For those already thinking about their 2017 income taxes, the following summarizes some of the changes from 2016.
“The government gave me money back” is a common phrase often heard after the April 30 or June 15 filing deadline. The truth is that the government is not being charitable; it is only refunding the tax that you or your employer had overpaid throughout the year.
Because the rate of tax withheld at source throughout the year may be different than the tax rate applicable to your actual taxable income (after taking into consideration all other income and deductions), you might have remitted more money to Ottawa than was necessary. Your "tax refund" is the difference between your remittances and your actual tax liability.
One of the biggest misconceptions is that, upon filing of their personal income tax returns, people with a lower income will likely receive a tax refund while people with a higher income will usually end up owing tax. This is not necessarily true because the tax refund/liability is not based on your income level but rather on the difference between the remittances paid compared to the actual tax liability.
As you gather your 2016 tax data together for your CPA, take a few moments to read about the following changes and assess the impact they may have on you and your family’s filing for 2016 and after.
There has been a significant change in the CRA’s policies regarding principal residency that must be followed by all taxpayers. Prior to 2016, there was a requirement to fill out form T2091 to designate your home as a principal residence. The form required you to designate the years in which the home was your principal residence. Although this form was required to be filed in the year of disposition, most individuals never filed the form because the resulting capital gain was often fully eliminated by claiming the principal residence exemption. Administratively, the CRA had waived this requirement to file if the exemption eliminated the gain.
Significant Rule Changes
For the taxation years that end on or after October 3, 2016 (e.g., the 2016 calendar year), if you sell your principal residence, you are required to report the sale and the resulting capital gain or loss on Schedule 3 of your T1. You are also required to file the form T2091 if you are claiming the principal residence exemption. These requirements are imposed regardless of whether or not the gain is fully exempt as a result of the designation.
A failure to file and disclose the information will have serious implications. Firstly, there is no limitation period (i.e., after which your returns are considered “statute-barred”) on the CRA’s ability to reassess in the future. Therefore, the deadline which would otherwise restrict the CRA’s ability to re-open the tax return would not start unless the information had been fully disclosed in the year of disposition.
Secondly, the principal residence exemption itself will only be allowed if the sale and the designation of principal residence are reported on your income tax return. Should you realize subsequent to the year of sale and filing of your income tax return that you did not file the sale of your principal residence , the CRA is not obligated to accept a late filing that designates the sale as a principal residence sale . Even if the CRA accepts the late filing, the taxpayer will be liable for penalties that are the lesser of $8,000 or $100 for each complete month from the original filing due date to the date the required information was received by the CRA in an acceptable format.
Since these rules will be effective for the 2016 calendar year, you should remember to report the sale of your principal residence if you had a disposition during the year.
Basic Personal Amount
The Federal Basic Personal Amount will increase to $11,474 for 2016, up from $11,327 in 2015. For 2017, the amount will be $11,635.
Marginal rates remain the same in 2017.
There have been no changes in the overall federal marginal tax rates; however, the thresholds for taxable income have been changed as indicated in the comparison table below. Keep in mind that these rates do not include the provincial rate nor do they include the various credits and deductions that may reduce the overall income tax for which you may be liable.
Purchasing or leasing an automobile in the company name and allowing employees to drive the automobile has tax consequences that may require owner-managers to add a taxable benefit to the employee’s T4.
CRA Definition of Automobile
For there to be a taxable benefit, the employer must first determine whether the vehicle is an automobile under the Income Tax Act . The Canada Revenue Agency (CRA) defines an automobile as “a motor vehicle that is designed or adapted mainly to carry individuals on highways and streets and has a seating capacity of not more than the driver and 8 passengers.”
