The purpose of the below article is to summarize and outline the different tax measures published by the political parties in their election platforms in an impartial manner. The views and measures expressed herein are those of the Conservative Party of Canada, they do not necessarily represent our views.

Tax Measures For Businesses

Canada Job Surge Plan to Subsidize 50% of New Hire Wages

Canada’s Conservatives propose to launch the Canada Job Surge Plan – paying up to 50% of the salary of net new hires for six months following the end of CEWS.

The government will pay at least 25% of the salary of a net new hire, with the subsidy increasing up to a maximum of 50% based on how long the new hire has been unemployed.

The salary maximum will be the same as for CEWS (which is $1,129 per month).

Canada Investment Accelerator Tax Credit for Capital Investments

Companies spending money and creating jobs will receive a 5% investment tax credit for any capital investment made in 2022 and 2023, with the first $25,000 to be refundable for small businesses.

Rebuild Main Street Tax Credit to Encourage Investment in Small Businesses

Provide a 25% tax credit on amounts of up to $100,000 that Canadians personally invest in a small business over the next two years to get money flowing into main street businesses and create jobs.

The policy objective here is to encourage middle-class investors to invest in small businesses while ensuring that those who want to open new stores, restaurants, and other small businesses to get Canadians back to work can get the investment they need.

$200,000 Main Street Business Loan

Provide loans of up to $200,000 to help small and medium businesses in hospitality, retail, and tourism get back on their feet, with up to 25% forgiven based on revenue loss.

The loan will have similar terms to the Canada Emergency Business Account (CEBA) loan.

The actual amount of the loan will be based on 4 months of pre-pandemic revenue up to a maximum of $200,000

Dine and Discover Program: 50% Rebate on Dine-In

Provide a 50% rebate for food and non-alcoholic drinks purchased for dine-in from Monday to Wednesday for one month once it is safe to do so, pumping nearly $1 billion into this sector.

Double the Apprenticeship Job Creation Tax Credit

The Apprenticeship Job Creation Tax Credit (AJCTC) is a non-refundable tax credit equal to 10% of the eligible salaries and wages payable to eligible apprentices. The maximum credit an employer can claim is $2,000 per year for each eligible apprentice.

The conservatives propose to double the Apprenticeship Job Creation Tax Credit for the next three years.

Tax Reform and Reforming the Canada Revenue Agency to Improve Treatment of Middle-Class Canadians and Small Business

The Conservatives propose the following measures:

1. Measure and report on the tax gap, in detail, by type of taxation and reason for the shortfall so that CRA can allocate resources where the problems exist;
2. Launch a comprehensive review of Canada’s tax system to improve competitiveness, bring down tax rates and simplify the rules.
3. Revise CRA’s penalties so that first-time problems or errors receive only minor fines, with increasing severity for repeat offenders; 
4. Create a “welcome to CRA” program and materials for new small businesses; and
5. Allow businesses with less than $60,000 in revenues to use simple cash accounting.

Tax Foreign Tech Companies

Making foreign tech companies pay a digital services tax representing 3% of the gross revenue in Canada if they don’t already pay corporate income tax in Canada.

Cut Taxes on Patent Income by Half

The Conservatives propose to cut the tax rate in half on income earned from patents on innovative products developed in Canada.

Subsidizing Patent Costs

Conservatives also propose to cover up to $10,000 of the administrative and legal costs of each of the first five patents filed by any Canadian small or medium-sized business.

Streamline and Accelerate The SR&ED Program

The Conservatives state that the current SR&ED Program is an administrative burden and propose the following measures to combat this:

1. Move administration from CRA to Innovation, Science and Economic Development Canada (ISED) and have the program administered by the same group that administers the Industrial Research Assistance Program (IRAP) program.
2. Allow ISED to issue a certificate of allowable deductions, which would then be accepted by CRA, saving significant compliance paperwork and allowing innovators to focus on innovating instead of filling out forms; and
3. Make it easier for software development to qualify for SR&ED.

Moreover, the Conservatives want these programs to benefit Canada and Canadian small businesses instead of foreign multinational corporations. They propose the following to achieve this:

1. Applicants must demonstrate that intellectual property, production, ownership, and profits are likely to stay in Canada;
2. Prohibit foreign state-owned entities or those with ties to foreign militaries from receiving funding;
3. All intellectual property developed with the support of the Canadian government must be held by a Canadian entity, and that recipients agree to pay back the subsidy if they sell the IP to a foreign buyer;
4. Ending the payment of Canadian tax dollars to large foreign tech companies; and
5. Put any money saved by no longer subsidizing foreign multinationals into increasing SR&ED generosity for Canadian small businesses.

