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Federal Budget Commentary 2023

Posted on March 29, 2023April 5, 2024 by Edixon

On March 28, 2023, Deputy Prime Minister and Minister of Finance Chrystia Freeland released Canada’s 2023 Budget (Budget 2023).

Budget 2023 prioritizes four key initiatives: (i) strengthening the middle class, (ii) making life more affordable, (iii) increasing accessibility to public health, and (iv) fostering a more environmentally sustainable economy.

From a tax perspective, Budget 2023 revealed a continued effort to fine-tune and implement previously announced measures. While there were no business or personal income tax rate increases, clean energy continues to be the focus and there is a clear directive to combat abusive tax avoidance schemes both domestically and internationally. Further, the proposed changes focus on supporting the middle class through inflationary times, namely by ensuring that the wealthiest Canadians pay their fair share of taxes.

This tax alert summarizes the personal and business income tax measures as well as indirect tax measures in Budget 2023 relevant to the middle market.

Personal tax measures

Budget 2023 proposes no changes to personal tax rates.

Employee ownership trusts

Employee ownership trusts (EOTs) were proposed as part of Budget 2022 as a vehicle to facilitate the purchase of a business by its employees without requiring them to pay directly to acquire shares of the business. EOTs will provide a valuable option for Canadian business owners interested in succession planning. These proposed changes will come into effect as of January 1, 2024.

The rules proposed in Budget 2023 on EOTs provide qualifying conditions to establish an EOT and changes to existing rules in the Income Tax Act (ITA).

Budget 2023 proposes that an EOT must have only two purposes:

To hold shares of a qualifying business for the benefit of employees; and,
To make distributions to those employee beneficiaries based on a legislative formula.

An EOT would be required to hold a controlling interest in the shares of one or more qualifying businesses. All or substantially all of an EOT’s assets must also be shares of a qualifying business.

Budget 2023 also updates existing rules in the ITA to better accommodate the establishment and use of EOTs. This includes increasing the deferral of capital gains for the sale of a business to an EOT for up to ten years, providing for a minimum 10% annual taxable inclusion of the gain. Ordinarily, a deferral of the recognition of a capital gain is allowed for a maximum of five years, providing for a minimum 20% annual taxable inclusion of the gain.

Further, an EOT will be exempted from existing rules in the ITA that require an employee to include a loan from a business in their income if that loan is not repaid within one year. Instead, a corporation would be entitled to loan amounts to an EOT for up to fifteen years without income recognition at the employee level. Additionally, EOTs are exempt from the 21-year rule, which generally requires certain trusts to be deemed to have disposed of their property every 21 years.

Application to mergers and acquisitions (M&A)

The EOT proposals would be welcome news to many private Canadian business owners who wish to transition their businesses to employees on a tax-efficient basis. The proposed EOT framework addresses many of the historical challenges associated with transitioning a business to employees, including tax-efficient financing, managing the timing of cash flows to taxation, and permitting access to capital gains treatment.

Strengthening the intergenerational business transfer framework

Bill C-208 was intended to facilitate genuine intergenerational business transfers by providing an exception to the anti-surplus stripping rules contained in the ITA. However, after the bill received royal assent on June 29, 2021, the federal government realized that it permitted surplus-stripping transactions to occur where no legitimate transfer of a business to the next generation took place.

Budget 2023 proposes to amend the rules introduced by Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place, effective January 1, 2024.

A genuine intergenerational share transfer would be a transfer of shares of a corporation by a natural person to another corporation where a number of conditions are satisfied. For instance, each share transferred must be either a “qualified small business corporation share” or a “share of a family farm or fishing corporation” at the time of transfer. Further, taxpayers who wish to undertake a genuine intergenerational share transfer must rely on one of two transfer options:

An immediate intergenerational business transfer (a three-year test); or,
A gradual intergenerational business transfer (a five-to-ten-year test).

The immediate intergenerational business transfer approach would provide finality earlier in the process but with more stringent conditions. Both legal and factual control of a business must be immediately transferred to the next generation.

The gradual intergenerational business transfer approach would require the initial transfer of only legal control.

Both types of transfers have detailed nuances to account for. Regardless of the intergenerational transfer approach taken, both options are eligible for a graduated ten-year reserve on capital gains incurred on the transfer.

Application to M&A

Owner-managers looking to transition their business should consider either the immediate business transfer route or the gradual business transfer. The choice should be based on the complexity and the readiness of the next generation acquiring the business, so as to structure the transition to meet the above conditions. Notably, while the gradual business transfer has seemingly eased restrictions, having to meet certain those conditions for up to 13 years post-transfer can be difficult and could result in a reassessment back to the initial year of transfer.

Alternative minimum tax for high-income individuals

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer deductions and tax credits than the usual progressive rate calculation. An individual pays the higher of the AMT and the regular progressive rate calculation. Proposed changes include broadening the AMT base, raising the AMT exemption, and increasing the AMT rate. The changes are intended to be effective for taxation years that begin after 2023.

The AMT base would be broadened by increasing the following inclusion rates:

Ordinary capital gains from 80% to 100%;
Employee stock option benefits from 0% to 100%; and,
Capital gains on donations of publicly listed securities to 30%

The AMT base would also be broadened by disallowing 50% of certain deductions, such as employment expenses, moving expenses, child-care expenses, limited partnership losses of other years, and noncapital loss carryovers. Additionally, only 50% of nonrefundable tax credits would be allowed to reduce the AMT base, subject to certain exceptions.

Lastly, Budget 2023 proposes increasing the AMT rate from 15% to 20.5% and raising the AMT exemption from $40,000 to the start of the fourth federal tax bracket, currently estimated to be approximately $173,000 for 2024. This means that the basic AMT exemption will be indexed annually.

