Preparing Information for your Personal Taxes

Our goal is to provide updates on topical accounting and tax issues. Information contained in this newsletter is not meant to be a comprehensive summary of the issues raised. Rather, we wish to bring what we believe to be important issues to the attention of our valued clients and readers. We would be pleased to discuss any questions that you, the reader, might have in greater detail.

Preparing information for your income taxes can be confusing and frustrating. What is a deduction? What is a tax credit? Are you eligible to benefit from these programs? Am I required to report this? With each Federal and Ontario annual budget, reporting requirements, benefits and credits, and programs are created, modified, and eliminated. This newsletter provides a summary of changes in 2017, as well as common areas of common confusion or programs of which you may not be aware.  

So long! Eliminated Credits in 2017

In 2017 and future years, the “Children’s Fitness Tax Credit” and the “Children’s Arts Amount” no longer exist.  Don’t fret about finding and collecting those receipts!

The Public Transit Tax Credit is being eliminated after June 2017. You will be able to claim a non-refundable tax credit for the cost of eligible transit passes that are for the use of public transit services for the period January 1, 2017 to June 30, 2017. Transit costs incurred after June 30, 2017 are no longer eligible. For annual passes, the credit will be prorated based on the 6 months that were eligible in 2017. Good news for seniors in Ontario! The Ontario government introduced the Ontario Seniors’ Public Transit Tax Credit on July 1, 2017. If you are 65 years or older as of January 1, 2017 and lived in Ontario on December 31, 2017, you can claim a refundable credit for transit costs incurred after July 1, 2017.

The Ontario government has eliminated the Healthy Homes Renovation Tax Credit for 2017 and future years. 

Sorry – these expenses are not eligible!

While buying lottery tickets for a charity fundraiser may be a great way to support your favourite cause, unfortunately, the purchase of these lottery tickets does not qualify as a charitable donation. They cannot be claimed on your personal tax return.

 Elective cosmetic procedures may not qualify for the Medical Expense Tax Credit. Common procedures include augmentations, teeth whitening, and filler injections. It is a question of fact whether a particular service or procedure was provided purely for cosmetic purposes, and the onus is on the individual claiming the credit to substantiate that a particular expense is not subject to this provision. It should be noted that procedures that would generally be considered to have a medical or reconstructive purpose include those that would ameliorate a deformity arising from a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. If you aren’t sure, we can help.

Are you eligible? Don’t miss out!

The Canada Tax Benefit is a payment for eligible parents with children under the age of 18. Based on your family net income, you may qualify. In order to apply, you and your spouse or common-law partner must file your income tax return for 2017. Payments will be issued starting July 2018. Great news! This benefit is tax-free. 

The Disability Tax Credit (“DTC”) is a non-refundable tax credit that helps people with disabilities or their supporting person reduce the amount of income tax they may have to pay. The disability amount may be claimed once the person with a disability is eligible for the DTC. In order to apply, have your physician complete form T2201 – Disability Tax Credit Certificate (Link: https://www.canada.ca/content/dam/cra-arc/migration/cra-arc/E/pbg/tf/t2201/t2201-16e.pdf) and send the application to the Canada Revenue Agency. The DTC provides the ability to claim attendant care and nursing home costs, and other tax benefits such as Registered Disability Savings Plan (“RDSP”) and Qualified Disability Trust (“QDT”) eligibility.

The new 2017 Canada Caregiver Credit will replace the previous Caregiver Credit, Infirm Dependant and Family Caregiver Tax Credit. If you incurred expenses related to the care of a dependant relative, you may be eligible for this non-refundable credit, up to a total of $6,883 of expenses. It should be noted, that any income earned by the dependant in that tax year will reduce the credit.

If you or your spouse or common-partner acquired a home in 2017 and did not live in a home owned by you or your spouse or common-law partner in the preceding four years, you may be eligible for the First-Time Home Buyers’ Tax Credit. This credit is claimed on your personal tax return and could be worth up to $750!

Don’t forget to report!

If you own foreign property with a cost of more than $100,000 you may have to file a T1135 – Foreign Income Verification Statement with your personal tax return.  Foreign personal-use property, such as a vacation home that is not rented, are excluded from these reporting requirements. Some examples of property that would have to be reported are shares of foreign corporations (held outside of registered accounts such as TFSA or RRSP), foreign rental properties or funds held at foreign banks. If you aren’t sure whether your foreign property needs to be reported, contact our office.

