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Tax Year 2019 – Preparing & filing your Individual Income…

Deadline

The deadline for most individuals to file their 2019 tax return and for all individuals to pay any amounts due is April 30, 2020.

Self-employed

For those who are self-employed, or who have a spouse or common-law partner who is self-employed, the deadline to file your tax return is June 15, 2020.
To avoid interest or penalties, make sure you pay any amount you owe by April 30, 2020. After this date, the CRA will charge interest on any amount you owe until your balance is paid.

Deceased persons

When filing a tax return for someone who has passed away, the due date for their return will depend on the date of death, and if the person owned a business in 2019.
The due date for filing the return of a surviving spouse, or common-law partner who was living with the deceased, is the same as the due date for filing the deceased person’s final return. However, any balance owing to the surviving spouse or common-law partner still has to be paid on or before April 30 of the following year to avoid interest charges.

Gather your tax information

Get everything you need to calculate your income and support any credits, deductions, and expenses you’ll claim.
If you were employed or had an investment income in 2019, your employer or financial institution will send you statements commonly referred to as ”slips”. Here are some common examples:
• T3 Statement of Trust Income Allocation and Designations
• T4 Statement of Remuneration Paid
• T5 Statement of Investment Income
If you have not received a tax slip for the current year, or you misplaced it, you can ask the issuer of the slip for a copy. You can also get copies of your slips by logging into the Canada Revenue Agency’s My Account service.

Methods for completing your tax return

Choose one of the following secure options for filing your tax return.

Electronically by software:

You will find a list of certified desktop, online, and mobile software products at canada.ca/netfile-software. Some of these products are free of charge.

On paper

You can print the 2018 income tax and benefit package online or you can order a copy from the CRA. If you filed your taxes on paper last year, the CRA will automatically mail the T1 Income Tax package to your home before the deadline.

By phone

Those who are eligible will receive an invitation letter in the mail in mid-February, to use our automated phone service called File my Return, you may be able to complete and file your return for free by phone. The personalized invitation is sent to eligible Canadians who have low or fixed incomes, and whose situation doesn’t change from year-to-year.

The Community Volunteer Income Tax Program

If you have a modest income and a simple tax situation, volunteers at a free tax clinic may be able to complete your tax return for you. Free tax clinics are generally offered between February and April across Canada, while some are open year-round. To learn more, or to find a tax clinic near you, go to Canada.ca/taxes-help.
Program volunteers will complete your income tax and benefit return for you.

Fill out your tax return

If you decide to complete your tax return using certified software, you may be able to use a feature called Auto-fill my return. This service makes it easier to do your taxes by automatically filling in parts of your tax return with information the CRA has on file. All you need to do to use this service is to register for My Account.

Step 1: Provide and update your personal information

Keeping your personal information up-to-date with the CRA can save you time when doing your taxes. Tell the CRA if any of the following has changed:
• your marital status
• the number of children in your care
• your banking information
• your home address
It is important to let the CRA know about these changes as soon as possible, to make sure you get the right benefit and credits you are entitled to.

Step 2: Report your income

Income is money you earn through employment, self-employment, and investments you have or the benefits you receive. On your return, you must report income from all sources, both inside and outside Canada. This is true even if you were paid in cash, which includes money you earn as a side job or tips you have received.

Step 3: Claim your deductions, tax credits, and expenses

Reduce the amount of tax you pay by claiming your deductions, expenses and tax credits. You’ll have to use the receipts and records you kept during the year to support your claims.

Send in (file) your tax return

There are several ways to send your tax return to the CRA. Ultimately, this may be dependent on how you decided to complete your return.
• By software (electronically): If you selected a NETFILE certified software, it will communicate directly with the NETFILE application servers and transmit all required information on your behalf directly to the CRA via the web service.
• By paper: Mail your completed income tax package to your tax centre.
• By phone: Follow the instructions in the invitation letter for File my Return that you received from the CRA.

IMPORTANT: Remember to keep all your receipts

Regardless of how you submit your tax return, you must keep all your tax documents for at least six years. If you claimed expenses, deductions or tax credits, make sure you keep all your receipts and any related documents in case the CRA asks to see them.

What to do after filing your taxes?
If you file online and are registered for online mail, you could get your notice of assessment (NOA) shortly after you file your tax return using the Express NOA service.

When to expect your refund

If you file your tax return online and choose direct deposit, you could receive your refund in as little as eight business days. If you send CRA a paper tax return, it generally takes eight weeks before the CRA issue your notice of assessment and any refund.

Pay a balance owed

There are many ways to make a payment to the CRA. To avoid interest or penalties, make sure you pay any amount you owe by April 30, 2020. After this date, the CRA will charge interest on any amount you owe until your balance is paid. Interest applies after April 30, even if you are self-employed.

If you cannot pay the balance you owe in full

You can make a payment arrangement with the CRA. The CRA can grant relief from penalty or interest, in certain circumstances.

Need to make a change to your return?

If you forgot to include information or made a mistake on your tax return, wait until you get your notice of assessment from the CRA. Then, you can change your return.

In this age of Cloud Computing, Secure and Fast Processing, Clearwater Professional Corporation strongly recommends its client to generate monthly financial statements and monitor their personal and business growth and plan their future monthly, rather than waiting for the end of the year, as by then it is too late to take advantage of many opportunities, such as
1. Investing in the best financial and non financial products
2. Keeping your Bank reconciliations up to date
3. Keeping your renewals and data up to date
4. Planning your tax strategy in advance in order to save tax
5. Generally being aware of your financial situation and be able to navigate and fix it, if it needs fixing
6. Improve your Credit Score

You would not incur any additional costs, on the contrary, save a lot more by planning ahead, saving wisely and generally being on top of things.
In this day of Cloud Accounting systems, accountants are better equipped to provide far better security, processing speed, lower fees and with the Clearwater Advantage monthly on one CFO Advisory session.

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Small Business Accountant in Oakville, Burlington

Successful, happy & wealthy small business owners & their accountants

How do small businesses achieve high profitability?