Application to M&A

Taxpayers should consider the impact of the revisions proposed by Budget 2023 in the context of a liquidity event where tax attributes are being utilized to reduce or eliminate an individual’s tax liability. Additionally, consideration should be given where that individual is not expected to have sufficient income to recover any AMT paid in the near future. The increase in the overall rate coupled with no changes to the carryforward period may result in a greater amount of AMT becoming in effect a permanent tax.

The higher inclusion rate for general capital gains realized in the year of a transaction may increase the AMT for high-income individuals under the revised formula. Taxpayers would be prudent to model the estimated impact of these adjustments on expected transactions for taxation years starting after 2023 and consider accelerating transactions where it is advantageous to do so.

Business tax measures

Budget 2023 proposes no changes to the federal corporate income tax rates or the $500,000 small business limit.

Changes to the general anti-avoidance rules (GAAR)

Budget 2023 proposes to amend the GAAR in multiple ways, namely:

By introducing a preamble;
Changing the avoidance transaction standard;
Introducing an economic substance rule;
Introducing a penalty; and,
Extending the reassessment period in certain circumstances.

The preamble would clarify the scope of the GAAR in its application with the intention for it to apply to every other provision of the ITA. The avoidance transaction standard is proposed to narrow from a “primary purpose” test to a “one of the main purposes” test. Additionally, the proposed amendments would provide that economic substance is to be considered at the “misuse or abuse” stage of the GAAR analysis and that a lack of economic substance tends to indicate abusive tax avoidance. These indicators of a lack of economic substance, while not intending to be exhaustive, may include:

Whether there is a potential for pre-tax profit;
Whether the transaction has resulted in a change of economic position; or,
Whether the transaction is entirely (or almost entirely) tax-motivated.

A penalty of 25% will also be introduced on the tax benefit if the transaction is subject to the GAAR. The penalty could be avoided if the taxpayer disclosed the transaction to the CRA voluntarily or under the mandatory disclosure rules. Budget 2023 also expands the normal reassessment period by three years for reassessments made under GAAR unless the transaction was already disclosed to the CRA.

Application to M&A

If enacted as proposed, commonplace M&A tax planning may fall within the expanded scope of the GAAR. In that instance, taxpayers should consider potential impacts on their acquisition or divestiture structures that may be caught by the revised GAAR. Taxpayers would also have to ensure that adequate documentation is maintained with respect to commercial considerations supporting the planning steps undertaken in order to meet the economic substance requirement under the proposed rules. The expansion of the GAAR will also be relevant to buyers as they seek to understand potential tax exposures, including any extended reassessment periods that may exist in a target company post-acquisition.

Clean hydrogen and technology manufacturing

Budget 2023 proposes to introduce two new environmental measures—the Clean Hydrogen Investment Tax Credit (CHITC) and Clean Technology Manufacturing Investment Tax Credit (CTMITC). Both credits will be subject to new labour requirements, and where a project is eligible for both of these credits, only one can be claimed.

The refundable CHITC will be available to projects that produce all, or substantially all, hydrogen through their production process and in respect of purchasing and installing eligible equipment. The credit will vary between 15% and 40% of the capital cost of eligible property. Those who claim the tax credit will need to meet certain environmental markers over a given period of time to continue to qualify for the credit. This credit will apply to property that is acquired and available for use on or after March 28, 2023, and will be phased out for property that becomes available for use after 2034.

The CTMITC is a refundable credit for clean technology manufacturing and processing, and critical mineral extraction and processing. It will be equal to 30% of the capital cost of eligible property. To qualify for the credit, the eligible property must be utilized in eligible activities, such as the manufacturing of certain renewable energy equipment and the manufacturing of nuclear fuel rods. The credit would apply to property that is acquired and available for use on or after January 1, 2024, and be completely phased out for the property that becomes available for use after 2034. The credit may also be recovered if the eligible property is sold or if there is a change in use.

Tax credit for carbon capture, utilization, and storage

The Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS Tax Credit) was originally announced as part of Budget 2022. Following consultations, there are now proposed changes to these rules. In particular, Budget 2023 proposes that:

The credit will apply to dual-use equipment;

British Columbia be added as an eligible jurisdiction for dedicated geological storage;
Qualified third parties be permitted to approve the process for using and storing CO₂ in concrete instead of requiring approval from Environment and Climate Change Canada; and,
There be additional rules for the treatment of refurbishment costs and the recovery of refurbishment credits.

Where a project qualifies for this credit and any of the Investment Tax Credit for Clean Technology (CTITC), the Investment Tax Credit for Clean Electricity (CEITC) or the CHITC, the claimant will only be permitted to claim one of these credits. This credit will apply to eligible expenses incurred after 2021 and before 2041.

Share buyback tax

A new tax equal to 2% of the annual net value of repurchased equity is proposed for repurchases and issuances of equity that occur on or after Jan. 1, 2024. This measure will apply to Canadian-resident corporations whose shares are listed on a public stock exchange, real estate investment trusts (REITs), specified investment flow-through (SIFT) trusts, and SIFT partnerships. Mutual fund corporations are excluded. A business would not be subject to the tax if its gross repurchases of equity were less than $1 million during that taxation year. Budget 2023 proposes to also exclude the following transactions from the application of these rules:

Issuance and cancellation of debt-like preferred shares; and,
Issuance and cancellation of shares in corporate reorganizations and acquisitions, amalgamations, liquidations, and share-for-share exchanges.

Even though the government hopes this measure will encourage companies to redirect profits to business growth and employees, this tax may have the unintended effect of increasing the cost of capital for public companies. It may also create market inefficiencies, disincentivize private companies from going public and discourage investment in Canadian public companies.