This definition of an automobile [paraphrased
from 248(1) from the Income Tax Act
does not include
“a van, pick-up truck, or similar vehicle” that:
Restrictions on Deductibility
Vehicles that fall within this definition of an “automobile” are subject to a maximum capital cost allowance addition (available for future capital cost allowance) of $30,000 plus HST. This limitation imposes a significant constraint on many business owners’ primary motivation for purchasing the vehicle in the corporate name. Vehicles such as king cab trucks that do not fall within the definition of “automobile” are not subject to such a restriction since they are considered necessary for the business and are not considered “luxury vehicles”. There are also restrictions imposed on leased automobiles. Generally, monthly lease costs for automobiles are restricted to $800 plus HST.
In addition to the restrictions on the deductibility of annual depreciation (or leasing costs), users of such vehicles are also deemed to have received a taxable benefit from the corporation for the use of the vehicles for non-business purposes.
For example, assume an owner-manager purchases a high-end SUV in the company name but the owner-manager’s spouse uses it primarily (i.e., more than 50% of the use) for non-business purposes. Assume also that the base price of this vehicle is $90,000 and the overall cost of owning the vehicle, once HST is added, is $101,700. The standby charge to the employee is calculated at 2% per month of the total cost of the vehicle. Thus, the standby charge for the employee is calculated at $101,700 at 2% ($2,034) per month or $24,408 per year. The standby charges would be reduced in cases where the vehicle is used primarily for business purposes and annual personal driving does not exceed 20,000 kilometres.
On top of the standby charge, an additional operating benefit of 26 cents per personal kilometre driven is taxable in the hands of the employee. In the case where the vehicle is primarily used for business purposes, the operating benefits could be reduced to 50% of the standby charges if the benefit results in an amount lower than otherwise calculated.
(Standby charges for a lease can be expensive as well. A monthly lease cost of $1,350 over 84 months creates a standby charge for 12 months of $10,800 plus an operating expense benefit as mentioned above.)
Owner-Manager’s Use of Vehicles
Owner-managers may believe they are not subject to the available-for-use rules because they are shareholders of the corporation and not employees. The CRA has made it clear that owner-managers are subject to the same taxable benefit as employees as indicated by the CRA’s reference to archived IT63R5 Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer — After 1992 .
Paragraph 18 reads as follows:
18. The above guidelines may generally be applied to a shareholder of a corporation. Subsection 15(5) provides that, for the purpose of subsection 15(1), the value of the benefit to be included in a shareholder’s income when an automobile is made available to such a person (or to a person related to that person) by a corporation, whether or not resident or carrying on business in Canada, is calculated on the assumption that subsections 6(1), (1.1) and (2) apply with such modifications as are required in the circumstances, and as though the references therein to “employer” were read as references to “corporation.”
Working from Personal Residence
Many owner-managers may work from their principal residence and thus have access to the vehicle 24 hours a day. The question is: “Does the close proximity of the vehicle mean that it is available for personal use and therefore a taxable benefit must be added to the owner-manager’s income at the end of the year?”
CRA: There is no taxable benefit if the automobile is operated for business use only.
The Answer According to the CRA
“An automobile is available to your employee if he or she has access to or control over the vehicle. It includes any part of the day, weekends and holidays during the calendar year.” (This suggests that, since the vehicle is parked at the place of residence and is available 24 hours a day — 365 days a year, there is a taxable benefit.)
“If your employee does not use the company’s automobile for any personal driving, there is no taxable benefit, even if the automobile is available to your employee for the entire year. This applies as long as the kilometres driven by your employee are in the course of his or her employment duties and the vehicle is returned to your (business) premises at the end of his or her work day.” (This suggests that, if the owner-manager can establish that they do not use the vehicle for personal use at all and park it at the “corporation’s” premises [also the owner-manager’s principal residence] then there may not be a taxable benefit.)
Keep Detailed Records
Convincing taxation authorities that the vehicle is not used for personal use will require due diligence and good record keeping since the CRA will take into consideration many factors when determining whether available-for-use benefits should be added to income.
