Federal Highlights

Corporate income tax rates

The federal general and M&P rates declined from 16.5% to 15% in 2012, while small business rates remained at 11%.  No further increases or reductions are currently slated.

Eligible dividends

Personal taxes on eligible dividends have again increased in 2012 from 28.19% in 2011 (see Appendix I for details). Designation rules for making eligible dividend payments have changed for payments after March 28, 2012.

Group sickness or accident insurance plans

Employer contributions to a group sickness or accident insurance plan after March 28, 2012 in respect of coverage after 2012 are to be included in the employee’s income for the year in which the contribution was made. 

Pooled registered pension plans

New voluntary savings plan introduced for small businesses and self-employed persons.

Employee profit sharing plans (EPSPs)

New tax rate for certain EPSP amounts contributed by the employer after March 28, 2012.

Retirement compensation arrangements (RCA)

Anti-avoidance rules expanded for investments acquired and transactions entered into after March 28, 2012.

Personal services business

Tax rate increased for taxation years starting October 31, 2011

Partnership information returns

Reporting requirements for Partnerships have expanded however transitional relief is available on certain items for 2011 and 2012 fiscal periods.

Joint Ventures

No longer permitted to have separate fiscal period for taxation years ending after March 22, 2011.

Scientific research and experimental development (SR&ED)

• Non-refundable Investment tax credit (ITC) decreased from 20% to 15% for taxation years ending after 2013.
• SR&ED deductions or ITCs will no longer be permitted on capital expenditures after 2013.
• Overhead proxy rate will be subject to staged reduction from 65% to 55% after 2012.
• Contract payments eligible for SR&ED ITCs reduced to 80% in some cases after 2012.

Provincial Highlights

Small business rate

$500,000 small business threshold is now applicable in all provincial jurisdictions except for Manitoba and Nova Scotia which remain at $400,000. Corporate rates are slated to decline in New Brunswick and Nova Scotia (see Appendix II).

General and M&P rate

Ontario non-M&P rate to remain at 11.5% for 2012 as rate reduction has been rescinded. British Columbia is scheduled to increase rates to 11% by April 01, 2014.

Capital tax

Applied only in Nova Scotia where it was eliminated on July 01, 2012. No longer exists for all other provinces.

Ontario personal income tax

(Wealth tax) 2% increase in surtax on incomes over $500,000. Increasing from 11.16% to 12.16% in 2012 and to 13.16% after 2012. Wealth tax to be rescinded when Ontario budget is balanced (scheduled for 2017-2018).

Harmonized Sales Tax (HST)

• British Columbia: Will cancel its HST and reinstate the former 7% PST and 5% GST; targeted to be effective April 1, 2013.
• Prince Edward Island: 14% HST to come into effect on April 01, 2013. It will replace the 15.5% PST/ GST.
• Nova Scotia: HST rates decreasing from 15% to 14% by July 01, 2014 and to 13% by July 01, 2015.

Quebec Sales Tax (QST)

QST rate increased from 8.5% to 9.5% on January 1, 2012 and will increase to 9.975% on January 1, 2013 when harmonized with GST.

International Highlights

Overseas employment tax credit (OETC)

OETC to be phased out over the period from 2013 to 2016. Tax deductions will not be affected by the phase-out of the OETC until the end of 2012.

Shareholder loans

Elections are available for Canadian corporations and certain partnerships controlled by non-residents to reduce withholding taxes (on the deemed dividend) on certain loans to foreign parent companies or related non-resident companies. The elections are for loans or indebtedness incurred after March 28, 2012.

Thin-capitalization rules

Reduction in the debt-to-equity ratio from 2:1 to 1.5:1 for corporate taxation years that begin after 2012. Interest expense on debt that exceeds this ratio will not be deductible for tax purposes and will be considered a deemed dividend subject to withholding tax effective after March 28, 2012.

