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27 Aug 2020

T1135 Foreign Property and Income Reporting Requirements

Posted by Tax Consultants. No Comments

T1135 Foreign Property and Income Reporting Requirements

In Douglas v. HMQ,  TCC 73, a recent decision by the Tax Court of Canada (TCC) under the informal procedure, the TCC surprisingly accepted the taxpayer 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.

27 Aug 2020

Why In-corporate?

Posted by Tax Consultants. Comments Off on Why In-corporate?

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.

27 Aug 2020

Chinese Tax

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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 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 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 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 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 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 tax treaties on Chinese-source dividends, interest, royalties and capital gains. In a circular dated August 24, 2009, China 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 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 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 60Â 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 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 tax treaties. These new administrative measures require extensive disclosures on the holding company and related tax planning arrangement. The measures reflect the Chinese government intention to tighten its enforcement of the taxation of non-residents and strengthen the tax authority 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 tax authority announced new rules for calculating China 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 Business Tax

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

Background

China 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 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 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 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.

27 Aug 2020

IFRS Conversion Plan

Posted by Tax Consultants. No Comments

International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB)

The Conceptual Framework sets out the fundamental concepts for financial reporting that guide the Board in developing IFRS Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, so as to provide useful information for investors, lenders and other creditors.

The Conceptual Framework also assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction, and more broadly, helps stakeholders to understand and interpret the Standards.

The revised Conceptual Framework for Financial Reporting (Conceptual Framework) issued in March 2018 is effective immediately for the International Accounting Standards Board (Board) and the IFRS Interpretations Committee. For companies that use the Conceptual Framework to develop accounting policies when no IFRS Standard applies to a particular transaction, the revised Conceptual Framework is effective for annual reporting periods beginning on or after 1 January 2020, with earlier application permitted.

Differences between IAS 12 and Canadian GAAP

Below is a summary of certain items that are treated differently under IAS 12 and existing Canadian GAAP. Other differences may also exist that will affect an entity income tax provision calculation.

Investments in subsidiaries, associates and interests in joint ventures

Similar to Canadian GAAP, IAS 12 requires that deferred tax is not recognized for the excess amount for financial reporting over the tax base of an investment in a subsidiary or a corporate joint venture (i.e., outside basis difference), if certain conditions are met. Unlike Canadian GAAP, however, IAS 12 requires disclosure of the aggregate amount of temporary differences associated with investments in subsidiaries, branches, associates and interests in joint ventures for which deferred tax liabilities have not been recognized.

Foreign non-monetary assets and liabilities

Under IAS 12, a deferred tax asset or liability is recognized for exchange gains and losses related to foreign non-monetary assets and liabilities that are re-measured in the functional currency using historical exchange rates. By contrast, Canadian GAAP provides that a deferred tax asset or liability is not recognized for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translations of the cost of non-monetary assets and liabilities of integrated foreign operations.

The IFRS treatment will affect Canadian companies with a functional currency that is different from their tax reporting currency.

Initial recognition exception

IFRS also has an exemption from recording deferred income taxes on the initial recognition of an asset or liability. There is no equivalent treatment under Canadian GAAP.

Under IAS 12, a deferred tax liability (asset) is not recognized if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit at the time of the transaction. For example, such a transaction could occur where assets are transferred under a tax-free rollover or where an entity is acquired through shares in a transaction that does not constitute a business combination. Further, an entity does not recognize later changes in the unrecognized deferred tax asset or liability as the asset is depreciated, requiring companies to track the piece that is essentially a permanent difference.

Canadian GAAP differs from IAS 12 in this respect. When a transaction is not a business combination and affects neither accounting profit nor taxable profit, an entity would recognize the resulting deferred tax asset/liability and adjust the carrying amount of the asset or liability by the same amount (using simultaneous equation).

Inter-company transfers of assets

An inter-company transfer of assets (such as the sale of inventory or depreciable assets) is a taxable event that establishes a new tax base for those assets in the buyer tax jurisdiction. The new tax base of those assets is deductible on the buyer tax return as those assets are consumed or sold to an unrelated party.

Under IAS 12, a deferred tax asset or liability is recognized for the difference in tax bases between the buyer and seller on an intra-group transfer of assets and so the deferred tax is computed using the buyer tax rate. Under Canadian GAAP, a deferred tax liability or asset is not recognized for the difference in the buyer and seller tax bases on an intra-group transfer of assets, and any current taxes paid or recovered by the seller are deferred based on the seller tax rate.