The first line of defence is a complete log book. Record the odometer reading as at January 1 of and December 31 of each calendar year to establish the total annual distance the vehicle has been driven. Log each business trip taken plus a description of the purpose. Hypothetically, the number of kilometres driven for business trips and the total kilometres driven should be the same.
Although it is highly unlikely an owner-manager would purchase or lease an expensive “toy” and use it primarily for work purposes, the CRA may start to review the purchase of vehicles to ensure they are indeed “work vehicles.” Additional calculations and circumstances will alter the available-for-use add-on, whether for a purchased or leased vehicle. But, as our hypothetical taxable benefit examples demonstrate, the additional taxable benefit will push the employee (i.e., owner-manager) into a higher tax bracket and thus bring closer scrutiny by the CRA.
Consult Your CPA
Calculation of available-for-use benefits is complicated and may be somewhat offset by taxable deductions within the corporation. If your business is considering purchasing or leasing a vehicle that will be operated in the gray area between business and personal use, consult your CPA to ensure you understand the potential personal tax consequences.
When entrepreneurs incorporate their businesses under their respective provincial articles of incorporation, often, little thought is given to the date for the fiscal year end. Many company founders unconsciously identify the company’s fiscal year end with the calendar year end of December 31, and therefore automatically select this date. After the articles of incorporation have been issued, the business may choose any date as year end provided the number of days of the fiscal year do not exceed 371. Conventional wisdom suggests, however, that the last day of the chosen month is the most practical date since most businesses and financial institutions process client data on a month-end basis. Setting the year end date at the end of your chosen month permits an easier cut-off and reconciliation process.
Factors to Consider
If, for example, you are a retail business, physically counting inventory during your busiest sales period (i.e., Christmas) would disrupt business, so January 31 would be a good date for your year end. Inventory, as well as the level of in-store activity, will be at their lowest in January when your staff can count, price and value inventory without taking time away from selling. For a service industry such as landscaping, work-in-progress may have to be calculated. It may be best to have a year end such as November 30, after the bulk of the contracts are finished.
Choose a year-end date that works with your accounting cycle.
Choosing an arbitrary year end such as December 31, which may not match your accounting cycle, could create issues for your in-house accounting staff as well as your CPA. Internal staff is often overwhelmed with completing year-end procedures for payroll, government reports, and finalizing year-end inventory, not to mention cut off of receivables and payables or budgeting for the coming year. Such stress can lead to errors, increased overtime and frustration.
Also, if your year end is December 31, your CPA may not be as available as you would like because they are consumed by tax planning and tax preparation for individuals and may be in no state of mind to work with staff that is already frustrated by their own year-end requirements. (This is not the best of formulas for getting quality time with your CPA to analyze your financial results.)
When a business starts up, cash flow difficulties are common, given the need to borrow working capital for start-up costs and capital assets. If, by good fortune, the business does extremely well in its first year and substantial taxable income materializes, a year end set 365 days from the date of incorporation may be advisable. Since there is no requirement to pay monthly or quarterly instalments in the first year of operations, the business gets the maximum tax deferral by setting the first year end as late as possible. A later year end would lessen the actual cash outflow for corporate income tax and provide additional working capital in the start-up period.
The requirement to pay monthly or quarterly instalments begins in the second year, the payment amounts are determined by the taxable income reported in the first year. In case the first year end was shorter than 365 days, the taxable income is normalized to reflect the income had it been for the full 365 days. This may be helpful for seasonal businesses, to set a year end prior to the peak income period because that would not only defer the tax liability of the first year but also reduce the required instalments in the second year. This allows businesses to have more working capital during the start-up phase.
Choosing a year end of July or later allows tax deferral of corporate profits. Suppose, for a moment, that the corporate profit is $150,000. Rather than pay the corporate tax on the $150,000, management may decide to pay out the $150,000 in bonuses to various employees of the company. If the bonus is declared for the July 2016 year end but not paid until January of 2017, the income tax expense for the corporation is nil and the tax on the bonuses is not taxed in the hands of the recipient until it is paid in January of 2017. This approach provides working capital for the corporation that otherwise would have gone to the Canada Revenue Agency (CRA).
