Prime Minister Trudeau Announces an $82 billion Support Package

Moments ago, the Prime Minister provided an update on the federal government’s response to the COVID-19 outbreak.

Prime Minister Trudeau informed Canadians that he and President Trump have decided to temporarily restrict all non-essential travel over the border. Travelers will no longer be able to cross for recreation and tourism. However, essential travel will continue to ensure supply chains are protected, and that people who must travel for other urgent reasons will not be impacted.

The Prime Minister also announced $82 billion in additional support measures. This includes $27 billion in direct support to workers and businesses, and $55 billion to meet liquidity needs of businesses and households to stabilize the economy through tax deferrals.

For people and business:

• Those who do not qualify for EI or paid sick leave will receive an Emergency Care Benefit which will provide EI-equivalent payments every two-weeks to those who must stay home for 14 weeks.
• The COVID-19 Emergency Support Benefit will support those who do not have access to EI and lose their job. This will also apply to self-employed workers who must cease activities because of illness.
• Employers will have access to a temporary wage subsidy to pay employees for a period of 3-months to keep staff on the payroll.

For those who’ve filed taxes and have money owed, they will have until August 2020 to pay.

• The Canada Child Benefit will receive a temporary boost for the next few months.
• Low income individuals will see an increase in the GST credit. In May adults who are eligible will receive $300 with an additional $150 for every child.
• A 6-month interest free moratorium will be placed on student loans.
• There will be an increase in funding for shelters so that those experiencing domestic violence do not have to isolate at home.
• $305 million in support will be provided to indigenous communities.
• More targeted assistance will be coming in the months to follow.

Additional mesures for businesses:

• Allowed to defer, until after August 31, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020. This relief would apply to tax balances due, as well as instalments, under Part I of the Income Tax Act.
• Provide flexibility on the Canada Account limit, to allow the Government to provide additional support to Canadian businesses, when deemed to be in the national interest, to deal with exceptional circumstances.

New refundable dividend tax on hand (RDTOH) rules for CCPCs

What Corporate Structure is Best for Canadian Businesses with Commission Income?

Consider the successful real estate or insurance agent, the financial product vendor, the area sales representative, or any other person earning commission income. One day they are asked, if they ever considered running their activities through a corporation as opposed to providing the services personally. There are definitely some valuable possibilities, but there are dangers too.

In a July 11, 2017 Technical Interpretation, CRA opined that whether a corporation is actually carrying on a business and earning commission income is a question of fact and requires more than a mere assignment of income.

CRA noted that “if insurance agents, realtors, mutual fund salespersons, or other professionals are legally… precluded from assigning their commissions to a corporation, then the commission income must be reported by the individuals, and cannot be reported through a corporation, regardless of the documentation provided”. Care must be taken to document that it is truly the corporation providing the services and not just an individual. Commission contracts identifying the corporation as the service provider rather than simply the individual would be valuable.

While some professionals earning commission income are legally prohibited from incorporating (due to the provincial/ territorial laws), others may be practically precluded from doing so due to, for example, a refusal by customers or key suppliers to contract with a corporation.

If a corporation does earn commission income, one must ensure that the corporation would not be considered a personal services business (PSB). A PSB is essentially an individual acting as an employee for a third party, but for the presence of their own personal corporation as an intermediary. For example, consider John, an employee of a car manufacturer (CarCo). If John set up a new corporation, had CarCo pay his corporation, but kept on doing the same things under the same terms and conditions as his previous employment contract, he would likely be conducting a PSB. If classified as a PSB, the worker and their corporation could be subject to substantially higher taxes, plus the denial of several types of deductions.

What You Need For a Business Loan in Alberta

Before you can get a cheque cut from a bank or other financial institution for your business, the lending institution is going to want some information. Often businesses assume that all they need is to fill-out a simple loan application and can find themselves caught off guard by what is required.

While every financial institution will have their own requirements, many documents are mandatory across all lenders. Before applying, here are the basics to keep in mind.

First, decide what the money will be used for. The reasons for the loan are important for determining the type of credit you need to apply for. For instance, if you’re looking for financing to purchase equipment or real estate, then the bank will have a clear idea of terms and security for the loan. On the other hand, if the loan is for financing losses or acquiring non-essential business assets, then the bank may be more reluctant and request stricter terms.