Major Tax Incentives for Start-Up Companies

The Conservatives propose the following:

1. The Conservatives propose introducing the use of flow-through shares for tech companies to help these companies get financing. This is based on a similar model used for mining financing, which helps to avoid the cost and complexity of listing on an exchange.
   
2. The Conservatives also propose to exempt Canadian-controlled start-ups headquartered and with at least 2/3 of their employees in Canada from the current plan to tax stock options.

Tax Credit for Buying From Canadian Start-Ups

This credit will encourage established Canadian companies to become the first customers for Canadian innovative companies.

Employee Ownership Trusts to Incentivize Business Owners to Sell Their Business to Employees

To encourage Canadian ownership of businesses and to help current business owners retire, Conservatives propose to increase employee ownership of Canadian companies by establishing Employee Ownership Trusts, which provide a tax advantage for company owners to sell to their employees. This will take the form of a reduction in capital gains tax when the owner sells to a trust owned by the employees, enabling ownership to transfer to the people who have partnered in building the business.

Maintain Bill C-208 to Reduce Taxes on Transitioning Family Businesses to Next Generation

The Conservatives state that the Liberals defied Parliament by delaying the implementation of Bill C-208, and clearly plan to repeal it if they win a majority. The Conservatives propose to ensure that the sale of a family farm to a family member is not taxed at a higher rate than a sale to a stranger. There are no comments about whether the measures on Bill C-208 will also apply to non-farm businesses.

Modernize the General Anti-Avoidance Tax Rule

Modernize the general anti-avoidance rule regime in order to focus on economic substance and restrict the ability of federally regulated entities, including financial institutions such as banks and insurance companies, to use tiered structures as a form of corporate tax planning that flows Canadian-derived profit through entities in low-tax jurisdictions in order to reduce taxes back in Canada.

Tax Measures for Individuals and Families

Tax Credit to Take a Vacation in Canada

A 15% tax credit for vacation expenses of up to $1,000 per person for Canadians to vacation in Canada in 2022.

Child Care Tax Credit to Give More Child Care Tax Benefits to Families

Conservatives propose to convert the Child Care Expense deduction into a refundable tax credit covering up to 75% of the cost of childcare for lower-income families. This measure intends to increase the support that lower-income families receive by thousands of dollars per year and provide more assistance to almost all families.

The Conservatives also propose to pay out the deduction over the course of the year so that families do not have to pay the cost of childcare and then get the money back later. The Conservatives state that a family with an income of $120,000 can today claim a maximum of $1,640. Under their plan they will receive up to $4,560.               

Canada Child Benefit to Start During Pregnancy

To help with first-time costs for cribs, clothes, car seats and a range of other items needed for the family, the Conservatives propose to expand the Canada Child Benefit by allowing benefits to begin at the 7th month of pregnancy rather than at childbirth.

Double the Canada Workers Benefit

The Canada workers benefit (CWB) is a refundable tax credit to help individuals and families who are working and earning a low income.

Double the Canada Workers Benefit up to a maximum of $2,800 for individuals or $5,000 for families and pay it as a quarterly direct deposit rather than a tax refund at year-end. The Conservatives also propose to double the disability supplement from $713 to $1,500.

Safety Net for Gig Economy Workers to Mirror CPP/EI Regime

The Conservatives will require gig economy companies to make contributions equivalent to CPP and EI premiums into a new, portable Employee Savings Account every time they pay their workers. The money will grow tax-free and can be withdrawn by the worker when needed.

Measures to Combat Hot Housing Market

Defer Capital Gains Tax When Selling A Rental Property

Encouraging Canadians to invest in rental housing by extending the ability to defer capital gains tax when selling a rental property and reinvesting in rental housing, something that is currently excluded; and  Exploring converting unneeded office space to housing.

Tax Incentives to Donate Land for Affordable Housing

Creating an incentive for corporations and private landowners to donate property to Land Trusts for the development of affordable housing. The Conservatives state that the incentive will mirror that which exists for donating land to ecological reserves.

Ban Foreign Investment for 2 Years

The Conservatives plan to ban foreign investors not living in or moving to Canada from buying homes here for a two year period after which it will be reviewed. Foreign investment in purpose-build rental housing that is affordable to Canadians will be encouraged.