Financial institution dividends

Corporations, including financial institutions, are allowed a dividend-received deduction in respect of dividends received on shares of Canadian resident corporations. Budget 2023 proposes that financial institutions will no longer be able to claim the deduction in respect of dividends received on shares that are mark-to-market property because the deduction conflicts with the policy behind the mark-to-market rules. Under these rules, gains on the disposition of mark-to-market property are included in ordinary income, not capital gains; and unrealized gains are included in computing income annually (in addition to when the property is disposed of). This measure would apply to dividends received after 2023.

Credit unions

For income tax and GST/HST purposes, if a credit union earns more than 10% of its revenue from sources other than certain specified sources (such as revenues from lending activities), it would not meet the definition of a “credit union.” The definition of a credit union is proposed to be amended to remove this revenue test. The proposed amendment would apply to taxation years ending after 2016.

International tax measures

Pillar two – Global minimum tax

Consistent with the announcement in Budget 2022, Budget 2023 announces the federal government’s intention to introduce legislation implementing the Income Inclusion Rule (IIR) and a domestic minimum top-up tax. These rules would be applicable to Canadian entities of multinational enterprises (MNEs), which are within the scope of Pillar Two (MNE with annual revenues of €750 million or more) and the undertaxed profits rule (UTPR).

In general, the IIR would impose a top-up tax on the income of a foreign-controlled entity or a foreign branch if that income was otherwise subject to an effective tax rate that is below 15%. The UTPR is a “backstop” rule that generally applies where neither the ultimate parent jurisdiction nor any intermediate parent jurisdiction of an MNE has implemented the IIR. In these cases, other jurisdictions in which the MNE operates that have implemented the UTPR would impose the top-up tax on the group entities located in their jurisdiction. The top-up tax would be allocated through a formula basis in those jurisdictions.

Budget 2023 proposes to implement the IIR effective for fiscal years of MNEs that begin on or after December 31, 2023, and UTPR for fiscal years of MNEs that begin on or after December 31, 2024.

Previously announced measures

Budget 2022 confirms the government’s intention to proceed with the following international tax measures previously announced:

Legislative proposals released on November 3, 2022, with respect to Excessive Interest and Financing Expenses Limitations.
Legislative proposals released on April 29, 2022, with respect to Hybrid Mismatch Arrangements.

Transfer pricing (TP) measures

The transfer pricing consultation paper is still forthcoming

Budget 2023 confirms the government’s intention to proceed with the Transfer Pricing Consultation paper previously announced in Budget 2021. While the Transfer Pricing Consultation contents remain unknown, initial indications of its focus exist in the proposed GAAR amendments on economic substance.

Following prominent global guidance, the CRA auditors have more recently audited with economic substance in mind. This is generally inconsistent with Canadian law, which has predominantly focused on legal form. As a result of this and other factors, the Department of Finance has experienced adverse outcomes for prominent transfer pricing court cases.

It is possible that these amendments may serve as a precursor to the CRA adopting a more substance-over-form approach, which may be central to the forthcoming Transfer Pricing Consultation. This can only be confirmed once the Consultation paper is released to evaluate the potential implications of the amendment.

Adoption of pillar one – Reallocation of taxing rights

Budget 2023 confirms the intention to adopt Pillar One. Pillar One will reallocate taxing rights over the profits of the largest and most profitable multinational enterprises (MNEs) to align with the jurisdictions of their users and customers. Budget 2023 indicates Pillar One has an anticipated entry-to-force date during 2024.

To the extent Pillar One is not adopted by January 1, 2024, the previously announced Digital Services Tax (DST) will enter force in respect of revenues earned as of January 1, 2022.

Indirect tax measures

The grocery rebate

Budget 2023 introduces the Grocery Rebate, which will increase the maximum goods and services tax credit (GSTC) for January 2023 by twice the amount received for January 2023. This would result in an effectual tripling of what would have otherwise been received for the month of January 2023 for eligible GSTC recipients. The Grocery Rebate will be paid as soon as related legislation is passed through the GSTC system. Maximum amounts under the Grocery Rebate will be $153 per adult, $81 per child, and $81 for the additional single supplement.

GST/HST treatment of payment card clearing services

Budget 2023 proposes to exclude payment card clearing services rendered by a payment card network operator from the GST/HST definition of “financial service”. Under the Excise Tax Act, supplies of financial services are generally “exempt” for GST/HST purposes. This amendment follows a recent court decision that found that the GST/HST does not apply to supplies of these services. As such, the amendment ensures that such services will generally continue to be subject to the GST/HST.

This measure will apply to a service rendered under an agreement for a supply if any consideration for the supply becomes due or is paid without becoming due after March 28, 2023. If the consideration for the supply became due or was paid on or before March 28, 2023, the measure will only not apply if the supplier did not charge, collect or remit any amount of GST/HST in respect of the supply. The measure will also not apply in respect of any other supply that is made under the agreement and that includes the provision of a payment card clearing service.

Cannabis taxation – Quarterly duty remittances

The excise duty on cannabis products is typically remitted on a monthly basis. However, previous changes introduced by the 2022 budget allowed smaller-licensed businesses to remit their excise duties quarterly. Budget 2023 proposes that starting April 1, 2023, all licensed cannabis producers will be permitted to remit excise duties quarterly.

Credits and incentives measures

Clean technology and innovation

These programs provide funding for large projects across sectors that include emissions reduction, biomanufacturing, and natural resources. Over the next 10 years, over $500 million will be allocated to support the development and application of clean technologies, critical minerals, and industrial transformation.

Canada innovation corporation

Budget 2023 proposes new measures to encourage business innovation by spurring business and research development through the creation of the new Canada Innovation Corporation (CIC) for both new and established industries. The CIC is a new Crown corporation with a mandate to increase Canadian business expenditure on research and development across all sectors and regions of Canada.

