That deadline has now effectively tripled. 

Under Bill C-15 (Budget 2025 Implementation Act, No. 1), the government has extended the eligibility period for the Subsection 164(6) election from one year to three years. 

Here is what this means for your estate planning and why this is a massive win for executors dealing with complex assets. 

The Old Rule: The “12-Month Sprint” 

When a taxpayer dies, they are deemed to have sold all their capital assets (like stocks, cottage, or private company shares) at fair market value. This often triggers a massive capital gain and a large tax bill on their Final T1 Return. 

However, if the estate later sells those same assets for less than that value, the estate incurs a capital loss. 

Under Subsection 164(6) of the Income Tax Act, the executor can elect to “carry back” that loss from the estate to the deceased’s final return. This offsets the initial capital gain and recovers tax money. 

• The Problem: Previously, you had to sell the assets and file this election within the first taxation year of the Graduated Rate Estate (GRE). 
• The Challenge: Selling illiquid assets like a family business or a vacation home within 12 months is often impossible due to probate delays, market conditions, or family disputes. If you missed the deadline, the tax recovery was lost forever. 

The New Rule: The “3-Year Window” 

Bill C-15 has amended this rule to provide much-needed breathing room. 

• Extended Deadline: Executors can now file the Subsection 164(6) election for capital losses realized in any of the first three taxation years of the Graduated Rate Estate (GRE). 
• New Process: You will file a “prescribed form” to amend the deceased’s final T1 return to claim these losses, rather than just filing a standard adjustment.

This change allows executors to hold out for a better selling price on assets or wait for probate to clear without forfeiting the chance to recover significant taxes paid on the terminal return. 

Who Qualifies?

This change is effective for the estates of individuals who die on or after August 12, 2024.

• Note: If the death occurred before August 12, 2024, the old one-year rule likely still applies. 
• Requirement: The estate must still qualify as a Graduated Rate Estate (GRE) at the time the loss is realized to use this election.

What You Should Do Now 

If you are currently administering an estate for someone who passed away recently (after Aug 12, 2024), you now have more strategic flexibility.  

1. Review Asset Sales: You no longer need to “fire sale” assets within the first 12 months just to trigger a tax refund. 
2. Check GRE Status: Ensure the estate remains designated as a Graduated Rate Estate (GRE) for up to 36 months to utilize this extended window. 
3. Speak to Us: Implementing a 164(6) loss carryback requires precise calculations and the filing of amended returns. 

Official Government Resources 

However, for more technical details about 3 Year Rule for Post Mortem Tax Planning, you can refer to the official announcements and legislation below: 

• Department of Finance – Legislative Proposals (Aug 2024): 
  • See the draft legislation proposing the 3-year extension for 164(6). 
  • Read the Department of Finance Proposals 
• CRA – Preparing Returns for Deceased Persons: 
  • General guide on how to handle capital gains and losses for the deceased. 
  • CRA Guide T4011: Preparing Returns for Deceased Persons 
• CRA – Net Capital Losses: 
  • Explanation of how to carry back losses to the final return. 
  • Net Capital Losses – Canada.ca 

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The government released draft legislation in August. In this article, we answer some key questions and discuss what we would like to see ironed out in the final version of the legislation.

Who Qualifies?

The Canadian Entrepreneurs’ Incentive is available where all the following conditions are met:

1. QSBC Shares: At the time of sale, the individual Claimant must directly sell qualified small business corporation shares[1]. One requirement is that 90% of the corporation’s value is derived from assets used in an active business carried on in Canada (other than the “excluded businesses” mentioned below).
   
2. 24-Month Holding Period and Minimum Ownership: For at least 24 continuous months before the sale, the claimant must have owned at least 5% of the shares (having full voting rights under all circumstances). The minimum ownership period can be any continuous 24-month period at any time since the business’ founding[2].
   
3. Active Engagement: The claimant was actively engaged in the business activities on a regular, continuous, and substantial basis for three years. This can be any combined three-year period at any time since the founding of the business[3].