Distributed vs. non-distributed rate

In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In these circumstances, IAS 12 requires the use of the tax rate applicable to undistributed profits in measuring deferred taxes. The tax consequences of the distribution are only recognized when a liability to make the distribution is recognized.

In Canada, income taxes generally are not payable at a higher or lower rate depending on the payment of dividends, and so Canadian GAAP does not address any such rate differential. However, Canadian GAAP sets out specific guidance for tax-exempt-type entities (such as real estate investment trusts, mutual fund trusts and specified investment flow-through entities (SIFT). This guidance provides an exemption from recognizing deferred taxes if certain conditions are met (see EIC 107). Additional guidance is provided for SIFTs that will become taxable in 2011 (see EIC 167).

Business combinations

In a business combination, temporary differences arise when the carrying amount of identifiable assets and liabilities acquired is revalued at fair value but the tax bases are not affected by the business combination or are affected by a different amount. For example, when the carrying amount of an identifiable asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises. Consistent with current Canadian GAAP, IAS 12 requires companies to recognize a deferred tax liability for these temporary differences and make a corresponding adjustment to goodwill.

Further, in a business combination, the deferred tax position of both the acquirer and acquiree at the date of acquisition is assessed from the point of view of the consolidated group. For example, a previously unrecognized deferred tax asset relating to the acquiree’s or acquirer’s tax losses may be recovered by utilizing the consolidated group’s future profit.

While this treatment is consistent with current Canadian GAAP (in accordance with CICA HB 1581), the accounting for the unrecognized amounts may differ under IAS 12. Under IFRS, where previously unrecognized deferred tax assets (e.g., tax loss carryforwards) of the acquirer are recognized, the acquirer recognizes the deferred tax asset in profit or loss. Under current Canadian GAAP, previously unrecognized deferred tax assets of the acquirer that become recoverable due to a business combination are recognized as a reduction of goodwill, rather than in profit or loss. The future recognition of the deferred tax asset is reported in profit or loss under Canadian GAAP only if the acquirer’s deferred tax asset was not recognized as of the acquisition date.

From the acquiree perspective, under IAS 12, if deferred tax assets of the acquiree that were not recognized at the date of acquisition are later realized (by realization or reduction of the valuation allowance), the adjustment is applied to reduce the carrying amount of goodwill related to that acquisition provided that the resulting deferred tax asset is recognized within the measurement period and results from new information about facts and circumstances that existed at the date of acquisition. If the carrying amount of goodwill is zero, any remaining deferred tax benefits are recognized in profit or loss.  All other acquired deferred tax benefits later realized are recognized in profit or loss.

By contrast, current Canadian GAAP requires the later recognition of the acquiree deferred tax assets for temporary differences that existed at acquisition to be recognized first against goodwill, then against other intangible assets before any balance is recognized as a tax recovery in profit or loss.

Uncertain tax positions

Like Canadian GAAP, IAS 12 does not contain specific guidance on the recognition and measurement of uncertain tax positions and practice may vary. Canadian companies adopting IFRS may need to re-measure liabilities recorded in respect of uncertain tax positions that remain unsettled at their IFRS transition date.

Compound instruments

Under IFRS, an entity that issues compound financial instruments, such as convertible debentures, classifies the instrument liability component as a liability and the equity component as equity. In some jurisdictions, the tax base of the liability component on initial recognition equals the initial carrying amount of the sum of the liability and equity components, and a taxable temporary difference arises. Under IAS 12, the resulting deferred tax liability is recognized, and the deferred tax expense is charged directly to the carrying amount of the equity component. Later changes in the deferred tax liability are recognized in profit or loss.

By contrast, Canadian GAAP provides that if a compound instrument can be settled tax-free, deferred taxes would not be recorded related to the temporary difference (i.e., the tax base of the liability component is considered equal to its carrying amount, and no temporary difference arises).

Allocation of tax to components of profit or loss or equity

IAS 12 requires the tax effects of items credited or charged directly to equity during the current year also be allocated directly to equity.  IAS 12 also requires subsequent changes in those amounts to be allocated to equity (i.e., full backwards tracing).  Such items may arise from either changes in assessments of recovery of deferred tax assets or changes in tax rates, laws, or other measurement attributes.  One must consider where the initial transaction was recorded as they follow through on changes to the deferred tax liabilities and assets in future years.

In contrast, Canadian GAAP is different from IAS 12 in that it generally requires that subsequent changes in those amounts to be allocated to profit or loss.