When small business owners who had achieved substantial success in growing their business either through acquisition, inheritance or as a start-up were asked about the key resource that led to their achievements, mostly pointed out the selection of a good accountant and more specifically accountants with the below-mentioned qualities:

    1. An advisor and a business partner
      Their accountant partnered with them in driving the strategy and plan of the business through well-constructed business plans and monthly face to face sessions supported by valuable data analysis rather than simply recording the transaction and filing taxes once a year.
    2. Monthly Financial Statements.
      Their accountants worked with Accounting systems like QuickBooks Online and processes that enabled them to generate monthly Profit & Loss, Balance Sheet, Cash Flow and Bank Reconciliation statements, and recently providing data in real-time through systems based on cloud computing and assisted by artificial intelligence. Monthly Financial Statements also help a small business to plan proactively towards their profit goals and tax strategy.
    3. Expert planner and strategic mindset
      The accountant had adequate experience and professional background to think strategically and provide long term business plans, structures on pricing, volume analysis, sales channels selection, fixed and variables cost analysis and precise calculation of taxes.
    4. Advance Tax Planning
      A valuable by-product of monthly financial statements and meetings and a strategic mind set enable the business owners to discuss and execute tax strategies fairly in advance and enable substantial savings.
    5. Cash flow focused
      Monitoring and projecting advanced cash flow is like monitoring the lifeblood of the business, profits do not necessarily translate into much-needed cash. Close monitoring of Bank reconciliations monthly if not daily is another key process good accountants and businesses follow.
    6. Analytical
      A most appreciated trait of an accountant leading to good advice and follow up was an analytical mind, trained to generate and interpret pertinent information, backed by timely advise and ability to spot any telling signs of trends that would otherwise escape the layman.
    7. Professionally qualified & knowledgeable
      A professionally qualified and trained accountant such as a Chartered Professional Accountant (CPA) has valuable traits that allow them to maintain high professional standards and ethics, in addition to a deeper understanding of numbers, rules, regulations and laws.
    8. Works with the latest technologies
      Technology is developing at an astonishing rate, with cloud computing, artificial intelligence and blockchain technologies forming a substantial part of the accounting ecosystem, your accountant must be comfortable working with these technologies to help you grow your revenues faster, track costs better, help choose the right inventory systems etc.
    9. Access to other small business service providers
      Small business owners need access to the same professionals that their larger counterparts use to run their business i.e. bankers, foreign exchange traders, lawyers, wealth managers to name a few. Great accountants usually partner with these professionals, especially those catering to small businesses and should be able to refer them to their clients when needed.
    10. Cost management and Investment monitoring
      A good accountant knows the delicate balance that the small business owner must maintain between cutting wastages and investing to boost future revenues when needed. Helping the small business owner to measure the cost of those additional investments or impact of reducing costs.
    11. Succession Planning
      Small business owners at a certain stage of the business life cycle face the decision to go public, name heirs to the business or sell it. A professional accountant helps with the selection of professional valuation firms, the IPO process, or simply transit the business legally and financially to the heirs.
    12. Corporate Structuring
      As a business partner who has access to the market and the inner workings of other successful businesses, the accountant is usually in a position to recommend changes to the business that would further boost the growth of stem any leakages of revenue.
    13. Debt Planning
      At a certain stage of growth, all businesses especially start-up require access to banking channels, debt markets, and other lenders to either enhance capital or borrow short and long terms. A great accountant has connections in the market place to recommend and access these funds.
    14. Acquisition as a growth strategy
      In some instances, the small business hit a plateau in terms of growth where the organic business growth strategy simply is not an option. An accountant has usually during their career worked on acquisition in terms of due diligence, purchase, bedding the acquisition or handled the complete cycle and is therefore in a good position to work with a team of professionals to identify the right fit for their client.

Clearwater Professional Corporation based out of Oakville, Ontario is one such firm that has focused completely to help small businesses generate positive cash flows and achieve above-average profit levels.

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Income tax preparation oakville

The Dividend Series – Dividend, Investment Income & Taxation –…

We will commence with some key definitions for a better understanding of the contents.

Ask any Canadian what a dividend is and, if they don’t know, they’ll at least say it’s something positive. For the most part, they’d be right.

Dividends are distributions of a corporation’s after-tax earnings to its shareholders. They’re optional to distribute, but corporations often use them to entice or pay shareholders.

Dividend taxation can be confusing, but it’s part of our tax system’s theory of integration: the idea that an individual should pay the same amount of tax whether income is earned personally or through a corporation.

Consider that corporations are distributing earnings that they’ve already paid tax on. For the sake of fairness, dividends are subject to a special gross-up and tax credit calculation. When an individual receives a dividend, the amount received is grossed-up to a higher amount, depending on the type of dividend, to approximate the tax the corporation has paid. Personal tax is then calculated on this grossed-up amount. To compensate for this, individuals can claim a dividend tax credit, which reduces their tax otherwise payable.

The theory of integration doesn’t usually work out precisely as intended, with individuals either realizing tax savings or paying a tax cost from corporate earnings paid out as dividends.

Example
Assume Martha is in a 35% tax bracket and invests in shares of Manfco, a public company. Manfco earns $1,000 and pays corporate tax at a rate of 26.5% in Ontario. Martha has received a $735 eligible dividend from Manfco, which nets Martha less than earning $1,000 personally.

Table 1: Dividend income versus regular

Eligible dividend Regular income
Original intended payment $1,000 $1,000
Less: Corporate tax paid @ 26.5% $265 N/A
Proceeds $735 $1,000
Less: Tax owed $355 (35% of grossed-up amount, which is $1,014.30*) $350 (35% of income)
Plus: Dividend tax credit $254 (25.02% of grossed-up amount, as per the Income Tax Act) N/A
Final proceeds $634 $650
Total tax cost $366 ($101 personal** and $265 corporate) $350

*$735 x 1.38, since eligible dividends are grossed up by 38%.
**$101 = $355 – $254

Planning ideas

  • In Ontario, a person can earn up to $35,000 in non-eligible dividends, or $50,000 in eligible dividends and pay no tax (other than health premiums) as long as they have no other income.
  • A shareholder doesn’t have to do anything to receive dividend income other than invest in shares, so a corporation doesn’t have to give the person voting power or management responsibility. By contrast, other income-splitting measures, such as paying a salary to family members, are subject to reasonability tests for tax purposes, which is potentially a disadvantage.
  • Many income-splitting opportunities, such as those involving family trusts, are based upon the payment of dividends to family members with lower income levels.
  • If a person is entitled to a spousal tax credit, dividend income can sometimes be transferred between spouses on their tax returns to minimize tax.

