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15 Jun 2010

Why Incorporate?

Posted by Tax Consultants. Comments Off on Why Incorporate?

Incorporating your practice

Tax Deferral

The tax deferral advantage available to an incorporated person may be substantial. This is because Canadian Controlled Private Corporations (as are most professional corporations) may be able to access the small business deduction under the ITA. More specifically, in an incorporated practice, the first $500,0001 of annual “business related profit” – the amount remaining after deducting all eligible expenses – may be eligible for the small business tax rate of about 13%-18% (depending on the province), which is significantly lower than top marginal personal income tax rates. A person who would otherwise pay tax at the top marginal personal tax rate may be able to defer the payment of tax by leaving money within the professional corporation to be used for investment or corporate debt repayment. This deferral advantage is equivalent to a tax-free loan from the government. Retaining income in the corporation may also create savings for retirement. On retirement, these savings may be distributed, usually by way of dividends to shareholders, during a time when you are in a lower tax bracket.

Income Splitting

Income splitting, which can be achieved in some provinces through the establishment of a family trust or through the payment of dividends to shareholding family members, can be an effective way to reduce the total tax bill paid by your family. Although the “kiddie tax” rules negate the advantage of distributing dividends to minors, you may still be able to reduce your overall family taxes by making distributions to your spouse and/or adult children if they are in a lower marginal tax bracket than yourself.

Timing

All partnerships, sole proprietorships, and professional corporations that are members of partnerships are required to use the calendar year as their fiscal period. Professional corporations that are not members of a partnership can have an off-calendar year-end, which can provide an opportunity for certain tax deferrals at a personal level.

Secondary Advantages

In addition to the primary advantages of tax deferral and income splitting, there are numerous miscellaneous secondary benefits that may be available to incorporated physicians. These include:

  • Individual Pension Plans
  • Capital gains exemption
  • Affordable Benefits
  • Flexibility – Salary vs. Dividend
  • Corporate Owned Universal Life Insurance
  • Cash Flow Maintenance
  • Retiring Allowance and Death Benefits
  • Employee Profit Sharing Plan

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

13 May 2014

Canada’s Federal 2016 Budget

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Canada’s Federal 2016 Budget

With Canada’s 2016 federal budget just around the corner, we consider what tax measures our new government might have for us.

Our new Liberal government has already implemented some of the tax measures promised in its platform.

These changes, and others, are in Bill C-2, An Act to amend the Income Tax Act (first reading on December 9, 2015) and are discussed in the following Tax Insights:globes MK & Associates

 

The Finance Minister Bill Morneau commented on the following personal tax changes, which were promised in the Liberal party platform:

  1. personal tax rates – starting January 1, 2016:
    1. A. the tax rate on incomes over $200,000 will increase from 29% to 33%;
    2. B. the second lowest tax rate will drop from 22% to 20.5%, decreasing taxes by up to $671 (based on 2015 tax brackets);
  2. Tax-Free Savings Account (TFSA) contribution limit – will be rolled back from $10,000 to $5,500 and indexing will be reinstated, for contributions made in respect of the 2016 and later years;
  3. income-splitting – the measure that allows some families with children under 18 to reduce their taxes by up to $2,000 will be cancelled, starting 2016;
  4. Universal Child Care Benefit, Canada Child Tax Benefit and National Child Benefit Supplement – will be replaced with a new Canada Child Benefit, for payments starting July 1, 2016; the Liberal party platform had stated that the new benefit would be income-tested and tax-free;mk change

 

The first two measures appeared in a Notice of Ways and Means Motion that was released. The latter two will be in the 2016 federal budget.

The Notice of Ways and Means Motion also increases:

  1. the Canadian-controlled private corporation (CCPC) investment income surtax from 6 2/3% to 10 2/3%, which therefore raises the overall tax on investment earned in a CCPC by 4%;
  2. the Part IV Tax rate from 33 1/3% to 38 1/3%;
  3. the dividend refund rate on taxable dividends paid by a corporation from 33 1/3% to 38 1/3%;

__________________________________________________________________________________________________________________________________

Canada’s Federal 2014-2015 Budget

Canada’s federal Finance Minister, Jim Flaherty, delivered his 2014 Federal budget.MK & Associates

 

Personal

 

Medical Expense Tax Credit

 

The budget proposes to make certain amounts paid for the design of an individualized therapy plan eligible for the Medical Expense Tax Credit. The amounts would be eligible where the cost of the therapy itself would be eligible for the medical credit and certain conditions are met, including that:

 

  • An individualized therapy plan is required to access public funding for specialized therapy, or a medical doctor or an occupational therapist prescribes an individualized therapy plan
  • The plan is designed for an individual with a severe and prolonged mental or physical impairment who is, because of the impairment, eligible for the Disability Tax Credit.

 

The budget also proposes to add expenses for service animals specially trained to assist an individual in managing their severe diabetes to the list of expenditures eligible under the medical credit.

 

Mineral Exploration Tax Credit

 

The budget extends the eligibility for the Mineral Exploration Tax Credit for flow-through share investors for one year to flow-through share agreements entered into on or before March 31, 2015.

 

Adoption Expense Tax Credit

 

The budget proposes to increase the maximum amount of eligible expenses for the 15% Adoption Expense Tax Credit to $15,000 per child for 2014 (up from $11,774). This amount will be indexed to inflation for taxation years after 2014.

 

Pension transfer limits

 

The amount of a lump-sum commutation payment from a defined benefit registered pension plan (RPP), received by a plan member who is leaving the RPP that may be transferred to a RRSP, RRIF, certain registered pension plans or a pooled registered pension plan on a tax-free basis is generally reduced if the RPP is underfunded, subject to certain exceptions. The portion of the commutation payment that exceeds the transferable amount must be included in the taxpayer’s income for the year in which it is received.

 

The budget proposes to extend the circumstances in which the maximum transferable amount, for a plan member leaving an underfunded defined benefit registered pension plan will be the same as if the plan were fully funded. In particular, the benefit reduction will be disregarded in the computation of the transferable amount if either:

 

  • Where the plan is an RPP other than an individual pension plan, the reduction in the estimated pension benefit that results in the reduced commutation payment is approved pursuant to the applicable pension benefits standards legislation, or
  • Where the plan is an individual pension plan, the commutation payment to the plan member is the last payment made from the plan (i.e., the plan is wound up).

 

The application of this rule must be approved by the CRA, and will apply in respect of commutation payments made after 2012.

 

GST/HST Credit

 

The budget proposes to allow the CRA to automatically determine if an individual is eligible to receive the GST/HST Credit. Each individual who is eligible for the GST/HST Credit will receive a notice of determination rather than having to apply for the credit. This measure will apply for 2014 income tax returns and for subsequent taxation years.

 

Search and Rescue Volunteers Tax Credit

 

The budget proposes a Search and Rescue Volunteers Tax Credit to allow eligible ground, air and marine search and rescue volunteers to claim a 15% non-refundable tax credit based on an amount of $3,000. This measure will apply to the 2014 and subsequent taxation years.

 

Business and rental income of trusts and partnerships

 

The budget proposes to apply the tax on split income where a minor is allocated income from a partnership or trust that is derived from business or rental activities conducted with third parties. Specifically, the budget proposes to amend the definition of “split income” to include income that is, directly or indirectly, paid or allocated to a minor from a trust or partnership where the income is derived from a business or a rental property, and a person related to the minor is either:

 

  • Actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or
  • In the case of a partnership, has an interest in the partnership (whether held directly or through another partnership).

 

This measure will apply to the 2014 and subsequent taxation years

 

 

Here are 10 highlights from the 2014 federal budget:

 

  • $1.5 billion over 10 years to support research and innovation at post-secondary institutions in areas that “create long-term economic advantages for Canada.”
  • $305 million over five years to expand and upgrade broadband service in rural and northern areas. The investment is expected to bring better service to 280,000 households.

Related:

 

  • Budget grab bag has relief for consumers, higher taxes for smokers
  • $323.4 million over two years to continue to improve First Nations water and wastewater.
  • $25 million over five years to continue efforts to reduce violence against aboriginal woman and girls.
  • boosting the adoption expense tax credit to $15,000 to recognize the costs of adopting a child. The new limit, up from $11,774, would apply to adoptions finalized after 2013.
  • A tax credit for search and rescue volunteers who perform at least 200 hours of service a year.
  • After a year that saw major floods in Alberta and the Greater Toronto area, Ottawa is pledging to explore options for residential flood insurance. “Canada is the only G8 country without residential flood insurance coverage,” the budget said.
  • A hike in the excise duty on tobacco products will add at least $4 to a carton of 200 cigarettes. The higher tax will pump $685 million into the federal coffers in 2014-15. As well, Ottawa has earmarked $91.7 million over five years to enhance the RCMP’s ability to combat contraband tobacco.
  • $11.4 million over four years to expand vocational training for people with autism spectrum disorders.
  • $44.9 million over five years to combat prescription drug abuse, including a campaign to educate Canadians on the safe use, storage and disposal of prescription drugs.

3 Mar 2014

Naturopathic and Acupuncture Services

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GST ALERT – Naturopathic and Acupuncture Services are now Exempt

After extensive consultations with alternative health care professionals across Canada, the Department of Finance reversed the taxable status of naturopathic and acupuncture services.   Effective Budget Day, February 11, 2014, certain of these services are now treated as GST-exempt Health Care Services.mk 4

The good news – Naturopaths and Acupuncturists across Canada seem elated with the removal of GST/HST from their fees.  (But not all revenues are affected.)

The real impact –This significant change will seriously impact operating costs.  It also appears that some previously claimed Input Tax Credits (ITCs) could be clawed back and will remain a CRA audit assessment risk for up to four years.