Balance sheet classification of deferred tax assets and liabilities

IAS 12 does not permit the deferred tax assets and liabilities to be classified as current.  Essentially, they are presumed to be non-current.  In addition, deferred tax liabilities and assets should be presented separately from current tax liabilities and assets.

On the other hand, Canadian GAAP indicates that the classification of future income tax assets and liabilities is based on the classification of the underlying asset or liability.  Where there is no related asset or liability, the classification is based on the date that the temporary difference is expected to reverse.

Similarities to existing Canadian GAAP

Below is a summary of certain items that will be treated under IAS 12 in a way that is more similar to their accounting treatment under existing Canadian GAAP.

Recognizing deferred tax assets

Under IAS 12, deferred tax assets are recognized to the extent that it is probable that the benefits will be realized. Probable is not defined in the standard, however, in practice, the more likely than not definition is often used (i.e., same as Canadian GAAP).

Measuring deferred tax assets and liabilities

Similar to Canadian GAAP, IAS 12 requires that deferred taxes are measured based on enacted or substantively enacted tax rates as of the balance sheet date.

Similarly, IAS 12 requires an entity to measure deferred tax liabilities and assets using the tax rate that is consistent with the expected manner of recovery or settlement of the asset or liability.  IAS 12 also indicates that the measurement of deferred taxes shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Goodwill

A deferred tax liability is not recognized if it arises on the initial recognition of goodwill that is not tax-deductible. However, any temporary difference is recognized after the acquisition if the goodwill is tax-deductible.

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

27 Aug 2020

Supplies of health care services

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Supplies of health care services

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 practise 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, chiropodic, 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 practises the profession relevant to one of these services and who is licensed or otherwise certified to practise 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.

Health care services supplied by corporations that are not medical practitioners or practitioners. The exemptions for supplies of the above-noted health care services do not apply to persons who do not qualify as medical practitioners or practitioners. Thus, the tax status of a health care service can vary depending on the supplier.

Corporations may supply health care services through their employees or through independent contractors they engage to perform services on their behalf. However, corporations who do not meet the definition of medical practitioner or practitioner should be aware that their supplies may not fall within the exemptions in the Act. Although an employee or subcontractor engaged by a corporation may hold a licence to practise a particular health care profession, this licence does not confer any benefit on the corporation for purposes of the Act. A corporation is a separate legal entity from its owners, directors, subcontractors and employees. The tax status of a corporation’s supplies is evaluated separately from the activities of its owners, directors, subcontractors and employees.

Corporations and independent contractors

In the health care field, corporations established to provide health care services to individuals often subcontract with independent contractors to provide these services. Because the GST/HST is a multistage tax, each transaction is a supply. This means that when a corporation enters into a contract to obtain the services of an independent contractor, the result is that the contractor has made a supply to the corporation, not to the individual. The provision of the health care service to the individual is made by the corporation.

It is important to note that if the independent contractor supply to the corporation is exempt, this exemption does not flow through to the corporations supply. The tax status of the corporations supply to its client is determined independently of the contractors supply to the corporation because for purposes of the GST/HST, the corporations supply to its client is a distinct supply from the independent contractors supply to the corporation.

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

27 Aug 2020

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.

27 Aug 2020

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 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.

Call us today for at 604-808-0392

27 Aug 2020

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.

10 Dec 2019

Canada’s Federal 2019/2020

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2019/2020 Tax Changes

For year 2020, the basic personal credit is $12,298,  For 2019, it’s $12,069. (Note that the newly re-elected federal Liberal government promised to raise the basic personal amount over four years to reach $15,000, phasing out the benefits of the increase at incomes over $147,667.)

Clients may be able to claim up to $2,000 if they reported eligible pension, superannuation or annuity payments.

The maximum RRSP contribution for 2019 is $26,500; for 2020, $27,230.

In 2020, the annual TFSA limit is $6,000, for a total of $69,500 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009. The annual limit for 2019 is $6,000, for a total of $63,500 in room available in 2019 for someone who has been eligible since 2009.

For the 2020 tax year medical expense threshold, the maximum is 3% of net income or $2,397, whichever is less. For 2019, the max is 3% or $2,352, whichever is less.

For 2020, the maximum pensionable earnings is $58,700 ($57,400 in 2019), and the basic exemption amount remains $3,500 for 2019 and 2020.

The maximum annual insurance earnings (federal) for 2020 is $54,200; for 2019, $53,100.

After March 20, 2013, the first-time donor super credit is 25% for up to $1,000 in donations, for one tax year between 2013 and 2017. This program has now expired.