Entrepreneurs

Dividends or salaries

An owner-manager must determine the most tax effective salary-dividend mix that minimizes overall taxes for the corporation and the relevant individuals.  The owner-manager must consider marginal tax rates, impact of alternative minimum tax (AMT), the corporation’s tax rate, RRSP contribution room, provincial health and/or payroll taxes, CPP contributions and other personal deductions and credits;

• If personal cash requirements are low, consider retaining income in the corporation to obtain the tax deferral as corporate rates are lower than personal rates.

Dividend payments

Required to follow specific procedures to designate dividends that qualify as eligible dividends.  

• For dividends paid after March 28, 2012, a corporation can designate at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. Late designations are acceptable if the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made.

Qualifying Small Business Corporation/Capital Gains Exemption

The decision regarding dividends and/or bonus may cause an increase in passive investments and could compromise the ability to claim the $750,000 lifetime capital gains exemption on the sale of the shares of the business.

Shareholder loans

Ensure that you repay shareholder loans from your corporation no later than one tax year after the end of the tax year in which the amount was borrowed. 

Depreciable Assets

• consider purchasing equipment prior to the end of your fiscal year in order to accelerate access to CCA (be wary of the available for use rules).
• A special election can be used to treat leased fixed assets as purchases under a financing arrangement.

Income to family members

Consider paying salaries to family members who work in the business.  Keep in mind the salaries must be reasonable.  This would also allow the recipient to have earned income for child care expense, CPP and RRSP purposes.

Dividends to family members

Individuals with no other income can receive up to about $50,000 in dividends, without triggering any tax, depending on their province or territory of residence and the availability of the general rate income pool (GRIP).

Remuneration accruals

For salaries and bonuses to be deductible, they must be accrued before the business’ year-end and paid within 179 days thereof. Appropriate source deductions and payroll taxes must be remitted on time.

Private health services plan (“PHSP”) premiums

If you are self-employed, PHSP paid may be deducted from your self-employment income in certain situations.  Premiums not deductible may be claimed as a medical credit.

Hiring credit for small business

Credit of up to $1,000 if your business’s employment insurance premiums were $10,000 or less in 2011 and increased in 2012.

Employee stock options

Consider if it will be the employee or the employer who will take the appropriate tax deduction for cashed-out stock options (keep in mind an election may be required).

E-filing of corporate income tax and information returns

• Required if corporate tax returns have gross revenues exceeding $1 million;
• Required for Information returns if more than 50 slips are submitted annually.

Tax liabilities

Final corporate tax liabilities need to be paid within two months after year end, and three months for certain eligible Canadian controlled private corporations (“CCPC’s”).

Scientific Research and Experimental Development (“SR&ED”)

• Remember that forgoing bonus payments (i.e. lowering income to the small business limit) may cause a CCPC’s SR&ED investment tax credits (“ITCs”) to be non-refundable and subject to the lower ITC rate in the following year;
• File SR&ED claims no later than 18 months after the corporation’s year end;
• If you are a corporate partner of a partnership, the deadline for filing an SR&ED claim in certain situations, has been reduced by up to 13 months.

Taxable Capital

Monitor the corporation’s taxable capital for federal tax purposes. If in excess of certain limits, the corporation will begin to lose access to the small business deduction and the 35% refundable investment tax credit for SR&ED.

• Use excess cash to pay off some debts;
• Planned dispositions that will result in income should be deferred until after year-end;
• Maximize federal and provincial refundable and non-refundable tax credits;
• Trigger capital losses to recover capital gains tax paid in previous years.

Personal Services Business

Draft proposals will increase the tax rate applicable to income from personal services businesses to 28% (due to removal of federal abatement) for taxation years ending after October 31, 2011. Consider if still beneficial to carry on business through this vehicle.

Personal Tax Matters

I am an employee so what do I need to know?

Employment-related courses

Consider having your employer pay directly for job-related educational courses.

