Smythe LLP was recently awarded the Financial Services Award by the Greater Nanaimo Chamber of Commerce. This award is given to any banking, financial, investment, or accounting service recognized for expertise leading to consistent customer satisfaction and ability to deliver customized solutions that help their clients achieve their unique goals.

Financial Services Award

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Health and Welfare Trust

A health and welfare trust (HWT) is not defined in the Income Tax Act (the Act). In general terms, a health and welfare trust is described as a trust arrangement established by an employer for the purpose of providing health and welfare benefits to its employees. Under this type of trust arrangement, trustees receive contributions from the employer and in some cases from employees, to provide certain health and welfare benefits agreed to between the employer and the employees. Multiple employers can participate in the same health and welfare trust.

In the past, the Canada Revenue Agency (CRA) has published administrative positions regarding the requirements for HWTs along with detailed guidance on computing taxable income of such trusts. Employer’s contributions to a HWT are tax deductible in the year made if they are reasonable. In preparing trust income tax returns, a HWT may deduct taxable benefits it pays out.

Employee Life and Health Trust

In 2010, the Act was amended to introduce the employee life and health trust (ELHT) rules which are virtually identical to the CRA’s administrative guidance on HWTs. An ELHT, like a HWT, is an arrangement that allows an employer to make contributions to a trust that will provide benefits under a group sickness or accident insurance plan, a private health services plan or group term life insurance. Employer’s contributions to an ELHT are tax deductible. An ELHT may deduct all expenditures related to providing eligible benefits, including insurance premiums, claims and administrative expenses plus any benefits it pays out.

An EHLT has restrictions on what employees can participate. The ELHT’s objects are limited to paying “designated employee benefits” for employees, former employees or members of their families who belong to at least one “class of beneficiaries” of one or more participating employers. At least one class of beneficiaries of an ELHT must contain more than 25% of all employees and at least 75% of the members of that class cannot be key employees. A key employee is defined as an employee who owns 10% or more of the employer’s shares or a “high-income” employee. This rule discourages plans that benefit business owners and key employees only.

Key differences between HWTs and ELHTs

  • While HWTs rely on administrative positions contained in CRA’s Income Tax Folio S2-F1-C1, ELHTs are defined in section 144.1 of the Act.
  • An ELHT must be resident in Canada while a HWT may be established in a foreign country.
  • An ELHT cannot be created primarily for the benefit of key employees. There are no restrictions for a HWT on the participation of key employees.
  • An ELHT can be more tax efficient than a HWT as an ELHT is able to deduct all expenditures related to providing eligible benefits, including insurance premiums, claims and administrative expenses plus any benefits it pays out. A HWT is taxable on its net investment income and is only able to deduct taxable benefits paid.

2018 Federal Budget proposals

The 2018 Federal Budget proposes to discontinue the application of the CRA’s administrative positions with respect to existing HWTs after the end of 2020 in order to encourage conversion of such trusts to ELHTs. Starting in 2021, only ELHTs will be subject to the tax rules for trusts according to the Act. In addition, the CRA will no longer adhere to its administrative positions for HWTs established after February 27, 2018.

The Department of Finance has requested comments on the transitional rules by June 29, 2018. The issues for consideration in the consultation include:

  • Whether a HWT can continue as an ELHT without creating a new arrangement;
  • Whether and under what conditions a rollover of assets of a HWT to an ELHT will be permissible; and
  • The tax implications for a HWT that does not satisfy the conditions to become an ELHT or where the trustees choose not to convert.

The Department of Finance will release draft legislative proposals and guidance to facilitate the conversion of existing HWTs to ELHTs following the consultation.


Please send your comments by June 29, 2018 to the Department of Finance at: 
HWT-consultation-FSBE@canada.ca 

Smythe LLP is pleased to welcome Randy Munro, CPA, CA to the partnership as Tax Partner to our Langley office, effective November 1, 2017.

Randy has 33 years of experience providing professional tax advice across a variety of industries. He also has extensive experience with owner-managed businesses, including corporate reorganizations, succession and estate planning.
 
In addition, Randy has a focus working with First Nation businesses on a variety of specialized services, including structuring of limited partnerships, establishment of settlement trusts and advising on the tax components of treaties.

Please join us in welcoming Randy to the Firm. His years of experience and expertise will be a valued asset to Smythe, specifically to its Langley practice. Smythe continues to be dedicated to providing our clients with a range of accounting, tax, insolvency and business advisory services in Vancouver, Langley and Nanaimo.

Randy Munro, CPA, CA

 

On November 2, the House of Representatives released their tax reform legislation, the Tax Cuts and Jobs Act. The bill is the starting point for negotiations and will likely go through several revisions before it is enacted. The following synopsis highlights some of the significant impacts on individuals and businesses.

