As we approach the end of another year, there are a number of changes coming that will affect many of us. I have already written about the changes to the small business deduction rules and the rules related to inter-corporate dividends found in Section 55 of the Income Tax Act.
Year End Issues
The following issues need to be considered prior to the end of the calendar year.
Land Transfer Tax
As anyone who has every purchased real estate knows, one of the closing costs often overlooked until the last minute is the Land Transfer Tax (LTT) imposed by the provincial government on any transfer of real estate.
Currently the Ontario LTT is:
*0.5% up to and including $55,000
*1% above $55,000 up to and including $250,000
*1.5% above $250,000
*2% above $400,000 where the land contains one or two single family residences.
The land transfer tax rate is the same for residents and non-residents of Canada.
In Toronto, there is also a Municipal Land Transfer Tax imposed on a purchaser.
For first time home buyers there is a rebate of LTT, currently $2,000.
As of January 1st, 2017, the Ontario LTT rates are going up. For purchases closing after 2016, the LTT for any property, other than properties that contain one or two single-family residences, will be increased to 2% from 1.5% for the portion of the purchase price above $400,000. The LTT on properties that contain one or two single-family residences will remain at 2% for the portion of the consideration between $400,000 and $2 million and will be increased to 2.5% for the portion of the consideration that exceeds $2 million.
The new rates will apply to all property transfers unless the transfer is made under a purchase agreement dated on or before November 14, 2016.
The province also proposes to double the first time home buyers rebate to $4,000, which would wipe out the LTT on qualifying purchases up to $368,000. The Toronto Municipal LTT is, so far, not affected.
For purchasers of property, especially large commercial property, unless the Agreement was entered into before November 14th, there is a big incentive to close before the end of the year.
Changes to Eligible Capital Property Rules
The 2016 Federal Budget introduced changes to the tax regime for eligible capital property (ECP) - generally intangible property such as goodwill, patents, trademarks, etc. The changes will be effective January 1st, 2017.
Under the current rules, 50% of the gain from the sale of ECP is taxed as active business income. The tax rate on active business income for a Canadian Controlled Private Corporation (CCPC) is 15% on the first $500,000 of income. The other 50% of the proceeds can be distributed tax-free to shareholders as capital dividends.
The new rules will repeal the ECP regime. In its place, a new capital cost allowance (CCA) class, Class 14.1, will be introduced. Class 14.1 will include goodwill and other intangible property that would previously have qualified as ECP under the current rules. Gains from the sale of CCPCs' assets belonging to Class 14.1 will be taxed as capital gains (one-half of which is taxable) and thus subject to investment income tax rates. Investment income of a CCPC is taxed at 50.17%, including refundable taxes that will be refunded only when taxable dividends are paid to the shareholders. The other 50% of the proceeds can still be distributed tax-free to shareholders as capital dividends.
For all CCPCs that have a large pool of ECP, consideration should be given to selling that property, even if it is an internal sale, before the end of the year in order to take advantage of the large increase in taxes that will apply after 2016.
I would be happy to assist in the planning to effect such sales prior to the end of the year.
Gifts to Employees - T'is the Season
As we approach the holiday season, it is important to note the Canada Revenue Agency (CRA) administrative policy regarding non-cash gifts to employees. Years ago the CRA policy was that one non-cash gift per year could be given to an employee on a non-taxable basis, as long as the gift had a value of less than $100.00 and the employer could not deduct the value of the gift. This changed effective 2001.
Employers can give their employees up to two non-cash gifts per year, on a tax-free basis, for special occasions such as Christmas, Hanukkah, birthdays, and marriages. As long as the total cost of the gifts to the employer, including taxes, is not more than $500 per year, the employer can deduct the cost of the gifts, even though the employee is not taxable on the value of the gift.
This does not apply to cash or near-cash gifts and awards. The value of such gifts and awards will be considered a taxable employment benefit. Near-cash gifts and awards may include such things as gift certificates, gift cards, or any items that can easily be converted to cash.
Where the cost of the gift or gifts (maximum of two) exceeds $500, the full fair-market value of the gift(s) will be included in the employee's income. There is no exemption for the first $500. If the cost of the gift exceeds the $500 limit, the gifts are deemed to form part of the employee's remuneration package.
For employers who want to give employees gifts at this time of year, as opposed to cash bonuses, the benefit of being able to deduct the value of the gifts while allowing the employees to receive the gifts tax free can be significant.
There are other important rule changes, of which I will write in the next couple of weeks. They will impact future years, and filings for 2016, but do not need to be acted upon before the end of the year.
I hope everyone has a wonderful holiday season and a happy and healthy new year.