If service fees are not increased, the profitability of these businesses will suffer. We understand that many practitioners have continued to collect GST while awaiting clarification from their professional associations.  In the meantime, GST/HST collected must be remitted to CRA.  However, ITCs will be denied.

17 Oct 2012

Voluntary Disclosure Program

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Voluntary Disclosure / Tax Amnesty

If you have never filed all your income tax returns or have filed them incorrectly, this page is for you. And you don’t need a costly tax lawyer to assist you with this.

What is Voluntary Disclosure?

Revenue Canada’s Voluntary Disclosure program, commonly referred to as tax amnesty or tax pardon, is a fairness program that allows for taxpayers to voluntarily declare income and file returns that have never been filed or have been filed incorrectly.

This program waives civil penalties and avoids criminal prosecutions for those who are volunteering to act in accordance with their legal responsibilities, as under the Income Tax Act and Excise Tax Acts by reporting their affairs before the Canada Revenue Agency (CRA) begins any action or investigation.

Persons that use this program will pay the taxes owing and interest but penalties will be waived. As well, policies exist that acknowledge uncontrollable circumstances and can provide relief from interest in certain situations.

Non-residents are also accommodated and if they meet requirements, and can extend their submission of section 216 returns.

This program also allows for anonymous disclosure under the No-Name Policy, which protects the identities of the complying taxpayers.

No-Name Policy

If a taxpayer decides to keep his or her identify anonymous and confidential, he or she will be able to proceed with disclosure, free of prosecution for 90 days.

The 90 day period begins from the “effective date of disclosure,” which is determined by the date of a written voluntary disclosure submission or the receipt of a VDP-1 Taxpayer Agreement Form as received by the CCRA tax services office.

This period allows for the taxpayer to prepare and submit a complete disclosure without any CRA interference or prosecution. This anonymity is even applicable if the unreported income has been earned off-shore or through criminal activity.

Who Does this program apply to?

Tax amnesty can be applied in several scenarios including:

– Failure to report income
– Income with inaccurate or missing information
– Income earned off-shore or from criminal activity
– Not filed tax returns
– Improper expense claims
– Not remitted source deductions
– Neglecting to retain of a portion of a purchase price on the acquiring of assets from non-residents under section 116 of the Act.

Requirements for Voluntary Disclosure

Four conditions must exist for an individual to use Voluntary Disclosure:

1.The disclosure must be voluntary. If you are already being investigated, it is too late. You must initiate the disclosure and contact the Canada Revenue Agency before they contact you!

2.The disclosure must be complete and accurate. Previously pardoned penalties will be applied if a person reveals only partial information or provides information with material errors.

3.The disclosure needs to involve a penalty. If no penalty exists, declare and file as usual.

4.Disclosure must be information that is over one year old or, if less than one year, not simply employed as an attempt to use this program to file late and avoid penalty.

Legislative References for Voluntary Disclosure

The CRA has the legislative authority to waive or cancel penalties, in whole or in part, on a voluntary disclosure. The pertinent legislative provisions can be found in:

– subsection 220(3.1) of the Income Tax Act
– section 88 of the Excise Tax Act
– section 281.1 of the Excise Tax Act
– subsection 3.3(1) of the Customs Act
– subsection 126(1) of the Customs Tariff

17 Oct 2012

VDP

Posted by Tax Consultants. No Comments

Voluntary Disclosure / Tax Amnesty

If you have never filed all your income tax returns or have filed them incorrectly, this page is for you. And you don’t need a costly tax lawyer to assist you with this.

What is Voluntary Disclosure?

Revenue Canada’s Voluntary Disclosure program, commonly referred to as tax amnesty or tax pardon, is a fairness program that allows for taxpayers to voluntarily declare income and file returns that have never been filed or have been filed incorrectly.

This program waives civil penalties and avoids criminal prosecutions for those who are volunteering to act in accordance with their legal responsibilities, as under the Income Tax Act and Excise Tax Acts by reporting their affairs before the Canada Revenue Agency (CRA) begins any action or investigation.

Persons that use this program will pay the taxes owing and interest but penalties will be waived. As well, policies exist that acknowledge uncontrollable circumstances and can provide relief from interest in certain situations.

Non-residents are also accommodated and if they meet requirements, and can extend their submission of section 216 returns.

This program also allows for anonymous disclosure under the No-Name Policy, which protects the identities of the complying taxpayers.

No-Name Policy

If a taxpayer decides to keep his or her identify anonymous and confidential, he or she will be able to proceed with disclosure, free of prosecution for 90 days.

The 90 day period begins from the “effective date of disclosure,” which is determined by the date of a written voluntary disclosure submission or the receipt of a VDP-1 Taxpayer Agreement Form as received by the CCRA tax services office.

This period allows for the taxpayer to prepare and submit a complete disclosure without any CRA interference or prosecution. This anonymity is even applicable if the unreported income has been earned off-shore or through criminal activity.

Who Does this program apply to?

Tax amnesty can be applied in several scenarios including:

– Failure to report income
– Income with inaccurate or missing information
– Income earned off-shore or from criminal activity
– Not filed tax returns
– Improper expense claims
– Not remitted source deductions
– Neglecting to retain of a portion of a purchase price on the acquiring of assets from non-residents under section 116 of the Act.

Requirements for Voluntary Disclosure

Four conditions must exist for an individual to use Voluntary Disclosure:

1.The disclosure must be voluntary. If you are already being investigated, it is too late. You must initiate the disclosure and contact the Canada Revenue Agency before they contact you!

2.The disclosure must be complete and accurate. Previously pardoned penalties will be applied if a person reveals only partial information or provides information with material errors.

3.The disclosure needs to involve a penalty. If no penalty exists, declare and file as usual.

4.Disclosure must be information that is over one year old or, if less than one year, not simply employed as an attempt to use this program to file late and avoid penalty.

Legislative References for Voluntary Disclosure

The CRA has the legislative authority to waive or cancel penalties, in whole or in part, on a voluntary disclosure. The pertinent legislative provisions can be found in:

– subsection 220(3.1) of the Income Tax Act
– section 88 of the Excise Tax Act
– section 281.1 of the Excise Tax Act
– subsection 3.3(1) of the Customs Act
– subsection 126(1) of the Customs Tariff

14 Aug 2012

Purchase Price Allocation

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Section 68 of the Income Tax Act (Canada) (the “ITA”) allows the Canada Revenue Agency (the “CRA”) to determine the reasonable consideration for the disposition of a particular property. In TransAlta Corporation v. The Queen (2012 FCA 20), the Federal Court of Appeal (the “FCA”) helpfully clarified two important allocation principles for the purposes of section 68 of the ITA.

In 2002, TransAlta sold its regulated electricity transmission business to an arm’s length purchaser for the negotiated price of 1.31 times the net regulated book value of TransAlta’s tangible assets. The parties allocated the bulk of the 31% premium to goodwill. This allocation was a standard allocation of purchase price premium for regulated industries and was supported by valuation theory, audited financial statements and long-standing industry practice. The Minister reassessed TransAlta, pursuant to section 68 of the ITA to reallocate the premium to tangible assets on the basis that the practice by regulated industries of allocating purchase price premium to goodwill was unreasonable as it allowed the vendors to avoid recapture of capital cost allowance on its tangible assets.

In determining whether an allocation of purchase price to a particular property is reasonable under section 68 of the ITA, the FCA provided the following guides: (1) an allocation of purchase price agreed to by arm’s length parties is an important (but not determinative) factor to consider and will be given considerable weight where the parties have strong divergent interests concerning that allocation and less weight where one of the parties is indifferent to that allocation or where both parties’ interests are aligned with respect to that allocation; and (2) the reasonableness test under section 68 of the ITA is not what the CRA believes is reasonable but rather “whether a reasonable business person, with business considerations in mind, would have made the allocation”.

In this case, the FCA concluded that the parties’ agreed allocation of the premium to goodwill was reasonable “precisely because of its compliance with industry and regulatory norms and its consistency with standard valuation theory for regulated businesses and standard accounting principles applied in such industries.” The taxpayer’s appeal was allowed

14 Aug 2012

10-year limitation period

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The Federal Court of Appeal recently released its decision in Bozzer v. The Queen, 2011 FCA 186. Since the introduction in 2004 of a 10-year limitation period for interest and penalty relief under subsection 220(3.1) of the Income Tax Act, the CRA has administered the provision as if the 10-year period for applying for relief expires on December 31st of the 10th year following the taxation year assessed (i.e., December 31, 2010 for taxation year 2000).

In a resounding victory for taxpayers, Justice Stratas rejected the Minister’s policy. In line with practitioners, who have argued that interest accrues continuously and that the CRA’s administrative practice has no “fairness” rationale, Justice Stratas accepted Mr. Bozzer’s position that the 10-year limitation period is the 10 years that end with the taxpayer’s application for relief, regardless of the taxation year of the principal tax debt.

However, CRA has not changed its administrative practice. The CRA has not yet expressed any official response to the decision and it remains to be seen if the Minister will appeal to the Supreme Court of Canada or ask the Department of Finance to legislate over the decision.

14 Aug 2012

Farm Losses Revisited by SCC

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On Friday March 23, 2012, The Queen v. John R. Craig was heard by the Supreme Court of Canada (SCC). This was the first opportunity for the SCC to revisit the issue of restricted farm losses since its decision in Moldowan v. The Queen, [1978] 1 SCR 480. In Moldowan, the SCC concluded that farm losses could only be deducted against other sources of income, without restriction, if farming or a combination of farming and some other source of income was a taxpayer’s chief source of income. This vague direction resulted in over 30 years of inconsistent decisions from the courts below.