Second, determine how much money is required. Underestimating the amount can lead to problems with working capital sooner than necessary. Overestimating can cause the bank to question your credibility. The best approach is to put together a well thought-out plan.

Most lenders will want to see a business plan, supported by complete financial statements and projections. Typically, it should include financial statements with a three-year history of earning like a profit loss statement, cash flow statement and balance sheet, and a current interim financial report. They’ll also want to review financial projections for the business over the next year or two. Regardless of how they were prepared; it is likely that the lender will insist that any financial statements be reviewed or audited by a Chartered Professional Accountant (CPA) firm.

Depending on the type of loan you’re applying for, other documents that may be required to include legal documents, collateral, business credit reports, insurance documents and the personal financial details of all the owners who have a significant share. Banks and other financial institutions these documents as part of their due diligence process.

Once you’ve prepared and collected all the documents, you’re ready to find a lender and prepare a loan application package for them based on their specific requirements.

Recent CRA Changes to Allow Businesses Electronic Distribution of T4 Slips

CRA has provided commentary on its website to discuss recent changes to allow the electronic distribution of T4 slips. In the past, an employer could provide a T4 electronically only with the employee’s consent. For 2017 and subsequent tax years, employers may also satisfy their obligations by providing electronic versions without specific consent, provided other criteria are met. The employer must provide the following by the last day of February following the calendar year to which the slip relates:

• a secure electronic portal through which the employee can access their T4 slip;
• a secure site for printing the slip; and
• an option to receive paper copies upon request.

Paper copies must be provided if:

• one of the above conditions are not met (unless employee consent has been received);
• the employee requests a paper copy;
• the employee is on sick leave or is no longer an employee of that employer; or
• the employee cannot be reasonably expected to have access to obtain the T4 slip electronically.

The above only applies to T4 slips. Employers cannot issue T4 slips by email due to insufficient security features.

Income sprinkling and passive investments held inside a private corporation

The Liberal government released the new proposals on income sprinkling and passive investments held inside a private corporation. Based on our analysis, income splitting with your spouse is going to be seriously impacted by these changes.

With these new changes, we are now recommending that if you were planning on paying dividends to a non-active spouse or adult child, you should do that before December 31, 2017.

The $50,000 annual investment income threshold previously announced remains unchanged. However, investment income in excess of this limit will be subject to much higher taxes.

The following is a more detailed summary. Please do not hesitate to contact us if you have any questions.

Guidance on the application of the split income rules for adults

The Department of Finance consultation paper, Tax Planning Using Private Corporations, released on July 18, 2017, included proposed amendments to expand the existing tax on split income to restrict income sprinkling involving adult individuals. The consultation period for public comments on the paper ended on October 2, 2017. Based on the comments received during that period, revised draft legislative proposals were released on December 13, 2017 (the “Proposals”). These new rules are proposed to be applicable to the 2018 and subsequent taxation years.

Overview

The Proposals will expand the tax on split income to amounts received by an adult individual. In this context, “split income” will generally include dividends or interest, but not salary, paid by a private corporation directly or indirectly to an individual from a related business (“Related Business”) in respect of the individual and certain capital gains unless the amount falls within a specific exclusion (the “Excluded Amount” or “Excluded Amounts”).

Under the Proposals, the following will be Excluded Amounts from split income:

• • For adult individuals – amounts received from an excluded business (“Excluded Business”):
  • Excluded Business: amounts derived from a Related Business where the individual was actively engaged on a regular, continuous and substantial basis (“Actively Engaged”) in the activities of the business in the taxation year or in any five prior taxation years of the individual.
  • An individual will be deemed to be Actively Engaged if the individual works in the business at least an average of 20 hours per week during the portion of the taxation year of the individual that the business operates, or meets that requirement for any five prior years. The five taxation years need not be consecutive. In any other case, whether an individual is Actively Engaged will depend on the facts and circumstances of that case.
  • For individuals age 25 or over – income from or taxable capital gain from the disposition of excluded shares (“Excluded Shares”) or a payment that qualifies as a reasonable return (“Reasonable Return”):
  • Excluded Shares: shares of a corporation owned by an individual are excluded shares where:
    • less than 90% of the corporation’s business income was from the provision of services and the corporation is not a professional corporation;
    • the shares represent 10% or more of the votes and value of the corporation; and
    • all or substantially all of the income of the corporation is not derived from another Related Business in respect of the individual, and
  • Reasonable Return: payments that represent a reasonable return based on the following criteria (the “Reasonableness Criteria”):
    • the work performed in support of the Related Business;
    • the property contributed directly or indirectly in support of the Related Business;
    • the risks assumed in respect of the Related Business;
    • the total amounts paid or payable by any person or partnership to or for the benefit of the individual in respect of the Related Business; and
    • such other factors that may be relevant.
  • For more information, see the Reasonableness Criteria section.
  • For individuals between the age of 18 and 24 – return on property contributed in support of a Related Business that is a safe harbour capital return (“Safe Harbour Capital Return”) or a Reasonable Return having regard only to contributions of arm’s length capital to the business (“Arm’s Length Capital”):
    • Safe Harbour Capital Return: return on property contributed by the individual in support of the Related Business provided that such return does not exceed a prescribed capital return determined by formula, and
  • Arm’s Length Capital: property of an individual, other than property that is derived from property income in respect of a Related Business, that is borrowed under a loan, or that is transferred from a related person (other than inherited property).
  • For any individual – taxable capital gains realized on death or from the disposition of qualified farm or fishing property and qualified small business corporation shares.

  Where the individual acquired a property as a consequence of the death of another individual, special rules will apply for determining whether a payment from property is derived from an Excluded Business in respect of an individual, is a Reasonable Return on contributions made to a Related Business or is income from, or a taxable capital gain from the disposition of, Excluded Shares.

  Please contact any one of the partners if you have any questions.

What’s a “Fair Market” Value for a Private Business?

Whether you are a business owner looking to sell a percentage (or all) of your business or an investor wishing to purchase a company, the first step is to arrive at a fair market value for the business. For every scenario, buyers and sellers need to quantify the worth of all, or part, of a business before the transaction can take place.

What is Fair Market Value?

Fair Market Value (FMV) is often simply thought of as what another person is willing to pay, when neither is acting under compulsion and both have reasonable knowledge of the relevant facts.

An obvious example of market value is the stock market, with the buying and selling of equity securities of publicly traded companies. Both the buyers and sellers have access to information that has followed established business standards and meets strict reporting requirements.

For private businesses, which don’t need to adhere to the same standards as a public company, it is often advantageous to get an independent and objective view.

What Factors Affect Fair Market Value?

Estimating a company’s worth is more complex than a simple review of the financial statements and book value of a business. In fact, the book value, which is an accounting value of a business, fails to recognize the true value of the business. Instead, it represents the current depreciated value of what was paid for an asset.

Arriving at a fair-market valuation needs to include other factors beyond those found on a balance sheet. Factors that can positively benefit the company like the income and earnings potential, the value of the brand and intellectual property need to be included. It’s also important to take into consideration risk factors like damage quantification and potential litigation. Quantifying the value of these factors requires specialized knowledge.

How is Fair Market Value Measured?

There are two basic approaches for value determination.

The first is the empirical approach, which relies on transactions involving similar businesses. It is useful when open market transactions are clearly identifiable and are, in fact, comparable to the business valuation being determined. However, it may be given more credibility than it deserves.

The second approach is the investment approach, which determines a business’s value through a detailed investment analysis. The techniques used are financial statement analysis and risk measurement theory. This approach is often used by sophisticated buyers and sellers in the open market, and therefore, the same technique can be used in the private market.

There are pitfalls and assumptions with both methods, which is why it’s advisable to employ a Chartered Business Valuator (CBV). CBVs are experts with specialized knowledge of businesses and their value, so they’re better able to quantify the worth of all, or part, of a business.

CRA Targeting Underground Economy: Contractors, Online Sales, Farmers Markets…

In recent years, Canada Revenue Agency (CRA) has particularly focused on tracking underground economy activities. One way they are doing this is by obtaining information from key 3rd parties.

