Current Issues British Columbia Tax Conference Vancouver, BC

Transcription

1 2016 British Columbia Tax Conference Vancouver, BC Current Issues Disclaimer: This material is for educational purposes only and is not intended to be advice on any particular matter. No one should act on the basis of any matter contained in these materials without considering appropriate professional advice. The presenters expressly disclaim all liability in respect of anything done or omitted to be done wholly or partly in reliance upon the contents of these materials. Deborah Graystone, CPA, CGA, TEP BDO Canada LLP, Vancouver Sam Liang, Legacy Tax + Trust Lawyers, Vancouver

2 Overview Legislative Changes Federal Budget BC Budget Other Administrative and Compliance Technical Interpretations and Rulings of Note CRA Audit and Other Initiatives Other Administrative Matters British Columbia Tax Conference

3 Legislative Changes December 7, 2015 NWMM January 15, 2016 Draft Legislation February 16, 2016 BC Budget March 22, 2016 Federal Budget April 15, 2016 Draft Legislation April 18, 2016 NWMM April 20, 2016 Bill C-15, Royal Assent June 22, 2016 July 25, 2016, BC 15% Additional Property Transfer Tax July 29, 2016 Draft Legislation British Columbia Tax Conference

4 Federal Budget (Tabled March 22, 2016) British Columbia Tax Conference

5 Small Business Tax Rate Business Taxation The budget announced that the small business tax rate will remain at the 2016 rate of 10.5% The gross-up factor and dividend tax credit rate applicable to non-eligible dividends will remain at current (2016) amounts British Columbia Tax Conference

6 Business Taxation Multiplication of the Small Business Deduction Currently there are rules that are intended to prevent the multiplication of the small business deduction (SBD) among businesses that are associated The budget proposes changes to address concerns about partnership and corporate structures that have been put in place to multiply access to the SBD These measures will generally apply to taxation years that begin on or after March 22, 2016 August 25, 2016 CBA/CPA Joint Committee submission British Columbia Tax Conference

7 Business Taxation Avoidance of the Business Limit and the Taxable Capital Limit The associated corporation rules in the ITA are relevant for applying both the $500,000 business limit and the $15 million taxable capital limit to Canadian-Controlled Private Corporations (CCPCs) The budget corrects inconsistencies in the treatment of property income received from an associated company and also the taxable capital limit of associated companies when such an election is made British Columbia Tax Conference

8 Business Taxation No Modification to Specified Investment Business Rules 2015 budget announced review of exclusion from specified investment business rules where there are more than five full-time employees Review completed, no changes will be made British Columbia Tax Conference

9 Business Taxation Life Insurance Policies - Proposed Changes Two significant changes to taxation of distributions involving life insurance proceeds and non-arm s length transfers of policies (after March 21, 2016): For non-arm s length transfers, the proceeds of disposition will be deemed to be the FMV consideration (rather than the cash surrender value) and the ACB of the policy to the purchasing private corporation Where the corporation or partnership receiving the policy benefit is not the policyholder, the CDA rules and ACB rules will apply as if the corporation or partnership receiving the policy benefit was the same person as the policyholder British Columbia Tax Conference

10 Business Taxation Eligible Capital Property Proposed Changes - Overview 2014 budget announced consultations regarding conversion of eligible capital property (ECP) into new class of depreciable property 2016 budget announced repeal of ECP regime and its replacement with new capital cost allowance (CCA) Class effective as of Jan 1, 2017 Loss of tax-deferral opportunity All businesses with cumulative eligible capital (CEC) amounts at Dec 31, 2016 will be affected British Columbia Tax Conference

11 Business Taxation Eligible Capital Property Proposed Rules Expenditures currently added to CEC will be added to new CCA Class 14.1 at 100% inclusion and deductible at 5% per year on declining-balance basis Opening balance of new CCA class at Jan 1, 2017 will be equal to existing CEC balance at that time Expenditures incurred before Jan 1, 2017 will be deductible at 7% for first 10 years Existing CCA rules will generally apply, including recapture, capital gains and depreciation (e.g. the half-year rule ) Transitional rules British Columbia Tax Conference

12 Business Taxation Eligible Capital Property - Other Rules to Simplify Transition for Small Businesses Separate business deduction for incorporation expenditures where first $3,000 will be treated as current expense rather than added to new CCA class To allow small balances incurred before 2017 to be eliminated quickly, taxpayer may deduct as CCA, the greater of $500 per year and amount otherwise deductible for that year This additional allowance will be available for tax years that end before British Columbia Tax Conference

13 S. 55(2) Changes Business Taxation The 2016 budget confirmed intention to proceed with changes with s.55(2) of the ITA relating to conversion of taxfree intercorporate dividends into taxable proceeds of disposition April 18, 2016 NWMM included changes to s.55(5)(f) replacing the taxpayer designation with an automatic rule that separates taxable dividends into two separate dividends to ensure that safe income is treated as a taxable dividend and not recharacterized as a capital gain British Columbia Tax Conference

14 Personal Tax Measures Dec 7, 2015 Draft Legislation Middle class tax rate cut 22% % Increase tax for high-income earners 33% for taxable income above $200,000 Budget contained consequential changes to ITA British Columbia Tax Conference

15 Personal Tax Measures Confirmation of Jan 15, 2016 draft legislation affecting: Deemed disposition on death of life-interest beneficiary Estate donations Stranded donation credits British Columbia Tax Conference