14 Aug 2012

Trust Residence

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On April 12, 2012, the Supreme Court of Canada (SCC) released its decision in Fundy Settlement v. Canada (2012 SCC 14). This case was the SCC’s first opportunity to consider the appropriate test for determining the residence of a trust for tax purposes.

Prior to this case, it was widely believed that the residence of a trust was determined by reference to the residence of its trustee. This conventional wisdom had been challenged by the Minister of National Revenue in its assessment of the Fundy Settlement.

The lower courts agreed with the Minister that the appropriate test was not the residence of the trustee, but the corporate “central management and control” test (CMC test). In a terse 19 paragraph decision, the SCC agreed with the courts below.

The case was about a trust that had a Barbados-resident trust company as its trustee and Canadian-resident individuals as the beneficiaries. When the trust disposed of shares of an Ontario corporation, it remitted withholding tax to the Minister of National Revenue on account of the capital gain realized by the trust. The trust then sought to obtain a refund of the Canadian withholding tax on the grounds that the trust was resident in Barbados and, thus, exempt from Canadian capital gains tax under the Canada-Barbados Tax Treaty.

The Minister challenged this position, asserting that the trust was resident in Canada because the role of the trustee was limited and the Canadian-resident beneficiaries were actually managing the trust.

The SCC concluded that, as with corporations, the residence of a trust should be determined by the principle that a trust resides where its real business is carried on, that is, where the central management and control of the trust actually takes place. In reaching its decision, the SCC concluded that corporations and trusts are similar because the function of both is the management of property, and that the application of the CMC test to trusts would promote consistency, predictability and fairness.

The SCC did not reject the possibility that the residence of a trust could coincide with the residence of its trustee, but only when the trustee carries out the function of centrally managing and controlling the trust in the trustee’s place of residence. In the case of the Fundy Settlement, it was found that the Canadian-resident beneficiaries were managing the trust with the result that the trust was resident in Canada.

 

14 Aug 2012

Attribution Case

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On July 13th, 2012, the Federal Court of Appeal dismissed the Crown’s appeal in The Queen v Peter Sommerer (2012 FCA 207)

In 1996, Peter Sommerer’s father, Herbert Sommerer, created an Austrian private foundation of which Peter, his wife and children were beneficiaries. Peter then entered into an agreement with the foundation to sell it certain shares at fair market value. The foundation used part of its endowment money to pay Peter for the shares. The foundation later sold the shares and realized a capital gain.

The main issue in the case was whether subsection 75(2) of the Income Tax Act (Canada) should be interpreted to apply in the context of the fair market value sale of shares, such that the capital gain realized by the foundation could be attributed back to Peter.

The Crown argued that the capital gains realized by the foundation should be attributed to Peter because it was possible that the shares or property substituted for the shares (including the proceeds of their sale) might be distributed to him as a beneficiary. In other words, the Crown argued that subsection 75(2), which generally applies in respect of the settlement of a trust where the settlor is also a beneficiary, should also apply in respect of property that has been purchased by a trust from a beneficiary at fair market value.

The Tax Court of Canada found in favour of the taxpayer on the basis that subsection 75(2) could not apply to a beneficiary in respect of property sold to a trust at fair market value. The Court’s main conclusion was that “once properly unraveled and viewed grammatically and logically, the only interpretation is that only a settlor, or a subsequent contributor who could be seen as a settlor, can be the ‘the person’ for purposes of subsection 75(2) of the Act.”

A unanimous Federal Court of Appeal upheld the Tax Court’s decision. Since Peter was neither the settlor not a subsequent contributor (because the property was sold at fair market value), the Court held that subsection 75(2) did not apply to attribute the capital gains realized by the foundation to him.

14 Aug 2012

T1135 Foreign Property and Income Reporting Requirements

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T1135 Foreign Property and Income Reporting Requirements

In Douglas v. HMQ, 2012 TCC 73, a recent decision by the Tax Court of Canada (TCC) under the informal procedure, the TCC surprisingly accepted the taxpayer’s argument that the penalty imposed under subsection 167(2) of the Income Tax Act (Canada) should be waived for the late-filing of a T1135 form.

In this case, the taxpayer knowingly filed his T1 income tax return along with his T1135 nine months late. He assumed that his failure to file on time would not attract a penalty as he did not owe any taxes for the year. However, the Minister imposed the maximum penalty of $2,500 for the late-filed T1135.

The TCC noted that although a judge-made due diligence defense should be used sparingly, the facts in this case justify such application to waive the T1135 penalty. The Court found that the taxpayer acted reasonably in believing that there would be no penalty since no taxes were owing. Notwithstanding that subsection 167(2) imposes a strict penalty, the TCC held that it would be unfair to penalize the taxpayer in these circumstances.

This decision suggests that a taxpayer may have recourse through the TCC for late-filed T1135 penalties when the taxpayer has exercised “all reasonable measures” to comply with the Income Tax Act.

2 Mar 2012

CA CMA CGA Merger

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VISION FOR THE PROFESSION

To be the pre-eminent, internationally recognized Canadian accounting designation and business credential that best protects and serves the public interest.

GUIDING PRINCIPLES FOR UNIFICATION

The guiding principles provide the framework to unify the profession and achieve the vision.
Photo Accountants CA CMA CGA merger
The new profession would adopt the Canadian designation, Chartered Professional Accountant (CPA).
1

Evolution to a single designation

The new profession would adopt the Canadian designation Chartered Professional Accountant (CPA).
All current members in good standing would be granted this designation from their new CPA provincial body as CPA legislation is approved.
For a period of 10 years, all members using the new CPA designation would be required to use it in conjunction with their existing designations. No current member could use the CPA without identifying his or her legacy designation as follows:
• First and Last Name, CPA, CA
• First and Last Name, CPA, CMA
• First and Last Name, CPA, CGA
After 10 years, a member could choose to use the CPA designation on its own.

2

Continued use of existing designations

Existing members would retain their current professional designations.
No member would be automatically granted an existing professional designation of another body.
The national and provincial CPA bodies would be promoting the new CPA designation. Use of legacy designations on their own post-unification would be subject to provincial merger agreements and legislation.

3

Retention but no expansion of rights

-Unification would protect all existing rights of members, such as public accounting rights and rights under any existing Mutual Recognition Agreement, without granting new rights.
-The new CPA organization would negotiate on behalf of all members when entering into new Mutual Recognition Agreements.
-Any member not authorized to practise in a restricted area, such as audit, prior to the merger would be required to complete any necessary provincial programs to qualify post-merger.
Photo Accountants CA CMA CGA merger
The new national Chartered Professional Accountants organization would establish a certification program that draws on the strengths of the existing programs and would be at least as rigorous as existing programs.

4

The Canadian CPA Certification Program 

The new CPA organization would establish a certification program that draws on the strengths of the existing programs and would be recognized by members, regulators, global accounting organizations and the business community as being at least as rigorous as all existing programs. Detailed information on the developing certification program is available by clicking here.
HIGHLIGHTS OF THE CANADIAN CPA CERTIFICATION PROCESS
A CPA Competency Map would be designed to meet the needs of industry, government and public practice.
-An undergraduate degree and specific prerequisite courses in business and accountancy would be required for admission to the professional education program.
-A post-graduate professional education program would be developed nationally and delivered provincially/regionally. Key components would include:
Individual examinations and team-based evaluations throughout the program.
A comprehensive, multi-day final examination.
Rigorous practical experience that builds the relevant CPA competencies and is subject to quality control by the profession.
Meet or exceed all standards for education, assessment and practical experience set by the International Federation of Accountants.
Meet or exceed requirements for existing and future Mutual Recognition Agreements.
Bridging programs to meet required degree or course prerequisites for the professional education program so that entry into the program would be accessible to entrants coming from the work force and abroad and those with non-business degrees.
To meet the diverse needs of both employers and clients, a separate program would be developed for those who aspire to a career in accountancy, but not as a qualified CPA. This program would have distinct entrance, education and assessment requirements. A bridging program to the appropriate stage of the CPA certification program would be developed.
Photo Accountants CA CMA CGA merger
Post-designation specialty programs would be developed to offer CPAs the opportunity to enhance their expertise and advance their careers.

5

A single designation with specialties

-As in other professions like medicine and law, post-designation specialty programs would be developed to offer CPAs the opportunity to enhance their expertise and advance their careers.
-A number of post-designation specialties would be considered, such as tax, forensic accounting, strategic management, and public sector accounting.

6

Branding the CPA designation

-Early in the transition process, all branding efforts would focus on the CPA designation and there would no longer be any branding of the legacy designations.

7

Common code of conduct, regulations, and the practice of public accountancy

-A new, common regulatory framework reflecting the best practices of the existing organizations, including codes of conduct, practice inspection, disciplinary processes and an effective, nationally consistent public accounting regime would be developed.
-The new national CPA organization would be responsible for supporting standard setting in the profession.
8

Merged operations and governance

The operations of the participating bodies would be combined at the provincial and national levels.
The new combined provincial and national bodies would be overseen by new Boards of Directors that would include representation from each of the participating bodies.
Mechanisms to protect existing members’ rights (such as those under Mutual Recognition Agreements) would be included.

-The organizations in each jurisdiction would be responsible for securing any legislation required to combine the operations and move to a new CPA designation. These bodies would work collaboratively to obtain any required change.
Unifying the profession is a strategic response to the rapidly evolving environment and the resulting opportunities and risks facing the Canadian accounting profession.
Photo Accountants CA CMA CGA merger The CPA designation is emerging as the largest accounting designation around the world.

The Canadian Environment

Increasingly, accountants are working in the same practice areas but remain subject to different qualification processes, codes of conduct, inspection and disciplinary regimes operated under 40 different governing bodies.
The three bodies in Quebec, at the invitation of their government, have agreed to merge under the Chartered Professional Accountant designation.
The Association of Chartered Certified Accountants (ACCA) in the U.K., which is aggressively advancing a global expansion strategy that targets Canada, is legally challenging the CA profession’s legislated rights to the exclusive use of the name “Chartered Accountant” in Canada.