If you paid or received child support or spousal support in 2017, you will need to report this on your income tax return. These rules can be complicated. Speak with your tax advisor to make sure you don’t miss an income inclusion or eligible deduction on your personal tax return. 

For more information, please feel free to contact our office. Keep an eye on our website or follow us on Linkedin for other tips and information throughout personal tax season.

Congratulations to all the West Ottawa Business Excellence Award Recipients!

While we didn't take home the hardware last night, we were inspired by all the wonderful entrepreneurs and businesspeople in attendance at the gala last night, and send our heartfelt congratulations to all the recipients.

In keeping with the spirit of the evening, our newest partner, Todd Hamilton, has a message for our leadership team that we would like to share.

I feel we have something very special at HW.  Each of you as leaders in the firm bring it with you each day.  It is a desire to help someone achieve more.  Whether that is a client, someone in our community, a peer, or an up and coming professional in our firm.  I see it everywhere.  It's just an awesome place to practice and grow as a professional.  I watch us grow together every day.  It is a very exciting time!
DaECPQuVwAMGK-w.jpg

West Ottawa Business Excellence Awards 2018 Finalists

The West Ottawa Board of Trade is one of the key business associations serving West Ottawa, and the Hendry Warren team is absolutely thrilled to have been named a finalist in the category of “Professional Services” for the West Ottawa Business Excellence Awards. The Awards Gala is tomorrow night and we are excited to be attending along with over 300 businesses and community leaders. Stay tuned for the results, and in the meantime, let’s celebrate!

Fraud and the CRA - A Friendly Reminder

There are new scams and types of fraud being developed every day.  Particular scams we have witnessed in the past are email phishing scams, as well as fraudulent phone calls.  More recently, we have even seen fraudulent letters that appear to be from the CRA.  However, a closer look at these letters reveals incorrect CRA contact information such as postal codes and phone numbers.

Heading into tax season it is important to remain vigilant when receiving correspondence from the CRA.  The CRA will not request SIN numbers, credit card or bank account numbers, addresses, or passport information.  We have provided a link below to the CRA’s website with helpful topics such as; knowing how to recognize a scam, examples of fraudulent communications and how to protect yourself.

Still not sure?  Please feel free to contact us and we would be happy to have a look at the correspondence and provide our opinion.

https://www.canada.ca/en/revenue-agency/corporate/security/protect-yourself-against-fraud.html

2018 Free Tax Clinic

On March 15th and 20th, Hendry Warren LLP gave back to the community in the best way they know how - by offering free personal tax services at the CPA Tax Clinics!

The CPA Tax Clinics are a free service run by volunteers from all levels of CPA firms and is offered to seniors and low-income individuals.  Hendry Warren LLP has been a proud volunteer at the clinics for many years and was happy to have had the opportunity to participate in two clinics again this year.

This year was another great success with over 45 returns prepared over the two nights at the Glebe Community Centre and Hampton Court. 

file2.jpeg
file1.jpeg

Meet David Ienzi - Senior Manager

David is keenly focused on providing private companies and their owner managers with exceptional, value-added advice in the areas of assurance, accounting, valuation and taxation.  As a Chartered Business Valuator, David  is skilled in assisting companies assess their value - whether it be for tax and estate planning, intergenerational transfers, or business succession.

Dave’s experience as a CFO provides him with insight into the day to day operations of private companies and he provides strategic advisory services in this area.

When he's not working, David enjoys volunteering with initiatives focused on engaging youth in being active members of their respective communities.

David.jpg

Newsletter

2018 Federal Budget - A Summary of Key Tax Changes

The latest Federal Budget was tabled by the Liberal government on February 27, 2018.  In terms of income tax measures, there were not a significant number of changes.  However, the Budget did contain the long awaited rules for passive investment income earned by private corporations.  This month’s newsletter will summarize these new rules as well as the other tax measures that were outlined in the Budget.

Passive Investment Income Earned by Private Corporations

Many private corporations in Canada have accumulated passive investments from the retention of business profits. The benefit of investing in a private corporation is the ability to pay lower corporate tax rates on business income and invest the larger pool of after tax funds corporately to accumulate savings for the shareholders.

The original proposals for passive investment income earned by private corporations were first announced in a discussion paper issued by the Department of Finance on July 18, 2017.  If enacted, the proposals would have effectively eliminated this deferral benefit. The mechanics of the proposal were complex and the government was not definitive on how exactly the new system would operate.  There was an immediate backlash from taxpayers and advisors in response to the proposals.  Among the main concerns was the suggestion that the combined corporate and personal tax rates on passive income earned by a corporation and paid out to the shareholders could be as high as 73% for individuals in the top tax bracket.  Secondly, the sheer complexity of the rules were considered by some to be unworkable in practice.  The government had committed to grandfathering existing corporate investment assets as well and in October of 2017, it committed to allowing $50,000 of passive investment income to be earned annually without being subject to the new, more punitive tax regime.  

