Deductibility of expenses Taxation Core – Level B; Elective – Level A
•General limitation – To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and be expected to generate income related to the taxpayer’s business or property
Common business expenses DISALLOWED Taxation Core – Level B; Elective – Level A
- Amortization / Impairment / Accounting Gains & Losses (deduct via CCA)
- Personal expenses and membership / club dues
- Charitable donations – deduction to determine Taxable Income for a Corp.
- Political contributions – limited tax credit available for an individual; Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit.
- Taxes, interest and penalties related to tax
- Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
- Expenses re: issue or sale of shares and refinancing costs (deduct over 5 years)
- Life insurance premiums (except where the policy has been assigned as collateral)
- Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
- Carrying charges on vacant land (non-deductible portion added to ACB)
- Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)
Common business expenses ALLOWED Taxation Core – Level B; Elective – Level A
- Automobile expenses
- Home office expenses
- Convention expenses (limited to 2 per year)
- Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
- Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
- Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year
Capital Cost Allowance (CCA) Taxation Core – Level B; Elective – Level A
- CCA may be claimed on all tangible capital property other than land, must be available for use
- Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
- Most classes subject to Accelerated Investment Incentive of 1.5 × CCA on net additions (except 53, 43.1, and 43.2, which are subject to 100% CCA in the year of purchase)
- Dispositions are credited to UCC at lesser of cost and proceeds (excess of proceeds over original cost result in a capital gain)
- Terminal loss – when there is a balance of UCC in the class but there are no assets remaining, the UCC can be claimed as a terminal loss (capital loss cannot arise on the disposition of depreciable property)
- Recapture – arises when the balance in the class is negative (i.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
- Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture. If negative, then terminal loss.
Retiring allowance rollover to RRSP Taxation Core – Level B; Elective – Level A
A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment. A retiring allowance includes:
• payments for unused sick-leave credits on termination; and
• amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work).
Individuals with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). The amount that is eligible for transfer is limited to:
• $2,000 for each year prior to 1996 PLUS
• Additional $1,500 for each year prior to 1989 (if no vested contributions to RPP or DPSP by employer)
Shareholder loan due to company Taxation Core – Level C; Elective – Level B
• Principal amount must be added to shareholder’s income unless any are met:
1. S/H is an employee, has repayment terms, similar loans avail to all staff and meets one of:
owns less than 10%
loan used to acquire one of three: dwelling, shares, vehicle for employment
2. Loan is repaid within 1 year (cannot be two consecutive balance sheets)
3. Loan was made in the ordinary course of business
4. Loan in intercompany or made to a non-resident
- If loan is not included in income, imputed interest must be included in income.
- If loan is included in income, no imputed interest is included in income.
- Repayment of loan that has been included in income is eligible for deduction in the year it is paid.
Residency Taxation Core – Level C; Elective – Level B
• CRA considers both significant and secondary residential ties in assessing whether a taxpayer is a resident of Canada
• Significant residential ties – factors that make a strong case, in and of themselves, that residential ties exist:
- a home in Canada
- a spouse or common-law partner in Canada
- dependents in Canada
• Secondary residential ties – factors that may contribute to whether residential ties exist (including, but not limited to):
- personal property in Canada (car, furniture, etc.)
- social ties in Canada (memberships in Canadian recreational groups, etc.)
- economic ties in Canada (Canadian bank account or credit cards, etc.)
- Canadian driver’s licence, Canadian passport, or Canadian health insurance
• If a taxpayer is determined to be a resident of Canada, they are taxed on all of their worldwide income; non-residents of Canada are taxed only on income tied to Canadian sources
Employee vs. Contractor Taxation Core – Level B
• No single test is decisive. Must consider:
- Control of work (hours, location, how job is completed)
- Ownership of tools (who supplies)
- Chance of profit and risk of loss
- Ability to subcontract work or hire assistants
- Integration - individual services degree of involvement in org
- Intention of the parties
• Issues:
- Contractors can deduct all reasonable expenses whereas employment deductions are limited
- Employees can receive EI benefits, contractors can opt in with restrictions
- Employers are required to withhold source deductions for employees
- Employer may be responsible for both employee and employer contributions of EI and CPP if an individual is incorrectly classified as a contractor
Employer provided automobile –Standby charge Taxation Core – Level B; Elective – Level A
• Standby charge is a taxable employment benefit that only applies if an employer-provided automobile is available to the employee for personal use
• Calculated as:
- 2% of the original cost + tax per month available (30,000 x 2% x 12 months); or
- 2/3 of the monthly lease payment + tax per month available (800 x 2/3 x 12 months)
• reduced by payments made by the individual to the employer
• reduced standby charge applicable where personal use less than 1,667 km per month and automobile primarily (50%) used for business purposes. (Personal annual Km’s / 20,004)
Employer provided automobile – Operating cost benefit Taxation Core – Level B; Elective – Level A
• Taxable employment benefit, calculated as:
- Personal use is less than 50% then benefit is 0.28 cents per km of personal use
- Personal use is greater than or equal to 50% then benefit is 50% of the standby charge
• Operating costs include gas, insurance and maintenance, but not parking
Employer provided automobile – Tax planning Taxation Core – Level B; Elective – Level A
• Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
• Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance. If they do not have a taxable benefit they will not be able to deduct costs.