Gifts and awards

Subject to certain exceptions, non-cash gifts and non-cash awards with a total value of $500 or less annually may not be taxable to you personally. Ask your employer to consider this option.

Employee loans

Pay 2012 interest on or before January 30, 2013.

Employee Stock Options

• It you dispose of stock options for cash, discuss with your employer as to whether they can elect to forgo the tax deduction so that you may claim it;
• Employee election to defer the payment of tax on stock option benefits until the shares are sold is no longer allowed;
• Employers now required to withhold and remit income tax relating to the taxable benefit realized when public company options are exercised.

Home office

Ensure you claim your entitlement to home office expenses if your employer will complete form T2200.

Public transit pass tax credit

Ensure you claim the cost of public transit (subject to certain criteria). Retain passes or receipts to support claims.

Overseas employment tax credit

Please be aware that if you currently claim this credit it will be eliminated by 2016.

Corporate Vehicle

• Reduce your operating cost benefit and/or standby charge benefit if you have access to a company vehicle.
  • To reduce the operating cost benefit:
    • Consider reimbursing your employer for some or all of the personal use portion of the actual operating costs by February 14, 2013; and
    • Reduce your personal driving (to < 50% of the total driving, if possible).
  • To reduce or eliminate your standby charge benefit:
    • Limit your access to the vehicle (i.e. not every day); and
    • Avoid personal driving.

Group sickness or accident insurance plans

Employer contributions to a group sickness or accident insurance plan generally made after March 28, 2012, relating to coverage after 2012, will be included in your income for the year in which the contributions are made. Contributions in respect of wage-loss replacement benefits payable on a periodic basis are accepted.

Pooled registered pension plan (PRPP)

Consider joining a PRPP if you do not have access to an employer-sponsored pension plan. PRPP’s are a voluntary savings plan similar to a defined contribution RPP or RRSP.

RRSPs, RPPs and DPSPs

If you contributed less than the maximum allowable amount to your RRSP in a previous year, use the unused contribution room for 2012 in addition to your normal contribution.  If you decide not to contribute your entitlement for 2012, your ability to do so carries forward indefinitely.  However, even if you do not need the deduction in 2012, you should still make the contribution if you have excess funds, so the funds can start go grow on a tax deferred basis.  You can claim the deduction in any future year.

RRSP Anti-avoidance

Anti-avoidance rules will now be applicable to certain transactions occurring, income earned, capital gains accruing and certain investments acquired after March 22, 2011. If your RRSP holds investments that became prohibited, file federal form RC341 by December 31, 2012 to benefit from the special transitional rules.

Registered Plans - Contribution Limits

I have investments so what do I need to know?

Interest deductibility

If you are incurring non-deductible interest and at the same time have cash or investments on hand, consider using some of your cash or investments to pay down non-deductible debt and then borrow to replace those investments (careful on triggering gains though if you liquidate investments).

Interest income

Consider waiting until January 2013, to purchase certain interest-bearing investments.

Capital gains and losses

If you have capital gains this year (or in 2011, 2010 or 2009), consider selling an asset with an accrued loss, which can then be offset against those capital gains this year and then from prior years (i.e. to recover tax).  Before triggering losses, consider the superficial loss rules. If you have little or no other income, or have capital losses to use up, consider triggering capital gains before year-end by selling an investment that has appreciated in value, then reinvesting the proceeds (even in the same investment).

• If certain conditions are met, you can dispose shares of an eligible small business corporation and defer the recognition of capital gains by reinvesting the proceeds from the sale of those shares in another eligible small business corporation by April 30^th, 2013.

Superficial loss rules

The superficial loss rules prevent a taxpayer from claiming a capital loss on an asset that the taxpayer clearly intended to continue to hold.  If you are holding an asset with an accrued loss and wish to sell the asset to offset against any capital gains realized and you purchase the identical asset within 30 days either before or after selling the original asset, the superficial loss rules will apply to deny the capital loss, provided that the asset is held at the end of thirty days after the sale.  The superficial loss would also apply if your spouse (or a company controlled by you or your spouse) buys the asset within the same timeframe.