Student placement programs

Budget 2023 continues to support Canada’s student work placement programs by providing employers with subsidies to promote the hiring of students to gain experience in the workforce. The program proposes to provide $197.7 million in 2024-25 to continue creating quality work-integrated learning opportunities for students through partnerships between employers and post-secondary education institutions.

Scientific research and experimental development

Budget 2023 does not propose any change regarding the Scientific Research and Experimental Development (SR&ED) tax incentive program. However, in 2022, the federal government announced intentions to review the SR&ED program to safeguard and encourage research and development that benefits Canada as well as to investigate opportunities for modernization and simplification of the program, such as changes to eligibility criteria. In the coming months, the Department of Finance will continue to engage with stakeholders to ensure the SR&ED program is effectively supporting the development of intellectual property.

Audit and enforcement measures

Publicly accessible federal beneficial ownership registry

As part of the government’s commitment to corporate transparency, Budget 2023 proposes further amendments to the Canada Business Corporations Act, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the ITA, and other statutes to implement a publicly accessible beneficial ownership registry. These amendments are in addition to the ones already implemented under the 2022 budget.

The changes will:

Introduce protections for whistleblowers;
Bolster the powers of Corporations Canada to make inquiries;
Introduce an exemption regime for certain individuals who may face harm from public disclosure, including minors;
Ensure compliance with the new regime through robust criminal and monetary penalties; and,
Facilitate information-sharing and data validation, including investigative bodies and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Automatic tax filing

To allow low-income Canadians to access valuable support, Budget 2023 provides that the federal government will increase the number of eligible Canadians for File My Return to two million by 2025. File My Return is a service that allows eligible simple tax-filing Canadians to auto-file their tax return over the phone after answering a series of short questions. Additionally, the CRA is piloting a new automatic tax filing service to assist vulnerable Canadians who do not file their taxes to receive their benefits starting in 2024.

COVID benefits

To ensure the integrity of Canada’s emergency benefit system post-COVID-19, Budget 2023 proposes to provide $53.8 million in 2022-23 to Employment and Social Development Canada to support integrity activities relating to overpayments of COVID-19 emergency income supports.

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/budget-commentary/2023-canada-federal-budget-detailed-commentary.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

2023 Canada Federal Budget: Industry highlights

Posted on March 29, 2023March 7, 2024 by Edixon

Key industry takeaways from the latest budget release

Finance Minister Chrystia Freeland on March 28, 2023, tabled the 2023 Canada Federal Budget. Here are the implications of Budget 2023 across major industries, including key takeaways for middle market companies.

Looking for more in-depth information? Read the 2023 Canada Federal Budget: Detailed Commentary.

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/budget-commentary/2023-canada-federal-budget-industry-highlights.html

For more information on how DJB can assist you, please contact us.

Insights on Operational Efficiency for the Family Office

Posted on March 29, 2023April 12, 2024 by Edixon

The family enterprise is tasked with maximizing efficiency and productivity amidst constant change and uncertainty in the business environment today.

A big focus and looming concern for many family offices is the ability to achieve operational excellence as they consider the latest trends and strategies to evolve their current operating model.

In this study conducted by RSM Canada, they found three key takeaways related to data, technology, and talent.

Read Insights

SAUNA AND HYDROTHERAPY POOL: Medical Expense Tax Credit

Posted on March 23, 2023March 7, 2024 by Edixon

In a December 4, 2018 Technical Interpretation, CRA was asked whether the costs of installing a steam shower (sauna) and hydrotherapy pool could be eligible for the medical expense tax credit (METC). The use of these devices was recommended as treatment to maintain strength and mobility.

CRA noted that, for renovations to be eligible, they must:

enable the patient to gain access to the dwelling or be mobile and functional within it;
not typically be expected to increase the value of the dwelling; and
not normally be undertaken by individuals with normal physical development or who do not have a severe and prolonged mobility impairment.

While the expenses contemplated may meet criteria (a), CRA opined they would likely fail criteria (b) and (c) and, therefore, not be eligible for the METC. However, eligibility remains a question of fact, with the onus on the taxpayer to demonstrate that all requirements were met.

Also, CRA noted that a renovation cost incurred for the main purpose of enabling a qualifying individual to gain access to the dwelling or be mobile and functional within it (the same as criteria (a) for the METC) could be eligible for the home accessibility tax credit (HATC). The HATC is a non-refundable credit that provides tax relief on up to $10,000 annually of renovations to a home to enhance mobility or reduce risk of harm for a qualifying individual (those 65 years of age or older at the end of the taxation year or eligible for the disability tax credit). The HATC requirements do not exclude costs failing criteria (b) or (c) above.

ACTION ITEM: There are several renovations that can be eligible for one or both of these credits. Receipts, invoices and/or other supporting documents should clearly identify the health benefits and purpose.

Contact one of our Taxation team members for more tax tips and advice.

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Tax Facts Card – 2023

Posted on February 1, 2023March 7, 2024 by Edixon

The Virtues of Family Employment Policies

Posted on January 4, 2023April 12, 2024 by Edixon

There comes a time in every company — a tipping point — when growth prompts the need for more formal policies and procedures. One of the areas where this need quickly becomes most obvious is in the human resources arena. As the number of family members increases from generation to generation, the complexity of hiring, training, and managing relatives can quickly overwhelm the original founders.

Part of the problem is that sometimes, typically after the second generation of family members is hired, there’s an expectation that all of the third generation of children and cousins will find life-long careers in the family business. While this works beautifully for a few family companies, it’s untenable for most.

Some relatives are more talented, knowledgeable, or harder working than others. Some have unique skills or training that make them particularly valuable to the company. Others are less motivated or less responsible, or just aren’t interested in pursuing a career there.