Not Available to Which Businesses?

The following are considered “excluded businesses”. If you have capital gains from the sale of the following businesses, you do not qualify for the CEI.

• Professionals: such as accountants, lawyers, notaries, doctors, mental health practitioners, healthcare workers, veterinarians, optometrists, dentists, chiropractors, engineers, or architects.
• Businesses where the main asset is employee expertise or reputation.
• Consulting services.
• Financial Services: handling financial assets, transactions, credit facilitation, or changing ownership of assets.
• Insurance Services: covering underwriting, selling insurance, reinsurance, or related services.
• Property Services: appraising, renting, leasing, selling, or managing real property, including short-term lodging or vacation services, like hotels and campgrounds.
• Food and Beverage: preparing and serving food for immediate consumption.
• Cultural & Entertainment: running events, exhibits, sports, and recreation services, or showcasing historical and artistic interests.

When Does it Take Effect?

CEI would apply to sales that occur on or after January 1, 2025.

What if I Claim the Lifetime Capital Gains Exemption?

The CEI would apply in addition to any available capital gains exemption. To the extent that the seller qualifies for both the lifetime capital gains exemption (LCGE) and the CEI, they can take advantage of both tax incentives. See the example below.

Can I Undertake a Corporate Reorganization to Qualify for CEI?

There are some anti-tax avoidance rules to watch out for.

First, there are rules to prevent using what is commonly known as “butterfly” transactions, where corporate assets are split off or sold to convert the corporate capital gain into a capital gain that qualifies for the CEI.

Second, there are also rules to deny the CEI, where a corporation sells assets to another corporation for less than the fair market value of the assets, and an individual realizes a capital gain on the sale of the shares of either corporation.

Rules to Prevent Converting Dividends to Canadian Entrepreneurs’ Incentive

Normally, dividends are taxed higher than capital gains. Some people might try to avoid paying tax on dividends by setting up shares that don’t pay dividends or pay very low dividends. Instead, they plan to sell these shares later at a high price and claim the CEI. There is an anti-tax avoidance rule that says you cannot claim the CEI if the capital gain you made from selling shares is because the company didn’t pay enough dividends (less than 90% of what would be a normal return on that share). The dividend that should be paid be equal to the rate of return that a knowledgeable and prudent investor would expect to receive.

While this rule aims to prevent tax avoidance, it introduces a level of uncertainty and subjectivity. Determining what constitutes a “normal return” or what a “prudent investor” would expect may lead to inconsistent interpretations. This could create challenges for business owners and shareholders, adding complexity and risk, especially in cases where companies have legitimate reasons for reinvesting profits rather than paying dividends. It raises the question: is the Canada Revenue Agency (CRA) best positioned to make these determinations about what constitutes a reasonable rate of return?

Given the nuanced and varied nature of private business operations, it may be difficult for the CRA to consistently assess what an appropriate dividend payout would be for each business. First, it could discourage reinvestment in businesses requiring growth capital or create uncertainties for entrepreneurs trying to plan for the future. Second, it adds more red tape and work for CRA.

As such, we believe that this anti-avoidance rule may not be the most effective approach and would benefit from further clarification or guidelines to provide more certainty and reduce the risk of inconsistent application.

Example: Sale in 2029

In 2029, Larry sells the shares of his tech business for $3 million. Let’s assume that Larry has $1 million remaining in the Lifetime Capital Gains Exemption (LCGE) and that the sale qualifies for the CEI.

After applying his remaining LCGE of $1 million, Larry has $2 million in capital gains left. Under normal rules, with a two-thirds inclusion rate and a $250,000 capital gains allowance at a 50% inclusion rate, $1,291,667 would be taxable. However, with the CEI, the inclusion rate drops to one-third, so only $666,667 is taxable. At Ontario’s top tax rate of 53.53%, this results in estimated tax savings of around $335,000. As you can see the benefit could be significant.