Investment holding company

Ontario residents who earn investment income from portfolio investments that is subject to Ontario’s high-earner income tax (i.e. on incomes exceeding $500,000 starting 2012) should consider holding these investments in a corporation.

Tax-Free Savings Account (“TFSA”)

• Canadian residents age 18 or older may contribute to a TFSA.  Contributions are not deductible but withdrawals and income earned are not taxed;
• Withdrawals should be done before year end as amounts withdrawn are not added to your contribution room until the beginning of the following year after the withdrawal;
• Consider holding investments that are subject to higher tax rates (i.e. interest and foreign dividends).

Donating Flow Through Shares

Be conscious of the limits now applicable to donations of publicly listed flow-through securities acquired after March 21, 2011. 

Eligible dividends

• Eligible dividends may trigger AMT;
• Eligible dividends could be tax-free if paid to individuals in lower tax brackets.    

Mutual funds

If you are thinking of investing in a particular mutual fund before year-end, enquire as to whether there is going to be a significant taxable distribution reported in 2012.  If so, consider waiting until January to make the investment to avoid paying tax on the distribution.

What do families need to know?

Estate planning

Ensure your estate plan is meeting your current and future objectives.  Also ensure that your will is up to date.

Income splitting

Consider an income-splitting plan to lend funds to family members in lower tax brackets.  The current prescribed rate is 1%. Interest on intra-family loans must be paid on or before January 30, 2013, to avoid attribution of income.

“Kiddie Tax”

Will apply to capital gains realized after March 21, 2011 that are included in the income of a minor, if the gain is attributable to a non-arm’s length disposition of shares and any dividends on those shares would have been subject to the kiddie tax. Any such capital gains will be ineligible for the lifetime capital gain exemption and be treated as dividends subject to the kiddie tax.

Family Trusts

In order to be included in the beneficiary’s income and deducted from the trust’s income, income earned by discretionary inter vivos family trusts must be paid or made payable to beneficiaries by December 31, 2012.  CRA has raised concerns about the absence of proper accounting and trustee minutes with respect to inter vivos trusts and is currently in the midst of a “family trust project”.  Therefore taxpayers should be following best practices with respect to maintaining their inter vivos trusts.

Registered Education Savings Plan (“RESP”)

• Plan to ensure the RESP will receive the maximum lifetime Canada Education Savings Grant (“CESG”) of $7,200;
• Asset transfers between RESPs for siblings are now allowed (subject to certain criteria).

Registered Disability Savings Plan (“RDSP”)

If your child qualifies for the disability tax credit and RDSP, you should:

• Set up an RDSP to qualify for Canada disability savings bond (lifetime maximum of $20,000 per child);
• Contribute to an RDSP to qualify for Canada disability savings grant (lifetime maximum of $70,000 per child);
• Allows RESP investment income to be transferred tax-free to an RDSP after 2013 if certain conditions are met;
• Allows certain family members to temporarily be the plan holder for an adult individual who might be unable to enter into a contract.

Home buyers’ plan and incentives

• If you are a first time home buyer, you may withdraw up to $25,000 from your RRSP and your spouse’s RRSP under the Home Buyers’ Plan to acquire a home;
• You may be eligible to claim the First Time Home Buyers’ Tax Credit of up to $750.
• If you are planning on using the HBP, consider deferring the withdrawal until after December 31, which will extend your time period for purchasing your home and repaying the amounts withdrawn by one year.
• If you participated in the HBP prior to 2011, you have a repayment due on or before March 01, 2012 for it to be considered to have been made in the 2012 taxation year.

Child care expenses

Ensure that child care expenses for 2012 are paid by December 31, 2012 and a receipt is obtained. Boarding school and camp fees qualify for the child care deduction (limits may apply).

