Recent Tax Developments 2016 Presentation Summary
This presentation highlights recent tax developments in 2016, covering topics such as legislative amendments, recent cases of interest, update on voluntary disclosures and Panama Papers, proposed legislative amendments at the federal level, selected corporate tax rates, and new corporate tax rates for active businesses. The content discusses changes in income taxation, trusts, estates, and other related legislative proposals introduced throughout the year.
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RECENT TAX DEVELOPMENTS 2016 Presentation to Accountants Study Group Sydney Sweibel & Barbara L. Novek Sweibel Novek S.E.N.C.R.L. L.L.P. November 1, 2016
Topics Recent Legislative Amendments and Proposals. Recent Cases of Interest. Gerbro (offshore funds); McGillivray (de facto control); Grad (trust residency). Update on Voluntary Disclosures & Panama Papers. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 2
Proposed Legislative Amendments (Federal) Legislative Proposals relating to Income Taxation of Certain Trusts and Estates, January 15, 2016. Legislative Proposals Relating to the Implementation of the OECD Common Reporting Standard, April 15, 2016. Notice of Ways and Means Motion to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures, April 18, 2016. Legislative Proposals Relating to Income Tax, Sales Tax and Excise Duties, July 29, 2016. cont d SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 3
Proposed Legislative Amendments (Federal) (cont d) Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations and to Related Legislation, September 16, 2016. Notice of Ways and Means Motion to amend the Income Tax Act, October 3, 2016 (principal residence exemption). Notice of Ways and Means Motion to amend the Income Tax Act, October 4, 2016 (CPP enhancement). Notice of Ways and Means Motion to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures, October 21, 2016, introduced in house of Commons as Bill C-29, October 25, 2016. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 4
Selected Legislative Amendments and Proposals New Corporate Tax Rates. Small Business Deduction. Back to Back Loans. Trusts and Estates. Mutation Tax. Principal Residence Exemption. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 5
New Corporate Tax Rates Active Business Taxation years beginning after March 21, 2016 CCPC, $500k or less + AL CCPC, $500k or less + NAL Over $500k or not CCPC Federal 10.5% 15% 15% Quebec 8% 8% 11.9% Total 18.5% 23% 26.9% SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 6
New Corporate Tax Rates Active Business Taxation years beginning after December 31, 2016 CCPC, $500k or less + no employee hours + NAL or CCPC over $500k or not CCPC CCPC, $500k or less + no employee hours + AL CCPC, $500k or less + employee hours + AL CCPC, $500k or less + employee hours + NAL Federal 10.5% 15% 10.5% 15% Quebec 8% 8% 11.8% 11.8% Total 18.5% 23% 22.3% 26.8% SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 7
Quebec: Refocusing of the SBD Quebec SBD represents 3.9% reduction (3.8% in 2017). Changes apply to taxation years beginning after December 31, 2016. Budget 2016: qualification for SBD based on minimum number of hours worked by corporation s employees. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 8
Quebec: Refocusing of the SBD (cont'd) Corporation will meet criterion for a given year if: during the taxation year, its employees worked at least 5,500 hours; or during the previous taxation year, the hours worked by its employees and the employees of associated corporations total at least 5,500. SBD rate reduced linearly between 5,500 hours and 5,000 hours, zero at 5,000 hours. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 9
Quebec: Refocusing of the SBD (cont'd) Computation of hours worked: maximum of 40 hours per week per worker; hours worked must be paid at time SBD claimed; hours worked by a direct or indirect shareholder included, regardless of whether remunerated; 5,500 hours applies to the current year based on complete taxation year, threshold reduced proportionately for shorter fiscal period. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 10
Quebec: Refocusing of the SBD (cont'd) Computation of hours worked (cont'd): hours worked by a subcontractor for a corporation cannot be counted by the corporation; Paid vacation days and statutory holidays not included; Employees of joint venture not included. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 11
Federal: Anti - Multiplication of SBD Federal SBD represents a reduction of 4.5% on the first $500k of income. Changes effective for taxation years beginning after March 21, 2016 aim to prevent the multiplication of the SBD. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 12
Federal: Anti - Multiplication of SBD (cont'd) Income ineligible for the SBD ( NAL Income ) Partnerships : income of a CCPC from providing property or services (directly or indirectly, in any manner whatever) to a partnership if a shareholder of the CCPC holds a direct or indirect interest in the partnership or the CCPC does not deal at arm s length with a person that owns a direct or indirect interest in the partnership. Corporations: income of a CCPC from providing property or services (directly or indirectly, in any manner whatever) to a private corporation if one of the following persons holds a direct or indirectly interest in the private corporation: 1) the CCPC, 2) a shareholder of the CCPC or 3) a person who does not deal at arm s length with the CCPC or one of the CCPC s shareholders. 10% de minimis rule: SBD available where all or substantially all (more than 90%) of the CCPC s income for the year is from providing property or series to arm s length persons. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 13
