A Canadian-controlled private corporation (CCPC) may be entitled to claim the small business deduction (SBD) on the first $500,000 of the CCPC’s active business income. The $500,000 business limit must be shared between each associated company and may be allocated among the group at the group’s discretion.
For taxation years beginning after March 21, 2016, a new concept called “specified corporate income” (SCI) will apply. The purpose of this new measures is to prevent non-associated corporate entities multiplying the business limit.
A CCPC’s active business income from providing services or property (directly or indirectly in any manner whatever) to a non-associated private corporation will be treated as SCI and ineligible for the SBD where the CCPC, one of its shareholders, or a person who does not deal at arm’s length with such shareholder has a direct or indirect interest in the other private corporation.
The other private corporation may assign a portion of its business limit to the CCPC equal to the lesser of:
An exception exists if substantially all (i.e. 90% or more) of the CCPC’s income is generated by the provision of similar services or property to arm’s length persons or partnerships, in which case the income from the other private corporation will be treated in the same manner as the arm’s length income.
If you would like more information about specified corporate income, seek the advice of a Chartered Professional Accountant.
The non-taxable portion of a capital gain realized by a private corporation can be distributed by means of a special dividend referred to as a "capital dividend.’ Capital dividends received by a Canadian resident shareholder are fully exempt from tax.
The amount of tax-free capital dividend available for distribution is accumulated in a notional corporate tax account referred to as the “capital dividend account”. The capital dividend account is a running balance that includes the non-taxable portion of capital gains and is reduced by the non-allowable portion of capital losses and prior payments of capital dividends. To ensure that the amount paid out is maximized, pay out capital dividends when capital gains are realized and before any capital losses are realized.
The corporation paying the capital dividend must file an election with the Canada Revenue Agency on or before the earlier of the day the dividend becomes payable, or the day any part of the dividend is paid. This election needs to be accompanied by a certified true copy of the corporate resolution to pay the capital dividend.
Other receipts can also add to a corporation’s capital dividend account, such as certain life insurance proceeds and capital dividends received from other corporations. The net non-taxable portion of income inclusions arising from the dispositions of eligible capital property (ECP) can also be added to a corporation’s capital dividend account but only at the beginning of the year following the year of disposition. For 2017 onwards, ECP will be treated as depreciable capital property and a disposition of ECP will be treated in the same way as a deposition of capital property.
If you would like more information about paying a capital dividend, seek the advice of a Chartered Professional Accountant.
In computing income from a business, capital cost allowance (CCA), or tax depreciation, is allowed as a deduction. When capital assets are purchased and available for use, they are grouped into classes based on the type of capital asset purchased. CCA is claimed annually against each class and the amount of the CCA claim is discretionary subject to the maximum limit. The "declining balance" method is used for most classes. Under that method, the maximum CCA you can claim against each class is a fixed percentage of the undepreciated capital cost (UCC) balance. The UCC balance is the capital cost of the capital assets in a class less previous CCA claims deducted.
For most assets, only one-half of the CCA you could otherwise claim for the assets is allowed in the year of acquisition. As a result, acquiring an asset just before your year-end, instead of just after, will accelerate the timing of your tax write-off.
If you would like more information about the timing of your capital asset purchases, seek the advice of a Chartered Professional Accountant.
If you run your own business, you are required to retain books and records that relate to a specific taxation year for a minimum of six years after the end of that year. If a particular year is under appeal, books and records for that year should be kept until the appeal is resolved and the time for any further appeal has expired. If a return has been filed late, the records must be kept for six years from the actual filing date.
Records include minutes of meetings, accounting records, and source documents such as invoices, receipts, cheques, bank statements, etc. The books and records must be sufficient for the Canada Revenue Agency (CRA) to confirm revenue, expenses and taxes paid. They must also be stored at a location in Canada unless CRA grants permission to hold them outside Canada.
If you use a computerized record-keeping system, there is a requirement to maintain an electronic backup and there are penalties for failure to do so. In addition, any paper records that you retain must be legible in the future. This means that you may need to copy certain receipts and invoices on paper that will not fade. Also, it is important to keep the detailed original invoices, not just the credit card slip and the monthly credit card statement, to document the nature and amount of the expenses.