For example, recently CRA obtained details from contractor credit applications submitted to Rona. Consider the type of information that Rona would have: name, address, and other specifics that would help determine whether credit should be given. Presumably CRA could compare information reported on a credit application to the contractors’ tax returns.

CRA has also recently obtained information from Square Canada. Many smaller vendors accept payment by swiping the customer’s credit card through a little square plastic device connected to the audio jack of a phone or IPad. Square Canada provides this payment processing device, a Square Reader. Through a Federal Court Order issued to Square Canada, CRA obtained identifying vendor information and sale details associated with individuals or entities using these devices. The information request primarily focused on those with annual revenues of $20,000 or greater, for the 2012-2015 and part of the 2016 year.

It would not be unreasonable to expect that CRA could obtain similar information from other websites, web-based apps and organizations.

How to Tell If Your Small Business Needs to Engage an Accountant

Up until a certain point, small businesses can often operate and file their taxes on their own before there is a need to bring in an expert. Today, with the abundance of accounting software available you may even be able to manage it for longer on your own, even if you don’t have a lot of financial knowledge.

However, as your business and your revenue grow, you may not have the time, or you may find that you require better systems to help you continue to increase your business and manage your money successfully.

Knowing when to hire someone externally is often a difficult decision. Here are some of the ways an accountant can help.

1. Unfamiliar with Accounting Practices

If you’re not familiar with accounting practices, then you may want help from the beginning. Accountants can help advise you on the best structure for your company, such as whether a sole proprietorship, partnership or incorporating would be the most beneficial to you. Each has different tax implications and the decision to choose one over another will depend on the nature, size, income and maturity of your business.

2. Running Your Business & Making Informed Decisions

Depending on what type of business you start, you may need a financial or managerial accountant. Most small-business owners will need a managerial accountant to help with salaries, profits and the cost of goods produced. The goal is to help owners and managers make sound financial decisions based on your cash flows and business activities. In addition, they can help your business avoid potential pitfalls and help you account for things like inflation, interest rate fluctuations or changes to tax laws.

3. You Require Professional Financial Reports

Financial accounting deals with providing information to the public, such as stockholders, customers, creditors and regulatory bodies. Even if you’re not legally required to submit them, professional financial reports may be required by your current investors or required to apply for a loan to present to potential investors as part of a business plan.

4. Rapid Growth

Even if you have a working knowledge of accounting, you may find that you simply do not have the time or that accounting is taking you away from more important tasks that could allow you to directly grow your business. Expanding often means more customers, hiring more employees, additional vendors, and more, which require more paperwork, record-keeping and number crunching.

5. Expanding Your Business

Growing your business through an acquisition or expanding into another province or another country requires carefully planning and thorough analysis. An accountant can walk you through the process and help you structure the growth to help set you up for success.

6. Taxes

The most obvious role of an accountant is tax management and planning. This means not just making sure you pay the right amount of tax, but also avoiding any potential penalties from the Canada Revenue Agency (CRA). A good accountant often pays for themselves very quickly, by ensuring you’re not missing out on any tax breaks or expense claims that you’re entitled to. In taxes, it’s often what you don’t know that can help or hinder your business the most.

7. Selling Your Business

When you’re ready to sell your business (or parts of your business), an accountant can help you value your business through investigation, analysis, projections and professional judgement. When done properly, it can ensure a seamless transition and the continued success of your business. They can also help you structure your deal to minimize any tax implications.

Return of Gifted Property: Charitable Organizations Beware!

In a March 31, 2017 Technical Interpretation, CRA commented on the tax consequences of a charity returning a donated property to the donor. This could occur, for example, when a donation was made specifically for a project that had been halted.

Donor – Where the property is returned to the donor, the taxpayer is deemed not to have disposed of the property nor to have made the gift. As such, the portion of the original charitable donation tax credit or deduction related to the property may be disallowed.

Donee – Before returning a gifted property, the charity should review other provincial and federal legislation as it might affect their ability to legally return donated property. CRA also noted that returning property could be regarded as making a gift to a non-qualified donee or providing an undue benefit which could result in revocation of charitable status.

A qualified donee that issued an official donation receipt and later returns donated property must file an information return with CRA if the fair market value of the property is greater than $50 when it is returned, and the property is returned after March 21, 2011.