Planning pitfalls

  • For seniors receiving old age security benefits, the dividend gross-up system can cause the loss of benefits if the dividend gross-up causes a senior to have income above the claw back threshold.
  • Dividend income doesn’t create RRSP room.
  • The payment of a dividend by a corporation is not a deductible expense to the corporation, while salary income is.
  • Dividend income isn’t helpful to an individual who wants to claim childcare expenses as a tax deduction, since dividends are not considered earned income for that purpose.
  • Minimum tax (see AE, March 2017) can sometimes be triggered when an individual has significant dividend income, since dividends are taxed at a more preferential rate than other forms of income.
  • Keep in mind that tuition credits must be fully claimed before dividend tax credits, and unused dividend tax credits cannot be carried forward.

Types of dividends

Eligible dividends
Dividends declared from earnings that were taxed at the general tax rate. Shareholders must be notified that a dividend is eligible at the time of payment, whether through website information for a public company or through letters to shareholders for a private company. For the 2016 tax year, eligible dividend income is grossed-up by 38% on an individual’s tax return. The top marginal tax rate on eligible dividends in Ontario is 39.34%.

Non-eligible dividends
Dividends declared from earnings taxed at the small business tax rate. For 2016, non-eligible dividend income is grossed-up by 17% on an individual’s tax return. The top marginal tax rate on non-eligible dividends in Ontario is 45.3%.

Capital gains dividend
A distribution by a Canadian mutual fund of its capital gains. Since the distribution is actually a capital gain, only half of the capital gain distributed will be subject to tax on an individual’s tax return.

Foreign dividend
Dividends from foreign corporations received by Canadian residents are considered to be foreign income, not dividends, for tax purposes. Foreign income is taxed at the same rates as salary or interest

What is Refundable Dividend Tax on Hand (“RDTOH”)?

RDTOH is a mechanism built into the income tax system in order to achieve integration. This concept ensures that income tax payable on investment income is essentially the same whether earned in a corporation and flowed out to its shareholder(s) or earned personally by the shareholder(s), i.e. where in the current environment investments are held in the company name and income is not paid as dividends but reinvested , benefiting the shareholder through deferred payment of taxes at lower small business corporate tax rates.

The RDTOH can be viewed as an account that accumulates refundable tax paid by a private company on its investment and dividend income. Investment income (including interest, rents, royalties, and the taxable portion of capital gains) earned by a Canadian Controlled Private Corporation (“CCPC”) is taxed at approximately 50%. A portion of this tax (calculated as 30.67% of taxable investment income) is added to the RDTOH account. In addition, taxable dividends (often referred to as “portfolio” dividends) received by a CCPC are subject to a refundable tax (Part IV tax) at a rate of 38.33%. The full amount of Part IV tax is also added to the RDTOH account. (Note that dividends received from connected corporations can, in certain instances, also attract Part IV tax.) Amounts in the RDTOH account are refundable to the corporation when a taxable dividend is paid to a shareholder at the rate of $1 of refund for every $2.61 of taxable dividends paid. The refunds are commonly referred to as “dividend refunds” and are deducted from the RDTOH account.

RDTOH should be taken into consideration in any concept comparing an insurance strategy to a corporate owned alternative investment.

The current RDTOH rules

To ensure that there is no advantage for an individual to earn investment income (e.g. interest, dividends, rental income, etc.) in a CCPC, instead of directly, a refundable tax is levied on that corporate investment income, in addition to regular corporate income tax. Accordingly, a corporation’s up front tax paid is approximately equivalent to the taxes that would be paid by an individual earning that income directly.

This refundable tax is tracked in a corporation’s RDTOH account. The refundable tax is recovered by the corporation only when a taxabledividend (eligible or non-eligible) is paid or deemed to be paid to the individual shareholder(s) of the corporation. This refund of tax is referred to as a dividend refund.

Eligible dividends are distributed from a corporation’s general rate income pool (GRIP) and are subject to a lower individual tax rate.

The table below illustrates the tax savings of paying an eligible dividend as opposed to paying a non-eligible dividend in 2019 (based on top combined federal and provincial/territorial dividend tax rates).

General rate income pool (GRIP)

A Canadian-controlled private corporation (CCPC) or a deposit insurance corporation may pay eligible dividends to the extent of its general rate income pool (GRIP) and no excessive eligible dividends were incurred under Part III.1 tax. The GRIP is calculated at the end of the tax year. However, a corporation can pay eligible dividends over the course of the year as long as, at the end of the year, the eligible dividends paid do not exceed its GRIP.
Note
The GRIP is a balance that generally reflects taxable income that has not benefited from the small business deduction or any other special tax rate.

Use Schedule 53, General Rate Income Pool (GRIP) Calculation, to determine the GRIP and file it with your T2 return. You should file this schedule if you paid an eligible dividend in the tax year, or if your GRIP balance changed, to ensure that the GRIP balance on our records is correct.

You can view GRIP balances using the “View return balances” service at:

Coming Next……..What does the Future Hold ?…..Part B of the dividend series

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Business Tax Accountant Oakville & Burlington

The dividend series – Dividends, Investment Income & Taxation –…

What does the future hold?

For taxation years beginning after December 31, 2018, all Canadian controlled private corporations (CCPCs) earning investment income must consider a new set of complex rules relating to their refundable dividend tax on hand (RDTOH) balances. These rules could increase the tax costs to individuals when distributing corporate funds from their private corporations. Before January 1, 2019, taxpayers will need to review their companies’ RDTOH balances to determine whether planning is required.