As records over six years old might contain information that is still relevant for tax purposes, you might wish to consult a Chartered Professional Accountant or the CRA prior to destroying your records. As well, you might need permission from other government departments before you may destroy records related to those departments’ activities.
For more information, refer to the CRA Information Circular 78-10R5.
If your children work in your business, you can pay them a reasonable salary and deduct it from your business income when preparing your tax return. The salary must be reasonable for the type of work performed.
Putting your kids on the payroll could mean deductions on your tax return, and might allow them to start accumulating RRSP contribution room which can be used to reduce their taxes in future years. The other advantage is that your kids might be taxed at a lower rate than you.
Don’t forget to make appropriate payroll withholdings. Note that CPP premiums are not required until your child turns 18 and that EI premiums are generally not required where the employee and the employer do not deal at arm’s length.
Consult the advice of a Chartered Professional Accountant for more information.
In general, when employers provide employees with benefits in addition to their regular salary, the value of such benefits must be included in the employee's income as a taxable benefit unless there is a specific exception provided in the Income Tax Act or the Canada Revenue Agency (CRA) has an administrative position not to tax a particular benefit in the hands of an employee.
With respect to employer provided medical benefits, the rules can be quite complex. For example, if the employer pays an employee's Medical Services Plan (MSP) premiums, a taxable benefit results for the employee. On the other hand, premiums for group medical plans (including private extended health plans, vision care plans, prescription coverage and dental plans) paid by the employer are not a taxable benefit to the employee, provided the plans only pay the costs of medical expenses that can be claimed as tax credits under the Income Tax Act. The employee participating in such plans cannot claim a tax deduction for the medical costs incurred except to the extent the costs are not covered or reimbursed by the plan.
The benefits or payments from certain kinds of insurance plans, such as disability insurance and sickness income maintenance plans, will be tax-free to the employee even if the plan is organized and sponsored by the employer, provided the employee pays the premiums. If the employer pays the premiums as a taxable benefit, a portion of such plans may be taxable to the employee. Typically the premiums are withheld by the employer from the employee's net pay, which means the employee is paying the premium with his or her after-tax income. As a result, benefits or payments to the employee from such an insurance plan are tax-free to the employee.
If an employer pays the premiums for the employee under a group term life insurance plan (generally an insurance plan that is in place only as long as the individual is an employee and where the employee's spouse or family is the beneficiary), the premium will be a taxable benefit to the employee and a payment out of the plan on the death of an employee will not be taxable.
The employee will not receive a taxable benefit for accessing counselling services provided for or paid for by the employer. These tax-free counselling services are limited to counselling related to the physical or mental health of the employee, or retirement or re-employment counselling.
Contact a Chartered Professional Accountant if you have any questions about taxable benefits from employment.
It is increasingly common for employers (both private and public companies) to grant stock options to their employees. The grant of an option to an employee is not a taxable event, even if the exercise price is less than the fair market value of the shares, provided the option is granted to the individual by virtue of his or her employment.
Employees who are granted an option to acquire shares of a public corporation have a taxable benefit from employment in the year they acquire shares of the corporation. The taxable benefit amount is the difference between the option price (sometimes called the "strike price") and the fair market value of the shares on the date the shares are acquired (if the employee has paid to acquire the option, the taxable benefit is reduced by the purchase price of the option). Even if the employer simply grants shares to the employee (i.e. the price paid by the employee to acquire the shares is zero), the rules discussed here still apply.
In the case of a publically-listed company, an employee may be entitled to a tax deduction equal to 50% of the stock option taxable benefit provided all of the following conditions are met:
The 50% deduction means an employee stock option is taxed at the same rate as a capital gain, but the income is employment income and not a capital gain. The employee stock option benefit cannot be offset by the individual's capital gains deduction or by capital losses.
For eligible securities of public companies acquired by employees under a stock option agreement entered into between February 27, 2000 and March 4, 2010, the employee's taxable benefit was determined when the option was exercised (when the shares were acquired) but the benefit was taxed only when the shares were sold. This income deferral was subject to an annual limit based on the fair market value of the eligible shares. For the year in which the employee stock option was exercised and the shares acquired and in each subsequent year the shares are held, the employee must file a Form T1212 with his or her personal income tax return to have the tax deferral in effect.