Federal: Anti - Multiplication of SBD (cont'd) Sharing of the Small Business Limit New definitions of specified partnership income ( SPI ) and specified corporate income ( SCI ). SPI and SCI are eligible for the SBD, but only up to the lesser of the NAL Income and the portion of the business limit assigned to the CCPC. For SCI minister has discretion to determine a lesser amount reasonable in the circumstances. Partnerships: A member of the partnership to which the CCPC provides property or services can assign a portion of its business limit to the CCPC. Corporations: The private corporation to which the CCPC provides property or services can assign a portion of its business limit to the CCPC. Inflexible rules for assigning the business limit in the case of partnerships, tied to partnership income allocated to the individual partner who assigns his or her limit. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 14
Federal: Anti - Multiplication of SBD (cont'd) Example 1 DentistCo is a dental professional corporation owned by Dr. X, a dentist. Dr. X Mrs. X ServiceCo owned by Mrs. X earns active business income from providing services to DentistCo. DentistCo ServiceCo Dr. X and Mrs. X are spouses. No SBD for ServiceCo unless DentistCo assigns a portion of its business limit to ServiceCo. Dental Practice SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 15
Federal: Anti - Multiplication of SBD (cont'd) Example 2 Mr. X Rental income received by RealCo from OpCo will be ineligible for the SBD, except to the extent OpCo assigns a portion of its business limit to RealCo, unless exception in new 125(10) applies. OpCo RealCo rental income Under new 125(10) added in October NWMM, RealCo s rental income will be eligible for SBD provided not deductible to OpCo from its own NAL income. Operating Income Real Estate SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 16
Federal: Anti - Multiplication of SBD (cont'd) Overlap of Association Rules and New Rules Under existing rules, all 3 corporations are associated and must share business limit (BL). HoldCo If allocated 50-50 between OpCo and LandCo under existing 125(3), each could claim SBD on $250,000. 51% 100% Under original proposal, for LandCo to claim SBD, OpCo must assign its $250,000 BL to LandCo under 125(3.2). OpCo LandCo Result: OpCo s BL reduced to nil with no corresponding increase to LandCo s BL, and $250,000 of BL is lost. Rent $500,000 Unintended result. Appears that this result could be avoided by allocating 100% of BL to OpCo under 125(3) and assigning $250,000 to LandCo under 125(3.2). Appears to be remedied in most cases by new 125(10). SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 17
Federal: Anti - Multiplication of SBD (cont'd) Example 3 BCo carries on a bookkeeping business and provides services to several clients. All but one of its clients are arm s length. Arm s Length Shareholders A B Arm s Length Clients One of BCo s clients is a corporation in which B s brother A holds a 5% interest. 95% 5% fees for services Only 15% of income of BCo is derived from providing services to ClientCo. ClientCo BCo fees for services The income of BCo from providing services to ClientCo will not qualify for the SBD; the 85% from providing sevices to arm s length clients will qualify. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 18
Federal: Anti - Multiplication of SBD (cont'd) Example 4 A B 100% 100% BCo ACo 50% 50% Arm s Length Clients ManagementCo LLP fees for services fees for services SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 19
Federal: Anti - Multiplication of SBD (cont'd) Example 4 ACo and B are the two partners of LLP, a professional partnership. ACo is owned by A. Bco, owned by B, earns income from providing B s professional services to LLP. ManagementCo is owned 50/50 by A and B. It provides services both to LLP and to arm s length clients. The income earned by BCo and by ManagementCo for providing services to LLP will not qualify for the SBD. B can assign his share of the partnership business limit to BCo and/or to ManagementCo. A can assign all or a portion of his share of the partnership business limit to ManagementCo. ACo, BCo and ManagementCo share one business limit. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 20
Federal: Anti - Multiplication of SBD (cont'd) Trap A and B were 50-50 partners and reorganized their structure as in the diagram. B A LLP has $500,000 of income before fees paid to B Prof Corp. B Prof Corp ACo Fees of $200,000 paid to B Prof Corp, reducing partnership income to $300,000, of which $50,000 paid to B and $250,000 to ACo. Services LLP Income of B Prof Corp does not qualify for SBD, subject to assignment of limit by B. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 21
Federal: Anti - Multiplication of SBD (cont'd) Trap (cont d) 250 300 A will be entitled to 5/6ths , rather than 50% of BL. 50 300 B will be restricted to only 1/6th of BL, i.e. BCo will only be entitled to SBD on $50,000; income of $150,000 will be taxed at high rate. TIP: High rate income added to GRIP, may be distributed as eligible dividend. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 22
Federal: Anti - Multiplication of SBD (cont'd) Services Provided by Partnership If partnership provides services or property to non-arm s length corporation and not all or substantially all of its income is derived from providing property or services to arm s length persons or partnerships, the SPI of a corporation that is a member of the partnership is nil. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 23
