Small Business Corporation Tax Changes for Income Sprinkling and Others

Income sprinkling:

By income sprinkling with regard to the small business corporation means reducing the income of the corporation by paying salaries mostly among the family members and thereby reducing the overall tax burden in the family considering overall situation.

On July 18, 2017, current Finance Minister presented the tax changes in a manner that it will levy a Tax on Split Income (TOSI) unless it is from an “Excluded Business”.

The above modified tax changes received Royal Assent on June 21, 2018 and therefore has become the part of the Income Tax Act since then.

When does the Income sprinkling rules not apply?

Over the Age of 18 years:

An Excluded business is the one in which you ( should be over the age of 18 years) were “actively engaged on a regular, continuous and substantial basis in the activities of the business” either in the year in question or any of the five prior tax years, which need not be consecutive.

You will be considered to be actively engaged in the business if you work at least an average of 20 hours per week. For a seasonal operations, you only need to work for at least 20 hours during the season.

Over the Age of 25 years:

If you are over the age of 25, corporation could also be exempt from TOSI rules if you hold the “Excluded shares” which means you hold at least 10% of both the votes and the value of the shares and earn less than 90% of the income from services. However, this rule does not apply to Professional Corporation or Services Corporation.

Over the Age of 65 years:

The rules of income sprinkling does not apply to the business owner’s spouse, provided owner meaningfully contributes to the business and is aged 65 or over.

Capital Gains from qualified small business corporation, qualified small farm or fishing property:

Any capital gains arising from the sale of qualified small business corporation or qualified farm or fishing property will not be subject to TOSI.

Passive Income Rules:

Passive income for a corporation is the one which is not an “active income’. Such incomes usually means income by way of interest, rent, royalty, foreign dividend etc. unless such incomes are earned by more than five full time employees in which case it will be treated as an active income.

Now, the new rules propose that earning such passive incomes inside the small corporation will attract additional taxation. However, there is a basic threshold of $50,000 per annum for levy of the additional taxation for corporation. If passive income exceed $50,000 per annum, ability of small business corporation to claim a deduction of Small Business Deduction (SBD) will reduce by an amount equivalent to $5 for every $1 extra (above $50,000) of passive income. This means that at $50,000 of passive income, SBD limit will be $500,000 (maximum) and it will be NIL at passive income of $150,000 (extra $100,000 passive income will wipe out SBD limit of $500,000).

Again, the corporation may not necessarily pay extra tax if the active income is less than the maximum limit of $500,000.

With regards to the rule of calculating passive income, following should be kept in mind:

Ø  Investments income earned on the existing investments made in the corporation will also be considered for counting the limit of $50,000. This is relevant in view of the fact that earlier government had promised not to consider grandfather investments in the corporation.

Ø  Incidental income earned on the investment will not be considered as an investment income.

Ø  The logic of laying down the investment income threshold of $50,000 is that a Canadian small business owner invest through his corporation $1 million Dollar and earn $50,000 at an estimated 5% annually.

Ø  Investment income in associated companies must be aggregated to arrive at the limit of $50,000 annually.

Ø  If there is an extra tax levied due to investment income exceeding $50,000 in a year, there will be a higher dividend tax credit and that should offset the higher tax paid through corporation, more or less. This higher dividend tax credit can be availed off when the investment income is paid out in the form of dividend.

Ø  There will be a refund of taxes at a different rates when the dividend is paid out from the corporation. Different rates of refund of taxes arise due to the fact that active income would have been taxes at a different rate compared to investment income exceeding $50,000.

Ø  Small Business Corporation will have to utilise the balance of refund of taxes at a lower rate first and then exhaust the refund of taxes at a higher rate. Hence this ordering rules will apply.

Ø  Investment income will not include the capital gains arising from the sale of active business assets, or sale of shares of a small business corporation or a rental income characterised as an active income or most death benefits received from life Insurance. 

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Payroll Deductions for Salary Drawn from your corporation

When you earn through your own private corporation, obviously you need to withdraw money from it. As explained in detail in my last blog, the most common ways of drawing the money from your corporation is either by way of salary or dividend.