The current proposals contained in the 2018 Federal Budget are a significant departure from the original proposals.  The original proposals have been entirely scrapped and replaced with a proposed system that will reduce a private corporation’s access to the small business deduction if its passive investment income (determined on an associated corporation basis) exceeds $50,000 annually.  The small business deduction will be reduced on a straight-line basis at a rate of $5 for every $1 of passive investment income in excess of $50,000 and will be entirely eliminated if passive investment income exceeds $150,000.  

For the purposes of the $50,000 passive investment income amount, a new definition, “adjusted aggregate investment income” (“AAII”) will be used.  In general, AAII includes:

-         Interest, rents and royalties received from non-associated corporations;

-         Dividends received from non-connected corporations;

-         Taxable capital gains in excess of net capital losses provided that they do not arise from the disposition of assets used principally in an active business carried on primarily in Canada;

-         Income from savings in a life insurance policy that is not an exempt policy.

Overall, the new proposals represent a significant softening of the rules when compared to the original proposals.  At their worst, the new rules will result in a reduction of the tax deferral from 40% to 27% available on reinvesting business income at the corporate level by possibly subjecting the corporation to 26.5% tax on its business income instead of 13.5%.  Gone is the potential 73% combined tax cost.  There is no mention of grandfathering existing wealth in the new proposals but given the approach adopted in the new proposals, it seems not to be necessary.  For holding corporations that do not earn active income, the new proposals will have no impact on the taxation of their investment income.

The latest proposals will apply to taxation years that commence after 2018.

Refundable Dividend Tax on Hand (“RDTOH”)

Under existing legislation, a dividend refund is available to a corporation at the rate of 38.33% of taxable dividends paid to the extent that there is an available balance of RDTOH at the corporation’s year‐end. The dividends paid can be either non‐eligible dividends or eligible dividends. There is a tax advantage where eligible dividends are paid as the effective tax rate to the recipient is generally about 7% less. 

The Budget proposes to introduce measures that will allow a CCPC to recoup RDTOH only on the payment of non‐eligible dividends. An exception will apply to RDTOH arising on the payment of Part IV tax on eligible portfolio dividends. Such RDTOH can be recouped on the payment of eligible dividends. To accomplish this, the Budget proposes to create an “eligible RDTOH” account and a “non‐eligible RDTOH” account.

Eligible RDTOH will include only Part IV tax paid on the receipt of eligible portfolio dividends. All other refundable taxes will be included in the non‐eligible RDTOH account. If a corporation pays a non‐eligible dividend, it will recover non‐eligible RDTOH first before it recoups eligible RDTOH. If it pays an eligible dividend, it can recover eligible RDTOH. Any taxable dividend paid, either eligible or non‐eligible, will entitle the corporation to a refund of eligible RDTOH. Special transitional rules will apply to determine the opening balances of eligible and non-eligible RDTOH.  

As a result of these rules, in a given taxation year taxpayers may have to choose between the preferential tax rates offered by eligible dividends and the ability to recover refundable taxes if only a non-eligible RDTOH balance exists.  

This proposal will apply to taxation years that commence after 2018.

Other Tax Matters of Interest

The Budget confirms that Finance will proceed with the implementation of the December 13, 2017, draft proposals

that address income sprinkling involving private corporations.  The details of these income sprinkling proposals were summarized in our December 2017 newsletter.  These rules took effect January 1, 2018.

The Budget did not contain any significant personal income tax measures.  The capital gains inclusion rate will not increase and remains at 50%. In addition, proposals in respect of “surplus stripping” first introduced in July 2017 and then abandoned have not been reintroduced.  Personal income tax rates remain unchanged.

The Budget proposes extensive new reporting requirements for most family trusts, effective for 2021 and subsequent taxation years. These requirements could impose an obligation to file a return where none currently exists, such as where the trust earned no income in the year. The trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust.  Penalties will apply for failure to file a trust return where the new reporting requirements apply, to a maximum of $2,500 annually. If the failure to file is made knowingly, or as a result of gross negligence, there will be an additional penalty of five per cent of the maximum fair market value of property held during the year with a minimum of $2,500.  As a result of these changes, we recommend that all family trusts file tax returns on an annual basis to avoid the possible application of penalties.  We will provide further commentary on these proposals as more information becomes available.