Global Alliances and Other International Developments

The global financial crisis has brought the regulation of the accounting profession under close scrutiny.
Photo Accountants CA CMA CGA merger A larger, more cohesive voice would ensure that the Canadian accounting profession continues to effectively influence international standard setting bodies and other global organizations.
The U.K. House of Lords is publicly calling for the amalgamation of the six U.K. accounting bodies, saying the fragmentation of the accounting profession there is inefficient.
The CPA designation is emerging as the largest accounting designation around the world. The CPA designation is used by more accountants than any other designation, with the current ratio of CPAs to CAs globally being 2:1.
The Institute of Chartered Accountants in England and Wales and the ACCA have both filed European trademark applications to control the Chartered Professional Accountant (CPA) designation.
The American Institute of Certified Public Accountants (AICPA) is aggressively seeking to expand its global footprint and is opening examination centres for the U.S. CPA exam outside of the U.S. In addition, the AICPA and the U.K.-based Chartered Institute of Management Accountants (CIMA) have announced a new jointly developed global management accountant designation.
Increasingly, other national and regional accounting bodies also are entering into alliance agreements to increase their individual and collective strength, relevance and influence. Examples include the Global Accounting Alliance and the Edinburgh Group.

The Risks of Continuing as a Fragmented Profession

Government mandating that we reform, and possibly dictating the terms of that reform.
Inability to respond efficiently and effectively to challenges from foreign accounting bodies or alliances operating in Canada.
If the profession does not unify it is possible that two of the existing bodies may merge, thereby potentially strengthening their position in the marketplace at the expense of the third body.

The CPA designation becoming controlled by one or more of the existing Canadian bodies — to the exclusion of the others.
Losing influence domestically and internationally if we do not speak with a single, strong voice.
Achieving our four unification objectives would result in benefits for members.

Best positions the profession to protect the public through the provision of a common certification program and a single set of high ethical and practice standards.
Enhances and protects the value of your designation in an increasingly competitive and global environment.
Contributes to the sustainability and prosperity of the Canadian accounting profession.
Governs the accounting profession in an effective and efficient manner.

A New Designation with Broad Expertise

Members would retain their current designation and add the Canadian Chartered Professional Accountant (CPA) designation, which would become the pre-eminent designation and business credential for professional accountants who work in every sector of the economy.
The Canadian CPA designation would represent a unique combination of expertise in all areas of accounting, including financial and management accounting, assurance and taxation. It would evolve into a globally recognized business credential in the areas of financial and strategic management, business leadership, and auditing and assurance competencies.
Steps would be taken so that members would have access to post-designation specialty programs.

Securing Rights to the Global Designation of Choice

Securing alignment with the most recognized global accounting designation would best protect the value of the Canadian profession’s designation in the long run.
Coming together under the Chartered Professional Accountant banner would align us with both CA and CPA, if either, or both, designations emerge as globally dominant.
Mutual Recognition Agreements would be maintained and expanded with the world’s most prominent CA, CPA and other significant bodies, facilitating members’ mobility globally.

Photo Accountants CA CMA CGA merger A fully unified profession would reduce the number of governing bodies from 40 to 14 and significantly simplify operations and governance.

Common Regulatory Processes

A new common certification program and a single set of high ethical and practice standards, common code of conduct and practice inspection and discipline processes would create a strong foundation on which to build the unified profession, and would be more efficient and effective.
Greater harmonization would enhance trust and confidence in the profession amongst employers and the public at large.
A common regulatory framework would enhance inter-jurisdictional mobility for all members.

Efficiencies and Economies of Scale

A fully unified Canadian profession would reduce the number of governing bodies from 40 to 14, significantly simplifying operations and governance, and reducing confusion in the marketplace.
Marketing dollars would be more efficiently used to support the interests of all CPA members.
Gains from increased efficiencies could be re-invested in:
• Enhancing member services, such as post-designation specialty programs and professional development.
• Creating new products that enhance members’ practices and career goals.
• Developing communities of interest and networking in the members’ many areas of activity.

A Powerful Organization with a Unified Voice

A single voice representing as many as 170,000 Canadian members would more effectively represent member interests with respect to domestic policy, legislation and regulatory issues affecting the accounting profession.
A larger, more cohesive voice would ensure the Canadian accounting profession continues to effectively influence international standard setting bodies and other global organizations.

A united force would be stronger and more effective in dealing with global alliances and other designations that are becoming increasingly international in scope.
As the Canadian accounting profession is provincially regulated, any decisions regarding subsequent merger proposals would be made provincially. Please contact your governing body for information regarding next steps in your province or region.

3 Feb 2011

Carrying on business in Canada

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In the past 15 years, direct investment in Canada has more than tripled in value; more than 65% of that investment has come from the U.S. It is anticipated that this figure will continue to grow as U.S. corporations seek to expand their markets. This item discusses the basic Canadian tax issues facing U.S. corporations seeking to expand their businesses into Canada and the use of limited liability companies (LLCs) and unlimited liability companies (ULCs).

Taxation of Nonresident Corporations

Under Canadian law, nonresident corporations are subject to income taxes in Canada when they carry on a business there or dispose of taxable Canadian property (generally real estate, property used in a Canadian business and private company shares). These corporations will be subject to tax at ordinary rates, which range from 31% to 39% depending on the province to which the income is allocated.

In addition to income taxes, nonresident corporations are subject to a branch tax of 25% of the profits deemed to have been repatriated to the U.S. The amount is determined by formula and is designed to replicate the withholding tax that would have been imposed had those corporations carried on their Canadian business indirectly through a Canadian corporation that distributed its after-tax business earnings via dividends

Defining “Carrying on Business”

A question often asked is, “what level of Canadian business activity can a nonresident corporation engage in before being deemed to be carrying on business in Canada?” The term “carrying on business” is not specifically defined in the Canadian Income Tax Act (Act); rather, a common-law definition has evolved from the U.K. and Canadian courts. In addition, Act Section 253 provides an extended meaning of the term that deems a nonresident to be carrying on business in Canada if it:

1. Produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs anything in Canada;

2. Solicits orders or offers anything for sale there through an agent or servant, whether the contract or transaction is completed inside or outside of Canada; or

3. Disposes of certain resource properties or Canadian real estate.

Accordingly, the level of Canadian activity required to be deemed to be carrying on business there is very low. U.S. resident corporations can usually find relief in the Convention between the United States of America and Canada with respect to Taxes on Income and on Capital, signed September 26, 1980 (Treaty).

Treaty Provisions

The Treaty generally provides relief for U.S. residents via Article VII, Business Profits. This Article states that a U.S. resident will not be taxable in Canada on business profits unless it carries on a business there via a permanent establishment (PE) situated in Canada. When there is a Canadian PE, all business profits allocable to it may be taxed there.

Article V, Permanent Establishment, defines a PE to include:

1. Place of management, a branch, an office, a factory, a workshop and a mine or oil and gas well;

2. Building site or construction or installation project that lasts more than 12 months;

3. Person acting in Canada on behalf of a U.S. resident if that person has, and habitually exercises in Canada, the authority to conclude contracts.

A PE is deemed not to include a fixed place of business used solely for storage, display or delivery of goods or for the purchase of goods. In addition, the fact that a U.S. corporation has a Canadian subsidiary that carries on business there via a PE will not result in the U.S. parent having a PE in Canada.

Accordingly, when treaty protection is available, it is possible to carry on business in Canada, within these limits, without being subject to Canadian income taxes. Note: Canada requires a nonresident carrying on business in Canada, but exempt from Canadian tax because of Treaty provisions, to file an annual information return; see Act Section 150(1)(a).

Article 10, Dividends, also reduces (and in some case eliminates) various withholding taxes and exempts the first C$500,000 of branch profits from Canadian branch tax.

The LLC Trap

The popularity of U.S. LLCs in the last few years has led these entities to establish Canadian branches or subsidiaries. While an LLC may be disregarded or treated as a partnership for U.S. tax purposes, it will be treated as a corporation for Canadian tax purposes. This differing treatment generally does not cause any problems in inbound-to-Canada planning, and can provide some significant opportunities in the area of cross-border financing structures.

The LLC trap is caused by the fact that Canada does not consider a disregarded LLC, or an LLC treated as a partnership, to be a U.S. resident for Treaty purposes; thus, it does not afford treaty benefits to such an LLC. This is became Article IV, Residence, defines a resident of a contracting state as a person that is subject to tax in that state. Because a disregarded LLC or an LLC treated as a partnership is not subject to tax in the U.S., it is not deemed to be a U.S. resident. Thus, an LLC carrying on business in Canada:

* Will be taxable in Canada, whether or not it is operating through a PE;

* Will be subject to 25% withholding tax, if it receives interest, dividends and royalties from a Canadian resident;

* Will not be eligible for the C$500,000 branch tax exemption; further, the branch tax will be imposed at 25%, rather than the 5% Treaty rate.

There are also negative consequences for an LLC that forms a Canadian subsidiary. While the subsidiary will still be taxed at regular Canadian rates, the withholding tax on dividend distributions will be 25%.

It is widely anticipated that the next protocol to the Treaty will resolve the LLC trap; however, it is not known when it will be completed. Accordingly, if an LLC is considering expansion into the Canadian market, it is vital that a Canadian tax adviser be consulted before commencing operations there.

