Category Archives: Corporate Tax

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Canada Announces Enhanced Capital Cost Allowances

On November 21, 2018 the Minister of Finance, Bill Morneau, released the Fall Economic Statement.

This Statement included the Accelerated Investment Incentivewhich outlined a number of tax changes relating to the capital cost allowance (CCA) system (amortization of assets that may be claimed for income tax purposes).

The Accelerated Investment Incentive was introduced to allow business in Canada to deduct the cost of their investments more quickly – and therefore increasing the attractiveness of making capital investments to improve a business’ efficiency and/or to expand a business’ operations.  The intention of the Accelerated Investment Incentive is to enhance the ability of businesses in Canada to compete internationally and is a reaction to the U.S. Government’s Tax Cuts and Jobs Act of 2017.

Significant change #1 – First-year capital cost allowance

Prior to November 21, 2018, only one-half of the allowable CCA could be claimed in most asset classes in the year of acquisition. This was commonly known as the half-year rule.

From November 21, 2018 to December 31, 2023, the allowable CCA is in the year of acquisition is three times the ‘prior to November 21, 2018 rate’.

January 1, 2024 to December 31, 2027, the half-year rule does not apply in the year of acquisition.

January 1, 2028 and onward, the half-year rule is again applicable in the year of acquisition.

Please note:

  • For those CCA classes for which the half-year rule does not apply the provisions of the Accelerated Investment Incentive allow for the accelerated depreciation of these CCA classes as well.
  • After the year of acquisition, the CCA rate will return to the normal declining balance rate for the respective asset class.

Example:

Your business purchased $1,000 of equipment and you immediately began using the equipment in the business.  For income tax purposes the equipment is added to CCA class 8.  The depreciation rate of CCA class 8 is 20%.

Prior to November 21, 2018, your business would claim a $100 deduction for tax purposes in the year of acquisition ($1,000 times 20% times ½).

From November 21, 2018 to December 31, 2023, your business would claim a $300 deduction for tax purposes in the year of acquisition ($1,000 times 20% times ½ *3).

January 1, 2024 to December 31, 2027, your business would claim a $200 deduction for tax purposes in the year of acquisition ($1,000 times 20%).

January 1, 2028 and onward, your business would claim a $100 deduction for tax purposes in the year of acquisition ($1,000 times 20% times ½).

Significant change #2 – Manufacturing and processing machinery and equipment

From 2016 to November 21, 2018, a previous Ministry of Finance incentive allowed for the addition of manufacturing and processing machinery and equipment to be added to class 53 with an amortization rate of 50% per year on a declining balance basis and with the half-year rule applying in year of acquisition.

Under the Accelerated Investment Incentive:

From November 21, 2018 to December 31, 2023, the allowable CCA is in the year of acquisition is 100%.  The half-year rule does not apply.  Therefore, this allows for a full deduction in the year of acquisition.

2024 and 2025 calendar years, the allowable CCA in the year of acquisition is 75%.  The half-year rule does not apply.  For the remaining years this addition is depreciated at a rate of 50% per year on a declining balance basis in class 53.

2026 and 2027 calendar years, the allowable CCA in the year of acquisition is 55%.  The half-year rule does not apply.  For the remaining years this addition is depreciated at a rate of 30% per year on a declining balance basis in class 43.

2028 onward calendar years, the allowable CCA in the year of acquisition is 15% – as the half-year rule is reintroduced.  For the remaining years this addition is depreciated at a rate of 30% per year on a declining balance basis in class 43.

Please note:  Income Tax Folio S4-F15-C1, Manufacturing and Processing, includes the following discussion of the activities that constitute manufacturing and processing:

1.2 It may be said, however, that the manufacture of goods normally involves the creation of something (for example, making or assembling machines, clothing, soup) or the shaping, stamping, or forming of an object out of something (for example, making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling, or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, and homogenizing and pasteurizing dairy products.

1.3 In Tenneco Canada Inc. v The Queen, [1991] 1 CTC 323, 91 DTC 5207, the Federal Court of Appeal indicated that the two tests for determining whether a taxpayer is engaged in processing are:

  • whether there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and
  • whether the product becomes more marketable.

1.4 The activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging.”

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2019 Change in CPP and EI rates AND the introduction of B.C. Employee Health Tax

Increase in CPP rates

CPP rates will increase gradually from 2019 to 2025.

In 2018 and prior years, CPP retirement benefits were intended to replace one quarter of a taxpayer’s average work earnings.  The purpose of the CPP rate increases is to have CPP retirement benefits replace one third of a taxpayer’s average work earnings.

Phase one of the CPP rate increase will have the current CPP rate of 4.95% increase by the following increments:

2019: 0.15%

2020: 0.15%

2021: 0.20%

2022: 0.25%

2023: 0.25%

By the end of the series of increases, the 4.95% contribution rate will have increased to 5.95%.

Phase two of the CPP rate increase will require a 4% premium to be paid on earnings in excess of the year’s maximum pensionable earnings (YMPE) up to 107% of the YMPE.

For example, if the YMPE is $70,100 in 2024, the additional limit will be $75,007.  The 4% rate will be applied to the difference between the $75,007 and the YMPE of $70,100 ($4,907) – resulting in $196.28 in additional premiums payable.