Canadian Entrepreneurs’ Incentive and Family Trust Structure

Please note that these rules are still in draft form at the time of writing, and further clarification may be needed as the legislation evolves.

One notable comparison is with the LCGE, which allows individuals to claim a deduction on capital gains from the sale of Qualified Small Business Corporation (QSBC) shares. If a trust allocates capital gains from such shares to a beneficiary, the beneficiary may claim the LCGE, provided the shares meet the necessary qualification criteria.

In contrast, the CEI, based on the draft legislation, seems to apply more narrowly. It appears to exclude gains on trust-held property from eligibility, meaning that even if a trust allocates the gain to a beneficiary, the CEI deduction may not be claimed. The CEI is reserved for individuals who directly own and sell the qualifying shares. As a result, gains allocated through a trust may not qualify for the CEI, even if the shares themselves would otherwise meet the criteria.

This is a key difference from the LCGE, which allows trust-allocated gains to flow to beneficiaries. However, if a trust rolls out shares to an individual beneficiary just before the sale, and the beneficiary sells them directly, the CEI may apply. In this scenario, the beneficiary is considered the direct owner of the shares, and if all CEI conditions are met, they may claim the deduction, avoiding the trust exclusion.

Our Comments on the Uninformed Legislation

The benefit is good for entrepreneurs. However, we are hoping future versions of the legislation will:

1. Address Family Trust Structures: Address issues like trust ownership with more clarity so that entrepreneurs with more complex structures – including family trusts – can qualify.
   
2. Expand the list of qualifying businesses: Under the draft rules, businesses whose “main asset is employee expertise or reputation” are explicitly excluded from CEI eligibility. However, these types of businesses, such as a dental practice or a consulting firm, often assume significant risks and play a key role in Canada’s entrepreneurial ecosystem. A dentist running their practice does not qualify. Similarly, a marketing consultancy or software development firm may also be ineligible because their main assets are tied to the knowledge and skills of their employees. Despite this, these businesses require substantial investment, face market volatility, and carry considerable operational risks. By expanding eligibility to include more “expertise-based” businesses, the CEI could better reflect the entrepreneurial spirit across a broader range of industries, aligning it more closely with the LCGE and supporting a broader range of business owners. One suggestion is to allow businesses exceeding a certain number of employees to qualify (such as more than 5 full-time employees).
   
3. Remove Rules to Prevent Converting Dividends to CEI: Many small businesses reinvest profits instead of paying dividends. These rules introduce unnecessary uncertainty and complexity, potentially discouraging small business owners from utilizing the benefit due to concerns that the CRA may later reverse the claim. The business cannot be cash-rich anyway because of the QSBC test, which requires 90% of the value of the assets to be deployed in an active business. So, this may not be required.

Footnotes:

[1] Note the property could also be qualified farm or fishing property, but we only cover this article in the context of qualified small business corporation shares.

[2] Government announces details on new Canadian Entrepreneurs’ Incentive – Canada.ca

[3] See note 2.

The post Canadian Entrepreneurs’ Incentive: A Promising Tax Break Needing Greater Clarity appeared first on LRK Tax LLP.

Last year’s tax season was challenging, with the government introducing a new requirement for bare trusts to file trust tax returns for the first time. Fortunately, at the last minute, the CRA announced that bare trusts would not need to file for 2023. This change came after recognizing the unintended impact on Canadians, particularly those with joint bank accounts or where parents were added to property titles to help their children secure mortgages.

Looking ahead to 2024, there’s good news. Recently released draft legislation confirms that bare trusts (that are otherwise not considered to be a “trust”) will also be exempt from filing tax returns in 2024. However, starting in 2025, bare trusts will need to file, with some exceptions, including:

• Arrangements where individuals jointly own property for their own use and benefit, such as joint bank accounts with family members.
• Situations where related individuals hold real property, such as when a parent is on title to help a child obtain a mortgage, and the property qualifies as a principal residence.
• Cases where real property is held by one spouse for the benefit of the other, where it serves as their principal residence.
• Partnerships (excluding limited partners) holding property for the partnership’s use or benefit.
• Instances where property is held under a court order.
• Arrangements where Canadian resource property is held for the benefit of publicly listed companies or their subsidiaries.
• Non-profits holding funds received from government bodies for the benefit of other non-profits.