Changing Your Year End
Your business may have changed over the years so that now there are compelling reasons to change its current year end, such as staffing or administration issues that make it impossible to complete the year-end process in a timely fashion. If, for instance, your business now has a high sales volume or high inventory at the current year-end date, it might be less disruptive to end the year on another date. If you are a subsidiary or highly dependent on another business such as a supplier, there could be administrative and accounting advantages to aligning year ends.
A request to change the year end must be sent to the CRA. Changes can only be made for sound business reasons (i.e., not for the purpose of an income tax benefit). A request for a change is not required if:
· the corporation is wound up and the final return is filed with a shorter fiscal year
· the corporation is emigrating to another country, is becoming exempt from tax or will cease to be exempt from tax
· persons or a group of persons acquired control of the corporation under subsection 249(4) of the Income Tax Act .
Owner-managers should keep in mind that, if a change in year end is granted, it will be necessary to produce financial statements and tax returns for the shorter period. Further, depending upon your accounting system, there may be additional cost in establishing the new year-end protocols.
Check with Your CPA before Making a Change
Decisions about establishing a year end or changing a year end can be fraught with unforeseen income tax consequences for both the corporation and owner-managers if personal and corporate tax issues are not considered. Entrepreneurs should meet with their CPA to discuss tax consequences; seasoned owner-managers should consider meeting with their CPA if making a change to the business year-end seems to be more and more necessary.
Regardless of whether your business is a
proprietorship, a partnership or an incorporated company, the Canada Revenue
Agency (CRA) requires the business to maintain financial books and records.
Here are a few of the CRA’s record-keeping requirements you should know.
Only in Canada, eh?
The CRA requires that records must be kept in Canada, either at your place of business or your residence. If your head office is in Canada and your books and records are stored electronically outside the country and accessed by your Canadian-based operation, these records are not considered to be maintained at your head office. Thus, if you are currently running cloud-based accounting software that is storing data in a foreign jurisdiction, your business is in violation of CRA requirements. If you wish to keep records in a jurisdiction other than Canada, you must seek written permission from CRA to keep them elsewhere.
Your business must assure the books and records are protected and available for inspection even if a third party is processing or storing the information. The third party must have adequate security and backup
to be able to provide information when requested.
Records must be complete and unabridged.
Complete and Unabridged Records
Records must be complete and unabridged, have sufficient information to support your tax liability or claim to funds owing to you, be supported by documentation and be maintained in English or French, or a combination of both languages.
Electronically stored data must be readable by CRA software.
In the event the CRA requests information, it is your responsibility to:
Factors to Consider
Original paper documentation must be kept in paper format unless it is converted to and stored in an accessible and readable electronic format. CRA guidelines suggest that microfiche and/or microfilm can be used as well; however, most businesses would probably opt for a high-speed scanner to store historic data. The CRA insists that any reproduction must provide the same detail as the original paper document without issues of “resolution, tonality or hue”.
Length of Storage Period
The CRA requires that all records and supporting documentation must be kept for six years from the end of the last tax year. The tax year is considered the fiscal year end for a corporation and the calendar year for an individual. This retention period is also required by the Employment Insurance Act , the Canada Pension Plan, and the Excise Tax Act (GST/HST).
Other Retention Issues
Documents concerning long-term acquisitions and disposal of property, the share registry, or other historical information that would have an effect on the sale, liquidation or wind‑up of the business must be maintained indefinitely. CRA may ask you to maintain records for longer periods. If an income tax return is filed late, the destruction date is six years from the date the return was filed.
In the event of an objection or appeal, all data must be maintained until the latest of the:
a. date the objection or appeal is resolved
b. date for filing further appeals has passed
c. six-year record-keeping period has expired.
If you are a sole proprietor or in a partnership, records must be kept for six years after the end of the taxation year of ceasing business. If a company is dissolved, keep all records and supporting documents for two years after the date of dissolution.