For 2025 and later calendar years, the 107% multiplier will be increased to 114%.

Change in EI Rates

Employment Insurance rates will be reduced to 1.62% in 2019.  This is a decrease of 0.04% from the 2018 rate of 1.66%.

The maximum insurable earnings for 2019 is $53,100.  The maximum insurable earnings in 2018 was $51,700.

The maximum employee premiums for 2019 will be $860.22 – this is an increase of $2.00 compared with 2018.  The maximum employer premium will be $1,204.31 – this is an increase of $2.80 compared with 2018.

Introduction of B.C. Employee Health Tax

The B.C. Employer Heath Tax (EHT) comes into effect on January 1, 2019.

The purpose of the B.C. EHT is to replace the revenue derived from Medical Service Plan premiums previously paid by residents of B.C.  Although residents of B.C. have had their MSP premiums reduced by 50%, it is the B.C. government’s intention to eliminate MSP premiums paid by residents of B.C. by 2020.

Employers with remuneration of $500,000 or less are exempt from EHT.

Employers with B.C. remuneration between $500,001 and $1,500,000 pay a reduced tax of 2.925% of the portion of B.C. remuneration that is above the $500,000 exemption.

Employers with B.C. remuneration greater than $1,500,000 pay tax at 1.5% of the total B.C. remuneration.

If you are associated with other employers, you must share the $500,000 exemption with the other employers.

How to register: Registration begins on January 7, 2019 and should be completed through your eTaxBC account.

When to remit: Using the lessor of your 2018 BC remuneration paid and your estimated 2019 BC remuneration, calculate your 2019 employer health tax liability.   If your employer health tax liability is greater than $2,925, you are required to make quarterly instalments on or before the following dates: June 15th, Sept 15th, Dec 15th and March 31st with the filing of the EHT return.

When to file the EHT return:  On or before March 31st each year.  The 2019 EHT return will be due on March 31, 2020.

Be a Santa and not a Scrooge to your staff

T’is the time of year to thank your employees for their hard work and dedication.  You may do this with gifts and a holiday party.  As you want to be a Santa and not a Scrooge, it is important to plan the gifts and social event so that they are not considered taxable benefits according to the Income Tax Act and consequently included in your employees’ employment income for the year.

Here are some of the main points:
All cash or near-cash gifts (i.e. gift certificates or gift cards) are considered taxable benefits.
If an employee receives non-cash gifts during the year with a value of $500 or less, the non-cash gifts are not considered a taxable benefit. 
If the value of the non-cash gifts received by an employee during the year total $600, then the employee will be deemed to have received a taxable benefit of $100 ($600 less $500).
Holiday parties in which all employees are invited and cost $100 or less per person are not considered a taxable benefit. 
If the holiday party costs $200 per person, the entire cost of the holiday party is considered a taxable benefit.

Restricting Multiplication of the small business limit

2016 Federal budget announced measures to reduce a Canadian controlled private corporation’s accessibility to the small business limit by restricting multiplication of the small business limit. The announcement introduced the term specified corporate income (SCI) – defined as income earned through the provision of services or property to another corporation where there is common ownership.

Let’s say that there are two unassociated corporations: OpCo and ServiceCo. OpCo pays ServiceCo a management fee for management services provided.

Previously OpCo and ServiceCo were each entitled to claim the $500,000 small business limit and, consequently, each corporation would pay 13% tax in British Columbia (federal and provincial combined) on its first $500,000 of qualifying income.

Effective for taxation years beginning on or after March 22, 2016, if there is common ownership between OpCo and ServiceCo, then SerivceCo cannot claim the small business limit on the active business income earned from OpCo unless OpCo assigns a portion of its unused small business limit to ServiceCo. This assignment is done by completing “a special form” – which has not yet been released.

Common ownership exists when ownership interest in Opco is held by:

  • ServiceCo;
  • any shareholder of ServiceCo.
  • any person who does not deal at arm’s length with any shareholders of Service Co.

However, if 90% or more of ServiceCo’s active business income is earned from providing services to arm’s length persons other than OpCo, then these SCI rules do not apply.

If Opco does not assign any of its small business limit to ServiceCo, ServiceCo will pay tax 26% tax – rather than 13% tax – in British Columbia (federal and provincial tax combined).

As at the date of the post, this 2016 Federal budget initiative had not yet received Royal Assent.

Beware of scammers posing as CRA employees

Over the past year a few of our clients have called to say they have received either a threatening telephone call from a person claiming to work for the Canada Revenue Agency who was demanding payment for a tax debt or an email from the Canada Revenue Agency requesting their banking information to facilitate the deposit of their tax refund.  In all of these instances we concluded that the communication was a scam.

If you are questioning the validity of any communication received from the Canada Revenue Agency, whether it be regarding a tax debt or refund, we recommend that you review your account online through My Account or My Business Accounts.  If you have not yet set up an online account with the Canada Revenue Agency you can also call Personal Income Tax Inquiries at 1-800-959-8281 or Business Inquiries at 1-800-959-5525.

The Canada Revenue Agency is well aware of these and other communication scams.  Please visit the Canada Revenue Agency’s webpage that discusses these scams.  We recommend that you take a few minutes and watch the Canada Revenue Agency’s video on this topic.