The new RDTOH regime

The 2018 federal budget announced new measures that restrict the ability to recover RDTOH through the payment of eligible dividends, with limited exceptions. This means that the cost of extracting profits from a CCPC may go up for the typical owner-manager.
Effective for taxation years beginning after December 31, 2018, the existing RDTOH account will be segregated into two new accounts:

  •  a non-eligible RDTOH (NRDTOH) account will track the refundable (Part I) taxes incurred on investment income earned (including taxable capital gains), and any refundable (Part IV) taxes on dividends received (net of Part IV taxes tracked in the eligible RDTOH [ERDTOH] pool)
    A refund of the NRDTOH will only be available upon the payment of non-eligible dividends. In all provinces these dividends are taxed at a higher rate than eligible dividends.
  • an ERDTOH account will track refundable (Part IV) taxes paid on eligible dividends received from corporations that are not connected,1 as well as eligible dividends received from connected corporations to the extent that these dividends triggered a dividend refund to the payor corporation
    A refund of the ERDTOH account will only be available upon the payment of eligible dividends.
    The existing RDTOH balance will be added to the NRDTOH account except for the transitional amount.

2019 transitional RDTOH amount

A CCPC’s opening ERDTOH account will have a one-time addition equal to the lesser of:

  • its existing RDTOH balance
  • 38.33% of the CCPC’s GRIP balance
    As a result:
  • the corporation’s GRIP balance must be at least 2.6 times the existing RDTOH pool in order for the entire RDTOH balance to qualify as ERDTOH, and
  • if the company has an RDTOH balance, but has no GRIP balance, all of the RDTOH will be added to the NRDTOH account

How can your accountant help with the planning strategy?

These new rules will impact taxation years commencing in 2019. To prepare for the change, you should discuss with your adviser whether:

  • it is possible to move the GRIP and RDTOH balances into the same company to maximize the addition to the ERDTOH account (for example, if a company has RDTOH but no GRIP, determine if the GRIP in a lower-tiered company can be moved to the higher-tiered company)
  • there is a plan to distribute corporate funds to individual shareholders in the next few years because there may be an advantage to speeding up the distribution before 2019 to realize a lower effective tax rate
  • for companies with GRIP, but limited RDTOH, it may make sense to trigger investment gains to create an ERDTOH account that can be used for future distributions

The 2018 Federal Budget confirmed the Canadian government’s intent to address Canadian controlled private corporations (CCPC) that earned significant investment income by targeting the Refundable Dividend Tax On Hand (RDTOH) regime. RDTOH is created from passive income earned by a CCPC and as implied in the name, is refunded to the corporation upon payment of taxable dividends. Investment income subject to the RDTOH regime is typically not added to a CCPC’s General Rate Income Pool (GRIP) from which eligible dividends are paid.

Under the historical RDTOH rules, an eligible dividend paid by CCPC could allow for a refund of RDTOH. This provided an opportunity to pay eligible dividends and still recover RDTOH created from investment income, which did not accrete to the CCPC’s GRIP from which the eligible dividend was paid. The eligible dividend would then be taxed at approximately 39 per cent personally rather than the approximate 46 per cent rate for non-eligible dividends (highest personal dividend tax rates in Ontario). Therefore, the individual is subject to a lower personal tax rate in comparison to receiving a non-eligible dividend that would otherwise be paid from passive investment income earnings, and the corporation continues to enjoy a RDTOH refund.

Under the new rules introduced in the 2018 Federal Budget, the existing RDTOH account will be split into eligible RDTOH and non-eligible RDTOH pools. RDTOH created from passive income will accrete to a CCPC’s non-eligible RDTOH account. This will be the case with most passive income apart from eligible dividend receipts. Only non-eligible dividends will result in a refund of non-eligible RDTOH balances. Further, ordering rules will also provide that amounts cannot generally be refunded from a CCPC’s eligible RDTOH account until the non-eligible RDTOH balance has been fully refunded. The character of RDTOH paid on dividends received from a connected corporation would match their payer’s eligible/ non-eligible RDTOH accounts.

The above rules will apply to taxation years beginning on or after January 1, 2019 and transitional measures have been included to compute the opening eligible RDTOH and non-eligible RDTOH balances of a CCPC. The eligible RDTOH balance will be calculated as the lesser of:

  • The existing RDTOH balance at the time of the transition; and
  • 38 1/3 per cent of the GRIP balance, at the time of the transition

Once the above allocation has been calculated, any remaining RDTOH would be allocated to the non-eligible RDTOH pool. Budget 2018 alludes to the fact that existing RDTOH should not be negatively affected on transition and should be in the eligible RDTOH pool. However, the transition rules included in the legislation create a problem.

How does this change play out?

For example, let us assume that Mr. A owns 100 per cent of his holding company (“HoldCo”) and the HoldCo owns 100 per cent of an operating company (“OpCo”). Furthermore, let us assume that OpCo has a GRIP balance of $10,000,000 and RDTOH of NIL while HoldCo has a RDTOH balance of $2,000,000 and no GRIP.
On transition, HoldCo will have its eligible RDTOH balance calculated as the lesser of:

  • The existing RDTOH balance at the time of the transition ($2,000,000); and
  • 38 1/3 per cent of the GRIP balance, at the time of the transition ($NIL)
    Therefore, HoldCo’s entire RDTOH balance will be included in the non-eligible RDTOH pool and block any refund of RDTOH when GRIP dividends are paid from OpCo through HoldCo to the individual shareholder. As a result, there is no transitional relief on HoldCo’s RDTOHearned before the new legislation became law.

How to plan for transition

A simple planning decision, that can be undertaken prior to the new regime coming into effect, is to pay an eligible safe income dividend to cause the GRIP balance in HoldCo to equate to the RDTOH balance in HoldCo. To continue our previous example, OpCo would pay an eligible safe income dividend of at least $5,217,392 prior to the transition. On transition, the eligible RDTOH balance of HoldCo will now be calculated as the lesser of:

  • The existing RDTOH balance at the time of the transition ($2,000,000); and
  • 38 1/3 per cent of the GRIP balance, at the time of the transition ($2,000,000)

The resulting eligible RDTOH balance of HoldCo will now equal at least $2,000,000 with no amounts added to HoldCo’s non-eligible RDTOHpool. Accordingly, eligible dividends can continue to be paid from OpCo through HoldCo to the individual shareholder and still provide for a refund of HoldCo’s RDTOH balances.

Taxpayers should examine their corporate structures prior to the rules coming into force on January 1, 2019 to determine potential planning opportunities.