Universal Child Care Benefit (“UCCB”) and Canada Child Tax Benefit (“CCTB”)

Consider investing the funds received from UCCB and CCTB in a separate bank account in trust for your children.  Investment income on these funds will not be taxable to you. 

Children’s fitness tax credit

Claim this federal non-refundable tax credit on up to $500 of fees paid per child under the age of 16 for enrolment in an eligible physical activity program.  These expenses have to be paid by December 31, 2012 and you must retain the receipts.

Children’s arts tax credit

Claim this federal non-refundable tax credit on up to $500 of fees paid per child under the age of 16 for enrolment in an eligible program of artistic, cultural, recreational or developmental activities.  These expenses have to be paid by December 31, 2012 and you must retain the receipts.

Education and textbook tax credits

Claim these credits if you attend post-secondary school either full-time or part-time. Eligible fees for exams taken after 2010 may qualify for the tuition tax credit.

Unused and unclaimed tax credits

Consider transferring your education, tuition or textbook tax credits to your spouse, parent or grandparent (subject to limitations) if you are unable to utilize them. The carryforward period is generally indefinite for unclaimed education, tuition and textbook credits and 5-years for unclaimed student loan interest.

Moving expenses

Your moving expenses may be deductible if you moved to attend school or moved from school to work or back home.

Lifetime Learning Plan (“LLP”)

You are allowed to make a tax-free withdrawal from your RRSP to finance full-time education (part-time for students who meet one of the disability conditions) for yourself, your spouse or your common-law partner.  You may withdraw up to $10,000 in a calendar year and up to $20,000 in total.

The Golden Years

Inter vivos trust

Consider establishing an inter vivos trust as part of your estate plan if you are 64 or older and live in a province with a high probate fee.

RRSP

If you turned 71 in 2012, you must collapse your RRSP.  You may:

• Defer taxes on all or a portion of the amount in your RRSP by transferring the funds to a registered retirement income fund (“RRIF”) or a life income fund (“LIF”);
• Contribute to your RRSP only until December 31, 2012, if you have unused RRSP contribution room or earned income in the previous year;
• Contribute to your spouse’s RRSP until the end of the year that your spouse reaches age 71, if you have unused RRSP contribution room or earned income in the previous year; and
• Make a 2013 contribution by the end of 2012, subject to a small penalty.

Pension income

If you receive pension income, consider splitting it with your spouse or common-law partner.

Old Age Security (“OAS”)

Allocation of pension income from a spouse or receipt of dividends may trigger OAS claw back. Consider measures to invest so as to earn capital gains as only 50% of the gain is included in income for the purposes of calculating the OAS amount.  Alternatively, see if you can manage your income (e.g. through a corporation) in order to avoid the OAS claw back.

Canada Pension Plan (“CPP”)

If you are employed or self-employed and are 60 to 70 in age, you must contribute to the CPP. However, if you are between the ages of 65 to 70, you can elect to stop these contributions. This election can be revoked the following year.

Individual pension plans

You must make minimum withdrawals starting 2012, if you have a defined benefit RPP that was creating primarily for you and you are over 71.

United States Matters

U.S. estate tax

Canadians may be exposed to US estate tax if they hold US property (i.e.  shares in U.S. corporations even if held in a Canadian brokerage account, U.S. real estate {including vacation homes}, interests in U.S. partnerships, etc.).

U.S. federal income tax return/treaty based tax return

Determine whether you are conducting activities in the United States that require you to file U.S. federal income tax returns, or U.S. treaty based tax information disclosure returns.

State and municipal taxes

The rules here differ in many cases from the US Federal level.  If you are carrying on business in the US, please consult your tax advisor to ensure that you are onside as each jurisdiction has its own set of rules.

U.S. retirement plans

If you are a Canadian resident, consider transferring your U.S. 401(k) or IRA plans on a tax-deferred basis to an RRSP.