New rules, effective for trusts with a December 31, 2025, taxation year-end, specify that a trust is deemed to include any arrangement where:

• One or more persons (the legal owners) hold property for the use or benefit of one or more persons or partnerships, and
• The legal owner can reasonably be considered to act as an agent for the persons or partnerships benefiting from the property.

Under these rules:

• Each legal owner in such an arrangement is deemed to be a trustee of the trust, and
• Each person or partnership that benefits from the property is deemed to be a beneficiary of the trust.

These exemptions provide some relief, ensuring that many common arrangements won’t trigger the filing requirement.

Beneficial Ownership Information

In 2023, all trusts were required to file a tax return and disclose detailed information about settlors, beneficiaries, and trustees through Schedule 15. However, an exemption existed for “Listed Trusts.” A Listed Trust was one that held assets with a total fair market value below $50,000 throughout the year, provided the assets were restricted to certain types, such as:

• Money,
• Certain government debt obligations,
• Listed shares, debt obligations, or rights,
• Mutual fund shares or units,
• Interests in related segregated funds,
• Beneficiary interests in listed trusts.

Listed Trusts only had to file a trust return if income from the trust property is subject to tax. However, it was exempt from filing Schedule 15.

The good news is that starting in 2024, for trusts with a December 31 year-end, Listed Trusts will include any trust where the total fair market value of its assets remains below $50,000 throughout the year, regardless of the types of assets it holds.

Additionally, a trust will qualify as a Listed Trust if:

• Each trustee and beneficiary is an individual,
• Each beneficiary is related to each trustee, and
• The total fair market value of the trust’s assets does not exceed $250,000 throughout the year, provided those assets are limited to money, GICs, certain debt obligations, listed securities, mutual fund units or shares, personal-use property, or rights to income from such assets.
• If these Listed Trusts have no tax payable, they are not required to file a tax return. If they do, they won’t need to file Schedule 15.

This means a Listed Trust with no tax does not need to file a trust return. If a Listed Trust does have to pay tax, it is still relieved from filing Schedule 15.

These changes simplify the filing requirements for smaller and family trusts, providing more flexibility. Note that, at the time of writing, these changes are still in draft.

The post Tax Filing Relief for Trusts in 2024 and Beyond appeared first on LRK Tax LLP.

For those in the top tax bracket, qualifying for this $250,000 capital gains allowance can save $22,000 in taxes. Many taxpayers are now looking for ways to multiply this benefit—especially by using spousal transfers.

How to Multiply the $250,000 Capital Gains Allowance with Your Spouse

One strategy to multiply the capital gains allowance is to split capital gains with a spouse, without triggering the attribution rules, which prevent income splitting. By following the correct steps, each spouse can claim the $250,000 allowance and reduce the overall tax liability.

Example: Andrew and Jane

Andrew and Jane are married, and Andrew owns a stock worth $100,000, which he bought for the same amount. He predicts the stock’s value will grow to $600,000 in one year. To maximize the capital gains allowance, Andrew takes the following steps:

1. Sell Half the Stock to Jane at Fair Market Value – Andrew sells half of his stock to Jane for $50,000, which is the fair market value. This avoids triggering attribution rules.
2. Elect Out of the Spousal Rollover – Normally, when you transfer assets to your spouse, a spousal rollover defers the tax on any unrealized capital gains. However, in this case, Andrew elects out of the rollover to ensure that Jane’s future capital gains and investment income are not attributed back to him. Jane issues Andrew a promissory note for $50,000 with an interest rate set at the CRA’s prescribed rate (currently 5%, though this rate may change as interest rates fluctuate).
3. Cost Basis Adjustment – Both now hold half of the stock with a cost basis of $50,000 each.
4. Stock Appreciates to $600,000 –After a year, the stock grows to $600,000, and both sell the stock, resulting in a $500,000 capital gain. Andrew and Jane each realize a $250,000 gain ($300,000 – $50,000).
5. Interest on the Loan –Jane pays Andrew $2,500 in interest (5% of $50,000), ensuring the attribution rules won’t apply.
6. Capital Gain Reporting
   • Andrew reports $250,000 in capital gains and $2,500 in interest income.
   • Jane reports $250,000 in capital gains and deducts the $2,500 interest as an expense.

Tax Savings Breakdown

• Total Capital Gains: $500,000
• Andrew’s Tax: Andrew reports $250,000 at the 1/2 inclusion rate, resulting in a taxable gain of $125,000.
• Jane’s Tax: Jane also reports $125,000 in taxable gains.
• Interest Treatment: Jane’s $2,500 interest payment reduces her taxable income while Andrew adds it to his.

If Andrew had reported the full $500,000 gain by himself, his tax bill would have been $156,000. By splitting the gains, their combined tax liability is $134,000, saving $22,000.

How This Strategy Works

This strategy doubles the capital gains allowance for married couples. Transferring assets at fair market value ensures the attribution rules don’t apply, allowing both spouses to claim the $250,000 capital gains allowance.

Final Thoughts

With the capital gains inclusion rate rising to 2/3 after June 25, 2024, taking advantage of the $250,000 allowance at the 1/2 inclusion rate is a valuable strategy for high-income taxpayers. Spousal transfers, like Andrew and Jane’s, can result in significant tax savings. However, with complex tax rules and potential scrutiny under the General Anti-Avoidance Rule (GAAR), careful planning is essential. Also note that the capital gains legislation is still in draft.

At LRK Tax LLP, our team can help you navigate these rules and maximize your tax benefits. Contact us today to learn how we can tailor your capital gains strategy.

The post How to Multiply Your Capital Gains Allowance Using Your Spouse: A Case Study appeared first on LRK Tax LLP.

The Small Business Deduction Eroded Faster Under New Rules

The small business deduction (SBD) in Canada offers significant tax relief to small businesses and entrepreneurs operating through Canadian-controlled private corporations (CCPCs). This deduction allows CCPCs to benefit from a lower corporate income tax rate on up to $500,000 of active business income annually, known as the corporation’s “business limit.”

In Ontario, eligible CCPCs benefit from a reduced tax rate of 12.2% under the SBD. However, the business limit is reduced on a straight-line basis when the “adjusted aggregate investment income” (i.e., passive income like rent, dividends, interest, and taxable capital gains) of the CCPC and its associated corporations falls between $50,000 and $150,000. We illustrate this with an example below.

Example: How the New Capital Gains Rate Also Increases Taxes on Business Income

Consider ACo, with a fiscal year from January 1 to December 31. Suppose ACo realizes a $225,000 capital gain in 2024 under the new capital gains inclusion rate, alongside $100,000 in regular business income in 2025.

Under the previous inclusion rate of 50%, ACo’s taxable capital gain would be $112,500. With the new inclusion rate of 66.67%, the taxable capital gain increases to $150,000.

This increase in taxable capital gain causes the tax on regular business income to also increase as follows:

• Under old rules, a $112,500 taxable capital gain would reduce the business limit by $312,500, resulting in an SBD after the grind of $187,500.
• Under new rules, a $150,000 taxable capital gain leads to a larger passive income grind of $500,000, effectively eliminating the SBD.
• Consequently, ACo faces a higher corporate tax rate on its business income, increasing from 12.2% to 26.5%, resulting in an additional tax burden of $14,300.

Under the old rules, assuming no other passive income, a corporation could realize between $100,000 and $300,000 in taxable capital gains without fully eroding the SBD. With the new inclusion rate, this range narrows to $75,000 to $225,000.