Corporate RDTOH Planning Opportunities

Currently, through the operation of the refundable dividend tax on hand (RDTOH) rules, a portion of the tax paid on passive income earned by a private corporation is refunded when the corporation pays dividends. The refund is available regardless of whether the dividends paid are eligible dividends (generally from active business income taxed at the general income tax rate) or non-eligible dividends (generally from passive investment income and active business income taxed at the small business tax rate).
As of January 1, 2019, changes to the RDTOH rules will limit the dividend refund to
(1) noneligible dividends paid by the corporation and
(2) Part IV tax on eligible portfolio dividends received by the corporation. What Planning Should You Consider Undertaking in 2018? If a corporation is planning to sell corporate assets in the near future or it has a holding corporation/operating corporation (Holdco/Opco) structure, there are two options that should be considered in 2018 to plan for the RDTOH rule changes.

  • Where possible, corporate asset sales planned within the next year or two should be completed before the end of 2018 in order to maximize the corporation’s RDTOH balance at 2018 year end. Due to a transitional rule, a corporation’s existing RDTOH balance at 2018 year end will be allocated to its eligible and non-eligible RDTOH balances for the 2019 taxation year.
  • Where a Holdco/Opco structure is in place and Opco has a balance in its general rate income pool (GRIP) and Holdco has RDTOH but low or no GRIP, consideration should be given to whether eligible dividends should be paid by the Opco to the Holdco in 2018 in order to maximize Holdco’s 2019 eligible RDTOH balance.

Non-Eligible Dividend Tax Credit Rates and Amount of Dividends That May be Received Without Incurring Tax in 2018a Current to: April 30, 2018

Actual Dividend Taxable Dividend Actual Dividend
Federal 11.64% 10.03% $30,733
British Columbia 2.40 2.07 22,334
Alberta 2.41 2.07 20,562
Saskatchewand 3.87 3.33 20,290
Manitoba 0.91 0.78 10,292
Ontarioe 3.62 3.12 30,733
Québecf—Amounts received before March 28, 2018 8.18 7.05 24,417
Amounts received after
March 27, 2018
7.28 6.28 22,261
New Brunswickg 3.31 2.85 18,650
Nova Scotia 3.67 3.16 16,699
Prince Edward Island 3.36 2.90 14,841
Newfoundland & Labrador 4.06 3.50 19,678
Northwest Territories 6.96 6.00 30,733
Nunavut 3.20 2.76 30,733
Yukon 2.62 2.26 15,747

Notes:

*A table for 2019 will be added in Summer 2019.
This table assumes only “non-eligible dividend” income is earned and takes into account all federal and provincial taxes, surtaxes, and alternative minimum taxes, but does not include provincial premiums. The respective basic personal and dividend tax credits and provincial tax reductions, where applicable, are also included.“Non-eligible” dividends are those that are not subject to the dividend rules applying to “eligible” dividends (see table I-6). The gross-up rate for non-eligible dividends is 16%. The actual amount received is therefore multiplied by 1.16 to determine the taxable amount of the dividend.
A The federal and provincial dividend tax credit (DTC) rates in the table’s first column apply to the actual amount of the dividend received by an individual. The DTC rate can also be expressed as a percentage of the taxable dividend, as indicated in the table’s second column.
B The federal DTC rate that applies to non-eligible dividends decreased to 10.03% (from 10.52%) of taxable dividends beginning January 1, 2018. The dividend gross-up factor that applies to non-eligible dividends also decreased to 16% (from 17%) beginning January 1, 2018.
C Ontario decreased the province’s DTC rate that applies to non-eligibledividends to 3.12% (from 4.29%) of taxable dividends effective January 1, 2018.

Coming Next……..

The Federal Dividend Tax Credit in Canada…. Part C

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Business Tax Accountant Oakville

The dividend series – Dividend, Investment Income and Taxes –…

The Federal Dividend Tax Credit in Canada
If you are a shareholder in a Canadian corporation, you may earn dividend income, which should be reported on your tax return. Typically, you also may be eligible to receive the federal dividend tax credit.

This is a non-refundable credit that reduces the amount of tax you owe.The “ dividend tax credit is given to avoid double taxation.”

Eligible and Ineligible Dividends

Corporations designate dividends as eligible or ineligible. The difference is negligible to you, except for tax purposes. As an investor, you’ll be able to note on your T5 statement of investment income whether your dividend is eligible or ineligible.

If you’re an employee who works for the corporation, you’ll receive a T4PS, which is a statement of employee profit sharing plan allocations and payments.

According to the Canada Revenue Agency, other statements that may include dividend income are:

  • T3, statement of trust income allocations and designations;
  • T5013, statement of partnership income;
  • T5013A, statement of partnership income for tax shelters and renounced resource expenses.

Dividend Income and Gross Up
Your dividend income gets added to your taxable income. In addition to reporting the amount you earned in dividend income, you should account for a gross up. Think of a gross up as an increase to account for applicable taxes.

For example, say your job pays $5,000 per week, but your salary is $5,500 per week because your employer wants $5,000 to be your income after taxes. This means your employer has grossed-up your salary.

The CRA has you add in a gross up to account for any tax the corporation has already paid on your dividend income.

Currently, the gross up rate is 38 percent for eligible dividends. Beginning in the tax year 2016, the gross up rate on ineligible dividends is 17 percent. This rate is slated to drop an additional one percent per year for the next two years.

The decrease is due to “corporate taxes going down,”

Calculating Dividend Income With Gross Up

As an example, if you received $200 worth of eligible dividends and $200 worth of ineligible dividends, you would have to gross up you eligible and ineligible dividends by 38 percent and 25 percent, respectively. So, you would claim $526 as dividend income on your return:

  • ($200 X 138 percent) = $276 ($200 X 125 percent) = $250 $276 + $250 = $526

Calculating the Credit

The CRA allows you to calculate the federal dividend tax credit one of two ways:

  1. As a percentage of the grossed up value of your dividend income (15.0198% of eligible dividends, as of 2015);
  2. As a fraction of the gross up portion of your dividend income (6/11 of eligible dividends; as of 2015).