Relax Mortgage Stress Tests

The Conservatives plan to remove the requirement to conduct a stress test when a homeowner renews a mortgage with another lender instead of only when staying with their current lender. They also plan to fix mortgage stress test to stop discriminating against small business owners, contractors and other non-permanent employees including casual workers.

Longer-Term Mortgages

The Conservatives plan to encourage a new market in seven- to ten-year mortgages to provide stability both for first-time home buyers and lenders, opening another secure path to homeownership for Canadians, and reducing the need for mortgage stress tests

Maintain Principal Residence Exemption

The Conservatives state that they will never tax Canadians’ capital gains on the sale of their principal residence.

Increase Housing Supply with Better Infrastructure

Build public transit infrastructure that connects homes and jobs by bringing public transit to where people are buying homes and require municipalities receiving federal funding for public transit to increase density near the funded transit.

The post Conservatives: 2021 Election Tax & Real Estate Measures appeared first on LRK Tax LLP.

This has been a common issue many family business owners have faced in the past few years. The tax system rewards you if you sell to a third party but penalizes you if you sell to a corporation owned by one of your children. That’s what gave rise to Bill C-208.  

What is Bill C-208? 

Bill C-208 received royal assent on June 29, 2021, and is now enacted. Before understanding Bill C-208, there are three tax concepts we like to highlight:  

1. Lifetime Capital Gains Exemption – The lifetime capital gains exemption (LCGE) exempts Canadians from paying tax on up to $892,218¹ of capital gains when they sell their small business corporation shares.  

2. Dividends vs. capital gains – In Canada, capital gains are taxed at a lower rate than dividends.  

3. Surplus Stripping – A tax maneuver for individuals to convert payments from the corporation –normally taxed as dividends – into capital gains. As a result of being structured as capital gains, it would be taxed more favourably and qualify for the LCGE. 

Section 84.1  

Bill C-208 proposes several amendments. It amends section 84.1, which, among other things, targets parents selling their shares to their children’s corporations. Before Bill C-208, section 84.1 made it more beneficial for parents to sell a corporation to a third party than their children. This was because (under the old section 84.1) if they sold their shares to a corporation owned by their children, the capital gain would be recategorized as a dividend. Meaning, it will not qualify for the LCGE and be taxed at the higher dividend rates.  

Legislation passed under Bill C-208 would allow parents to sell the shares of their corporation to a corporation owned by their children while getting capital gains treatment and qualify for the LCGE. 

It also proposes additional requirements, including: 

1. The new purchaser corporation must be controlled by one or more children or grandchildren aged 18 or older. 

2. Subject to certain limitations, the purchaser corporation cannot dispose of the shares within 60 months after the purchase.  

3. The availability of the LCGE will be reduced if the taxable capital of the company being sold exceeds $10 million and will be eliminated at $15 million.  

4. An independent assessment of the fair market value must be provided to the CRA. 

5. An affidavit must be signed by the seller and purchases attesting to the disposal of the shares. 

Case Scenario: Homer’s Juice Bar

Homer started Homer’s Juice Bar, and the business has taken off.  Homer is now ready to retire and would like to transition the business and sell it to Lisa for $800,000. Suppose the dividend tax rate is 48%. 

Lisa is excited to take over the business but has concerns about paying her dad for the business. She doesn’t have a lot of money personally but would still like to take over the business. Homer insists on using the LCGE to shelter any tax he would owe on the sale.  

Before Bill C-208 

To simplify, Lisa would have to buy Homer’s Juice Bar. Lisa would need to borrow money or pay her dad for the business over time. She needs to use money from Homer’s Juice Bar to pay herself, pay tax on the amount she receives, and then use the remaining proceeds to pay off her dad or the loan. She would incur personal tax of $384,000 ($800,000 x 48%).  

After Bill C-208 

Lisa can now use a corporation to buy Homer’s Juice Bar while her dad would still qualify for the LCGE. She would not have to buy it personally. When she makes money from Homer’s juice bar, she can pay a tax-free intercorporate dividend to her purchaser corporation. The purchaser corporation can then use the money to pay Homer and Lisa without any personal tax. The Simpson family saves $384,000 in taxes that could be reinvested in the business.  

Should I Start Planning the Transfer of My Business?

Not so fast, because there is a lot of political controversy over this Bill.  