ULCs

A special type of Canadian corporation, the ULC, has become very popular with cross-border planners over the last few years, due to the opportunities presented by its hybrid classification. It is treated as a corporation for Canadian tax purposes and may be treated as a disregarded or flowthrough entity for U.S. tax purposes. In the past, this type of corporation could only be formed in the province of Nova Scotia; very recently, the province of Alberta passed legislation allowing ULC formation there, too; compare the Nova Scotia Companies Act to the Alberta Business Corporations Amendment Act (Bill 16, 5/17/05). Some of the advantages “of using a Canadian ULC include:

1. When an S corporation carries on business in Canada through a PE, the use of a ULC can reduce the effective tax rate, by allowing the S shareholders access to foreign tax credits that would not be available if the S corporation had used a regular Canadian corporation. A qualified subchapter S subsidiary is often used to shield the parent S corporation from liabilities arising from the Canadian operations, as a ULC does not provide liability protection.

2. The use of a ULC allows losses to flow through to the U.S. parent.

3. When a ULC is disregarded for U.S. purposes, transfer pricing issues are simplified; only the Canadian authorities must be satisfied, as the transfer price does not affect U.S. taxation.

4. A ULC instead of a Canadian branch also simplifies Canadian transfer pricing issues, as there is more guidance available on establishing transfer prices between two corporations than on determining the profits that should be allocated to a PE under the Treaty.

5. The use of a ULC instead of a regular Canadian corporation avoids the complexities of the U.S. controlled foreign corporation and passive foreign investment company rules.

6. The ULC can be very useful in developing cross-border financing structures that can significantly reduce the effective cost of capital.

7. In an acquisition, it may be possible to step up the basis of the assets of a Canadian target corporation by “converting” it to a ULC.

The cost of incorporating and maintaining a ULC has risen over the past several years, due to increased fees being charged by Nova Scotia; however, with the competition provided by Alberta’s ULC legislation, it is anticipated that these costs will now decrease.

Conclusion

While this item has discussed some of the basics of Canadian taxation of nonresidents and some issues surrounding the use of LLCs and ULCs, there are many more considerations for a U.S. corporation seeking to expand into the Canadian marketplace; it will be vital for U.S. and Canadian tax planners to work together to find the most effective structure for both sides of the border

8 Sep 2010

GST/HST Dentists

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A dentist whose professional practice is comprised one-third of crown, bridge and denture work, with office rent, administration and other taxable costs of $200,000 per year, may be eligible to recover an estimated $5,000 per year ongoing and a four-year “catch-up” for a total of $20,000 of immediate ITC entitlement as a result of this court decision.

This Tax Court of Canada decision reflects the first judicial review of CRA’s GST policy for dentists and indiscriminately rejects CRA’s narrow interpretation of the matter.

This decision establishes a legal precedence that, at the moment, is the highest authority with respect to this issue.  In plain terms, this Tax Court decision overrules CRA’s policy on the matter of dentists’ services with respect to crown, bridge and denture work.

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23 Aug 2010

SALE OF ALL THE ASSETS OF A DENTAL PRACTICE

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SAMPLE RULING

Statement of facts

A, who is a non-registrant dentist, has agreed to sell all the assets of his dental practice to dentist B who is also not registered for GST purposes. The closing of the sale will take place on March 15, 1995. The assets sold by A are as follows:

– dental supplies including various articles like crowns and caps;

– equipment and furniture;

– goodwill; and

– leasehold improvements

A previously acquired the above assets for use exclusively in the provision of exempt dental services, and in fact did not make any taxable supplies.

Ruling Requested

A is not required to collect and account for GST on the sale of the above business assets.

Ruling Given

Provided that the preceding statement constitutes a complete and accurate disclosure of all the facts, proposed transaction, and provided that the proposed transaction is completed as described above, our ruling is as follows:

The sale of dental supplies as well as equipment and furniture will not be subject to GST pursuant to paragraph 141.1(1)(b) of the Excise Tax Act. Furthermore, under section 167.1 of the Excise Tax Act, the consideration allocated to goodwill will not be included in calculating GST payable. However, A must collect and remit GST on the sale of the leasehold improvements since it is a taxable supply of real property. On the other hand, A will be eligible for a rebate under section 257 of the Excise Tax Act for the GST paid on the acquisition of, and improvements to the real property.

This ruling is given subject to the limitations and qualifications set out in GST Memoranda Series (1.4) issued by Revenue Canada and is binding provided that this proposed transaction (i.e., sale closing on March 15, 1995) is completed prior to June 15, 1995.

This ruling is based on the Excise Tax Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

23 Aug 2010

GST/HST to Independent Medical Evaluations

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 Supplies of health care services

DRAFT FOR DISCUSSION PURPOSES ONLY

 Introduction

 In a Tax Court of Canada decision concerning

 The Court concluded that the individuals were “patients” of the Riverfront facility because they attended the facility to be examined by a physician. The Court concluded that because Riverfront provided the examination rooms and other equipment necessary for the examinations and remunerated the physicians for the examinations and reports, Riverfront’s supplies of IMEs and reports fell within the exemption provided in section 2 of Part II of Schedule V to the ETA. This provision exempts a supply made by the operator of a health care facility of an institutional health care service rendered to a patient of the facility. Thus, for an IME to be an exempt supply, the activities that comprise the IME must fall in one of the exemptions in the ETA.

In view of the Court’s comments regarding the physicians’ examinations, we reviewed our position on the tax status of supplies made directly by physicians of IME reports, as well as evaluations supplied by other health care professionals. Our position is noted below.

Riverfront Medical Evaluations Ltd. v. Canada (“Riverfront”), the issue was whether a corporation’s supplies of independent medical evaluation (“IME”) reports to insurance companies and lawyers were “institutional health care services” supplied by the operator of a health care facility and rendered to patients of the facility. Essentially, the Court found that an IME consisted of medical care because it consisted of a physical examination of an individual by a physician. In addition, the Court found that Riverfront was a “health care facility” for purposes of the Excise Tax Act (the “ETA”) because the physical examinations were provided at Riverfront’s facility.

  Under the Excise Tax Act (the Act), exemptions from the GST/HST for supplies of medical and certain other health care services are generally limited to those made by suppliers who are engaged in the practice of a particular profession and who are licensed or certified under the laws of a province to practice the particular profession. These suppliers are defined in the Act.

 For instance, a supply of a consultative, treatment, diagnostic or other health care service rendered to an individual is exempt for GST/HST purposes when a medical practitioner makes the supply. A medical practitioner is defined as a person who is licensed under the laws of a province to practice the profession of medicine or dentistry

 In addition, a supply of an optometric, chiropractic, physiotherapy, podiatric, osteopathic, audiological, speech-language pathology, occupational therapy, or psychological service rendered to an individual is exempt when a practitioner supplies the service. A practitioner is defined in the Act as a person who practices the profession relevant to one of these services and who is licensed or otherwise certified to practice that profession (if required in the province where the service is supplied) or has the qualifications equivalent to those necessary to be so licensed or certified in another province (if not required in the province where the service is supplied). Please note that it is possible for a corporation to qualify as a medical practitioner or practitioner.

17 Aug 2010

Federal

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Federal

  • The new tax rates and income brackets as shown on Schedule 1 are as follows:
    Tax Brackets Rates
    $0 $40,970 15%
    $40,971 $81,941 22%
    $81,942 $127,021 26%
    more than $127,021 29%
  • The personal basic amount has increased to $10,382.
  • The maximum age amount has increased to $6,446. If the taxpayer’s net income exceeds $32,506, this credit is gradually reduced and reaches NIL at a net income of $75,480
  • The spousal amount and the amount for an eligible dependant have increased to $10,382.
  • The maximum amount for an infirm dependant age 18 or older has increased to $4,223 per dependant.
  • The maximum eligible earnings for CPP/QPP purposes is $47,200. The rate respecting CPP/QPP contributions is 4.95%.
  • For Canadian employees (except Quebec) the maximum amount of eligible earnings for employment insurance purposes is $43,200. The employment insurance premium rate remains unchanged at 1.73%
  • The maximum amount of eligible earnings for employment insurance purposes for a Quebec resident is $43,200. The employment insurance premium rate is at 1.36% (maximum premiums of $587.52).
  • The maximum amount of eligible adoption expenses has increased to $10,975.
  • The pension income amount remains unchanged at $2,000.
  • The maximum amount eligible for the calculation of the caregiver amount is $4,223 per dependant.
  • The disability amount has increased to $7,239, and may be increased by a maximum supplement of $4,223 (workchart 316).
  • The maximum medical expense threshold (3% of net income) required to reduce total medical expenses has increased to $2,024.
  • The maximum amount for the Canada employment non-refundable tax credit has increased up to a maximum of $1,051.
  • The non-refundable tax credit for children under 18 has increased to an amount of $2,101 per child.
  • The 2010 budget proposes that separated parents that have shared custody of their children will be able to equally split the monthly payments of the Child Tax Benefit (“CTB”), Universal Child Care Benefit (“UCCB”), and the quarterly GST/HST credit.
  • The 2010 budget proposes to allow single parent families the option of declaring the UCCB on either the parent’s return or to tax the sum on the return for the individual for which the eligible dependant amount was claimed.
  • Starting in 2010, the Canada Revenue Agency will no longer allow as medical expenses cosmetic procedures that are done solely for cosmetic purposes. However, the same procedures will qualify if the patient required the treatment for medical reconstructive purposes such as surgery to ameliorate a deformity arising from, or directly related to a congenital abnormality, a personal injury resulting from accidental trauma or a disfiguring disease.
  • The 2010 budget also proposes to extend the existing RRSP rollover rules to allow a rollover of a deceased individual’s RRSP proceeds into a registered disability savings plan (“RDSP”) of a financially dependent infirm child or grandchild.
  • The 2010 budget proposes to clarify that a post-secondary program that consists principally of research otherwise eligible for the Education Tax Credit and the scholarship exemption will be taxable for post-doctoral fellowships.
  • According to the 2010 budget an amount will be eligible for the scholarship exemption only to the extent it can reasonably be considered to be received in connection with enrolment in an eligible educational program for the duration of the period of study related to the scholarship.
  • Effective March 4, 2010, 4:00pm EST (the “Effective Time”), in order to allow employees stock option deductions on their personal income tax returns, employers with “cash-out” stock option plans may have to provide written proof that their company has not taken any deduction in consideration of such plans.
  • The 2010 budget also proposes special relief for tax deferral elections on stock options for taxpayers who elected under the current rules to defer taxation of their stock option benefits until the disposition of the optioned securities.
  • For U.S. social security benefits received on or after January 1, 2010 the 2010 federal budget proposes to reinstate the 50% inclusion rate for Canadian residents in receipt of U.S. social security benefits since January 1, 1996 and for their spouses and common-law partners who are eligible to receive survivor benefits.
  • The 2010 budget proposes that the Mineral Exploration Tax Credit be extended for one year for flow-through share agreements entered into on or before March 31, 2011. Funds raised with this credit during the first three months of 2011 can support eligible exploration until the end of 2012.
  • The maximum amount tax credit for sport and recreation per child remains unchanged at $500, plus a $500 supplement for children under 18 with disabilities.
  • The education amount for part-time studies and the textbook amount remain unchanged at $120 and $20 per month respectively.
  • The education amount for full-time studies and the textbook amount remain unchanged at $400 and $65 per month respectively.
  • The maximum amount for the refundable medical expenses supplement (line 452) has increased to up to a maximum of $1,074.
  • The Home Renovation Tax Credit has not been renewed for 2010.
  • For 2009 and subsequent years, a taxpayer may claim the new non-refundable Home Buyers’ Tax Credit, based on an amount of $5,000, for a qualifying home acquired after January 27, 2009.
  • The maximum Home Buyers’ Plan (“HBP”) amount that can be withdrawn from an RRSP under the HBP has increased to $25,000.
  • With respect to the Investment Tax Credit, the deadline to claim the mineral exploration tax credit on qualifying expenses renounced under the flow-through share agreements was extended to March 31, 2010.
  • Eligible dividends are taxable at 144% with a federal dividend tax credit of 17.9739%. Dividends other than eligible dividends are taxable at 125% with a federal dividend tax credit of 13.3333%.