Continuing the example, a $200 eligible dividend had a grossed up value of $276, so either method of calculation would produce the same results:

  • $276 X 15.0198 percent = $41.45 2) $76 X (6/11) = $41.45

Why You Receive Credit

The purpose of the federal dividend tax credit is to balance things out. You receive your share of the corporation’s earnings as a dividend.

You pay a gross up to turn that income back into pretax income — because the corporation has already paid taxes on it — then, you receive a tax credit to make it fair for everyone.

Both you and the corporation aren’t being double-taxed and the CRA subsidizes you for the tax the corporation already paid on your dividends.

Refundable portion of Part I tax
Lines 440, 445, and 450
The refundable portion of Part I tax is part of the refundable dividend tax on hand (RDTOH). More information about RDTOH is in the section that follows.

The refundable portion of Part I tax allows a CCPC that has paid Part I tax on investment income to recover part of that tax when the corporation pays taxable dividends to its shareholders. The refundable portion of Part I tax only applies to corporations that are CCPCs throughout the tax year.

The refundable portion of Part I tax is based on the aggregate investment income and foreign investment income. You have to determine these amounts by completing Parts 1 and 2 of Schedule 7, Aggregate Investment Income and Active Business Income.

Part 1 – Aggregate investment income calculation

The aggregate investment income is the aggregate world source income calculated as follows:

add

  • the eligible portion of the taxable capital gains for the year that is more than the total of:
    • the eligible portion of allowable capital losses for the year
    • the net capital losses from previous years which are applied in the year
  • total income from property (including income from a specified investment business carried on in Canada other than income from a source outside Canada) from which the following amounts have been deducted:
    • exempt income
    • AgriInvest receipts (include the Quebec amount)
    • taxable dividends deductible after deducting related expenses
    • business income from an interest in a trust that is considered property income under paragraph 108(5)(a)

deduct

  • total losses for the year from property (including losses from a specified investment business carried on in Canada other than losses from a source outside Canada)

On line 440 enter the amount of aggregate investment income that you determined on line 092 of Schedule 7.

You can include taxable capital gains and allowable capital losses in a CCPC’s net investment income only if you can attribute the gain or loss to a period of time when a CCPC, an investment corporation, a mortgage investment corporation, or a mutual fund corporation held the disposed property.

Part 2 – Foreign investment income calculation

The foreign investment income is all income from only sources outside of Canada calculated as follows:

add

  • the eligible portion of the taxable capital gains for the year that is more than the eligible portion of allowable capital losses for the year
  • the total income from property from a source outside Canada from which the following amounts have been deducted:
    • exempt income
    • taxable dividends deductible after deducting related expenses
    • business income from an interest in a trust that is considered property income under paragraph 108(5)(a)

deduct

  • the total losses for the year from property from a source outside Canada

On line 445 enter the amount of foreign investment income that you determined on line 079 of Schedule 7.

Calculate the amount of the refundable portion of Part I tax. Enter the amount from line 450 at amount P in the “Refundable dividend tax on hand” area of your return.

References

Subsections 129(3) and 129(4) IT 73, The Small Business Deduction IT 269, Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation

Refundable dividend tax on hand

Lines 460, 465, 480, and 485

The RDTOH account only applies to corporations that were private or subject corporations.

A CCPC generates RDTOH on both the Part I tax it pays on investment income, and on the Part IV tax it pays on dividends it receives. For any other type of private corporation, only the Part IV tax it pays generates RDTOH.

For more information on taxable dividends deductible under section 112 or 113, or subsection 138(6), see line 320.

For information on Part IV tax and instructions to complete Schedule 3, see line 712 – Part IV tax payable.

All or part of the RDTOH at the end of the tax year is available as a refund if the corporation pays taxable dividends to the shareholders during the tax year.

You can view refundable dividend tax on hand balances using the “View return balances” service through:

To calculate the RDTOH at the end of the tax year, add the following amounts:

  • the RDTOH balance at the end of the previous tax year (minus any dividend refund issued to the corporation in the previous year)
  • the refundable portion of Part I tax from line 450
  • Part IV tax calculated on line 360 of Schedule 3
  • any balance of RDTOH transferred from a predecessor corporation on amalgamation, or from a wound-up subsidiary corporation

For the first tax year of a new corporation formed as a result of an amalgamation, enter on line 480 all RDTOH balances being transferred from predecessor corporations. Do not include this amount on line 460.

For a parent corporation that wound up a wholly owned subsidiary, enter on line 480 any RDTOH transferred from the subsidiary corporation. On line 460, enter the RDTOH the parent corporation is carrying forward from its previous tax year.

Note

You cannot transfer any RDTOH to a new or parent corporation if, had the predecessor or subsidiary corporation paid a dividend immediately before the amalgamation or wind-up, subsection 129(1.2) would have applied to that dividend.

On line 485, enter the RDTOH at the end of the tax year. Also, enter it at amount T in the “Dividend refund” area of your return.

References
Subsections 129(3) and 186(5)

Dividend refund

A private or subject corporation may be entitled to a dividend refund for dividends it paid while it was a private or subject corporation, regardless of whether it was a private or subject corporation at the end of the tax year.

Note

To claim a dividend refund or to apply the amount to another debit for any tax year, including the same tax year, you have to file your income tax return within three years of the end of the tax year. If your income tax return is not filed within three years of the end of the tax year, the dividend refund becomes statute barred, and will not be issued.

A dividend refund arises if you pay taxable dividends to shareholders, and if there is an amount of refundable dividend tax on hand (RDTOH) at the end of the tax year. To claim a dividend refund, you have to have made an actual payment to the shareholders, unless the dividend is considered paid (a deemed dividend).

For tax years that begin after 2018, a private corporation’s dividend refund will be calculated by reference to two new accounts, the eligible refundable dividend tax on hand (ERDTOH) and the non-eligible refundable dividend tax on hand (NERDTOH). They will replace the existing RDTOH account for those years.

Eligible dividends will generate dividend refunds from ERDTOH, and non-eligible dividends will generate dividend refunds from NERDTOH first, then possibly from ERDTOH. The calculation will effectively require a private corporation to get a refund from its NERDTOH account before it gets a refund from its ERDTOH account, when it pays a non eligible dividend. A transitional rule will preserve the refundability of a corporation’s pre existing RDTOH.

