and investments must

monitor whether they are compliant with the changing reporting obligations.



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Broad Explanation GST is a recoverable flow-through cost for most businesses and is non-

recoverable for financial services businesses. Financial institutions (FIs) often do a combination of financial services

business and other businesses. Complicated FI reporting rules to determine appropriate amount of GST recoverable.

Financial services business can set up office in any province and could service customers in other provinces. Complicated SLFI reporting rules to determine appropriate amount of GST vs HST payable.

Court decision and subsequent legislation regarding appropriate amount of GST for business with pension plan.

GST legislation lists the type of taxpayers subject to these reporting rules -- list is ever expanding.



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GST exemption for issuing of financial instrument, and the arranging for 2010 amendments retroactive to the 1991 start of GST to exclude from

exemption administrative type services “to clarify the tax treatment of financial services…”

Broker/Dealers Finder’s Fees Certificates of Insurance

CRA Rulings Possible indication of how CRA will audit and assess 2016 Ruling: Dealer services in relation to Certificates of Insurance is GST

taxable.

GST EXEMPTION FOR FINANCIAL SERVICES


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Changes to Reporting Obligations Background

2009: HST announcement for BC and ON Agreements entered into before announcement were grandfathered

Reporting obligations, penalties for non-compliance Originally mechanism: obligations based on whether purchaser entitled to

new housing rebate (dependent on $450,000 threshold and use) New mechanism: obligations based on $450,000 threshold only

Election to fall under new mechanism Avoid penalty risk that comes from mechanism based on purchaser use Election available to projects already sold and ongoing projects Deadline based on reporting period; Dec. 31, 2016 for many builders

HST GRANDFATHERED NEW HOUSING BUILDS


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Effective Oct. 1, 2016 Joins rest of Atlantic provinces Charge the correct GST or HST rate

“Place of Supply” rules different for different types of goods and services

PEI HST INCREASED TO 15%


THANK YOU