3 Aug 2010

GST HST basics

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HST basics: five things you must know

 Here are five fundamentals that businesses in Ontario and B.C. need to know about the new tax:

  1. HST combines the federal Goods and Services Tax (GST) with the provincial sales tax (PST) into a single tax.
  2. Ontario businesses will charge 13 per cent.
  3. B.C. businesses will charge 12 per cent (the lowest HST rate in Canada).
  4. HST applies to both goods and services, adding the provincial sales tax to services that would previously only have had GST applied.
  5. As of May 1, 2010 businesses that sell goods or services to be delivered, installed or performed on or after July 1, 2010 are required charge HST.

Which businesses will need to charge HST?

HST will apply to goods, services, real property and intangible property, such as contractual rights and patents. (We’ve included two charts below to show how the tax status of many goods and services will change.)

You will need to charge HST if:

  • you have sales over $30,000 in the calendar year or any four consecutive quarters;
  • your business is registered for the GST already.

Current GST registrants won’t need to apply for a new number. The business number (BN) you use for your GST account number will be the same number you will use for your HST account and your filing frequency stays the same.

Why harmonize?

In both Ontario and British Columbia, the HST is being introduced to help businesses cut red tape and save money. The purpose of harmonization is to make businesses more competitive and to stimulate the economy.

Here’s how this works.

Under the current tax system, you can claim back the GST you’ve paid on all of your business expenses, but you can’t do the same for PST. As a result, goods have a “tax history” that has PST added at every step of the supply chain. These hidden PST costs are included in the final price, with consumers paying tax on the embedded tax.

As a value-added tax, GST is different. There is no hidden tax, because businesses can use the GST they pay out as an input tax credit. The business only remits the difference between the GST it has collected and the GST it has paid.

Harmonization brings the same system and advantages to the collection of the retail sales tax portion. Every business expense that includes HST, from phone services to office supplies, will help reduce the total amount of tax remitted to the government.

Claiming input tax credits

Not all businesses will be able to claim input tax credits on the PST portion of the HST right away.

Small and medium-sized companies with annual taxable sales under $10 million will be able to claim input tax credits for the sales tax paid out after July 1, 2010. However, financial institutions and large businesses with annual taxable sales of more than $10 million will have to wait five years to claim input tax credits paid on the provincial portion of the HST for certain expenses. Then, full input tax credits will be phased in over a three-year period.

Once the HST is fully phased in, the estimated savings for business are substantial.

In B.C., it’s estimated that businesses will save $1.9 billion in input costs. In Ontario, the HST will slash about $4.5 billion annually in hidden sales taxes once it’s fully phased in.

Lessons learned from other provinces

The HST is not new to Canada. Already, Quebec and the Atlantic provinces have tax harmonization. And around the world, more than 130 countries have adopted value-added taxes.

Interestingly, prices actually dropped slightly in the eastern provinces after the HST was introduced. According to the C.D. Howe Institute, lessons from the implementation of HST in the eastern provinces suggest that harmonization in Ontario and B.C. will not lead to higher consumer prices.

In Ontario, businesses can expect to save more than $500 million annually in compliance costs while B.C. businesses can expect to save $150 million a year.

“Sales tax harmonization will simplify tax compliance for businesses since they will only have to manage one sales tax system,” says Ted Wigdor, vice-president, government and corporate affairs, with Certified General Accountants of Ontario. That means one harmonized tax base, one set of sales tax returns and one consistent reporting period, all of which will benefit small- and medium-sized enterprises.

HST implementation checklist

The following checklist will help you identify the systems you will need to change to be ready for the introduction of the HST on July 1, 2010.

  • Do you need to modify your cash registers or point-of-sale systems?
  • Do you need to update automatic payments to include HST?
  • Do you need to update your e-commerce website to add the HST? (Remember, your business might be closed for the July 1 holiday, but your website is not!)
  • Do you need to update your accounting software to accommodate the new tax?
  • Do you need to update your accounts receivable / accounts payable / invoicing software?
  • Do you need to make adjustments to the way you do your input tax/taxable benefits calculations?
  • Are there any other aspects of your business that will be affected by the new tax?

Sample HST remittance calculation

To better understand how value-added tax works, let’s take a British Columbia accounting firm as an example.

Scenario: The firm hires an independent contractor to work on an accounting project. The contractor bills the accounting firm $1,000 and the accounting firm, after reviewing the work and managing the project, bills its client $2,000.

As of July 1, 2010: calculating the “value-added”

Contractor’s fee to accounting firm $ 1,000
+ 12% HST $ 120
Total invoice $ 1,120
Accounting firm’s fee to client $ 2,000
+ 12% HST $ 240
Total invoice $ 2,240

 

Total HST remitted to government: $240.

Even though $360 of HST is collected between the two companies, only $240 is remitted to the government. That’s because while the accounting firm collected $240 in HST, it keeps $120 of the funds collected to cover the money paid out to the contractor and only remits the remaining $120 to the government.

In reality, each business will likely have other qualifying HST deductions as well from the tax paid on other business expenses, so the amount paid to the government would likely be reduced even further.

Special rules for transactions that staddle the implementation date

Service businesses that have not charged provincial sales tax may need to charge both taxes on work that overlaps the July 1 implementation date.

If over 90 per cent of the work is done before July 1, the business will charge GST only. However: If more than 10 per cent of the work is done after July 1, the business will need to charge GST on the pre-transition portion of their work and charge HST on the remaining portion. These rules apply to the taxable supplies of personal property and services made in Ontario or B.C.

Consider a design firm that creates a brochure a client. Work begins in May and the brochure is completed at the end of July. Seventy per cent of the work is performed in May and June, while the remaining 30 per cent is performed in the month of July.

Since more than 10 per cent of the work overlaps the HST implentation date, the firm must charge both GST and HST. Here is an example of how the company would invoice both taxes:

Invoice for services rendered

Brochure design (pre-July1) $ 7000
GST (5% of $7000) $ 350
Brochure design (post-July1) $ 3000
HST (12% of $3000 using the BC rate) $ 360
Total amount owing $ 10,710

 

How goods & services will be taxed as of July 1, 2010

Wondering which products and services will see a change in their tax status as of July 1? Here’s a run-down of some of the key ones:

Goods & services that will have the HST added in both provinces

 

Affected goods & services Up to June 30 After July 1
Advertising services GST only HST
Cleaning services GST only HST
Commissions GST only HST
Custom software* GST only HST
Electricity GST only HST
Gasoline GST only HST
Goods for resale and raw materials GST only HST
Heating fuels GST only HST
Magazines* GST only HST
Manufacturing equipment* GST only HST
Membership fees (fitness, golf) GST only HST
Office rent GST only HST
Personal services (manicures, hair cutting, etc.) GST only HST
Professional services (accounting, legal, graphic design, etc.) GST only HST
Real property contracts (home improvements, office renovations) GST only HST
Safety clothing* GST only HST
Taxi and limousine fares GST only HST
Trade show admissions and conferences GST only HST
Training seminars GST only HST
* These items may be subject to certain conditions or, as in the case of safety clothing, be defined by the province.

 

Goods and services with variable PST/HST status in Ontario and B.C.