If the employee is granted an option to acquire shares of a "Canadian controlled private corporation" (CCPC) and the employee was dealing at arm's length with the employer immediately after the agreement was made, the employee stock option benefit, although calculated at the time the option is exercised, is deferred until the year the shares are sold (it does not matter if the employer is no longer a CCPC at the time the shares are sold). The employee can claim a deduction in that year equal to 50% of the taxable benefit if:
The "adjusted cost base" (ACB) of the shares acquired under an employee stock option plan is the fair market value of the shares on the date the option is exercised. The ACB is not reduced for the 50% deduction.
The rules related to stock options are complex and have changed considerably over the years. You should consult a Chartered Professional Accountant to see how these rules may apply to you.
A You have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.capital gain is the amount realized from the sale of assets that are “A capital property is an investment asset on which you expected to earn investment income.capital property” – the difference between the proceeds of sale and the cost of the property. For income tax purposes, the cost of the property is called the "The adjusted cost base (ACB) is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees.adjusted cost base" (ACB).
Only half of capital gains are taxable, this amount is the “The portion of your capital gain that you have to report as income on your income tax and benefit return.
If you realize a capital gain when you donate certain properties to a qualified donee or make a donation of ecologically sensitive land, special rules will apply. For more information, see Gifts of shares, stock options, and other capital property. taxable capital gain”, and the other half is not included income.
Generally, if you gift an asset, you will have a deemed disposition of the asset at its Usually the highest dollar value you can get for your property in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other.fair market value and a capital gain to the extent its fair market value exceed ACB. Alternatively, you will have a capital loss on the asset to the extent its fair market value is less than ACB (there are rules that suspend or deny capital losses under various circumstances). In certain circumstances where a capital gain is realized on property donated to a Canadian registered charity, the entire capital gain can be tax exempt.
Capital gains realized by individuals on a disposition of shares of a "Canadian-controlled private corporation" engaged in an active business that meets the definition of a "qualified small business corporation" can be offset with the individual's cumulative "lifetime capital gains exemption". The "lifetime capital gains exemption" limit for 2016 is $824,177. For the capital gains on the sale of qualified farming or fishing properties the "lifetime capital gains exemption limit" is $1 million. While the "lifetime capital gains exemption" may offset the individuals’ capital gain, the capital gain must still be reported in the individual’s tax return.
Given the favourable treatment of capital gains, it might be more tax effective to hold investments that will yield capital gains outside of a RRSP, RRIF, or TFSA, and hold other assets inside a RRSP, RRIF, or TFSA. Contact a Chartered Professional Accountant to help create tax strategies to take advantage of the lower tax rates for capital gains.
Individuals who are Canadian residents throughout the year have available to them a "lifetime capital gains exemption" of $824,177 for 2016 (indexed for inflation) to offset the capital gains realized on the sale of shares of a "Canadian-controlled private corporation" (CCPC) that is a "qualified small businesses corporation" (QSBC). Because only half of a capital gain is taxable, your lifetime capital gains deduction for 2016 is $412,088 (or half of $824,177). For gains on the sale of qualified farming or fishing properties the "lifetime capital gains exemption limit" is $1 million.
The claim for the "lifetime capital gains exemption" will be reduced by any previous claim of the capital gains exemption, by the individual’s existing “cumulative net investment loss” (CNIL) balance, and by any previous deductions for an “allowable business investment loss” (ABIL).
Consult a Chartered Professional Accountant about your capital gains exemption limit.
There are four types of capital losses:
Capital losses from listed personal property, such as artwork, jewellery, stamps, and coins, are only deductible against capital gains on listed personal property.
Losses from the sale of personal use properties, such as a car, boat, or home, are generally not deductible.
A loss from the sale of certain small business corporation shares or debt may be an “business investment loss”, one-half of a business loss is an “allowable business investment loss” (ABIL). An ABIL is a capital loss; normally a capital loss is only deductible against a capital gain but an ABIL is deductible against other sources of income. The ability to claim an ABIL may be limited by previous capital gains exemption claims. The CRA will audit the deduction for an ABIL; you must be able to prove the amount of the investment, the type of investment and provide evidence of the investment loss.
Losses on the sale of other capital properties must first be netted against capital gains realized in the year. Any excess amount may then be carried back three years (use Form T1A) or forward indefinitely to offset capital gains realized in future years.