Be Intentional

The best way to manage these expectations — and the ensuing family drama — is to create thoughtful written family employment policies. Having these policies in place lets all of the relatives know exactly how the company handles the employment of family members. The topics to be addressed by the policies should include:

Education and training: Do you expect family members to attain certain degrees, licenses, or certifications before they join the company? If so, this should be spelled out in the employment policies, along with a timeframe required for completing the education or training. Also, clarify the company’s policy on paying for additional education or training programs.

Experience: Some family businesses require relatives to have a certain number of years of outside experience before joining the company. Exposing young adults to the rigors of the “real world” often gives them an appreciation for the dedication it takes to make a company thrive. They can also learn from others outside the business and bring those lessons back to the family, which adds a fresh perspective and new ideas.

Career track: Where will family members start their careers and how will they move up the corporate ladder? Some companies have formal training programs that rotate relatives through the various departments of the business so they get the big picture and discover their passions. Others start relatives at the lowest position and have them work their way up just as non-family employees do. Whatever path you choose is fine, but get it in writing so relatives know what to expect.

Compensation: How and how much will family members be paid? It’s not unusual for family businesses to overpay or underpay relatives. Best practices dictate that salaries be market-driven. That way, the family employees know the true value of their services relative to other employees and the marketplace.

You must also determine how to compensate relatives who actually work in the business (versus those who don’t), who will participate in ownership, and how ownership shares will be dispersed.

Communicate Regularly

To be effective, these policies must be enforced, communicated, and updated. An annual family meeting — separate from a business meeting — is the perfect forum for discussion of these and other family issues. While introducing these policies may be met with some resistance, moving forward with them in place takes a huge burden off the executive team and ultimately preserves family relationships.

If you’re making major changes to the way family employment has been traditionally handled, these discussions might be a bit emotionally charged. But getting everything out on the table is often a relief, and having everyone informed and on the same page sets the stage for a successful future.

Navigating workforce challenges: What drives employee satisfaction and retention?

Posted on December 14, 2022March 7, 2024 by Edixon

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/services/business-strategy-operations/navigating-workforce-challenges-employee-satisfaction-retention.html

For more information on how DJB can assist you, please contact us.

2022 Ontario fall fiscal update

Posted on November 14, 2022April 12, 2024 by Edixon

Executive summary

On Nov. 14, 2022, Ontario’s Minister of Finance, Peter Bethlenfalvy, released the 2022 Ontario Economic Outlook and Fiscal Review which serves as an update to Ontario’s 2022 Budget.

The government affirmed its commitment to help Ontarians navigate economic uncertainty and introduced new initiatives, particularly for small and medium-sized businesses, as well as additional targeted measures to keep costs down for families.

The following is a summary of the key business and personal income tax measures in the budget.

Business income tax measures

Expanding the small business rate

To mirror the proposed changes to the federal small business corporate rate as announced in the 2022 Federal Budget, the Ontario government is proposing to extend the range over which the benefit from the small business rate is phased out.

Ontario provides a small business corporate income tax rate of 3.2% for Canadian Controlled Private Corporations (CCPCs) on their first $500,000 of active business income. This benefit is phased out on a straight-line basis for CCPCs, and associated groups of CCPCs, that have more than $10 million of taxable capital employed in Canada in the previous year and is fully eliminated at $15 million. The proposed measure would phase out the benefit from the small business rate for taxable capital between $10 million and $50 million, up from $15 million.

Ontario intends to introduce legislation for this measure once the corresponding federal legislation has received Royal Assent to ensure simplicity and clarity for businesses. The proposed Ontario measure would apply to taxation years that begin on or after April 7, 2022, consistent with the proposed federal change.

Applying to taxation years that begin on or after April 7, 2022, this proposed change will allow more medium-sized CCPCs with Ontario jurisdiction to benefit from the small business rate.

Allowing for immediate expensing

To encourage business investment, the government is proposing to provide temporary immediate expensing for eligible property acquired by a CCPC, an unincorporated business carried on directly by Canadian-resident individuals (other than trusts), and Canadian partnerships where all the partners are CCPCs or Canadian-resident individuals (other than trusts). This measure will mirror the federal measure introduced in the 2021 Federal Budget and received Royal Assent on June 23, 2022.

Once legislation is passed in Ontario, the immediate expensing will be available for property acquired after April 18, 2021 that is available for use before Jan. 1, 2025. The expense is limited to $1.5 million per taxation year, which must be shared amongst associated members of a group of CCPCs.

Property eligible for this new measure would be capital property subject to Capital Cost Allowance (CCA), other than property in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51.

This change may provide an opportunity for medium-sized businesses to make capital investments at a lower cost.

Modernizing Ontario’s Cultural Media Tax Credits

In the 2022 Budget, the government announced its intention to modernize various media tax credits. The Economic Outlook confirms that it will proceed with the proposed updates, and in the coming months, proposed regulatory amendments to implement this measure will be posted for public review and comment.

Personal income tax measures

Increasing the Non-Resident Speculation Tax Rate

Effective Oct. 25, 2022, the government implemented amendments to increase the Non-Resident Speculation Tax rate from 20% to 25%. The Non-Resident Speculation Tax applies to the purchase of a home located anywhere in Ontario by foreign nationals, foreign corporations or taxable trustees.

To ensure taxpayer fairness, purchasers who entered into binding agreements of purchase and sale before Oct. 25, 2022, may be eligible for relieving transitional provisions.

This article was written by Clara Pham, Daniel Mahne, Sigita Bersenas and originally appeared on Nov 14, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/2022-Ontario-fall-fiscal-update.html.