The Capital Gains Inclusion Hurts Small Business Owners and Entrepreneurs

Many small business owners and entrepreneurs, who often lack benefits like medical coverage and pensions, take risks to stimulate the economy by creating jobs, goods, and services. The lower business tax rate helps these entrepreneurs save for the future to offset risks. These business owners also have capital gains from selling off investments or rebalancing portfolios. Although the government asserts that the increased inclusion rate is fair and does not harm small business owners, this example illustrates the contrary.

A potential strategy for CCPCs might be to defer realizing capital gains in the hope that the inclusion rate might revert to the historical 50%. The capital gains tax in Canada, introduced in 1972 under Prime Minister Pierre Trudeau, initially included 50% of capital gains in taxable income. This rate was increased to 66.67% in 1988 and then to 75% in 1990 by the Progressive Conservative government to address budget deficits. Later, the Liberal government reduced the rate back to 66.67% in 2000 and then to 50% in 2001 to stimulate investment and economic growth. The 50% inclusion rate has been the most common, reflecting a balanced approach to encouraging investments.

Effective Tax Planning for Small Businesses

In conclusion, recent changes in capital gains inclusion rates emphasize the need for strategic tax planning to preserve small business wealth. As tax specialists, we are committed to helping small business owners and entrepreneurs navigate these challenges effectively. Our tailored strategies are designed to grow your wealth tax-efficiently amidst these new rules. Contact us today to explore how our expertise can support your business.

The post How the Capital Gains Inclusion Rate Increase Can Also Increase Tax on Small Business Income appeared first on LRK Tax LLP.

• Increase Generational Wealth Through Unique Tax Planning During Recession – Despite the possibility of a recession or sluggish economic growth in 2023, there are ways for entrepreneurs and small business owners to leverage the tax system and boost their long-term financial security. These tax planning opportunities can help them accumulate generational wealth.
  
• Flip the Anti-Flipping Tax on its Head – The government introduced the anti-flipping tax to discourage short-term residential home flips. However, through clever tax planning, taxpayers can use this rule to pay less taxes by structuring real-estate investments through a corporation.  
  
• Non-Residents Getting Out of Canadian Real Estate Need to Pay Attention to Special Tax Filings  – The implementation of policies such as the Underused Housing Tax (UHT) has prompted foreigners to sell their Canadian properties. Failing to engage in effective tax planning prior to selling could result in unexpected financial strain and funds being held by the CRA.

If you found this newsletter useful, please feel free to pass it on to your team of advisors as it will be useful for them as they also consider your financial, estate, and business plan to preserve and grow your hard-earned wealth. 

Sincerely,
LRK Tax Team

The post <strong>February 2023 Newsletter</strong> appeared first on LRK Tax LLP.

The post Trustees: Don’t Fall into the Underused Housing Tax Trap! appeared first on LRK Tax LLP.

CRA’s position on UHT and short-term Airbnb rental properties

To be exempt from UHT, the property must have 180 days of occupancy in a year. In other words, someone must have had the right to live in it for 180 days. In computing the 180 days, the Canada Revenue Agency (CRA), in their form UHT-2900, excludes rentals that are for less than one month at a time. Even if you rented out your Airbnb for more than 180 days in total, none of those days may count if you rented it out for less than one month at a time. This means that most Airbnb rentals, which typically have an average length of 3 to 5 days, may be subject to the tax if no other exemptions are available.

Other Exemptions from the UHT for foreign Airbnb owners?

Some Airbnb owners may still be exempt from UHT. Detached residential homes with more than 3 self-contained “dwelling units” are automatically exempt from the rules. If a detached home has at least 4 separate rentable dwelling units with private kitchen, bath, and living areas, it is exempt from UHT even if the rentals are less than one month at a time. This strategy only works for detached homes and does not apply to semi-detached homes, townhouses, or condos.

