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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:
- 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.
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.
Form T1135 – Foreign Income Verification Statement – is required to be completed if a resident (i.e. individual or corporation) of Canada owned specified foreign property with a combined tax cost of more than $100,000 at any time during the year.
Specified foreign property includes foreign bank accounts, non-Canadian investment accounts, share in foreign companies (regardless whether shares are held through a Canadian brokerage firm), foreign rental and investment properties. Specified foreign property does not include personal use property (i.e. vacation property), listed personal property (i.e. artwork, jewelry, coin collection) and property held in a registered account (i.e. RRSP, RRIF or TFSA).
This reporting is required even if the specified foreign property earned no income during the year.
For the 2014 and later taxation years, the Canada Revenue Agency has revised the reporting requirements. One significant change is that specified foreign properties for which a taxpayer receives a T3 or T5 slip were previously exempted from this reporting. These investments must now be reported in the 2014 and later taxation years.
For those taxpayers with specified foreign property (i.e. shares in foreign corporations) held in an account with a Canadian registered securities dealer or Canadian trust company, the revised reporting requires taxpayers to report for each investment the country of investment, highest fair market value during the 2014 taxation year, fair market value at the end of the year and gross revenue. This information may be aggregated on a country by country basis.
The failure to file and false statement and omission penalties are significant.
The filing deadline for the foreign verification statement is the same as the filing deadline for your tax return. For individuals the deadline is April 30, 2015 if you or your spouse/common law partner were not self-employed during the 2014 taxation year and June 15, 2015 if you or your spouse/common law partner were self-employed during the 2014 taxation year.
For additional information on this reporting requirement please refer to the Canada Revenue Agency’s website.
We are requesting that all of our clients consider whether this reporting requirement applies to them, contact their investment advisor to discuss and contact Trout Lake Group before February 27, 2015 with any questions or concerns that they may have.
If you are doing your own bookkeeping for your 2013 personal tax return, please use our checklist to assist with compiling your paperwork.
If you would like us to prepare your bookkeeping, we have a separate checklist.
Following our checklists will streamline the process for filing your tax returns. This will ultimately save you money!