Generally, a “superficial loss” can occur when you dispose of capital property for a loss and you, or a person affiliated with you, buys the same or identical property during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale, and you or such affiliated person still owns the substituted property 30 calendar days after the sale. If you have a superficial loss, you cannot deduct it when you calculate your income for the year. However, if you are the person who acquires the substituted property, you can usually add the amount of the superficial loss to the adjusted cost base of the substituted property. This will either decrease your capital gain or increase your capital loss when you sell the substituted property.
Losses triggered on the transfer of assets to an RRSP, RRIF, or TFSA are deemed to be zero for tax purposes.
If you have capital gains in the year or prior three years and unrealized losses on your investments, as you approach year-end you might consider triggering those losses before the year-end to offset current year capital gains or to carry your capital losses back. Be aware that there are “stop-loss” rules designed to negate losses triggered on “superficial” transactions, so contact a Chartered Professional Accountant to help you devise a loss-selling strategy.
If at the end of a year you own shares of a company that went bankrupt in the year or is an insolvent corporation (as defined in the Bankruptcy Act or the Winding-up Act), you might be able to claim a capital loss on those shares on your income tax return for the year. The capital loss arises from a deemed disposition of your shares for zero proceeds if you elect to do so in your tax return for the year. To qualify for this election, the corporation must generally be bankrupt or otherwise insolvent and expected to be wound up or dissolved with the fair market value of your shares determined to be nil.
There is no formal election to file to claim the capital loss on such shares; the election is made in your tax return by reporting the disposition of the shares for zero proceeds on Schedule 3. The CRA has stated that in order to make a valid election you must send CRA a letter to advise them of the election, and provide details of the investment, but the Tax Court of Canada has repeatedly held that the Income Tax Act does not require any such letter.
Where the loss is on shares of a "Canadian-controlled private corporation" (CCPC) engaged in an active business, the loss qualify as a "business investment loss" (BIL) if certain criteria are met; because only half of capital losses are allowable, only half of a BIL is an “An allowable business investment loss is a capital loss and half of which is deductible against other sources of taxable income.allowable business investment loss” (ABIL). The CRA will review all ABIL claims so you need to have evidence of the original investment, proof that the company in which you invested was a CCPC engaged in active business carried on principally in Canada, and support there was a loss triggering event in the year.
Contact a Chartered Professional Accountant to see whether you might be able to claim a capital loss for an investment in shares and whether the resulting loss might qualify as an ABIL.
If, at the end of a year, you are owed a loan amount that is no longer collectible, you might be able to realize a capital loss on that loan. Only half of a capital loss is allowable and is subject to certain limitations that can result in the loss being suspended (available later) or deemed to be zero. A capital loss can only be used to offset capital gains realized in the year, in the prior three years, or in any future years.
The capital loss on a loan determined to be a bad debt is calculated as a disposition of the loan for zero proceeds. For the capital loss to be permitted for income tax purposes, the loan must have been made for the purpose of earning income from a business or property, or received as consideration for the disposition of capital property to a person with whom you were dealing at arm’s length. The loan must have been established by you to have become uncollectable in the year.
There is no formal election to file to claim the capital loss on such a loan; the election is made in your tax return by reporting the disposition of the loan for nil proceeds on Schedule 3. The CRA has stated that in order to make a valid election you must send CRA a letter to advise them of the election, and provide details of the loan, but the Tax Court of Canada has repeatedly held that the Income Tax Act does not require any such letter.
If the loan was to an arm's length Canadian-controlled private corporation (CCPC) engaged in an active business carried on principally in Canada at some point in the twelve months prior to becoming a bad debt, the loss may qualify as an “An allowable business investment loss is a capital loss and half of which is deductible against other sources of taxable income.allowable business investment loss” (“ABIL”) which is deductible against other sources of taxable income. The CRA will review all ABIL claims so you need to have evidence of the amount of the loan, proof the company to which you lent the funds was a CCPC engaged in "active business" in the twelve months prior to becoming a bad debt, support the loan was made to earn income from business or property, and the nature of the loss triggering event in the year.
Contact a Chartered Professional Accountant to see whether you might be able to write off a loan, and whether the resulting loss might qualify as an allowable business investment loss.