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Economic statement 2022

Posted on November 8, 2022April 1, 2024 by Edixon

Executive Summary

On Nov. 3, 2022, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s Fall Economic Statement; the government’s first update in the wake of high inflation, increasing interest rates, and economic uncertainty. The 2022 Fall Economic Statement introduces several new tax measures and affirms the government’s intention to proceed with previously announced tax measures, although the implementation date of some key measures is being delayed (trust reporting rules, mandatory disclosure rules, and excessive interest and financing expense limitation rules).

Along with the 2022 Fall Economic Statement, the government both (i) released draft legislation for public consultation in respect of some tax measures and (ii) introduced Bill C-32 into Parliament to implement many other tax measures. This alert summarizes the key measures from the government’s Fall Economic Statement, draft legislation, and the proposed legislation currently before Parliament.

New tax measures announced in the Economic Statement

The following is a list of the new tax measures announced in the Economic Statement. These are not yet in effect, as the government indicated that it will provide details in the 2023 Federal Budget or at a later date.

A tax on share buybacks. The government announced its intention to introduce a corporate-level 2% tax that would apply on the net value of all types of share buybacks by public corporations in Canada, similar to a recent measure introduced in the United States. The details of this new tax will be announced in Budget 2023, and the tax would come into force on January 1, 2024.
Revisions to the Alternative Minimum Tax. The Alternative Minimum Tax (AMT) has been in effect for more than 35 years and is intended to ensure that high-income individuals cannot lower their tax bill too much. The government intends to revise (read and enhance) the AMT in the 2023 Federal Budget.
Investment tax credit for clean technologies. To attract investments in Canada’s clean technologies, the government proposes a refundable tax credit of up to 30% of the capital cost of investments in eligible equipment for property available for use on or after the day that the 2023 Budget is released.
Residential property-flipping rule will apply to assignment sales. Starting on Jan. 1, 2023, profits arising from dispositions of residential property (including rental property) that was owned for less than 12 months is deemed to be business income (subject to limited exceptions). The government proposes to extend this new deeming rule to profits arising from the disposition of the rights to purchase a residential property via an assignment sale.

Intention to proceed with previously-announced measures

The government reiterated its intention to proceed with previously-announced tax measures and introduced Bill C-32 to implement these measures. Below are some of the notable measures:

Introducing the Canada Recovery Dividend under which banks and life insurance companies pay a temporary one-time 15% tax on taxable income above $1 billion over five years;
Increasing the corporate income tax rate of banks and life insurance companies by 1.5% on taxable income above $100 million;
Raising the upper limit for the phase-out of the small business tax rate from $15 million to $50 million;
Providing that a tax benefit as defined in the general anti-avoidance rule (GAAR) applies includes an increase in tax attributes that have not yet been used to reduce taxes;
Strengthening the rules on avoidance of tax debts (i.e., enhancing the government’s power to collect unpaid tax debts); and
Increasing reporting requirements for trusts, however, the Bill C-32 delays the implementation by one year: for taxation years that end after Dec. 30, 2023 (instead of after Dec. 30, 2022). Bare trusts are still included in the scope of the trust rules.

Notably absent from Bill C-32 are the new Mandatory Disclosure Rules (reportable transactions, notifiable transactions, and uncertain tax treatments). The government still intends to proceed with these rules but confessed that it needs more time to consider the feedback it received from the tax community before it proceeds with legislation. As a result, the proposed implementation date of Jan. 1, 2023, for reportable transactions and notifiable transactions is being pushed back to an unspecified date (whenever the legislation for the mandatory disclosure rules receives Royal Assent). The government still intends to have the uncertain tax treatment rules apply for taxation years starting on or after Jan. 1, 2023 (but the penalties will not be applicable until the legislation receives Royal Assent).

Excessive interest and financing expense limitation rules

The excessive interest and financing expense limitation (EIFEL) rules – announced as part of Budget 2021 – were first released in draft form on Feb. 4, 2022. On Nov. 3, 2022, the Department of Finance released an updated package of the draft EIFEL legislation, which provides essential considerations to the middle market of Canada.

The EIFEL rules have not been enacted yet. However, it is not too early to consider their application.

What is EIFEL?

The EIFEL rules limit a taxpayer’s interest and financing deduction (i.e., interest and financing expenses (IFE) net of interest and financing revenues (IFR)) to a fixed ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA), referred to as adjusted taxable income (ATI). The EIFEL rules apply after the existing limitations on the deductibility of IFE including the thin-capitalization rules under the Income Tax Act (Act).

IFE includes, among other things: interest; financing expenses that are ‘capitalized’ and deducted as capital cost allowance or as amounts in respect of resource expenditure pools; an imputed amount of interest in respect of certain finance leases; certain amounts that are economically equivalent to interest or that can reasonably be considered part of the cost of funding; and various expenses incurred in obtaining financing. IFR includes the taxpayer’s interest income, as well as other income from the provision of financing.

The ratio of permissible IFE, or taxpayers’ deduction capacity, will be 40% for taxpayers with a taxation year beginning on or after Oct. 1, 2023, and before Jan. 1, 2024. This ratio will reduce to 30% for taxation years beginning on or after Jan. 1, 2024. The denied IFE will be carried forward indefinitely and may be deducted in a future tax year where the taxpayer has sufficient capacity. Where the taxpayer’s IFE is less than its deduction capacity, the taxpayer will be able to carry forward the deduction capacity to apply against its own IFE in the next three tax years. Alternatively, a taxpayer may transfer the excess deduction capacity to another group member, subject to certain conditions.

To whom does EIFEL apply?

The EIFEL rules apply to taxpayers that are corporations or trusts, including non-resident corporations or trusts that earn income in Canada. The rules also apply to members of a partnership who are corporations or trusts, with the IFE and IFR being attributed to them in proportion to their interest in the partnership.