U.S. tax reforms

• Limits the ability of a U.S taxpayer to claim foreign tax credits in certain situations;
• Imposes penalties on U.S investors that fail to report their investments in foreign financial assets, PFICs and other foreign entities.

International Matters

Transfer pricing

If your corporation has transactions with a related non-resident corporation or partnership, ensure that the transfer-pricing documentation meets the requirements imposed by the Canadian transfer-pricing rules. Non-compliance can result in significant penalties.

Foreign reporting requirements

Individuals, corporations, trusts and partnerships that own specified foreign property with a total cost exceeding C$100,000 at any time in the year are required to file form T1135. Review your foreign holdings to determine if you have a reporting obligation. Taxpayers resident in Canada that owns shares of a non-resident corporation that is a foreign affiliate may be required to file an information return (T1134).

Thin Capitalization

Thin capitalization rules limits the deduction of any interest on that debt where the debt to equity ratio is greater than 1.5:1 for corporate taxation years beginning after 2012 and the creditor is a non-resident with significant ties to the debtor. Any disallowed interest expense is considered to have been paid as dividend and is subject to withholding tax for taxation years ending after March 28, 2012.

Payments to non-residents

• You may be required to withhold and remit 15% of certain payments made to non-residents in respect of fees, commissions or other services rendered in Canada;
• Be aware of the new NR301, NR302 and NR303 forms released by the CRA that non-residents should file in support of reducing withholding tax rates on payments under a tax treaty;
• Be aware of the new Form R102-R that has been released by the CRA to request reduced withholdings on payments made to non-resident employees.

Key Tax Dates

December 15, 2012

• Final quarterly installment of 2012 tax due for individualsDecember 24, 2012

• This is likely the final trading day for Canadian exchanges for those wishing to have trades settled for 2012

December 31, 2012

Last opportunity to make a payment for the following items in order to utilize any applicable credit or deduction on your 2012 return

• Charitable donations
• Payment of Union dues and professional fees
• Investment counsel fees, interest and other investment expenses (including safety deposit box fees but these are not deductible in Quebec)
• Alimony and maintenance payments
• Child care and child fitness expenses
• Interest
• Medical expenses
• Moving expenses of individuals
• Political contributions
• Deductible employee legal fees
• Tuition fees and interest on student loans
• Payments to employer to reduce standby charge
• RRSP contributions if you turn 71 by December 31, 2012

January 15, 2013

• U.S. taxes : estimated tax payments due for individuals

January 30, 2013

• Interest due on intra-family loans
• Non-deductible interest due on loans from your employer, to reduce your taxable benefit

February 14, 2013

• Payment to your employer to reduce your taxable operating benefit from an employer provided automobile

February 28, 2013

• Last day to file T4, T4A and T5 Summary and Supplementary forms

March 1, 2013

• Deductible contributions to your own RRSP or spousal RRSP (for 2012 deduction)
• RRSP Home Buyer’s Plan repayment due (to avoid 2012 inclusion)

March 15, 2013

• First quarter (2013) personal tax instalment due

March 31, 2013

• Last day to file income tax returns for inter vivos trusts without penalty
• Last day to file NR4 Summary and Supplementary forms regarding amounts paid or credited to non-residents of Canada

April 15, 2013

• U.S. individual tax return due if you have not obtained an extension

April 30, 2013

• Last day to file personal tax returns (except for self-employed individuals or spouses of self-employed individuals in which case the deadline is June 17, 2013).  No matter your deadline, interest will be charged on any balance due after April 30
• Filing deadline for personal return may be later if individual or spouse died during the year (terminal return required)

Appendix I

2012 & 2013 PERSONAL TAX RATES

Appendix II

2012 & 2013 CORPORATE TAX RATES

Stephen Rupnarain, CA, is a Tax Manager in the Toronto office of Collins Barrow.