A couple of weeks ago someone posted a photograph online of a sign outside their local school. The sign read:
“School starts September 3. Resistance is futile.”
It made me laugh but at the same it made me sad. When I was younger, the start of school meant the end of long evenings, playing outside with friends, no more camp and being left with only the memories of the family vacation taken that season. It was time to get serious, open up textbooks, prepare for tests and projects, and start learning. I always thought it would be a great idea if the first week of school was dedicated to reviewing what we had learned in the previous grade (before I had turned my mind off for the summer). So consider this blog your refresher and let’s review some of the key tax developments that have taken place so far this year.
Increase to the Lifetime Capital Gains Exemption (LCGE)
The LCGE is available to individuals who sell “qualified small business corporation shares.” Essentially these are shares of Canadian controlled private corporations that generate active business income and have little to no redundant cash or other assets not essential to operating the business.
The LCGE is set to increase from $750,000 to $800,000 for any sales taking place on or after January 1, 2014. The LCGE will be indexed for inflation in future years. If an individual utilizes his or her LCGE on a sale of “qualifying small business corporation shares”, she/he will shelter the first $800,000 of capital gains realized on the sale. This can result in tax savings of almost $200,000, therefore proper planning should be implemented to ensure that the corporation’s shares meet the Income Tax Act’s definition of “qualified small business corporation shares”. Taxpayers should also look at taking advantage of multiplying the number of LCGEs available to the shareholder and his or her family wherever and whenever possible. Generally, this type of planning must be done well in advance of a potential sale.
Increase to Non-Eligible Dividend Rates
Non-eligible dividends are dividends that are paid out of a corporation’s retained earnings which have been subject to the low corporate income tax rate of 15.5% in Ontario, commonly referred to as the “small business deduction rate.”
The personal income tax rate on non-eligible dividends is set to increase on January 1, 2014. This means that individuals can expect to pay as much as 2.3% more in personal income taxes received from their private corporations in 2014. If a shareholder is contemplating having his or her corporation pay a dividend in 2014, it may make sense to expedite it and have it declared in 2013. If the corporation does not have sufficient cash to pay it in 2013 it could be paid by way of a promissory note payable in a future year when the corporation has sufficient cash.
Recent Court Ruling on Factors in Determining Employee versus Contractor Status
This summer the Federal Court of Appeal (FCA) released its decision in 1392644 Ontario Inc. et al. v. The Queen. This case clarified the approach that should be taken when determining whether an individual is providing services in his or her capacity as an employee or an independent contractor. The approach suggested by the FCA is a two-step approach. In the first step, one must determine the parties’ intent. This is ascertained by examining the written contractual relationship the parties have entered into or by looking at the actual behavior of each party such as providing invoices for services rendered and registering for HST/GST as an independent contractor. The second step examines whether an “objective reality” is consistent with the subjective intent of the parties. At this stage it is appropriate to examine the 4 factors established by Canadian jurisprudence – control, ownership of tools, chance of profit and who bears the risk of loss – to determine whether the facts support the intent of the parties. The FCA confirmed that the parties’ intent cannot override the importance of the objective facts. Thus, while intent is relevant, ultimately it comes back to the reality of the situation.
What does this mean for employers and individuals? They should ensure that the intent of their relationship is documented and supported by legal contracts and behaviors; however, they must keep in mind that ultimately the decision as to whether an individual is an employee or an independent contractor will be based on the “four-in-one” test.
New Rules for Foreign Affiliate “Upstream” Loans
Over the past decade, the Department of Finance introduced a series of new proposals dealing with foreign affiliates of Canadian corporations. The foreign affiliate rules that were finally enacted this summer bear little semblance to the initial proposals. That being said, I feel there is at least one series of new rules which should be reviewed by any Canadian corporate group which has ownership, directly or indirectly, in any foreign company, namely the rules dealing with loans from foreign affiliates. Where a foreign affiliate has made a loan to a Canadian corporation or non-resident corporation (that does not deal at arm’s length with the Canadian corporation, unless the situation falls within a hand full of exceptions), the loan will be considered income to the Canadian corporation if it is not repaid within two years. These rules are quite complex, so if you think they apply to your situation you should discuss it with your professional advisor.
Hope you enjoyed your review of some of the key tax developments from 2013 so far. Surely there will be new updates and issues we can look forward to when the government returns to sitting in the fall.
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