For more information on eligible dividends, go to Eligible dividends or see Line 710 – Part III.1 tax payable.

You can make this payment either in cash, or with some other tangible assets at fair market value, including the following:

  • stock dividends
  • section 84 deemed dividends
  • amounts paid as interest or dividends on income bonds or debentures that are not deductible when calculating income

If you lose your private status following a change in control, a deemed year-end occurs. This allows you to claim a dividend refund for any dividends paid during the deemed short year.

You have to complete Parts 3 and 4 (if they apply) of Schedule 3 to claim a dividend refund. The dividend refund is equal to whichever of the following amounts is less:

  • for tax years that end after 2015, 38 1/3% of taxable dividends that you paid in the year as a private or subject corporation (the previous rate was 33 1/3%). For tax years that end after 2015 and start before 2016, the additional 5% is prorated according to the number of days in the tax year that are after 2015
  • the RDTOH at the end of the tax year

The total of taxable dividends paid for the purpose of the dividend refund is equal to the amount on line 460 of Schedule 3. Refundable dividend tax on hand refers to the amount on line 485 in the “Refundable dividend tax on hand” area of your return.

Parts 3 and 4 of Schedule 3

The following explains how to complete Parts 3 and 4 of Schedule 3. See Parts 1 and 2 of Schedule 3 for explanations on the first two parts of the schedule.

If you paid taxable dividends during the year, complete Part 3 to identify taxable dividends that qualify for the dividend refund.

If the amount of dividends paid includes dividends that do not qualify for the dividend refund, you have to deduct these dividends before completing the calculation in Part 3. In this case, complete Part 4 of Schedule 3 to identify dividends that do not qualify.

Dividends that do not qualify are:

  • dividends paid out of the capital dividend account
  • capital gains dividends
  • dividends paid for shares that do not qualify as taxable dividends, because the main purpose of acquiring the shares was to receive a dividend refund [subsection 129(1.2)]
  • taxable dividends paid to a controlling corporation that was bankrupt at any time in the year

Complete Part 3 of Schedule 3 to identify a connected corporation that received taxable dividends that qualify for the dividend refund.

If the dividend refund is more than the amount of Part I tax payable for the year, we deduct the excess from any other taxes owed under the Income Tax Act. Any balance left over is available for a refund.

If the total dividends paid during the year is different from the total of taxable dividends paid for the purpose of the dividend refund, complete Part 4 of Schedule 3.

References
Section 129
Subsection 186(5)

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Canadian Tax Year 2018

As 2018 draws to a close, it’s a good time to meet with your accountant and have an informed discussion about maximizing tax savings for the past year. Small business owners, in particular, have many opportunities to save on their yearly taxes, so take a few minutes to review your options with an expert before 2018.

In this blog, we’ll take a look at some of the changes in tax provisions that will affect individuals and small businesses below:

Eligible Deductions & Credits

If you pay the following expenses by December 31, 2017, they will be eligible for the deductions of tax credits. In other words, you’ll have to pay less for the past tax year:

  • Childcare expenses
  • Moving expenses
  • Investment council fees
  • Charitable donations
  • Accounting fees
  • Medical expenses
  • Tuition fees
  • Deductible support payments
  • Political donations
  • Interest paid on loans used to purchase investments

Contribute to Your RRSP

The most popular tax tool available to the average person is investing in a Registered Retirement Savings Plan (RRSP). Contributions to RRSPs are tax deductible and the income earned within the RRSP grows until you retire — with taxes deferred. You can claim a contribution of up to 18% of your earned income from 2016 (to a maximum of $26,010).

Earned income includes the following sources:

  • Employment income
  • Business income
  • Net income from rental properties
  • CPP disability pension
  • Certain types of royalties
  • Spousal or child support payments that are included in your income

Remember that your contribution limit may be subject to a pension adjustment reversal from 2016. So if your employer is making contributions to a pension plan, or actuarial commitments to such plans in the year 2016, then these will be reflected in this pension adjustment.

It is also important to remember that the age limit for RRSP contributions is 71. The age limit for converting an RRSP to an annuity or RRIF is also 71.

Finally, don’t overcontribute — a severe penalty will result. If you have any questions about RRSP contributions, talk to a professional accountant today.

Capital Gains Exemption Deduction

The Lifetime Capital Gains Exemption Deduction applies to individuals who dispose of shares in a qualified small business corporation, or in a qualified farm or fishing property. The exemption is $835,716 for small businesses and $1,000,000 for farms or fishing properties.

If you have already claimed the $100,000 Personal Capital Gains Exemption, which ended in 1994, then this will reduce the amount of Lifetime Capital Gains Exemption available to you.

You must also verify whether you have claimed allowable business investment losses (ABIL) in prior years or have cumulative net investment losses (CNIL) as of December 31, 2017. These items will also affect the amount of exemption that can be claimed.

Use Your Capital Losses to Reduce Income Taxes

Did you know that you can use your 2017 capital losses to reduce your current year’s income taxes, by applying such losses against your 2017 capital gains?

This can be an effective strategy for reducing what is owed in a given tax year — but you must be careful of the superficial loss rules, which prevent you from claiming a capital loss on an identical asset that you reacquired 30 days before or after the sale date.

If your capital gains were realized in the years 2014 to 2016, and net capital losses were incurred in 2017, then you can carry these losses back against previous years’ capital gains. You can also carry the unused 2017 losses forward to future capital gains.

The last 2017 transaction date effective for publicly-traded securities is December 22, 2017.

Other Tax Planning Recommendations

There are many other strategies available for individuals and business owners who want to save on their income taxes in 2017. Here are some quick recommendations from our team, which you may want to consider:

  • Consider a Registered Education Savings Plan (RESP) for your children.
  • Set up a Tax-Free Savings Account (TFSA).
  • Review your December income tax instalment.
  • Make a low-interest loan to your spouse.
  • Repay outstanding shareholder loans and pay interest on employee loans.
  • Contribute to your spouse’s or common-law partner’s RRSP to the extent of your RRSP deduction limit for 2017. This doubles the amount a couple can withdraw for the Home Buyer’s plan.
  • Consider a Registered Disability Savings Plan for a child with a severe disability.
  • Claim you personal tax credits.
  • Keep your transit passes (up to June 30, 2017).
  • Pay reasonable salaries to family members in 2017.
  • Convert non-deductible debt to deductible interest.
  • Review your will every 5 years.
  • Split pension income with a spouse.
  • Apply for Home Buyer’s tax credit, if you are a first-time homebuyer.