-If allowance is over per KM limit then its taxable
-if allowance is not based on KM’s then its taxable
-if employee receives reimbursements for operating costs then its taxable
- Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
- Maintain log to justify business vs. personal km
- Lower standby charge by reducing number of days vehicle available for personal use
- Increase business use by visiting clients on the way to and from work
Employment –Taxable benefits Taxation Core – Level B; Elective – Level A
- Board and lodging (unless at remote location)
- Most rent-free and low-rent housing
- Trips of a non-business nature
- Gifts greater than $500 (that are not cash or near-cash)
- Cash and near-cash gifts
- Cost of tools where employee is not required to have tools to work
- Forgiveness of debt
- Employer-paid education costs when primarily for the benefit of employee
- Automobile for personal use
- Employer paid life insurance where the benefit if for the employee
Employment Non‑taxable benefits Taxation Core – Level B; Elective – Level A
- Uniforms and special clothing required to be worn
- Transportation to job site
- Moving expenses reimbursed, excluding housing loss reimbursement
- Recreational facilities at place of work
- Premiums paid under private health services plans
- Professional membership fees when primarily for benefit of the employer
- trivial gift such as mug, t-shirt, trophy
- Long-service awards in 5-year intervals for $500 or under
- Employer paid medical/dental premiums
Business use of home expenses Taxation Core – Level B; Elective – Level A
A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions:
• The home is the principal place of business.
• They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients.
Eligible costs include: heat, home insurance, electricity, property taxes, repairs and maintenance, mortgage interest or rent (if tenant).
- Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home.
- Home office expenses are also pro-rated for a short business year.
- Losses cannot be created by home office expenses. Unused expenses are carried forward for use in a later year.
- Do not claim CCA on a principal residence, as it may negatively impact the ability to use the principle residence exemption.
Business income vs. property income Taxation Core – Level B; Elective – Level A
It is a question of fact whether income is from business or property.
• Capital property is property that provides a long term or enduring benefit
• Disposition of capital property gives rise to capital gains or losses
• Business income will arise from an “adventure or concern in the nature of trade”, determined as follows:
Conduct
- How long was the asset held? Have there been similar transactions?
Nature of the asset
- Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business?
Intent
- Did the taxpayer originally acquire the asset with the intention to sell?
- For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable.
- For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains
Tax Implications of Going Public Taxation Core – Level B; Elective – Level A
- Company status will change from CCPC to Public company.
- Deemed year end on date of change in status.
- Possible acquisition of control
- Tax balances that are no longer available CDA, RDTOH
- Small business deduction only available to CCPC public company will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends.
- Any undistributed Small Business earnings in the Low Rate income pool must be paid out first as non-eligible dividends.
- SR&ED – public company qualifies for lower rate of ITC, and they are not refundable (only refundable for CCPC)
- Public company shares do not qualify for Capital Gains exemption
Employer paid automobile expenses - Taxable benefit Taxation Core – Level B; Elective – Level A
- A taxable benefit arises when an employee is given something that is personal in nature or if something that is personal in nature is paid for by the company
- A benefit may include an allowance or a reimbursement of an employee’s personal expense (e.g. personal fuel is reimbursed)
- The value of the benefit is generally its FMV
- If an employee is provided with a taxable benefit, the amount must be included in their income
Owner-Manager Compensation Salary vs. Dividends Taxation Core – Level C; Elective – Level B
- Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
- The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration
- Salary payments are deductible to the corporation whereas dividends are not
- Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
- Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
- Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments
- Dividend payments will reduce an individual’s cumulative net investment loss (CNIL)
Reserves for Bad Debts Taxation Core – Level B; Elective – Level A
• A reserve may be deducted for bad debts to the extent that it is reasonable and based on specific uncollectible accounts
• A reserve claimed in one taxation year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income
o Effectively this means that the increase in the reserve amount should be deducted each year
Business Investment Loss Taxation Core – Level B; Elective – Level A
• For tax purposes, in the year a SBC corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil
- Generally, this will yield a capital loss equal to the ACB of the shares
• A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss
- Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source
- The ABIL can be carried back up to three years or forward up to 10 years
- If the ABIL is not used by the end of the 10 years, it will become a capital loss
Moving Expenses Taxation Core – Level B; Elective – Level A
In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses.
• Eligible relocation is:
- Occurring as a result of a new work location within Canada, and
- One in which the new residence is at least 40 kilometres closer to the new work location than the old residence
• Deductible moving expenses include:
- Selling costs related to the old residence (i.e. commissions)
- Costs to transport household goods (i.e. moving company costs, etc.)
- Legal fees associated with the purchase of a new residence
- Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses
- Travelling costs
- Meals and lodging (not exceeding 15 days, not including travel days)
- Costs of cancelling a lease on the old residence
- Up to $5,000 of interest, property taxes, insurance, heating and utilities costs on the old resident, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property
• Examples of costs that are not deductible include:
- Home renovations for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property)
- Travel expenses for a house-hunting trip
Principal Residence Exemption (PRE) Taxation Core – Level B; Elective – Level A
The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.
• The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer.
• Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year
• A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year
o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family
• If a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence
• To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence
Replacement property rules Taxation Core – Level B; Elective – Level A
• To be eligible to defer the gain, the replacement property rules must apply:
Simple:
- New property was acquired to replace old property
- New property is used for similar use as old property
- Both new and old property are taxable Canadian property
Long explanation:
- It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use)
- Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
- Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer
- If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively.
- In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain
Refundable dividend tax on hand (RDTOH) Taxation Core – Level B; Elective – Level A
For tax years beginning on or after January 1, 2019, there are two types of RDTOH balances:
• Non-eligible RDTOH: Includes refundable taxes on investment income and Part IV tax on non-eligible portfolio dividends.
- Only the payment of a non-eligible dividend can trigger a refund from this account.
• Eligible RDTOH: This tracks refundable taxes paid on eligible dividends received by the corporation.
- Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account; however, when non-eligible dividends are paid, the refund must come out of non-eligible RDTOH first.
At the date of transition, the eligible RDTOH balance will be calculated as the lesser of:
• The existing RDTOH balance; and
• 38 1/3 % of the General Rate Income Pool (GRIP) balance.