When you draw salary from corporation, you need to pay the payroll taxes regularly within the prescribed time limit. Many private corporations pay the payroll deductions on a monthly basis. Payroll deductions need to be paid within 15 days from the end of the month in which such salaries and wages are paid out from the corporation. Some corporations also pay on a quarterly basis.

Canada Revenue Agency (CRA) also keeps track of all the payroll deductions that your corporation remit regularly to them (CRA).CRA has its own cash flow planning for payroll deductions payment. Therefore, in case if you do not take out any payroll from your corporation, there will be no payroll taxes to pay. In such case, the fact that there is no payroll deduction for the month needs to be intimated to CRA before CRA makes a call to inquire about no payroll deduction.

You can intimate it to CRA either by phone on 1-800-959-5525 or file NIL remittance payroll report through “My Business Account “of CRA.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Ways of Extracting Funds The Corporation

When you operate through your corporation, you obviously have a question as to what is the most tax efficient way of taking out the money from your corporation.

This is most relevant in case if you own your private corporation since public corporations have different criteria of withdrawing the money from corporation and the owners have many times no personal interest in the corporation.

The several ways of taking out the money from your corporation is as follows:

1)      Reimbursement of Expenses from Corporation:

When you incur corporation expenses from your personal bank account, it goes without saying that you can take out the money without inviting any tax implication.

However, the care should be taken to withdraw the exact itemised amount of expenses.

2)      Withdrawing money from Corporation by way of Salaries/Management Fees:

 When you withdraw salary from your corporation, an appropriate payroll tax needs to be paid to Canada Revenue Agency (CRA) within the prescribed time limit.

Salary/wages paid by the corporation is tax deductible for your corporation and taxable in the hands of the recipient of salary/wages.

The payroll tax calculation can be done by putting in the Gross Salary figure in Payroll Deduction Online Calculator (PDOC). Payroll tax needs to be paid on or before 15 th of the next month from the end of the month in which such salary or wages are paid out.

3)      Withdrawing money from Corporation by way of Dividend:

Dividend can be withdrawn from your corporation by withdrawing the money from your corporation without paying any payroll taxes. This is the simplest way of taking out the money from the corporation.

When you take out the dividend from your corporation, it is not tax deductible for corporation but taxable for the recipient. However, dividend is taxable on the concessional basis since it was not deducted by the corporation.

Of course, we need to file the salary and dividend slip and summary on or before February end of each year.

Whether to withdraw the money from your corporation by way of salary or by way of dividend would depend on couple of factors whether you want to create Registered Retirement Savings Plan (RRSP) and you believe investing in RRSP, whether you want to buy home and qualify as First Time Home Buyer, whether you have child care expenses that you want to deduct on your income tax return etc.

4)      Interest On Loan to Corporation:

When you lend the money to your corporation, you may want to change the interest to the corporation at the market rate. The interest paid by the corporation will be tax deductible for your corporation and will be taxable on the recipient tax return.

5)      Capital Dividend Payment:

When you sell your corporation asset. There will be capital gains tax liability on the excess of the selling price (or Market Value) over its cost.50% of the capital gains can be withdrawn absolutely tax free from your corporation.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Dividend Income of spouse from a Taxable Canadian Corporation [Section 82 (3)]

It is usual that your spouse may receive the dividend income from a taxable Canadian Corporation. You may be entitled to report such dividend income on your income tax and benefit return (not the spouse) if the following conditions are satisfied:

1)      The dividend received by your spouse is from Taxable Canadian Corporation. By Taxable Canadian Corporation we mean a corporation which is liable to tax in the Canadian jurisdiction.

2)      You can report the dividend received by your spouse on your income tax return only when it increases your spousal tax credit and not otherwise. Spousal tax credit is a non-refundable tax credit that you can avail of on your tax return if your spouse income is below a limit prescribed. For the year 2017, such limit prescribed is $11,635.