Changes in Tax Rates

  • Individual Tax Rates: The number of tax brackets has been reduced from seven to four, and rates are generally reduced. However, since the Canadian tax rates are still higher, this is not likely to impact US citizens in Canada.
  • Pass-through Entity Rate: The individual tax rate on business income from pass-through entities will be limited to 25%. Certain portions of the income from pass-through entities may be considered equivalent to wages and not subject to the pass-through tax rate.
  • US Corporate Tax Rate: The corporate tax rate is reduced from 35% to a flat rate of 20%.

Estate and Gift Tax

  • Double Estate and Gift Tax Exemption: The exemption for estate and gift tax will be doubled from US$5.49 million to US$10.98 million, and the estate tax is due to be phased out by 2023.

US Citizens and US Corporations with Ownership of Foreign (including Canadian) Corporations

  • One-time Tax on Deferred Foreign Earnings: Earnings held in cash and liquid investments will be taxed at 12%, while earnings invested in capital equipment will be taxed at 5%. This will impact US citizens and US corporations with significant assets within their Canadian corporations.
  • Current Taxation of Certain Active Business Income: Under a complex formula, US citizens and US corporations may be taxed currently on up to 50% of the undistributed income earned within their foreign (including Canadian) corporations that is considered “Foreign High Returns”.
  • Foreign Dividend Received Deduction: For US corporations, dividends from more than 10%-owned foreign corporations will be non-taxable as long as the earning was not derived from passive income.

Other Changes

  • Alternative Minimum Tax Repealed: Alternative minimum tax will be repealed for both individuals and corporations.
  • Principal Residence Exemption: While the dollar amount remains unchanged at $250,000 per individual, individuals will have to have lived in the home for at least five of the previous eight years to qualify and the exemption can only be used once every five years. In addition, the exemption will be phased out when income exceeds a certain threshold.
  • Bonus Depreciation: Businesses may elect to expense capital equipment placed in service. The eligible properties have been expanded to include used properties if it is the first time owned by the taxpayer, and the dollar limit has been increased from US$500,000 to US$5,000,000.
  • Alimony Deduction: Individuals are no longer able to deduct alimony paid nor are the recipients required to include alimony as income. It is possible that without the deduction, a US citizen in Canada may be liable for US income tax because Canada allows such a deduction.
  • Elimination of State Income Tax Deduction: Individuals are no longer able to deduct state and local income tax when calculating their federal taxable income. This should not apply to state and local income paid in earning business income.

While the Tax Cuts and Jobs Act will be revised in the coming days, the bill presents some of the most sweeping changes to US tax law in several decades. The current goal of the House and Senate Republican leaders is to finalize the legislation by the end of 2017. US citizens in Canada, especially the owners of Canadian corporations, as well as businesses with cross-border investments, will likely be affected by these proposals and may wish to review their current tax structure.

For more information on the proposed tax changes, contact one of Smythe’s US tax advisors below.

This week, the Department of Finance issued two news releases, being their initial responses to the vast number of submissions received during the consultation period related to the July 18, 2017 tax proposals. Further information is expected to be forthcoming.

Small Business Tax Rate

The Government announced its intention to lower the federal small business tax rate from 10.5% to 10% effective January 1, 2018, and to 9% effective January 1, 2019. This tax rate applies to the initial $500,000 of qualifying active business income of a Canadian-controlled private corporation.

Income Sprinkling Measures

The Government announced its intention to move forward with a simplified form of measures proposed to limit income sprinkling using private corporations. As originally announced, the tax on split income rules will introduce a reasonableness test for family members aged 18-24, as well those 25 and older. The intention of these tests will be to demonstrate an adult family member’s contribution to the business through a combination of the following four principles:

  • Labour contributions;
  • Capital or equity contributions to the business;
  • Financial risk taken on, such as co-signing a loan or other debt; and/or
  • Past contributions in respect to previous labour, capital or risks.

The Government promises to simplify the proposed measures in the draft legislation released on July 18, 2017 in order to reduce the compliance burden, better target the proposed rules and address double taxation concerns. How the rules will be simplified is yet to be seen; however, the tax on split income rules will be effective for the 2018 and subsequent taxation years.

Lifetime Capital Gains Exemption

The Government will not be moving forward with the proposed measures that prevent the multiplication of the lifetime capital gains exemption (LCGE). The originally proposed rules sought to disallow the LCGE for capital gains that accrue before the year an individual turns 18 years of age and those that accrue during the time the property was held by certain non-qualifying trusts. However, it appears capital gains may still be subject to the tax on split income rules, which may limit the LCGE claim.

