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Changes to Specified Income

In October the Federal Government abandoned many of the proposed changes, while amending others, as a result of the massive outcry from the small business community.

However, one area the Government insisted would still be implemented on January 1, 2018, are the proposed changes to the “dividend income sprinkling” rules. That said, they promised to simplify and better target the rules, but they have not done so. They also promised to issue revised measures during the fall.  On December 13, 2017, literally minutes before the legislature rose for their winter break and shortly before Canadians went on their Christmas break, the Government issued the revised measures, stating that the rules will still come into effect on January 1, 2018 and insisting their timeline has given Canadians enough time to plan their situations.  The Government did this despite the Standing Senate Committee on National Finance recommending that the proposals be withdrawn or deferred until January 1, 2019, and for the Government to undertake an independent and comprehensive review of Canada’s tax system.

Given the complexity and vagueness of the rules, a detailed review of the proposals is beyond the scope of this e-mail, however please feel free to review the Technical Backgrounder on Measures to Address Income Sprinkling here - http://www.fin.gc.ca/n17/data/17-124_2-eng.pdf.  You can also view a “simplified” flowchart to assist you in determining how the new rules might apply to your situation here - https://moodysgartner.com/tax-split-income-flowchart/.

A simplified summary of the rules is, in the case of dividends paid to inactive family members, the dividend income splitting rules will not apply to non-service businesses, however they will apply to service businesses, thus greatly increasing the family tax burden of service businesses only.  The term service business has not been defined by the Government, as such the applicability of the rules to certain companies will be unclear for some time.

The rationale for the Government to single out service providers as opposed to businesses that sell product is perplexing. As an example, a painter using a corporation to income split with their spouse, making $150,000 per year and employing 20 people in a small rural community, will no longer be able to income split with their stay at home spouse raising their children because the business supplies a service, and does not sell a product, costing the family approximately $14,000 more in taxes annually.  Using the same example except say the business is a group of successful car dealerships making $100M+ per year selling cars - in this case the family will not be impacted at all, and the family will continue to benefit from being able to income split with inactive family members, simply because they are selling products (vehicles) as opposed to providing a service. 

We urge you, as a private corporation owner, to familiarize yourself with these proposals and how they may affect your business, your family, and your future. It is a very good time to contact your Member of Parliament (Pamela Goldsmith - Jones - [email protected] or 604.913.2660) to express your concerns before the proposed rules are finalized as part of the Governments February budget.

As we seek to finalize your own compensation strategy before the end of February, we will be reviewing the proposed rules potential impact to your specific situation, and advise you accordingly. As always, please don’t hesitate to contact us with any questions you have.

URGENT ALERT: 143 million Customers Exposed in Financial Data Breach

Credit reporting company Equifax has just revealed that its databases were hacked in a large-scale breach affecting millions across the US, UK & Canada. While no hacking event is ever good news, some are easier to ignore than others – this isn’t one of them. The sensitive nature of the exposed data now requires immediate action for all those even possibly affected.

The short version: Equifax is one of the three main organizations in the US that manages & calculates credit scores. To do that effectively, they have access to almost every piece of financial data for adults in the country, plus pretty much anyone who’s lived/worked in the US. We’re talking social security, tax file numbers, drivers’ license, credit card numbers…the big stuff. On July 29, Equifax disclosed the breach, stating that hackers had repeatedly gotten in through a vulnerability in the web application from mid-May to July of this year.

If you’re an Equifax customer: As scary as all that sounds, what’s done is done. Equifax, cyber-security experts & law enforcement officials are on the case, working to minimize the long-term damage.

The best action now is to protect yourself against fallout:

  1. Go to: http://www.equifaxsecurity2017.com to see if your data may have been affected. There was some news that this site was delivering random results, but Equifax announced it has been corrected. At this stage, it’s safest to assume everyone with a credit history has been impacted, so unless that link gives a definite ‘no you’re safe’ response, continue with the following recommendations.
  2. Claim the Equifax free year of credit monitoring & identity theft insurance (if you’re a US resident). If you’re not eligible, consider sourcing your own. As the hacked data will continue to circulate for some time, also consider extending your credit monitoring for a few more years.
  3. Keep a close eye on your finances and accounts. Check for notifications of new credit applications, monitor your statements and bills, and immediately report any suspicious activity or sudden change in billing.
  4. Change all your passwords to be strong, unique and long. Any of the stolen data may give hackers a free pass into the rest of your bank accounts, email and personal information.
  5. Add two-factor authentication where possible. This is when an account demands a second layer of authentication before allowing access or changes – getting the password correct isn’t enough, the hacker would also need to get the special code sent by SMS.
  6. Consider freezing your credit report. This makes it harder for identity thieves to open accounts under your name, as access is completely restricted until you choose to un-freeze.