Got questions about these recommendations or anything else in this article on 2017 taxes? Contact the team of Chartered Professionals Accountants at Clearwater for more advice.

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Small Business Accountant in Oakville, Burlington

Amazing success stories – a 90% success rate – cpc…

Starting a new business or decision to accelerate growth of existing business

CPC Accounting works with new & existing entrepreneurs all the time , and we find 90% success stories, share a discipline which unfolds as follows:

1. A 60 months detailed business plan , based on lead generation strategy, client acquisition potential and resulting in a  “Profit after tax” tracked every month against actuals leading to Vision of Profit after tax and Business Valuation after 5 years.

The 5 Year Business Plan builds a very realistic Profit after tax growth (assessing the Product Pricing, Volumes to sold, employee expenses, Cost of good sold, ROI for Advertising & marketing expenses , operational expenses) , a monthly Cash Flow analysis and a monthly Balance Sheet tracking the need for Credit Lines, goodwill etc).

The business plan is tested under various stress simulations and a decision to go ahead is based on a simulation that the owners and Clearwater Professional Corporation agrees upon.

2. Once step 1 is approved, we go forward and execute the following:

  •  Incorporate the company
  •  Open Bank accounts
  •  Register with CRA (I.tax, HST, Payroll , WSIB etc)
  •  Setup Cloud based accounting systems
  •  recruitments
  •  Open the door for Business

The above steps normally takes two weeks.

For existing owners, milestones , deliverables and resources are put into place based on the 5 year business plan (60 month) to achieve the Growth aspirations, measured in Profit after tax and Business Value for sale at the end of the 60th month.

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Top Traits of a Successful Small Business Accountant

When surveyed about key factors that led to their success, most small business owners singled out the selection of a good accountant as the most important asset. This resource was found to be a common factor for businesses that were acquired from a previous owner, inherited from a family member, or founded as a startup.

This survey of small business owners also uncovered fourteen important qualities (mentioned below), which were identified as the top traits shared by successful small business accountants:

1. An advisor and a business partner

These accountants provided much more than simple records of transactions and yearly tax filing services.

Successful small business accountants partnered with business owners in driving the strategy of the business, with well-constructed business plans and monthly face-to-face sessions supported by valuable data analysis.

2. Monthly financial statements

These accountants used sophisticated systems and processes to generate monthly financial statements for the following:

  • Profit & Loss
  • Balance Sheet
  • Cash Flow
  • Bank Reconciliation

They were also able to provide data in real-time through systems based on cloud computing and assisted by artificial intelligence.

3. Expert planners with a strategic mindset

These accountants had the business experience and the professional background to think Strategically. They also provided valuable advice on long-term business plans, structure for pricing, volume analysis, sales channels selection, fixed and variables costs analysis, and the precise calculation of taxes.

4. Advanced tax planning

One valuable by-product of monthly financial statements, meetings, and a strategic mindset is that the accountant and the business owners were able to discuss and execute tax strategies fairly in advance and generate substantial savings.

5. Cash flow-focused

Monitoring and projecting advanced cash flow is like monitoring the lifeblood of the business. Profits do not necessarily translate into much needed cash. A close monitoring of bank reconciliations on a monthly, if not a daily basis, is another key process that good accountants and businesses will follow.

6. Analytical mind

One of the most appreciated traits of a successful accountant — which leads to good advice and follow-up — is an analytical mind that is trained to generate and interpret pertinent information. This analytical mind provides the ability to spot any telling signs or trends that would otherwise escape the layman.

7. Professionally qualified & knowledgeable

It almost goes without saying, but a professionally qualified and trained accountant is a necessity, if you want to be successful. Professional qualifications show that the accountant knows how to maintain high professional standards and ethical conduct in all matters, in addition to possessing a deep understanding of numbers, rules, regulations, and laws.

8. Works with the latest technologies

Technology is developing at an astonishing rate, with cloud computing, artificial intelligence and blockchain technologies forming a substantial part of the accounting ecosystem.

Today’s accountant must be comfortable working with these technologies to help grow your revenue faster, track costs better, help choose the right inventory systems, and so on.

9. Access to other small business service providers

Small business owners need access to the same professionals that their larger counterparts use to run their business, (i.e bankers, foreign exchange traders, lawyers, and wealth managers). Great accountants will usually partner with these professionals, especially those catering to small businesses. Your accountant should be able to refer you to these types of service providers when you need them.

10. Cost management and investment monitoring

A good accountant understands the delicate balance that the small business owner must maintain between reducing waste and investing to boost future revenues. A good accounting partner will be able to help a small business owner measure the cost of those additional investments or the impact of reducing costs.

11. Succession planning capabilities

At a certain stage of the business lifecycle, small business owners will face the decision to either go public, name heirs to the business, or sell it. A professional accountant can help with the selection of professional valuation firms, the IPO process, or simply assist in transitioning the business legally and financially to the heirs.

12. Corporate structuring

As a business partner who has access to the market, and the inner workings of other successful businesses, the accountant is usually in a position to recommend changes to the business’s corporate structure that would further boost growth or stem any loss of revenue.

13. Debt planning

At a certain stage of growth, all businesses may require access to banking channels, debt markets, and other lenders to either enhance capital or borrow on short and long terms. This is especially true for start-up businesses. A great accountant has connections in the marketplace and will be able to access these funds or make recommendations to the business owner.

14. Acquisition as a growth strategy

In some instances, small businesses hit a plateau, in terms of growth, where organic business growth strategy is simply not an option. During their career, a successful accountant has usually worked on an acquisition and will understand what is required in terms of due diligence, purchase, bedding the acquisition, and so on. In an ideal situation, they will have handled the complete acquisition cycle and can work with a team of professionals to identify the right fit for their client.

Looking for an accountant who fits the above traits? Book a consultation with the team at Clearwater to see if we’d be a good fit for your business.

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