Anti-surplus Stripping

The Government has also abandoned the proposed measures relating to the conversion of dividend income into capital gains. The proposed rules would have created increased taxes for intergenerational business transfers, increased taxes on private company shares held upon death, and uncertainty around capital dividend account balances.

Passive Investments

The Government announced its intention to move forward with measures to limit the deferral benefits of passive investments in private corporations while:

  • Ensuring passive investments already made by private companies, including the future income earned from such investments, are protected;
  • Protecting the ability of businesses to save the funds they need for contingencies or future investments;
  • Including a passive income threshold of $50,000 per year, below which would not be subject to an increase in tax, for future go-forward investments; and
  • Working with venture capital and angel investment sectors to ensure continued investment in the next generation of Canadian innovation.

Currently, it is unclear as to what measures will apply to track income from grandfathered passive investments and those that are subject to the new rules.  Further the scope of passive income is yet to be defined, particularly whether certain capital gains may be scoped out.

The Department of Finance intends to release the related draft legislation as part of the 2018 Budget. Any proposals will apply on a going-forward basis.

Next Steps

Significant concerns were raised during the consultation period in response to the July 18, 2017 tax proposals. The Government announced it will address the unintended consequences of these proposals and will make changes to the tax treatment of private corporations with the intention to reflect the following five guiding principles:

  • “Support small businesses and their contributions to our communities and our economy.
  • Keep taxes low for small businesses, and support owners to actively invest in their growth, create jobs, strengthen entrepreneurship and grow our economy.
  • Avoid creating unnecessary red tape for hard-working small businesses.
  • Recognize the importance of maintaining family farms, and work with Canadians to ensure we don’t affect the transfer of a family business to the next generation.
  • Conduct a gender-based analysis on the finalized proposals, to ensure any changes to the tax system promote gender equity.”

 

For more information on this proposed policy contact one of Smythe’s tax advisors here.

 

 

The activities expected from a finance department cover a wide range from basic bookkeeping  to providing information to assisting managers in making strategic decisions.  What to expect from your finance department will depend largely on factors such as how much involvement the owner/manager has in the organization.

At the base level, your bookkeeper will be responsible for all the day-to-day transactional accounting for the business.  This will include the tracking of all transactions and the management of any government reporting. In very small owner-managed businesses, this role is often filled by a family member with accounting experience. An outside accounting firm is usually used for annual financial statements and returns. In larger organizations this role will extend right through to preparing the financial statements with an external auditor engaged for assurance purposes.

To talk to one of our trusted advisors today contact us here, or continue reading below.

The finance department is also responsible for management of the organization’s cashflow and ensuring there are enough funds available to meet the day-to-day payments.  This area also encompasses the credit and collections policies for the company’s customers, to ensure the organization is paid on time, and that there is a payment policy for the company’s suppliers.  In most organizations there will be some form of forecast prepared on a regular basis to systematically calculate the ongoing cash needs.

Where there are cash needs beyond the day to day working capital, the finance department is responsible for advising and sourcing longer term financing.  Financing may be obtained though bank or private lender debt or, in applicable firms, share issues to private investors.  If the organization is ready to target angel investors or venture capitalists the finance department will be key in preparing the documents required for these presentations and may work with outside consultants on a company valuation.  In larger firms considering public share offerings the finance department will assist with the preparation of the offering documents but will likely also use outside consultants to advise on this complicated process.

With the must-do’s taken care of, the finance department can now start to contribute to the management and improvement of the operations by measuring and reporting regularly on key numbers crucial to the success of the organization.  Management accounting information is information that managers can use to monitor the operations and decide where further attention may be required.  It will likely include some non-financial information and should be communicated to managers in a way that is easy to understand.  In smaller owner-managed businesses this resource, though extremely important, is often overlooked or ignored.

Looking forward, the finance department will work with managers to prepare the organization’s budgets and forecasts, and to report back on the progress against these throughout the year.  This information can be used to plan staffing levels, asset purchases and expansions and cash needs, before they become necessary.  Some organizations often ‘plan’ by the seat of their pants, while organizations know it is important to have some idea of where you want to go before you start going there.

Finally, the finance department should be called upon to provide information to assist managers in making key strategic decisions, such as which markets or projects to pursue or the payback periods for large capital purchases.  The finance department can often contribute an objective perspective based on special financial assessment techniques.

In summary, some organizations know the finance department should be considered a resource to assist managers in the running of the business.  With the growing popularity of outsourced finance departments, it is possible for even small businesses to have access to all of the benefits of a full finance department, through part time professionals, at a fraction of the cost of employing a full time finance department.

J.A Smith & Associates

 

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