Proposed Changes to the Taxation of Private Corporations

On July 18, 2017, the federal Minister of Finance, Bill Morneau, announced extensive proposed changes to the taxation of private corporations in Canada.  These changes likely will impact you, and will likely result in you having to pay significantly more in taxes starting in 2018.  For more information, please visit the following links:

  1. www.cpacanada.ca/en/connecting-and-news/news/professional-news/2017/july/finance-canada-consultation
  2. www.taxpayer.com/commentaries/bill-morneau-s-attack-on-the-middle-class
  3.  www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp

These changes were proposed to ensure the wealthiest of Canadians pay their fair share of taxes.  Unfortunately, the proposed changes impact ALL private corporations, not just those that are owned by the wealthiest of Canadians.  In fact, the majority of private corporations in Canada are owned by “middle-class” Canadians, the very group of Canadians that the Government promised to protect. 

We do not believe that these proposals are fair, and are counter-productive to the Canadian economy as a whole for the following reasons:

  1. The proposals are based on the unsupportable argument that an employee and a private corporation owner should be taxed the same.  We believe that a private corporation owner carries significant additional risks and responsibilities that an employee does not, hence warrants the current tax regime;
  2. The proposals argue that spouses who are not directly involved in the business do not share in the risks and rewards of the corporation;
  3. The proposed changes casts a tax net at the wealthiest of Canadians that is so wide that it is going to catch hundreds of thousands of Canadians in the middle-class, resulting in the largest tax increase in decades to the middle-class;
  4. The proposed changes take away an important incentive for people to take risk and to innovate in Canada;
  5. The “trickle-down” effect on the economy will be far in excess of the tax revenues generated;
  6. A 75-day consultation window, in the middle of summer, is not properly consulting with the Canadians affected, especially given the changes proposed are changing tax law that has been in place for over 40 years;
  7. The proposed changes are overly complex, thus resulting in significant tax uncertainty for all impacted.

We think that you, as a private corporation owner, should be aware of these proposals and how they may affect your business, your family, and your future.  It is a very good time to contact your Member of Parliament (Pamela Goldsmith - Jones - [email protected] or 604.913.2660) to express your concerns before the consultation period ends on October 2, 2017.

Some of these proposals are scheduled to come into law on January 1, 2018, which will likely impact your 2017 tax planning decisions.  As there may be significant amendments to the proposed legislation (or hopefully abandoned altogether depending on the response from Canadians during the consultation period), we do not recommend any action with regard to your business structure at this time.  However, we will be in touch with you after the consultation period closes and once it becomes clear as to the extent of the final proposed changes.

CRA Scam Alert – 2017


It has come to our attention that a CRA scam purporting to be endorsed by TCG Chartered Professional Accountants LLP has been distributed via email.CRA Scam 2017

Be advised that neither TCG nor CRA is involved in any way with this illicit activity.

Please visit the following CRA resource to learn how to best protect yourself online and how to identify fraudulent activity:

http://www.cra-arc.gc.ca/scrty/frdprvntn/menu-eng.html

Have you been a victim?


You should report deceptive telemarketing to the Canadian Anti-Fraud Centre online or by calling 1-888-495-8501.

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Tax Free Savings Accounts (“TFSA”) – Beneficiary Designations

TFSA’s have now been around since 2009.  If you have not made any contributions before, as of 2016 you can contribute a maximum of $46,500, and each year after 2016 you will be able to contribute an additional $5,500 (the annual contribution amount being subject to indexation).

Any income and capital gains in your TFSA are tax-free to you, so a TFSA should certainly be part of your overall savings portfolio.

Like registered retirement savings plans (“RRSP”), you have the ability to designate a beneficiary on your TFSA.  Unlike RRSP’s, a TFSA has a third possible designation, the “successor holder”, which is still not well understood by many, and the differences in the designations can have a significant impact to your Estate.  The only person that can be a “successor holder” is one’s spouse.

It should be mentioned that you may not have ANY TFSA beneficiary designation.  In the case of a self-administered TFSA account (i.e. one you opened through an online brokerage), the default may be no designation until you to file a “beneficiary designation form” to have one added to the account.  Your beneficiary designation is typically shown on your investment statements, if not contact your financial institution to confirm your designation.  In the case of no designation made, the default on your death is your TFSA gets paid to your Estate.

Here are the income tax and probate fee differences between the designations:

  1. No designation (default Estate) / Estate designated as beneficiary:
  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after date of death – fully taxable to Estate as income
  • Subject to BC probate fees – yes

 

  1. Specific individual and/or spouse designated as beneficiary:
  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after date of death – fully taxable to individuals and/or spouse as income
  • Subject to BC probate fees – no

 

  1. Spouse designated as Successor Holder:
  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after date of death – none
  • Subject to BC probate fees – no

So if you have a spouse, you should ensure that they are designated as the successor holder of your TFSA.  This ensures, on your death, they step into your shoes as owner of your TFSA, effectively doubling the amount of TFSA that continues to grow tax-free.  If you only designate your spouse as beneficiary, this is not the same as designating them as successor holder, because your TFSA will not continue to grow tax-free in their hands upon your death.

For more information, contact your Chartered Professional Accountant or financial institution. You can get more information at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/dth/menu-eng.html