If you have at least 3 self-contained units at the moment, a strategy could be to add in a fourth self-contained unit to:

1. Increase your rental revenues;
2. Keep more money in your pocket by not having to pay UHT; and
3. Not have to worry about filing a UHT return every year and be subject to penalties

Note that this strategy does not work with semi-detached homes, townhouse units, or condos and is only available for detached homes. And it may not always be practical, even if possible.

Conclusion

Foreign owners who rent their residential property short-term could be liable to pay UHT unless another exemption is available. A closer look at the tax legislation may suggest that there could be an alternative interpretation to the rules, but that is beyond the scope of this article and one that does not seem to be supported by CRA. Foreign owners of Airbnb properties in Canada should reach out to their accountants well ahead of the May 1, 2023, filing deadline to understand their obligations.

How to prepare the UHT Return Guide

Please feel free to consult our guide on How to Prepare the Underused Housing Tax Return for more information.

The post Foreign Airbnb Owners Face New Underused Housing Tax in Canada appeared first on LRK Tax LLP.

This newsletter highlights the most notable tax developments affecting small business owners. In 2023, the government has or will be looking to introduce new taxes:

• The Underused Housing Tax (UHT) – This new tax is meant to apply to foreigners who own vacant homes in Canada. However, suppose you’re a Canadian and own residential real estate in a corporation. In that case, you must still file a UHT tax return (in addition to your regular tax return) indicating your corporation has no foreign owners. If you fail to file this return, you face a penalty of at least $10,000. If you have a corporation that owns real estate in Canada, please get in touch with your accountant about this new filing requirement. 
  
• A New Minimum Tax (on the Rich) Coming in 2023 – We all know the government needs funds to pay for the spending it did and proposes to do. The liberal government has announced that they will introduce a new minimum tax in the 2023 budget that could thwart the tax planning you have in place. You should have your accountant review the tax planning strategies you have in place and see if you need to accelerate some planning before this tax takes effect. 
  
• Real Estate Investors are Starting to Hit the Sell Button but Need to Watch Out for the New Anti-Flipping Tax – Due to rising costs, Real Estate investors are not making the return they had once hoped for. They are starting to hit the sell button. If they are not careful, they could walk right into the new Anti-Flipping Tax that taxes gains as regular business income and not as capital gains (where only 50% gets taxed). 

The tax rules have become increasingly complex in the last few years with many landmines. Also, these new tax rules are coming with astronomical penalties for non-compliance (i.e., $10,000 for even filing the UHT return one day late!). The CRA has become stricter with the penalties. This is why we analyze the latest legislation day and night, even before it is passed into law, to give our clients peace of mind knowing that they are paying the least amount of taxes possible and that their filings are taken care of. 

If you found this newsletter useful, please feel free to pass it on to your team of advisors as it will be useful for them as they also consider your financial, estate, and business plan to preserve and grow your hard-earned wealth. 

We wish you and your family a happy, healthy, and prosperous 2023! 

Sincerely,
LRK Tax Team

The post LRK Tax Newsletter – January 2023 appeared first on LRK Tax LLP.

A new minimum tax for wealthy Canadians

According to the federal government, “wealthy Canadians” pay comparatively little personal income tax as a share of their income. In the 2022 Fall Economic Statement, the Liberal government expressed its commitment to introduce a new minimum tax regime to ensure that all wealthy Canadians pay their “fair share” of tax.

What will this minimum tax for wealthy Canadians look like?

We don’t yet know how this tax will work exactly. However, in their 2021 election platform, the Liberal government announced their intention to create a minimum tax rule so that everyone who earns enough to qualify for the top bracket pays at least 15 % each year, removing their ability to artificially pay no tax through excessive use of deductions and credits.

The top federal tax bracket in 2023 is $235,675. Therefore this minimum tax would likely apply to people earning more than $235,675 before factoring in certain deductions. The minimum tax ensures that these taxpayers pay at least 15% in taxes (assuming this is the rate that the government will announce in Budget 2023). If they already pay a 15% tax, this minimum tax will likely not apply. If they don’t – because of additional deductions or tax planning – the minimum tax is intended to apply.