The Political Turmoil Behind Bill C-208 

This Bill didn’t follow the normal process of drafting a tax bill. Generally, the Tax Policy Branch of Canada’s Department of Finance is responsible for developing tax policy. They conduct research, analysis, and review case law to develop tax policy. The Department of Finance would then draft legislation in consultation with the Department of Justice and the CRA. The minister of finance would introduce it to Parliament with the help of the Department of Justice. Parliament studies the proposed legislation in their committees before passing it.  

Liberals Kill Bill C-208

Bill C-208 was a private member’s Bill meaning a member of Parliament drafted the Bill and introduced it to Parliament. The Department of Finance did not analyze the Bill. The majority of the Liberals voted against it (including Justin Trudeau and Chrystia Freeland). In contrast, the NDP and Conservatives unanimously voted to pass the Bill. As a result, the Bill passed.  

Normally, a bill comes into full force under Canadian law – the day it receives royal assent. However, the Department of Finance released a statement to delay the implementation of this Bill to January 1, 2022. However, the Liberal government has since been criticized for this announcement, given that the Bill received royal assent and should already be in force. The Department of Finance has retracted its statement as a result.

Liberals Bring Back Bill C-208 to Life (Temporarily) 

In response, the Liberals have announced that they intend to present amendments that ‘honour the spirit of Bill C-208’, closing any loopholes that it may have created. One of the reasons for these amendments is that the Bill is poorly written and can potentially be exploited, eroding the tax base. The Liberals have announced that their amendments will clarify various issues by ensuring legitimate transfers of control from parents to (grand)children under reasonable timelines and reasonable ownership limits maintained by the parents. The draft amendments will be introduced in a parliamentary bill sometime on or after November 1^st, 2021.  The government commented that this new Bill will only apply as of November 1, 2021, or when the legislation passes. This means there is still a tiny window where taxpayers can rely on Bill C-208 as it currently reads and take advantage of the looser rules.  

What Now?

In short, it is good that the government is looking at facilitating genuine intergenerational share transfers. We hope that the amendments are reasonable and do not prevent small business owners – the lifeblood of our economy – to legitimately and reasonably transition their businesses to their children, who are committed to carrying it on. Until November 1^st, 2021, small businesses may be able to transition their businesses without additional restrictions that the Department of Finance intends to introduce.  

The post Liberals Kill Bill C-208 and Brought It Back to Life (Temporarily) appeared first on LRK Tax LLP.

Many of Joe Biden’s tax proposals aim to increase taxes for large U.S. multinational corporations and wealthy individuals. However, many of the proposals still have implications for Canadian companies doing business in the U.S. We highlight the top 3 things you need to know about the 2022 U.S. budget if your company does business in the U.S.  

1. Increasing the U.S. Corporate Tax Rate from 21% to 28%

President Biden is proposing to increase the U.S. corporate federal tax rate from 21% to 28%, which is a significant increase. Note that this tax rate excludes any U.S. state tax rates that may be applicable (typically, the average state tax rate is 6% and would be in addition to the federal rate).

The increase in the U.S. corporate tax rate has other implications that extend beyond the corporate tax rate. For instance, the value of the state tax deduction will also increase. The implications are complex and are beyond the scope of this article.

2. Increasing Spending on the IRS

It has long been known that the IRS’s funding has consistently been decrasing. The IRS does not have the required resources to effectively enforce the tax laws. As such, some individuals and companies simply do not file their required filings.

As a bid to raise revenue, Biden is proposing to significantly increase the IRS budget, nearly double the IRS workforce, and modernize their IT systems to ensure taxpayers are in compliance. With the increasing of the the IRS budget should come increased visibility and enforcement from the IRS. Companies who do business in the U.S. should consider reviewing their U.S. tax exposure and ensuring accurate compliance.

3. Increasing Third-Party Reporting

To further ensure compliance, Biden is proposing to have U.S. banks and other financial institutions report the total deposits and withdrawals of each of their customers and to provide those amounts to the IRS.

Through FATCA, measures already exist for non-U.S. banks to provide financial information for their U.S. clients.

A separate proposal targets cryptocurrency investors by requiring cryptocurrency exchanges to report transfers of USD$10,000 or more to the IRS.

Call to Action

As tax rates increase, the IRS enforcement increases, and third-party reporting increases, it is evident that the new Biden administration is taking a stricter approach towards tax administration and is equipping themselves with the necessary resources. What does this mean for your Canadian business?  It is best that your company review their U.S. tax obligations to ensure they are compliant before many of these measures are enacted.

The post The Top 3 Things You Need to Know about Biden’s Proposals if You Do Business in the U.S. appeared first on LRK Tax LLP.