3)      When the dividend received by your spouse is reported on your income tax return, you must as a necessary condition, report all the dividends received by your spouse from the Taxable Canadian Corporations and cannot pick and choose the dividend income to report on your income tax return.

4)      When the spousal dividend is reported on your income tax return, it must be grossed up and you would be entitled to a dividend tax credit with regard to such dividend income.  

5)      There is no special form to include such dividend income on your income tax return. While finalising your income tax return, you should check with your tax expert or accountant who files income tax return on your behalf.

6)      If your spouse has incurred a deductible interest expenses for earning such dividend income, it is not transferred to your income tax return but your spouse alone should use that tax deductible interest to offset any other such income.

7)      Further information can be obtained from Canada Revenue Agency’s (CRA) guide to Line 120-Taxable Amount of dividends from taxable Canadian corporations.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based on the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek independent professional advice.

Canada Caregiver Credit-New Non-Refundable Tax Credit For Tax Year 2017

Last year Budget has introduced new Canada Caregiver Credit as a non-refundable tax credit for individual taxes. This is going to be effective from the year 2017. Before we discuss about the Canada Caregiver Credit, let us understand the nature of this credit.

Canada Caregiver Credit is a non-refundable tax credit for individuals. Non-refundable tax credit means it can reduce your tax payable to zero but can not create any tax refund.

Canada Caregiver credit is a credit for supporting your infirm spouse or common law partner or other eligible relatives.

Specifically, the claim is allowed for following categories:

1)      Infirm spouse or common-law partner (when anyone lives with his/her partner for a continuous period of 12 months unless child is involved)

2)      Infirm dependants to whom you can claim as an eligible dependant. An eligible dependant claim can be made when you are either single, separated, widowed or divorced at any time during the year and supported one eligible dependant during the time that you had one of the above marital status. The eligible dependant could be either child under the age of 18 years of age, parent or grand parents, uncle, aunt, niece or nephew, brother or sister.

3)      Other infirm dependants who can not be claimed as an eligible dependant by anyone on his or her tax return.

Of course, this claim is subject to the income of the above-mentioned dependants. Dependant’s income reduces the amount of this claim.

There will only one claim of maximum $6,883 can be allowed for any taxpayer.

 Line 304 of Individual Income Tax and Benefit Return:

Canada Caregiver Amount for Spouse/Common Law Partner or Eligible Dependant of age 18 years and older:

Total claim of $6,883 is allowed (subject to the income of the dependant) for infirm spouse or common law partner or eligible dependant. This claim is reduced by the amount of claim already made for the above category of person on line 303 (spousal amount claim) or Line 305 (Eligible Dependant claim as explained in 2) above)

Line 307 of Individual Income Tax and Benefit Return:

Canada Caregiver Amount for other infirm dependants of age 18 years and older:

Total claim of $6,883 is allowed (subject to the income of the dependant) for claiming parents,       grand parents, uncle, aunt, niece, nephew, brother, sister who are infirm. This claim starts        reducing after net income of dependant from $16,164 or more and is completely phased out at income of $23,046.

The same rules of calculations apply for calculation of claim on Line 367 which deals with the claim of credit for infirm dependent child under the age of 18 years of age.

Few other points to keep in mind are as follows:

1)      Healthy seniors over 65 years of age can no longer be claimed under the new rules for Canada Caregiver credit.

2)      The requirement for you to live with the dependant is no longer a precondition to claim this credit.

3)      While filing your individual tax return it is not required to attach any proof of infirmity of spouse or common law partner or other eligible relatives claimed until at a later date when Canada Revenue Agency (CRA) asks you to show the proof of the same.

4)      Infirmity is different from disability. Instances of infirmity could be Parkinson, Alzheimer, Multiple Sclerosis etc. It simply requires the letter from doctor to prove it. The disability is far more strict and is allowed only when the disability is substantial and prolonged ( more than 12 months)

5)      If any of the above mentioned dependants are disabled (where CRA has approved the disability in writing), separate disability amount of $8,113 can be claimed in addition to claiming Canada Caregiver amount.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.