Not all high-income earners are “wealthy”

We don’t know whether this minimum tax would exempt one-time transactions. For instance, many Canadians who would not consider themselves “wealthy” may have one year with high income. For instance, after decades of hard work and risk, they may have sold their business in the year. We think it would be unfair to levy this minimum tax, which could significantly affect their retirement. We hope the government does not levy this tax in such cases.

What should I do now?

A minimum tax could significantly shut down the benefits of many tax strategies. Assuming this minimum tax is not grandfathered to start from 2023 onwards, it may be prudent to accelerate some tax planning involving deductions (i.e., the lifetime capital gains exemption, etc.). It would be best if you began conversations with your tax advisor in early 2023 to review your overall tax plan and see the potential impact of the minimum tax. For instance, if you were planning on taking advantage of the lifetime capital gains exemption on selling your business or farm, a minimum tax could result in a significant amount of tax.

We expect details to emerge in the 2023 Federal Budget (around March to April 2023).

More tax measures targeting housing affordability

High-interest rates and rent are causing are making housing affordability a big issue, especially in large cities like the GTA. The government introduced many measures in 2022, such as the First-Home Savings Account and the Anti-Flipping Tax, to deal with housing affordability. However, many experts believe that these measures will not be enough. With a lack of supply, and Canada aiming to welcome 465,000 new immigrants in 2023, it will undoubtedly put more pressure on housing affordability. For this reason, we expect more measures targeting housing affordability in 2023.

This is what the government introduced in 2022:

• A two-year ban on non-Canadians purchasing residential property in Canada, effective January 1, 2023.
• A 1% annual “underused housing tax” on the value of non-resident/non-Canadian-owned residential property that is vacant or underused. This was effective January 1, 2022.
• The application of GST/HST to all assignment sales of newly constructed or substantially renovated residential housing, effective May 7, 2022.
• Tax-Free First Home Savings Account (FHSA), which would give prospective first-time home buyers the ability to save up to $40,000, tax-free.
• Double the First-Time Home Buyers’ Tax Credit, which would provide up to $1,500 in tax credits.
• A new refundable Multigenerational Home Renovation Tax Credit.
• A new Anti-flipping tax on properties held for less than 12 months starting in 2023, with certain exceptions for unexpected life events.

More Tax Measures Addressing Cryptocurrencies

The rise in cryptocurrencies and the digitalization of money are transforming financial systems in Canada and worldwide. At the same time, digital assets and cryptocurrencies have been used to avoid global sanctions and fund illegal activities in Canada. On top of this, scandals like FTX are putting governments on alert.

Canada’s tax rules have not kept up to pace with the rapid development in the cryptocurrency space. Tax practitioners rely on general principles and analogous non-cryptocurrency transactions when accounting for crypto transactions. There is a risk that Canada’s self-assessing tax system is not consistently taxing crypto transactions.

The government began consultations with stakeholders on digital currencies, including cryptocurrencies, stablecoins, and central bank digital currencies, on November 3, 2022. Expect to see some tax measures come out of such consultations.

Global Minimum Tax for Canadian Corporations Doing Business Overseas

A global minimum tax regime for large Canadian multinational corporations that would ensure that such corporations are subject to a minimum effective tax rate of 15% on profits in every jurisdiction in which they operate. The tax is meant to affect corporate groups with revenues of EUR 750 million or more).

The global minimum tax operates based on adjusted financial accounting income and adjusted accounting tax expense to calculate an “effective tax rate.” A minimum tax would arise if the effective tax rate is lower than 15% on a jurisdiction-by-jurisdiction basis.

Because there are differences in many countries between financial accounting income and taxable income, even a country with a much higher statutory tax rate can have an effective tax rate for financial accounting purposes below the 15% minimum rate. Examples of factors that cause such differences include the impact of accelerated tax depreciation, bonus depreciation, certain tax credits, and other tax adjustments.

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