The following entities are excluded from the EIFEL regime:

CCPCs, together with any associated corporations have taxable capital employed in Canada of less than $50 million;
Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $1 million or less;
Certain standalone Canadian resident corporations and trusts and groups consisting exclusively of Canadian resident corporations and trusts that carry on substantially all their business in Canada. This exception will not apply where a group member has a ‘material’ foreign affiliate, a non-resident holds a ‘significant’ interest in any group member, or a group member has any ‘significant’ amount of IFE paid to a non-arm’s length ‘tax-indifferent investor’ such as a non-resident or a person exempt from tax.

Excluded and exempt IFE

Subject to certain conditions, taxpayers (including corporations and partnerships) may file an election to exclude IFE and IFR from the application of the 30% or 40% fixed ratio of deductible IFE when they are members of the same corporate group. This election facilitates domestic loss-consolidation transactions, which allow the losses of one group member to offset against the income of another group member.

Further, IFE incurred in respect of certain public-private partnership infrastructure projects (P3 projects), e.g., to design, build, finance, maintain, and operate, real or immovable property owned by the public sector authority, will be exempt from the scope of the rules.

The group ratio method of calculating deduction capacity

Taxpayers who are members of an accounting consolidated group or would be if the group were required to prepare such statements under IFRS, can elect to deduct IFE based on a group ratio, which may be in excess of the fixed ratio.

The maximum amount of IFE the consolidated group members are collectively permitted to deduct is generally determined as the lowest of: (i) the total of each Canadian group member’s ATI multiplied by the group ratio; (ii) the consolidated group’s net interest expense; and (iii) the total amount of ATI of each group member. The group may apportion this maximum deductible amount among its Canadian group members in its group ratio election. This flexible allocation mechanism allows taxpayers to redistribute the group ratio deduction capacity where it is most needed.

What should corporations do?

Once enacted, these rules will have a significant impact on the tax obligations of resident and non-resident taxpayers having IFE from arm’s length or non-arm’s length sources. Further, IFE paid before the enactment of these rules (i.e., during “pre-regime” years), including the present tax year, will affect the taxpayer’s beginning balance of carryforward deduction capacity. Therefore, taxpayers should carefully analyze the application of these rules along with other provisions in the Act on the deductibility of IFE.

Rules for reporting income in the digital world and gig economy

The Department of Finance has released draft legislation to adapt the OECD’s “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy” for Canadian income tax purposes. The government sees these rules as necessary because the gig economy is causing a shift away from traditional employment relationships and, therefore, the traditional employer reporting obligations. Many of these gig economy businesses operate through online platforms – e.g., Airbnb and Uber – necessitating new reporting obligations.

These legislative changes will not create additional tax liability. Instead, the resulting reporting will provide the CRA with additional information to ensure tax compliance from those who use online platforms to provide goods or services. The draft legislation is slated to come into force on Jan. 1, 2024.

Reporting entities

The draft legislation introduces several new definitions and entities. For the purposes of this summary, below is a high-level overview of “reporting platform operator” and “seller”. Sellers are platform users registered on the platform during the relevant period to provide goods or services. This group is further subdivided into three categories: active sellers, excluded sellers, and reportable sellers. Reportable sellers are sellers that provide services or sell goods, receiving consideration for selling goods or providing relevant services during the period unless an exclusion applies.

Reportable sellers face a penalty if they fail to provide their tax identification number, such as a business number, to the reporting platform operator unless they are exempted from providing the number.

A reporting platform operator is any platform operator other than an excluded platform operator that is either resident in Canada or facilitates activities by sellers resident in Canada or related to immovable property located in Canada.

Reporting and record-keeping requirements

Reporting platform operators will need to file the prescribed form for the prior reporting period by Jan. 31 of each year unless another reporting platform operator satisfies the reporting requirement. The form will include information about the reporting platform operator, the reportable sellers, and business operations conducted through the platform. The same information must be provided to each reporting seller by Jan. 31. Consequently, the reporting platform operator is required to obtain the identifying information from each seller except excluded sellers who use their platform and keep records according to the requirements in the legislation. The information must be collected and verified by Dec. 31 of each year.

This article was written by Yoni Moussadji, Nakul Kohli, Cassandra Knapman, Sigita Bersenas, Simon Townswend and originally appeared on 2022-11-08.

For more information on how DJB can assist you, please contact us.

Reminder: New Accounting Standard for Agriculture under ASPE and ASNPO Released! How Will Your Financial Statements be Impacted?

Posted on November 4, 2022March 6, 2024 by Edixon

The Canadian Accounting Standards Board (AcSB) has released a new accounting standard on agriculture. The new standard provides guidance on recognizing, measuring, and disclosure with respect to biological assets and harvested products of biological assets. This new standard could be a dramatic change for many agricultural producers preparing financial statements under Accounting Standards for Private Enterprises (ASPE) or Accounting Standards for Not-for-Profit Organizations (ASNPO)! Why do you ask? Previously there was no specific authoritative guidance for agricultural producers. Hence, this led to significant diversity in practice, which the AcSB is trying to rectify.

The new guidance comes into effect for fiscal years beginning on or after January 1, 2022. Therefore, you have time to prepare now. Understanding how this new standard impacts your entity’s financial statements will be key in preparing for this upcoming change.

Why Should I Start Preparing Now?

You may need to revise your existing accounting policies for recognizing and measuring biological assets and the harvested products of these assets. In addition, you may need to track information that was not previously retained in order to apply the new accounting requirements. Therefore, it is important to understand the requirements of the new standards. Here is a brief overview of the new standard, Section 3041 of the CPA Canada Accounting Handbook, to get you started.