 

Goods/services Current PST tax status Current PST tax status Tax status with HST
  Ontario British Columbia  
Legal services Non-taxable Taxable Taxable
Admissions under $4 Exempt Non-taxable Taxable
Footwear under $30 Exempt Taxable Taxable
Basic groceries Exempt Exempt Zero-rated
Restaurant and catered meals Taxable (under $4, exempt) Exempt Taxable in B.C.; In ON over $4 is taxable, under $4 has a point-of-sale rebate on the provincial portion*.
Snack foods and soft drinks Taxable Exempt Taxable
Internet access fees Non-taxable Taxable Taxable
Newspapers Exempt Exempt Taxable in B.C.; in Ontario, there is a point-of-sale rebate on the provincial portion of HST
Software services (subject to certain conditions) Taxable Exempt Taxable
Adult-sized clothing for children under 15 Taxable Exempt Taxable

 

* While the Ontario tax rate for prepared foods and beverages under $4 is often said to be tax exempt, that is not correct. According to a GST/HST bulletin GI-064, businesses will get an instant point-of-sale rebate on the 8 per cent provincial portion of the HST. There are strict guidelines for qualifying products as well as how the HST must be shown on the sales receipt.

Consumers will normally receive the rebate by being paid by the retailer at the point of sale. The consumer can file a rebate claim with CRA using Form GST189 within four years of the purchase if the vendor does not pay or credit the rebate amount at the point of sale. Be sure to visit the link in the further reading section below to learn more about which products qualify for this instant rebate.

Further reading

For more on how transitional rules for the HST may affect your business, go to http://www.cra-arc.gc.ca/tx/pstr/trnstnl/menu-eng.html.

For more information on the HST and how to get registered, go to “Demystifying the GST / HST” at http://www.canadaone.com/ezine/oct03/gst.html.

For more information on qualifying products for Ontario’s Point-of-Sale rebate on Prepared Foods and Beverages http://www.crfa.ca/pdf/cra_pos_rebates.pdf.

For more information on point-of-sale rebates for Ontario newspapers visit http://www.cra-arc.gc.ca/E/pub/gi/gi-060/gi-060-e.pdf.

For more information on transition rules for services and personal property, visit http://www.cra-arc.gc.ca/E/pub/gi/notice247/notice247-e.html#P1.2

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Health care professionals

 

 

On July 1, 2010, the provincial sales tax (PST) will be harmonized with the federal goods and service tax (GST), resulting in a federally administered single sales tax imposed at 12%. The proposed harmonization will impose significant additional costs on the health care industry.

Now is the time for medical and health care professionals to consider the implications of harmonization on their costs, compliance systems and customers. Medical and health care professionals are persons licensed or otherwise certified to provide such services and include doctors, dentists, nurses, and other health care providers (e.g., chiropractors, orthopedists, optometrists, physiotherapists, podiatrists, chiropodists, osteopaths, audiologists, pathologists, occupational therapists, psychologists and midwives).

Most services provided by medical and health care professionals are not currently subject to either the GST or the PST. Under B.C.’s proposed harmonization with the GST, these services should remain exempt from B.C. HST with no direct impact to the consumer. However, where supplies made by a medical or health care professional are taxable (e.g., therapeutic massages, cosmetic surgery, sales of certain goods such as toothbrushes, etc.) these supplies will be subject to the B.C. HST. This represents a significant increase to the price of these supplies to consumers, and it is recommended that the tax status of these items be reviewed in detail prior to the introduction of the B.C. HST.

Impact on purchases made by medical and health care professionals

Currently, the PST applies to a relatively narrow base of goods and services used by medical and health care professionals in their practices. The B.C. HST will apply to a much broader base of goods and services. As a result, medical and health care professionals will be required to pay additional non-recoverable tax on the purchase of goods and services that are not currently subject to the PST. Consequently, their overhead costs will likely increase, and these professionals may be forced to pass on the additional costs to their customers.

The following table highlights a number of typical expenses that are currently subject to the GST but not the PST. Acquiring these items under the B.C. HST will become more expensive than under the current regime.

Other issues to consider

With the implementation of the B.C. HST fast approaching, medical and health care professionals should  consider a number of strategic planning activities:

  • Timing of purchases – stocking up on purchases of goods that do not currently attract the PST but that will attract the B.C. HST on July 1, 2010, will assist in reducing overall costs.
  • Real estate issues – consider purchasing real property prior to the implementation of the B.C. HST to minimize the taxes due on the purchase (i.e., 5% GST instead of 12% B.C. HST on the purchase of real property).
  • Corporate structure – consider reviewing the structure to determine the optimal treatment for income tax and B.C. HST purposes.
  • Current contracts – discussing the impact of the B.C. HST on suppliers will assist in determining whether a supplier’s costs will be positively affected by the implementation the B.C. HST and, as such, allow the medical or health care professional to purchase these products at a lower price.

Farmers in BC

Currently, farmers are exempt from paying PST on the cost of many items purchased for use in the farming business.  If a farmer is registered to collect GST/HST, any HST paid on costs for the farming business are recoverable as input tax credits. As most agricultural products are zero-rated (they are considered taxable, but the HST rate is zero), very little or no HST would be collected.  Many farmers are small suppliers, so registering to collect GST/HST is not mandatory, but would probably be to their advantage.  See Who has to register to collect GST/HST?

 Proposed General Transitional Rules for BC HST

Transitional rules are required to determine which tax – the existing PST (Social Services Tax) or the BC component of the HST – would apply to transactions that straddle the July 1, 2010 implementation date.

November 18, 2009 – New home sales – Grandparenting

Where written agreements of purchase and sale are entered into on or before November 18, 2009, and both ownership and possession of the homes are transferred under the agreement after June 2010, the sales will be subject to the federal component of the HST, but not the provincial component.  This would apply to sales of newly constructed or substantially renovated single-unit homes to individuals, and to sales of residential condominiums to all persons including individuals.

Sales of these grandparented homes would not be eligible for the new housing rebate or new rental housing rebate.

October 14, 2009

Certain purchasers that are non-consumers may have to self-assess the BC component of the HST on consideration that becomes due, or is paid, after October 14, 2009 and before May 1, 2010 for goods and services provided on or after July 1, 2010.  This would not apply if the non-consumer is a GST registrant and would therefore be entitled to an input tax credit.

Note:  Consumer means an individual who acquires goods or services for the individual’s personal consumption or use or for the personal consumption or use of another individual.  See the detailed information in Canada Revenue Agency’s Notice 247 regarding this topic.

A GST registrant in BC or Ontario should not be collecting the provincial portion of the HST prior to May 1, 2010, for goods or services provided in BC or Ontario, even if the goods or services are to be provided on or after July 1, 2010.  Prior to May 1, only the 5% GST should be collected for these goods or services.

May 1, 2010

The HST would generally apply to consideration that becomes due or is paid on or after this date, for property and services provided on or after July 1, 2010.

Some items addressed in the proposed HST transitional rules:
 
 
 
 
 
 

 

  

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Funeral services – HST will not apply to funeral services where the contract is entered into before July 1, 2010.    
 
 

 

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Transitional PST inventory rebate for residential real property contracts – A rebate will be available for PST embedded in construction materials purchased before July 1, 2010, but used in residential property contracts on or after July 1, 2010.    
 
 

 

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Subscriptions to newspapers, magazines and other periodical publications – HST will not apply to subscriptions paid before July 1, 2010.    
 
 

 

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Passenger transportation services – HST will generally not apply to the cost of continuous journeys that commence before July 1, 2010.    
 
 

 

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Freight transportation services – HST will generally not apply to the cost of a freight transportation service performed on or after July 1, 2010 if the service is part of a continuous freight movement of goods that begins before July 2010.     
 
 

 

 

For further information on the BC HST and the proposed transitional rules, see the following on the BC Ministry of Finance website

  

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News Release    
 
 

 

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Canada Revenue Agency information:
 
 
 
 
 
 

 

  

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Notice247 Harmonized Sales Tax for Ontario and BC – Questions and Answers on General Transitional Rules for Personal Property and Services    
 
 

 

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Notice246  Harmonized Sales Tax for BC – Questions and Answers on Housing Rebates and Transitional Rules for Housing and Other Real Property Situated in BC.    
 
 

 

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GST/HST Information SheetsTransition to the Harmonized Sales Tax
 

 

  

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GI-070 Goods    
 
 

 

 

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GST/HST Information Sheets:  Harmonized Sales Tax:
 
  

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  Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice. 

16 Jul 2010

Chinese Tax

Posted by Tax Consultants. No Comments

Chinese Tax Developments Re-draw the Map for

Canadian Investors

Canadians doing business in China may have a hard time keeping up with the country’s rapid pace of tax reform. Over the past year, China has introduced a host of changes to its tax laws and administration that aim to increase compliance and eliminate tax avoidance by non-resident investors. A new protocol to the China-Barbados tax treaty could also affect companies investing into China through Barbados by eliminating relief that was previously available to dividends and capital gains. On a brighter note, China has also announced a series of Business Tax exemptions for certain foreign business activities.

Companies with business investments or operations in China may need to review their activities and business structures in light of these reforms. The following recent Chinese tax developments of interest to Canadian investors:

  • Changes to the China-Barbados tax treaty
  • New anti-avoidance rules for non-residents
  • Enterprise Income Tax on representative offices in China
  • New exemptions from China’s Business Tax.

Protocol to the China-Barbados tax treaty

Access to reduced dividend withholding tax rate restricted

Under the protocol to amend the China-Barbados tax treaty signed on February 10, 2010, access to the reduced five-percent withholding tax rate on dividend payments between China and Barbados is only available if a beneficial owner company directly holds at least 25 percent of the dividend payer’s capital. If not, the withholding tax rate under the treaty is 10 percent.

The five-percent withholding tax rate on dividends is still competitive compared with other China treaties. Among popular holding company jurisdictions, only China’s treaties with Luxembourg, Ireland, Singapore and Hong Kong currently provide a five-percent withholding rate on dividends. Each of these treaties also includes a 25-percent ownership test as a condition for the reduced withholding tax rate.