Before You Destroy Records
Legal representatives of a deceased taxpayer should obtain a clearance certificate before they destroy records that show how property of the deceased was distributed.
When concerned about GST/HST issues, it is advisable to ask for and fill out form GST352 Application for Clearance Certificate . If you wish to destroy records before the mandatory retention period, complete form T137 Request for Destruction of Records or apply in writing to your local tax service office.
If you have made electronic copies of the original paper books of account and supporting documents and the CRA considers the images to be representative of the original documents, you can destroy the original paper documents.
Tax regulations suggest that destruction of records in advance of mandatory retention dates or before receiving official written permission may result in prosecution.
An Important Business Procedure
Records must be kept in a format and for the time period prescribed by the CRA and other regulatory bodies. Meeting regulations is an important business procedure that will ensure that any review of historical records by the CRA will be as effortless as a review of today’s information.
The election of a new government in Ottawa is
often accompanied by changes to the way income is taxed. The last federal
election was no exception. The changes announced in the March 2016 budget that
will impact many taxpayers are as follows:
Family Tax Cut
Spousal income splitting was eliminated. In the past, one spouse or common-law partner could transfer as much as $50,000 of taxable income to the other to save up to $2,000 in income taxes. This option will no longer be available.
Child Tax Benefit
Taxpayers with children are familiar with the Canada Child Benefit (CCB) tax-free monthly payment and the taxable Universal Child Care Benefit (UCCB) that were designed to assist parents with the cost of raising children under the age of 18.
The new budget proposes that the CCB will provide as much as $6,400 per child under the age of six and $5,400 for children from six to 17. As can be expected, the benefits will not apply equally to all income categories. Levels of payout will be adjusted for those whose family income is between $30,000 and $65,000 and those who earn in excess of $65,000. If family income exceeds $200,000, there will be no benefits.
Indications are that the CCB will not be taxable and will not be included in certain federal income-test programs such as the Registered Disability Savings Program (RDSP). The new structure will be based upon the adjusted net family income for the 2015 tax year. Because the amount of the benefit will be tied to family income, benefits will be reduced as income rises.
Labour-Sponsored Venture Capital
Up to now, the federal government has permitted the creation of labour-sponsored venture capital corporations (LSVCCs) at both the federal and provincial levels. Prior to 2015, individuals purchasing $5,000 worth of shares in such corporations each year received a 15% federal tax credit. The credit was reduced to 10% in 2015. The federal government proposes to restore the credit to 15% for provincially registered LSVCCs for 2016 and thereafter but will reduce the credit to 5% for federally sponsored LSVCCs in 2016, then eliminate it. This is part of the federal government’s plan to close the federal part of the program altogether.
Individuals attending post-secondary educational institutions could previously claim tuition fees plus an education and textbook amount based upon the number of part-time or full-time months of attendance at a qualified institution. For 2016, the federal education and textbook amounts will be eliminated. The tuition fee amount will remain intact.
Teacher tax benefit
There are teachers and early childhood educators who may spend their own money on classroom supplies. To offset these out-of-pocket expenses, a new Teacher and Early Childhood Educator School Supply Tax Benefit will be introduced. A licensed and certified teacher can now purchase up to $1,000 worth of school supplies each year and receive a tax credit of 15% that should provide a tax savings of up to $150 each year.
Tax Free Savings Account
The tax free savings account will be reduced from $10,000 per annum to $5,500 for the 2016 tax year. In that the 2015 tax budget increased the former limit of $5,500 to $10,000, it is assumed the taxpayer will not be penalized for taking advantage of the $10,000 limit when tax planning in the start-up months before the March 2015 budget.
Home Buyers’ Plan
The Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw up to $25,000 from their RRSP to purchase or build a home without having to pay tax on the withdrawal. The current plan required the amount to be repaid over a 15 year period. The government will now allow taxpayers faced with significant life changes (e.g., job relocation, death of a spouse, marital breakup or the requirement to house an elderly family member) to borrow from the RRSP without tax penalty.