The Budget also proposes to shorten the filing deadline for the foreign affiliate information reporting (T1134) from the current 15 months after the taxpayer’s year‐end to 6 months after the year‐end.  This proposal applies to taxation years that begin after 2019.

International Women's Day at Hendry Warren

It's International Women's Day, and we wanted to take a minute to appreciate everything that these women do for  Hendry Warren LLP.

We always look forward to seeing what amazing things they accomplish, and are proud to encourage their growth.

We're proud to be part of a company that believes women play a crucial role in the world.

international womens day.jpg

2018 FEDERAL BUDGET

On February 27, 2018, the Liberal government tabled its spring budget.  In terms of income tax measures, there were not a significant number of changes.  However, the Budget did contain the long awaited rules for passive income earned by private corporations.   For more information, please see the 2018 CPA Canada Federal Budget Commentary which can be found on our Resources page, or contact our office.

Coldest Night of the Year

On Saturday, February 24th, dedicated HW staffers participated in the Coldest Night of the Year fundraising walk for the Ottawa Mission.   The fundraiser surpassed its goal of $100,000, raising $123,000 for a wonderful cause.  If you don't know about the Mission, you can check out the event website at https://cnoy.org/location/ottawa to learn more.    Thanks to our great team for taking time out of their Saturday night to support those in need.

Coldest Walk.jpg

HW Alumni - where are they now? - Scott Bates

Many of our clients know Scott Bates, as he started working with Hendry Warren in January of 2012. Six years later, we were sad to see him go, but excited about his new opportunity. If you haven’t been able to reach him at HW, it's because he has returned to his old stomping grounds to become a partner at Bates & Bates Chartered Accountants, a firm started over 25 years ago by Cynthia and David Bates in Newmarket, ON. Scott will continue to provide the superior client service he was known for at HW to the clients of Bates & Bates. We miss him already, and congratulate him on this exciting new step in his career!

linkedin Pic.jpg

Personal Tax Season Resources

It's that time again....time to think about getting yourself organized for personal tax preparation.  The regular filing deadline is April 30th.  If you, or your spouse, are self-employed, you have until June 15th to file your return, however CRA will charge interest on unpaid taxes starting on May 1st.  To help you get organized, you can find a number of helpful checklists and worksheets  on our resources page.

business-money-pink-coins.jpg

Set Aside Money for Taxes

Every year, you know you’re going to have to pay taxes, and when. Make putting money aside for it a part of your regular financial process. Unpaid taxes can incur penalties and interest from the CRA, so make sure the money is there when you need it. By putting money aside each month, it won't be as painful when they are due.

Have an accounting question? Let us know: https://lnkd.in/dZqmn6J

Accounting tips for business.png

Bell Let's Talk Day!

The staff and partners of HW are proud supporters of Bell Let's Talk Day, and of ensuring the dialogue around mental health goes on all year.   After an informative breakfast yesterday, the group gathered together for this photo.

HW Pic.jpeg

ACT NOW! New Voluntary Disclosure Program Effective March 1, 2018

 

Our September 2017 Newsletter outlined significant proposed changes to the Canada Revenue Agency’s (“CRA”) Voluntary Disclosure Program (“VDP”). The VDP is a CRA administrative program that promotes compliance with Canada’s tax laws by encouraging taxpayers to voluntarily come forward and correct any previous errors or omissions in their tax affairs. On December 13th, 2017 and December 15th, 2017, the CRA released IC00-1R6 and GST/HST memo 16.5, respectively, detailing the program updates. The new program is effective March 1, 2018. The VDP applies to disclosures relating to income tax, excise tax (GST/HST), payroll taxes, and other reporting requirements. The term taxpayer includes an individual, an employer, a corporation, a partnership, a trust, a GST/HST registrant or a registered exporter of softwood lumber products.

As an example of the current program; failure to file form T1135 – Foreign Income Verification Statement where a taxpayer had foreign assets with a cost in excess of $100,000 could result in a penalty of $2,500 per year. The VDP would potentially allow the penalty to be avoided.

Similar to the existing program, the CRA has imposed criteria which determine eligibility for the program. The disclosure must meet the following conditions;

i. be voluntary;

ii. be complete;

iii. involve the application or potential application of a penalty and, for GST/HST applications, the application or potential application of a penalty or interest;

iv. include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due; and

v. include payment of the estimated tax owing.

