Tax Update – COVID-19: Latest Relief Measures for Small Businesses
The developments on the COVID-19 pandemic have been numerous and developing rapidly since the Government of Canada passed the first COVID-19 Emergency Response Act approximately one month ago.
This Tax Update looks at some of the more recent measures intended to provide relief to Canadian small businesses and taxpayers:
- the Canada Emergency Wage Subsidy
- the Canada Emergency Business Account loan program
- the Business Credit Availability Program
- Canada Emergency Commercial Rent Assistance
Tax Update – COVID-19: Support for Canadian Businesses and Individuals
In response to the rapidly evolving threat of the COVID-19 pandemic, the Federal Government of Canada and the Government of Ontario have introduced a number of tax and economic measures intended to benefit individuals and businesses alike.
In this Tax Update, we provide a summary of the following major tax and financial measures announced to date:
- The 75% Canada Emergency Wage Subsidy
- The temporary 10% wage subsidy
- Federal Tax filing and payment extensions
- Provincial EHT relief and WSIB extension
- Canadian Emergency Response Benefit
Changes to Passive Investment Income
In 2018, the federal government passed new tax legislation for Canadian-controlled private corporations (CCPCs), including incorporated professionals. Effective for taxation years starting in 2019, the small business limit ($500,000 federally and in most provinces) will be reduced by $5 for every $1 of investment income above $50,000. Under the rules, a new definition of adjusted aggregate investment income (AAII) is used to determine the amount of investment income that will grind down the small business deduction, which is effectively eliminated when investment income reaches $150,000 in a given taxation year. Just as associated corporations must share the small business limit, investment income in associated corporations must be aggregated to determine if the $50,000 threshold has been surpassed and to determine the amount of the small business limit that will be clawed back. The reduced small business limit is then what must be shared within an associated group of companies.
Small Business Tax Rate Decreasing in 2018
For Canadian-controlled private corporations (“CCPCs”) claiming the small business deduction, the net federal tax rate is being reduced from 10.5% to 10% and the net Ontario tax rate is being reduced from 4.5% to 3.5%. As a result, the combined tax rate for CCPCs in Ontario on the first $500,000 of active business income is decreasing from 15% to 13.5%. These measures are meant to offset other changes such as increases to the investment tax rate and limitations being introduced on income sprinkling.
Income Sprinkling Rule Changes
Effective from January 1, 2018 and subsequent taxation years, Finance is moving forward on restricting income sprinkling for private corporations as part of its commitment to tax fairness. Prior to the introduction of these rules,business owners could potentially redirect their income to family members that pay a lower rate of income taxes. As a result of these changes, new rules have been introduced to determine whether a family member is significantly involved in business, and thus is excluded from potentially being taxed at the highest marginal tax rate (known as the tax on split income or TOSI). The changes include a new set of tests to determine whether recipients of such income will be subject to the TOSI rules. For more information on these rules or to determine if you will be impacted as a result of these changes, feel free to contact us.
Changes to the Principal Residence Exemption
In 2016, the Department of Finance introduced significant changes to the principal residence exemption rules under the Income Tax Act
(Canada). The mandate of these changes was specifically to “improve tax fairness by closing loopholes surrounding the capital gains exemption on the sale of a principal residence”. The proposed changes to the principal residence exemption rules effectively limit the ability of certain taxpayers to reduce or eliminate the capital gain on the sale of their home.
The valuation concept of “double-dipping” refers to the double counting of marital assets; once in the property division and again in the support award. This theory is premised upon the fact that the same cash flows capitalized to determine the value of a spouse’s business (an asset subject to equitable distribution) are also considered a component of that spouse’s total income for support calculation purposes.
Foreign Reporting Requirements
Recent legislative changes to foreign reporting requirements for Canadian taxpayers requires the reporting of all specified foreign property owned during the year if the cost base of all specified foreign property exceeds $100,000 at any point during the year.