Employer EI premiums are waived for young hires.
The budget proposes to waive the Employment Insurance (EI) premium for 12 months for companies that hire individuals between the ages of 18 to 24 if they are hired into a permanent position in the years 2015 to 2018 inclusive. A minor reduction of the EI rate after the first year of hiring is contemplated as well.
The previous government planned to reduce the small business tax rate from 11% in 2015 to 9% by 2019. The 2016 reduction to 10.5% is frozen with no further reductions planned.
67 to 65
The former Conservative government raised the age of eligibility to collect Old Age Security (OAS) from 65 to 67 starting in 2023. The new rules of the Liberal government will return the age of eligibility to 65. This age drop applies equally to the Guaranteed Income Supplement. Both programs will be adjusted to a new Seniors Price Index to reflect the actual rising cost of goods and services.
Tax cuts are always welcome. If all goes as planned, middle income individuals (i.e., those earning between $45,283 and $90,563 per annum) will have their tax bracket lowered. This table provides the tax bracket as well as a comparison of 2015 and anticipated 2016 federal tax rates.
$45,282 or less
$45,283 to $90,563
$90,564 to $140,388
$140,389 to $200,000
The automobile allowance rate for the 2016 taxation year is 54 cents per kilometre for the first 5,000 kilometres driven, and 48 cents per kilometre after that. Add four cents per kilometre in the Northwest Territories, Yukon, and Nunavut. This is a reduction of one cent per kilometre.
The following amounts are unchanged:
· capital cost for vehicles: $30,000 plus applicable taxes
· leasing rate for vehicles: $800 per month plus applicable taxes
· monthly interest deduction: $300 per month
· taxable benefits associated with employer-owned or employer-leased vehicle available to employees.
The personal portion of automobile operating expenses paid by employers for 2016 is reduced from 27 to 26 cents/kilometre. If the taxpayer is selling or leasing vehicles as a mainstay of employment, the rate will be reduced to 23 cents/kilometre. These personal portions are taxable.
Little Changed in 2016
Changes to the tax system for individuals will not have a significant impact on the take-home pay for the average taxpayer and will not, for most, change the information required for preparation of the 2016 personal income tax returns.
Having a disability or caring for an individual with a disability can be emotionally and financially draining. The Canadian government, recognizing the need to assist in the future care of an individual with a disability, has created a vehicle for persons with disabilities and their families to save for the future.
As a Starter
The first step is to open an RDSP in the name of the beneficiary who must be a Canadian resident under the age of 60. If the beneficiary is 59, the plan must be opened before the end of the calendar year in which the individual turned 59. Other requirements for enrolment include the need to have a social insurance number and be eligible for the disability tax credit. The program allows only one RDSP per beneficiary and only one beneficiary per RDSP.
Determining the Holder
Once these criteria have been met, the RDSP holder (administrator) must be determined. The holder can be an individual or an organization. If the beneficiary is under the age of majority (the age of majority varies from province to province), the holder can be a parent, a legal representative or the provincial trustee.
If the beneficiary is over the age of majority but not capable of entering into the RDSP arrangement, specified family members may be able to open the RDSP on behalf of the disabled beneficiary until the end of 2018.
Choosing the Financial Institution
The RDSP must be administered through a financial institution participating in the program. Most banks, as well as a number of credit unions and trust companies, offer this service.
There is no annual contribution limit.
Unlike other savings plans, there is no annual limit on contributions to an RDSP. However, the lifetime limit of contributions is $200,000 and the threshold must be met by the end of the calendar year in which the beneficiary attains 59 years of age. The federal government actively contributes to an RDSP plan based upon family income levels.