Capital gains exemption narrowed

The China-Barbados protocol restricts the current exemption for capital gains on the disposition of shares in Chinese companies, eliminating one of the advantages of the China-Barbados treaty and bringing it in line with other Chinese treaties. Once the protocol takes effect, China’s capital gains tax will apply to gains realized on the disposition of shares deriving more than 50 percent of their value from immovable property in China. Further, if a Barbados company holds at least 25 percent of a Chinese corporation, any gains realized on the disposition of shares are also taxable in China.

The changes to the China-Barbados treaty eliminate opportunities for foreign shareholders to avoid the Chinese capital gains tax on shares in land-rich Chinese companies and significant interests in Chinese investees.

New anti-avoidance rules for non-residents

The Chinese tax authority recently issued three circulars with guidance that aims to prevent cross-border tax planning that the government perceives as abusive.

Pre-approval of treaty benefits

Starting October 1, 2009, non-residents must request pre-approval to obtain benefits under one of China’s tax treaties on Chinese-source dividends, interest, royalties and capital gains. In a circular dated August 24, 2009, China’s tax authority clarified existing procedures and documentation requirements for non-residents to apply for pre-approval. The process requires extensive disclosure of the non-resident’s operations and group structure.

Intermediate holding companies

In a circular issued on December 10, 2009, China’s tax authority announced plans to eliminate traditional tax planning approaches involving intermediate holding companies. Specifically, the circular targets the “indirect” transfer of an interest in a Chinese company through the transfer of shares in a foreign-incorporated holding company. If the transfer of the intermediate holding company has no commercial purpose, avoids tax liabilities, and is undertaken in an “abusive” manner, the tax authorities can use the substance over form principle to recharacterize the transaction as a sale of the Chinese company and levy capital gains tax accordingly. These changes are retroactive to January 1, 2008.

The December 2009 circular does not define “abusive reorganisation planning”. However, if the shares of the Chinese resident corporation are transferred indirectly and the capital gains tax paid by the ultimate transferor is less than 12.5 percent of the gain, detailed information on the transaction and the parties’ relationship must be submitted to China’s tax authority within 30 days of the transfer. The documentation requirements include questions relating to the substance of the intermediary holding company and its function within the group.

Based on these information requirements, it appears that the Chinese tax authorities may consider the transfer of an intermediate holding company to be abusive where the transfer occurs tax-free and the intermediary company has no assets or activities other than its investment in the Chinese company.

Beneficial ownership of interest, dividends, and royalties

Another new circular sets out guidance on determining whether a non-resident is eligible for beneficial owner status and thus able to claim treaty relief on dividends, interest, and royalties. This circular took effect on October 27, 2009.

The Chinese tax authorities will take a “substance over form” approach in making these determinations. The circular distinguishes a “beneficial owner”, who owns or controls property in substance and “generally” carries on business in substance, from a “conduit company”, which is only registered to satisfy legal requirements but does not manufacture, trade or manage any commercial activities in substance. The circular lists seven factors that constitute unfavourable evidence:

1.      The entity applying for beneficial owner status is liable to distribute all or most (e.g., more than 60 percent) of its income to a resident of a third country within a specified time period (e.g., 12 months).

2.      The entity has no commercial activities other than holding property or shares that generate dividends, interest or royalties.

3.      Where the entity does carry on a business, the assets, number of employees and scale of the business are so small that the business’s size cannot match the revenues earned by the entity.

4.      The entity has little or no control over the property or shares that generate the dividend, interest or royalty income.

5.      The entity pays little or no tax on income earned in the treaty country.

6.      Where the entity seeks treaty benefits for interest income on a loan, the entity has a third-party loan that is similar in amount, interest rate and issuance date.

7.      Where the entity seeks treaty benefits for royalty income from an underlying right regarding patent, franchise or intellectual property, there is a similar underlying right with a third party.

Factors 1 to 4 focus on whether the recipient has substantial activities in its residence country to justify the revenue received. Factor 5 focuses on the amount of tax paid on income earned in the treaty company. Factors 6 and 7 address situations where the loan, patent, franchise or intellectual property is provided via a back-to-back arrangement through an intermediate holding company in a favourable treaty jurisdiction.  

Previously, a non-resident of China generally only had to provide a certificate of tax residency from its state of residence to obtain benefits under one of China’s tax treaties. These new administrative measures require extensive disclosures on the holding company and related tax planning arrangement. The measures reflect the Chinese government’s intention to tighten its enforcement of the taxation of non-residents and strengthen the tax authority’s ability to scrutinize and challenge tax planning strategies that are perceived to be abusive.

If the measures are applied and interpreted strictly, many current investment structures into China may have difficulty sustaining treaty benefits. KPMG in China is aware of cases where non-residents have failed to have their previous treaty entitlements renewed under the new rules.

Canadian companies with Chinese interests should review their holding, financing and intellectual property structures in light of these rules. Structures that do not meet these substance requirements could be restructured to increase the level of activity in the intermediary company (such as by transferring additional functions, assets and resources to the relevant country). Companies intending to set up new structures should account for these substance requirements in their planning. For example, such structures could be set up in countries in which the corporate group has or plans to establish a substantial business operation with its own third-party revenue, employees and physical assets, or substantial head office management functions.

Enterprise Income Tax on representative offices

On February 20, 2010, China’s tax authority announced new rules for calculating China’s Enterprise Income Tax (EIT) and related filing requirements. The EIT applies to non-resident companies that carry on business in China through a “representative office” in China. The changes apply retroactively from January 1, 2010.

Before 2010, Chinese domestic law provided an EIT exemption for representative offices on their market research, marketing communication, and auxiliary activities in China in support of the manufacture and sale of their products. Under the new rules, the relevant tax treaty must be reviewed to determine whether the representative office has a permanent establishment in China. If it does, China has the authority to tax the activities of the representative office. Treaties based on the OECD model treaty typically exclude certain auxiliary activities from their “permanent establishment” definitions; however, the specific treaty should be consulted.

Further, unless a representative office can provide complete and accurate financial records, it must calculate its income tax liability based on the cost-plus method. The new rules raise the mark-up rate to not less than 15 percent (from 10 percent).

Representative offices in China that do not meet the new requirements for exemption should consider the potential benefits of converting the entity to a wholly-foreign-owned corporation.

New exemptions from China’s Business Tax

On September 27, 2009, the Chinese government announced that certain foreign business activities are exempt from China’s Business Tax.

Background

China’s Business Tax is a turnover tax that applies to individuals and entities providing services, transferring intangible assets or selling immovable property in China. The tax rate on the transaction ranges from three to 20 percent depending on the type of transaction. At the end of 2008, the scope of the Business Tax was significantly broadened. Previously, the tax only applied to services that were physically carried out in China. The current regime applies to companies or individuals that either provide or receive services that are located in China

Under the recent changes, Chinese companies and individuals that render services outside China are exempt from Business Tax with respect to construction, cultural and sporting activities. Also exempt are services provided to Chinese recipients outside of China by non-resident individuals and corporations in certain areas, including cultural and sporting services, entertainment, catering, hotels and warehousing services.

Since China’s Business Tax applies to any business services provided to or received by a Chinese resident, the tax can be a significant cost for Canadian companies investing or providing services in China. For example, the tax applies not only to transfers of intangible assets from a foreign entity to a resident of China but also to any future royalties paid by the Chinese resident with respect to the intangible assets, even though the withholding tax also applies to the royalties.

China Business Tax also represents an additional cost for interest payments made by a Chinese borrower to a foreign lender as the five-percent tax is charged in addition to the 10-percent withholding tax. Further, this additional tax is beyond the scope of China’s tax treaties and no treaty protection is available. In effect, for all jurisdictions other than Hong Kong, the effective tax burden on interest payments is now 15 percent (12 percent for Hong Kong).

Further, where a Chinese resident makes service payments to a foreign entity through an intermediate Chinese resident, the Business Tax would apply to both transactions. Foreign entities investing in China should be aware of the potential adverse application of China Business Tax and structure their transactions accordingly.

Since the active business income of foreign affiliates is exempt from Canadian tax, this change does not affect income earned through Chinese subsidiaries of Canadian companies. However, if the Canadian company carries on business in China directly, the change may jeopardize the company’s ability to offset the tax by claiming foreign tax credits for Canadian purposes since the Business Tax is not a tax on income or profit. As a result, Business Tax payments only qualify for an ordinary tax deduction for Canadian purposes, instead of a foreign tax credit or grossed-up deduction under the foreign affiliate rules.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

16 Jul 2010

International Taxation

Posted by Tax Consultants. No Comments

Non-residents who conduct business in Canada, earn Canadian income or own taxable Canadian property are required to report and file Canadian income tax returns. Failure to file the required withholding taxes and remittances to CRA can result in severe tax penalties, significant amounts of interest on back taxes, increased accounting and legal costs, and could even tie up proceeds from the sale of Canadian property for extended periods of time.

We have experience in preparing and filing NR4, NR6 and Section 216 tax returns with Canadian tax authorities for non-residents and obtaining Clearance Certificates from CRA.

We have also helped many non-residents obtain favourable results under Voluntary Disclosure rules for waiving CRA penalties.

4 Jul 2010

Recent case

Posted by Tax Consultants. No Comments

Are Management fees deductible?

Tax planning to use tax losses in a corporate group structure may be allowed by the Canada Revenue Agency , using management fees as a tool for that planning may not be. As the recent case, Les Entreprises Rejean Goyette Inc. v. Her Majesty the Queen (2009 CCI 351), in which the Tax Court of Canada (TCC) denied the taxpayer’s deduction of inter-corporate management fees because there was no formal management agreement and, therefore, no legal obligation to pay them.