Key Definitions
It is important to understand these key definitions since it affects how the biological assets and harvested products are measured and accounted for.

Agricultural producers are defined as enterprises that undertake agricultural production, such as those that engage in agriculture, apiculture, aquaculture, floriculture, or horticulture.

Agricultural production is defined as the development and harvest of biological assets for sale or for use in a productive capacity. Agricultural production covers a diverse range of activities, such as annual or perennial cropping, raising livestock or aquatic organisms, and cultivating orchards and plantations.

The following activities are not considered agricultural production therefore, they are not within the scope of this Section:

forestry;
harvesting from sources that are not owned or controlled by an agricultural producer (e.g., ocean fishing, hunting and trapping); and
raising or purchasing animals for competitive sport.•

Biological assets are defined as living animals or plants, and can be either agricultural inventories or productive biological assets. Examples of biological assets are sheep, beef cattle, wheat, and fruit trees/vines.

Productive biological assets are held for use in the production or supply of agricultural inventories or other productive biological assets, acquired or developed for use on a continuing basis with other than short productive lives, and not intended for sale in the ordinary course of business. Examples of productive biological assets are mature sheep, mature beef cattle, unharvested wheat, and producing fruit trees/vines.

Agricultural inventories are defined as biological assets, or the harvested products of biological assets, that meet one of the following criteria:

held for use in the ordinary course of business;
in the process of agricultural production to be held for sale or use in a productive capacity;
in the form of raw materials or supplies to be consumed in the enterprise’s agricultural production process; or
held for use in a productive capacity with short productive lives.

Example of agricultural inventories include wool, beef, harvested wheat, and harvested fruit.

Who Applies this New Standard?

An entity preparing financial statements in accordance with ASPE or ASNPO will account for its biological assets and harvested products of biological assets used in agricultural production under this new accounting standard as long as it meets the definition of an agricultural producer. Entities not subject to this new guidance will continue to account for biological assets and harvested product using other standards in ASPE and/or ASNPO, such as Inventories, S3031.

How are Agricultural Inventories Measured?

First, an agricultural producer makes an accounting policy choice to use either the cost model or the net realizable value model in measuring its agricultural inventories. If the cost model is used a further accounting policy choice is made to determine the cost of its agriculture inventories using either: (a) full cost; or (b) only input costs (cost of direct materials and direct labour).

The net realizable value model, however, can only be used when all of the following three conditions are met:

the product has a readily determinable and realizable market price;
the product has reliably measurable and predictable costs of disposal; and
the product is available for immediate delivery.•

An example of a type of agricultural inventory that might meet all three conditions is harvested wheat that is available for immediate delivery.

The accounting policy choice to use either the cost model or the net realizable value model must be applied consistently to all agricultural inventories having a similar nature and use.

Input costs of agricultural inventories comprise direct costs which include the purchase price, import duties and other taxes (other than those subsequently recoverable by the enterprise from taxation authorities), transport, handling, and other costs directly attributable to the acquisition of materials and services used in the development and harvest of biological assets. Trade discounts, rebates, and similar items are deducted in determining input costs.

Example of direct materials input costs for plants would include seeds or seedlings, fertilizer, and pesticides. Input costs for animals would include feed, vaccinations, and other veterinary costs.

Input costs of agricultural inventories also comprise direct labour, to the extent the cost of labour is readily determinable and is directly related to the items of agricultural inventories produced.

Alternatively, the cost of agricultural inventories measured at full cost includes all input costs (direct materials and direct labour) and a systematic allocation of fixed and variable agricultural production overheads and all other costs incurred in the development and harvest of biological assets.

Impact of Accounting Policy Choice for Cost Method

For entities that choose to use only input costs it is expected to reduce the cost and effort associated with measuring agricultural inventories at cost. Entities that choose to measure their agricultural inventories at full cost will likely incur a one-time cost to establish a methodology to allocate overhead costs.

How are Productive Biological Assets Measured?

Productive biological assets are initially measured at cost and are amortized over their useful lives. The costs of productive biological assets include all costs directly attributable to the acquisition, development or betterment of the assets, including delivery and establishing them at the location and in the condition necessary for their intended use (very similar to accounting standards for property, plant, and equipment).
There is one exception to amortization of productive biological assets. Some productive biological assets are managed on a collective basis to maintain their collective productive capacity indefinitely. Productive biological assets of this type are considered to have an indefinite useful life and are not subject to amortization.

An example of productive biological assets managed on a collective basis would be a herd managed collectively to meet a production quota indefinitely. Such a herd is considered to have an indefinite useful life and is not subject to amortization. The costs incurred in the maintenance of the service potential of the herd is a maintenance expenditure, not an addition to the biological assets.

Effective Date and Transition

Section 3041 applies to annual financial statements relating to fiscal years beginning on or after January 1, 2022. Earlier application is permitted. An agricultural producer is required to apply this new Section retroactively which means that the entity will need to restate the comparative information in its financial statements. There are certain transitional provisions that are meant to facilitate the adoption of this Section in a cost-effective manner that we can advise you on. There will also be added note disclosures and additional information that will be required to be disclosed in the financial statements. A new disclosure requirement for example is information regarding quantities of agricultural inventories and productive biological assets if readily determinable. For example, an agricultural producer with a cattle herd may track the number of cattle in its herd and would disclose this.

Next Steps

As noted, there is time to plan and transition for this new standard, but we recommend considering now how the impending changes will impact your financial statements prepared under ASPE or ASNPO. Financial covenants, debt agreements and /or other key metrics should be considered and discussed with users of the financial statement since banking agreements may need to be revised or waivers obtained if this new guidance creates violations.

Our team of experienced DJB advisors can help you assess the impact on your financial statements, and determine what information you need to gather in advance of applying this new standard for the first time.