Similar to the Registered Education Savings Plan (RESP), contributions made to the RDSP are not eligible for a tax deduction by the contributor(s) but income and capital gains within the plan grow on a tax-deferred basis. Once the funds are withdrawn, the amount is taxed as income in the hands of the beneficiary. Withdrawals include a blend of taxable and non-taxable amounts. Money that has been contributed to the RDSP is not included as taxable income when it is withdrawn. (The amount of non-taxable income is calculated according to a formula developed by the Canada Revenue Agency.) However, investment income and capital gains, plus any Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) amounts in the plan are included in the beneficiary’s income for tax purposes when paid out of the RDSP.
Contributions and Withdrawals
It may come as a surprise, but anyone can contribute to a specific RDSP as long as the holder approves the contribution amount in writing. Withdrawals must begin when the beneficiary turns 60. Annual withdrawals, Lifetime Disability Assistance Payments (LDAPs), continue until the death of the beneficiary. A beneficiary may make a one-time withdrawal under the Disability Assistance Programme (DAP).
The investment criteria mirror those of an RRSP investment in that investments can be made in mutual funds, fixed income investments, GICs and Canadian, U.S. and foreign equities, including new issues.
Canada Disability Savings Grant
The beauty of the RDSP is that the federal government will assist saving for the beneficiary by providing matching grants of up to 300% for every dollar placed into the account by contributors. The maximum grant provided through the Canada Disability Savings Grant tops out at $3,500 per annum and has a ceiling of $70,000 during the matching contribution period that ends when the beneficiary turns 49 years of age.
As can be expected, grant amounts are based upon the beneficiary’s family income and inflationary factors but, if you meet the various criteria to apply for the grants, the rewards to the RDSP are as follows:
If family income is less than or equal to $87,900:
The government also contributes funds to low- and modest-income Canadians through the Canada Disability Savings Bond. Those who qualify can receive up to $1,000 per annum to a maximum of $20,000, depending upon family income. The government will make no more contributions after the year in which the beneficiary turns 49. Note that it is possible to receive the bond even if contributions are not made to the RDSP.
Withdrawals from RDSPs
Because RDSPs are designed as long-term plans, withdrawal of funds from either the bond program or the grant program before the 10th anniversary triggers repayment requirements. Plan holders should be aware that the death of the beneficiary or a determination that the beneficiary may have a shortened life expectancy will create withdrawal or repayment requirements.
Because withdrawals or the death of the beneficiary will create different repayment or settlement terms, the beneficiary should understand the financial and income tax impact of early withdrawal, death or shortened life expectancy. Your CPA tax advisor, in conjunction with the financial institution representatives should be able to offer advice.
Excellent Means of Saving
RDSPs are an excellent vehicle for individuals with disabilities or those responsible for their future financial security. As in any program designed to look after the future welfare of those we care for, the earlier the program is registered, the more opportunity is available not only for government contribution but for the RDSP to grow and provide that financial security.
One of the latest means of raising money to start a new business, raise operating funds, or tackle costly research and development projects is to make a broad-based appeal for funds with crowdfunding. Crowdfunding is not new; it was used in the nineteenth century, especially in small communities, to fund local projects through subscription. For example, the monumental base for the Statue of Liberty was financed by a New York newspaper that gathered small donations from 160,000 donors. More recently, it has been used to fund tours of rock bands, and to produce movies, video games and inventions.
Social media have expanded the use of crowdfunding. Social media make it possible to reach a large audience that might be willing to make personal contributions for families with unmanageable medical bills, or to help needy individuals recover from catastrophic personal financial loss.
Why crowdfunding is so beguiling is anyone’s guess, but its success cannot be understated. In 2013, an estimated $51 billion was provided to crowdfunding appeals around the globe.
Crowdfunding and Business
Business entrepreneurs have also discovered crowdfunding as a new means of raising funds because it creates an alternative to traditional financial institutions. Further, the receipt of funds from complete strangers through crowdfunding removes the need for a business to provide the donor with shares, a promissory note, or to pay interest or dividends. At first blush, the recipient might think crowdfunding income meets all of the criteria of a windfall.