Federal: Anti - Multiplication of SBD (cont'd) Example Services Provided by Partnership B A Opco earns income from providing services to arm s length clients. Partnership earns income from providing services to OpCo. ACo BCo The SCI income of ACo and BCo is nil, i.e. no SBD. fees fees Arm s Length Clients Partnership OpCo services SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 24
Federal: Anti - Multiplication of SBD (cont'd) Anti-avoidance rule 125(9) Active income consisting of providing property or services to a person or partnership is not eligible for the SBD where: The person or partnership holds a direct or indirect interest in a particular partnership or corporation; One of the reasons for the provision of the services or property to the person or partnership, instead of to the particular partnership or corporation, is to avoid the application of the SPI and SCI rules. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 25
Federal: Anti - Multiplication of SBD (cont'd) Example Anti-Avoidance Rule 125(9) BEFORE Mr. X Mrs. X If ServiceCo provides the services to Mr. X instead of to OpCo, the anti-avoidance rule could apply, if one of the reasons is to avoid new rules. fees for services OpCo ServiceCo services AFTER Mr. X Mrs. X services services fees fees OpCo ServiceCo SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 26
Back to Back Loans Shareholder loan rules in subs. 15(2) and seq. are amended to add new back to back loan rules. Purpose to ensure subs. 15(2) and 80.4(2) are not avoided where corporation provides debt funding to shareholder indirectly through one or more intermediaries. Where conditions are satisfied, shareholder is deemed to receive loan from ultimate funder so that 15(2) applies. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 27
Back to Back Loans (cont'd) A X Arm s Length Loan 3 ACo XCo Loan 2 BCo Loan 1 CCo SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 28
Back to Back Loans (cont'd) New rules also apply in certain circumstances where corporation provides security to immediate funder. Rules appear to apply where corporation provides security for shareholder bank debt (even if guarantee fee is paid). SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 29
Back to Back Loans (cont'd) A Loan BANK Security OPCO SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 30
Back to Back Loans (cont'd) October 21 Explanatory Notes added that new rules are not intended to apply if security interest merely secures payment of shareholder debt and does not in and of itself provide a means for immediate funder (e.g. bank) to raise funds that may be used for a purpose other than to reduce an amount owing in respect of the shareholder debt. Application Date: As of March 22, 2016 to new arrangements and outstanding balances of existing arrangements. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 31
Trusts and Estates Effective January 1, 2016 (pursuant to legislation adopted December 2014): Only Graduated Rate Estates (GRE) and Qualified Disability Trusts (QDT) subject to graduated tax rates; Non GRE estates, testamentary and inter vivos trusts taxed at highest rate; GRE status required for many advantages such as loss carry-back under 164(6) and favorable donation rules. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 32
Trusts and Estates (cont'd) Conditions for GRE Status: Estate that arose on and as a consequence of death; No more than 36 months have passed since death; Testamentary trust; Designated in first tax return after 2015; Deceased s SIN is provided (and new code 903 on T3); No other estate designated. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 33
Trusts and Estates (cont'd) GREs have flexibility to choose any year-end. All other estates and trusts must have calendar year-end. Liquidators of GRE may choose a year-end which would give the GRE four taxation years in the 36 month period following death. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 34
Trusts and Estates (cont'd) Example Individual dies December 1, 2016: Taxation year as GRE Taxation year end on anniversary of death Taxation year December 31 1st year Dec. 1, 2016 to Nov. 30, 2017 Dec. 1, 2016 to Dec. 31, 2016 2nd year Dec. 1, 2017 to Nov. 30, 2018 Jan. 1, 2017 to Dec. 31, 2017 3rd year Dec. 1, 2018 to Nov. 30, 2019 Jan. 1, 2018 to Dec. 31, 2018 4th year Jan. 1, 2019 to Nov. 30, 2019 _____ SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 35
Trusts and Estates (cont'd) Effective January 1, 2016: Spousal Trusts and other life-interest trusts (LIT) deemed to have year- end at end of day of death of life interest beneficiary. Capital gain on deemed disposition on beneficiary s death was required to be reported in terminal return of deceased beneficiary and not in the trust. Effectively shifted tax burden on death of life beneficiary of LIT from the trust to the beneficiary s estate. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 36
Trusts and Estates (cont'd) January 15, 2016 Draft Legislation proposed to restore the deemed gain back to the life interest trust via new 104(13.4)(b.1). New 104(13.4)(b.1) included in October 21, 2016 NWMM (now Bill C-29). Tax burden not shifted to beneficiary unless election is made and specific conditions satisfied. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 37