The significant addition to the criteria is that the disclosure must include the payment of the estimated tax owing. While payment was previously encouraged under the old system to halt the accrual of interest at the time the disclosure was submitted, it was not required in order for the disclosure to be valid.  

Consistent with the Draft Information Circular issued in September 2017, the CRA has committed to two streams of voluntary disclosures, the Limited Program and the General Program for income tax purposes. The Limited Program provides relief for non-compliance where there is an “element of intentional conduct on the part of the taxpayer”. The Limited Program, where eligible, would protect the taxpayer from criminal prosecution and gross negligence penalties, but not other penalties and interest. All other disclosures would be classified under the General Program, which could protect the taxpayer from penalties and criminal prosecution, as well as partial interest relief for the years preceding the three most recent years of returns required to be filed.  Full interest charges will be assessed for the three most recent years.

It should be noted that for GST/HST, excise taxes, excise duty, softwood lumber and air traveller’s security charge disclosures a third category, Wash Transactions, will exist. A wash transaction exists where a supplier would otherwise be required to collect GST/HST and would be entitled to a full input tax credit, such that net tax may not apply. Disclosure of unreported wash transactions may be eligible for a reduction in penalties and interest.

Determination of whether an application should be processed under the General or Limited Program will be made by the CRA based on the facts presented. The CRA has stated that they will consider the dollar amounts involved, the number of years of non-compliance and the sophistication of the taxpayer.

The effective date of a disclosure (“EDD”) is the date the CRA receives a completed and signed VDP application, where the five eligibility criteria are met. The taxpayer may have up to 90 days from the EDD to submit additional information. Where complexity or extraordinary circumstances exist, an extension may be granted where a written request is received from the taxpayer or an authorized representative. If the additional information not received by the CRA within the time frame, the CRA may commence action resulting in penalties, interest, and potential prosecution.

The CRA has also indicated that the following applications will generally not be considered under the VDP:

  • applications that relate to income tax returns with no taxes owing or with refunds expected; these would be handled using normal processing procedures.
  • elections; there are provisions within the various acts administered by the CRA which entitle taxpayers to choose or “elect” specific treatment of certain tax transactions
  • applications relating to an advance pricing arrangement
  • applications that depend on an agreement being made at the discretion of the Canadian competent authority under a provision of a tax treaty
  • applications where a person is in receivership or has become bankrupt;
  • post-assessment requests for penalty and interest relief

It should be noted that once a taxpayer uses the program to become compliant, the CRA expects the taxpayer to remain compliant, such that multiple submission may not be considered. The CRA has stated that it may consider reviewing a file a second time in situations where the circumstances are beyond the taxpayer’s control.

 

Highlights of Changes

  • Payment of estimated taxes owing required upon application.
  • No-name VDP is no longer available. A non-binding, “pre-disclosure discussion” resource has been implemented, where taxpayers can receive guidance on an anonymous basis from CRA agents. While this may provide insight and answer questions related to the new program, it will not offer any protection to taxpayers.
  • Corporations with gross revenue in excess of $250 million in at least two of the last five taxation years, and any related entities, will be considered under the Limited Program.
  • Complex transfer-pricing applications will be referred for a specialized committee.
  • Relevant specialists will be reviewing complex applications.
  • The name of the advisor who assisted with the non-compliance should be included in the application.
  • Previous relief of penalties and interest could be cancelled where it is determined that a disclosure did not meet the eligibility criteria.
  • Under the Limited Program, participants will have to sign a waiver of their right to object and appeal in relation to the specific issue. If a taxpayer disagrees with an assessment, a second review can be requested, however this will be at the discretion of the CRA.

 

What now?

The additional complexities and limitations of the revised program may dissuade taxpayers from making future disclosures. Where possible, taxpayers may want to consider taking advantage of the current program before March 1, 2018. For more information on the current program or making a disclosure on or after March 1, 2018, please contact our office. 

Meet Trina Watters - Manager, Audit and Assurance

Trina finds purpose in helping others. This is a reflection of her life at Hendry Warren where she provides valuable financial, tax and business advisory services to owner managers and entrepreneurs alike. Trina leverages her attention to detail and personable attitude to ensure financial reporting and taxation deadlines are met and client service expectations are exceeded. Trina graduated with honours from Carleton University in 2012 and became a member of CPA Canada and CPA Ontario in 2015.  She joined the Hendry Warren team in 2016. Previously she worked at a national firm in addition to obtaining financial planning and analysis experience at various industry positions. Trina maintains her work life balance outside the office as a registered yoga teacher offering classes on a weekly basis at a local yoga studio

Trina-Watters-01.jpg