This non-taxable benefit was effective July 1, 2016, and replaced the universal child care benefit. In 2020, the maximum CCB benefit is $6,765 per child under age six and up to $5,708 per child aged six through 17. In 2019, those amounts are $6,639 per child under age six and up to $5,602 per child aged six through 17.

As of 2018, the maximum child care expense deduction limit amounts that can be claimed are $8,000 for children under age seven, $5,000 for children aged seven through 16, and $11,000 for children who are eligible for the disability tax credit.

If you have a dependent who is physically or mentally impaired, you may be able to claim up to an additional $2,182 in calculating certain non-refundable tax credits.

The disability amount for 2020 is $8,576 (non-refundable credit; $8,416 in 2019), with a supplement up to $5,003 for those under 18 (the amount is reduced if child care expenses are claimed; $4,909 in 2019).

The child disability benefit is a tax-free benefit of up to $2,886 (2020) for families who care for a child under age 18 with a severe and prolonged impairment in physical or mental functions. For 2019, the amount is $2,832.

The lifetime capital gains exemption is $883,384 in 2020 and $866,912 in 2019.

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Announced on July 18, 2017

The Canadian federal Finance Minister, Bill Morneau,  the release of a consultation paper and with a draft legislation which, will have a dramatic impact on the taxation of Canadian private corporations and business structures that Canadian entrepreneurs have had in place for decades if enacted.

The government’s proposals which target (1) income splitting strategies, (2) access to the lifetime capital gains exemption, (3) the tax treatment of passive investment income earned in a private corporation and (4) strategies to convert income into capital gains.

Income splitting

It is common for entrepreneurs who control private Canadian corporations to make use of ownership structures involving multiple family members. This can be achieved by either having family members hold corporation shares directly or through a family trust. Under these structures, family members (or the family trust) often hold different classes of shares which allow for dividends to be paid to the different family members at the discretion of the corporation’s directors or the family trust’s trustees. This share structure permits dividends to be paid to family members who are in a lower tax bracket than the family member who controls the business. This is referred to as “income splitting” or “dividend sprinkling” in order to reduce the overall tax burden of the family.

The proposals to address income splitting strategies with private corporations also expand the application of the TOSI to include (1) income from certain debt obligations, (2) capital gains from the sale of shares the income from which is subject to the TOSI and (3) compound income on property that is the proceeds from income previously subject to the TOSI rules or the income attribution rules. However, this third type of income will only apply to individuals under the age of 25.

The new anti-income splitting rules are to be effective starting in 2018.

Lifetime capital gains exemption

Since 1988, Canadians have been able to shelter capital gains from the disposition of “qualified small business corporation” shares from tax up to a lifetime limit. The government has identified concerns with common ownership structures that allow multiple family members to make use of their capital gains exemption on the sale a of a family-owned business. Under the proposals, the capital gains exemption will be denied in the following circumstances:

  1. individuals under the age of 18 will not be allowed to make use of the capital gains exemption;
  2. beneficiaries of trusts will no longer be permitted to make use of the capital gains exemption with respect to gains on the value of shares that accrue during the period in which the trust holds the shares; and
  3. individuals who are subject to the TOSI with respect to a share will not be able to make use of the capital gains exemption on the sale of such shares.

These new rules are to be effective starting in 2018. However, the proposals include a transitional rule that will allow an election to be made by the end of 2018 to crystallize a capital gain and claim the capital gains exemption so as to increase the adjusted cost base of the “qualified small business corporation” shares. Making such an election will reduce the individual’s capital gain on a subsequent sale of the shares.

Passive investment income

The consultation paper identifies a concern with respect to a potential advantage that arises from earning business income through a corporation rather than individually. Corporations are taxed at a much lower rate than individuals on business income. As a result, more after-tax dollars are available for investment if earned through and retained in a corporation. This is an intentional tax policy decision to encourage reinvestment of business profits to broaden the tax base and increase employment. However, the government has expressed concern that this fact of the Canadian corporate tax system is unfair if the surplus funds are used for passive investment rather than reinvestment in the business.

 Converting income into capital gains

Intended to allow a shareholder to extract retained earnings from a private corporation as a capital gain rather than as a dividend. This is beneficial to the shareholder, as capital gains are taxed at a lower rate than dividends. Amendments are proposed to the anti-surplus stripping rule in section 84.1 of the Income Tax Act to shut down this type of planning. These changes would apply on or after July 18, 2017.

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%;

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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.

14 Aug 2012

Purchase Price Allocation

Posted by Tax Consultants. No Comments

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