Trusts and Estates (cont'd) Deemed capital gain on death will only be transferred to terminal return of deceased life interest beneficiary where: Life interest beneficiary was resident in Canada immediately before death; Trust is a post 1971 testamentary spousal or common-law partner trust created by will of taxpayer who dies before 2017; and Joint election in prescribed form is made by trust and life interest beneficiary s GRE to have 104(13.4)(b) apply, and is filed with both T3 and T1 returns. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 38
Trusts and Estates (cont'd) Where no election is made, tax on deemed capital gains on death will be taxed in the trust. Puts taxpayers where they were before 2016, except. Trust can no longer claim life interest beneficiary s unused capital gains exemption (because subs. 110.6(12), repealed as of January 1, 2016, has not been restored). SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 39
Trusts and Estates (cont'd) Example: Betty died November 2015, leaving her shares of Opco to a spousal trust for her husband Fred, a Canadian resident. When Fred dies (whether before or after January 1, 2017), the capital gain in respect of Opco shares will be taxed in the spousal trust (same as pre-2016 rules), unless trust and Fred s GRE elect to shift income to Fred s terminal return. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 40
Trusts and Estates (cont'd) In most cases, the default rule (taxation in the trust) will be simplest and best strategy. Planning opportunity Consider electing to shift tax burden to deceased beneficiary if: Trust s tax rate greater than that of deceased life interest beneficiary; Trust s assets consist primarily of qualifying small business corporation shares and life interest beneficiary has unused capital gains exemptions or capital losses. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 41
Trusts and Estates (cont'd) All or nothing election; cannot elect on asset by asset basis Trust Opco Investment Holdco FMV: $2M ACB $1 FMV: $2M ACB $1 SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 42
Trusts and Estates (cont'd) Where election is made, same compliance and practical issues as pre-amendment will arise, including: conflicting interests between capital beneficiaries of trust and heirs of deceased beneficiary; post-mortem planning and collection issues; solidary liability of trust and estate; trust s charitable tax credits may be stranded if trust does not have sufficient other income. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 43
Trusts and Estates (cont'd) Testamentary trust status, and hence GRE status, tainted where estate receives contribution from someone other than the deceased testator. Issue where spousal trust pays tax liability of deceased beneficiary spouse resulting from election to report deemed disposition in terminal return. Is this a contribution which disqualifies the spouse s estate as GRE? SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 44
Trusts and Estates (cont'd) Relieving measure, new 108(1.1)(b), in October 21 NWMM. Payment to or on behalf of an individual s estate will not be considered a contribution if: Made by post-71 spousal or common law partner testamentary trust of which the individual was the beneficiary whose death triggered deemed disposition; Election filed under 104(13.4)(b.1) for 104(13.4)(b) to apply; Estate is individual s GRE (ignoring the payment); Payment is on account of and does not exceed tax in individual s terminal return attributable to the election. SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 45
Recent Legislative Developments in the Real Estate Sector Changes to Quebec s land transfer tax regime Changes to Canada s Principal Residence Exemption SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 46
Changes to Quebecs land transfer tax regime Changes to Quebec s land transfer tax regime Quebec Budget 2016-2017 announced amendments to the Act respecting duties on transfers of immovables The Budget proposals apply to transfers occurring after Budget Day (i.e., after March 17, 2016) Amendments seek to eliminate common structures used to avoid land transfer taxes Unregistered off-title transfers of ownership Arm s length sales through intermediary corporation Under Budget proposals, Revenu Qu bec and municipalities authorized to exchange information SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 47
Changes to Quebecs land transfer tax regime Land transfer tax rates imposed by the City of Montreal SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 48
Changes to Quebecs land transfer tax regime Summary of Changes to Quebec s land transfer tax regime New timing at which the transfer duty becomes payable New reporting mechanism for transfers not registered in the land register Elimination of the 90 percent FMV Test exemption re. transfers between closely- related corporations Clarification of the 90 percent Vote Test exemption re. transfers between closely- related corporations Introduction of requirement to maintain exemption condition for certain transfers Introduction of disclosure mechanism when exemption condition ceases to be met Introduction of exemption from transfer duty for transfers between former de facto spouses SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 49
Changes to Quebecs land transfer tax regime Change to the transfer duties due date Old regime: mutations tax payable upon the registration of the transfer in the land register New regime: mutations tax payable as of the date that an immovable is transferred (whether off/on-title) Unregistered transfers: transferee now required to notify municipality within 90 days of transfer failure to notify municipality (within 90 days of transfer) 50% penalty Registered transfers: registry office notifies municipality of transfer SWEIBEL NOVEKS.E.N.C.R.L. L.L.P. 50
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