Crowdfunding is treated as income and therefore is subject to tax.
Not a Windfall
Because funds raised through crowdfunding are not a windfall or gift, they are treated as income and thus, are subject to income tax.
According to a Dec. 9, 2014 Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime , the CRA states that crowdfunding is a taxable benefit. As a starting point, the income tax folio states:
1.5 However, sometimes individuals receive a voluntary payment or other valuable transfer or benefit by virtue of an office or employment from an employer, or from some other person. In such cases, the amount of the payment or the value of the transfer or benefit is generally included in employment income pursuant to subsection 5(1) or paragraph 6(1) (a). (See also Guide T4130, Employers’ Guide — Taxable Benefits and Allowances.) Similarly, voluntary payments (or other transfers or benefits) received by virtue of a profession or in the course of carrying on a business are taxable receipts.
The Folio continues with an example specific to crowdfunding:
Assume a business uses crowdfunding as a method of raising funds for the development of a new product and the contributors do not receive any form of equity. The amounts received by the business would be included in its income pursuant to subsection 9(1).
Subject to Tax
Whether the business organizational structure is a proprietorship, a partnership or a corporation, funds received from crowdfunding are subject to tax. If, as part of the crowdfunding activity, consideration is provided in the form of thank-you plaques, pens, T-shirts, etc., then these costs are deductible expenses. In addition, many campaigns raise money for a particular purpose. If spent for that purpose, little or no taxable income may result. If one also considers that financing costs are minimized along with the need for debt repayment and perhaps personal guarantees for the borrowed money, the income tax cost, if any, may not be onerous.
Some entrepreneurs want to use crowdfunding to raise equity capital. Securities regulators of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia have implemented or expect to implement registration and prospectus exemptions that will enable start-ups and early-stage companies to do just that. Companies will be allowed to raise up to $500,000 in a year through approved Internet funding sites. No more than $250,000 of this can be raised in one offering, however. No individual can invest more than $1,500 per distribution. People will have the right to withdraw their money within 48 hours. Ontario has decided to develop separate standards. As would be expected, funds raised through an equity issue are not taxable to the recipient company, but any dividends or capital gains received by the contributors will be subject to income tax.Be Aware of the Tax Implications
Raising money through crowdfunding, whether for operational, developmental or equity issue, is a relatively new means of raising funds and many budding entrepreneurs may not realize the tax implication of receiving crowdfunding money. For businesses or corporate entities considering using crowdfunding as a means of generating operating capital, it would be wise to consult your chartered professional accountant to determine the amount of tax for which they may be liable.
Because lighting, heating and cooling represent 19%-25% of the cost of operating a commercial business, control of energy costs is essential to improving profit margins. A reduction of even 10% in these costs can produce a significant improvement. But, because Canada is located in a part of the world where temperatures can range from 40C below zero to 35C above, it is inevitably expensive to keep internal temperatures at levels needed to maintain comfortable working conditions through the changing seasons.
Setting the price point for your product or service is not simply the process of determining the cost of production then adding a mark-up. It is more a matter of understanding the price the consumer will accept as the value of your product or service and keeping the costs of production to a level that will give you a profit at that price.
The significant rise in the cost of equipment, vehicles, real estate, and inventory has prompted many businesses to increase business debt. Low interest rates, combined with the ability to obtain larger loans with extended payment terms, have allowed businesses to operate in a “business as usual” mode with less consideration for the actual cost of borrowing.
To give some idea of the effect of even low interest rates on an owner-managed business, the following key elements of most businesses have been put forward as an example of the effect of interest costs on a business. The effect of domestic borrowing has been added to show the full impact of current interest rates on the owner-manager. Since lending rates vary widely depending on a variety of factors such as risk, item to be funded and the term, and are usually negotiated, the interest rates used below have been chosen at random from Internet sources; calculations are approximate and for illustrative purposes only . All loans have been made effective June 1, 2017.