16 Personal Tax Measures Donation of private corporation shares and real estate budget proposals axed New Canada Child Benefit introduced Elimination of income splitting tax credit Reinstatement of LSVCC tax credit Elimination of education and textbook tax credits Phase out of children s fitness and arts tax credit Extension of Mineral exploration tax credit for flowthrough shares British Columbia Tax Conference

17 Personal Tax Measures Taxation of Switch Fund Shares Many mutual fund corporations are organized as switch funds Currently, investors able to exchange shares of one class of the mutual fund corporation for shares of another class without triggering a disposition for income tax purposes Budget proposes to deem such exchanges to be dispositions for tax purposes, except for certain switches between different series of shares within the same class Will apply to dispositions of shares after British Columbia Tax Conference

18 International Tax Measures Extension of back-to-back rules Country-By-Country Reporting (CbCR) Canadian parent entities of multinationals with consolidated revenues of approximately CAN $1 billion or more Revised transfer pricing guidelines Spontaneous exchange of tax rulings Common Reporting Standard British Columbia Tax Conference

19 Sales and Excise Tax Measures Closely Related Elections CRA Policy Statement P-255: Late-filed Section 156 Elections and Revocations (ETA 156, Form 4616) CRA may accept late-filed election or revocation when: Requests made in writing with clear explanation of why late Considered on a case by case basis Acceptance does not constitute confirmation that election is valid. CRA may audit and later assess GST/HST on supplies between non-qualifying members British Columbia Tax Conference

20 BC Budget No changes to provincial corporate tax rates (2.5% small business, 11% general) Two-year temporary increase in top personal marginal rate expired December 31, top personal marginal rates: Interest and regular income 47.70% Capital gains 23.85% Eligible dividends 31.30% Non-eligible dividends 40.61% British Columbia Tax Conference

21 BC Property Transfer Tax PTT exemption for newly constructed homes up to $750,000 Addition of third tier PTT rate of 3% for FMV of property exceeding $2,000,000 Authorization to collect additional information on transferees (purchasers) for registered transfers August 2, 2016 additional 15% PTT on registered transfers where the purchaser is a non-resident (potential maximum rate of 18%) British Columbia Tax Conference

22 Administrative and Compliance Technical Interpretations / Rulings of Note CRA Audit Initiatives Other Administrative Matters British Columbia Tax Conference

23 Technical Interpretations and Rulings of Note Several recent s. 55(2) TI s outline CRA s views on: Creditor proofing dividends Surplus stripping Safe income allocation to discretionary dividend shares Purpose tests British Columbia Tax Conference

24 Technical Interpretations and Rulings of Note STEP Canada / CRA Roundtable - June 2016 Many of the issues concern the technical aspects relating to implementation of the new estates and trusts legislation: Graduated rate estates (GRE) and transfers to testamentary trusts GRE s and multiple wills Distribution from inter vivos trust to GRE Qualified Disability Trust and Preferred Beneficiary Election Capital loss carry back and late-filed subsection 104(13.2) designation British Columbia Tax Conference

25 Technical Interpretations and Rulings of Note Support for U.S. Foreign Tax Credit (FTC) Claims CRA administrative change now requires taxpayers to provide transcripts from IRS supporting their claim. Meeting this requirement is quite problematic. Per CRA: Where taxpayer unable to provide notice of assessment or equivalent from foreign government to support tax paid, CRA will accept other forms of proof of payment or refund May include bank statements, cancelled cheques Document must show: amount of tax paid, date paid, relevant tax year, and identify applicable foreign government British Columbia Tax Conference

26 Technical Interpretations and Rulings of Note Filing Obligation for 75(2) Trust Holding Non-Income Producing Property CRA asked to comment on whether reversionary trust is required to file T3 return for taxation year regardless of whether tax payable or whether property subject to s.75(2) earns income or profits or generates capital gain. CRA believes subsection 204(1) of Regulations requires T3 return for trust with property subject to s.75(2) If trust did not generate income, profit or capital gain then no T3 return required to be filed British Columbia Tax Conference

27 Technical Interpretations and Rulings of Note Trust and Estate Issues - Update on recent rulings that CRA considers relevant to trusts and estates Three recent interpretations of note per CRA: Normal reassessment periods of T1135 and T1 return tied together Election available to trust to remit tax in 10 equal instalments where deemed disposition arises on resource properties (s. 104(5.2)), with proper security S. 70(6) rollover would not apply to transfer where estate executor disposes of assets and subsequently transfers proceeds or substituted property to spousal trust British Columbia Tax Conference

28 Technical Interpretations and Rulings of Note Post-Mortem Pipeline Update Background Pipeline planning used to avoid double taxation of surplus Planning may consider dividend versus capital gains rates CRA concerns with surplus stripping Position tax policy to the effect that any distribution by a corporation must be made by way of a dividend However, CRA currently allows extraction of surplus as a gain, for example, with acceptable pipeline planning British Columbia Tax Conference

29 Technical Interpretations and Rulings of Note Post-Mortem Planning Several favourable rulings have now been issued. Various fact patterns considered, but certain items are consistent: All had investment holding companies at time of death Original corporation held for a period of at least one year post death and was not amalgamated with the pipeline corporation for at least one year after death The same mix and value of the assets that the corporation had at the time of death was maintained Assets not distributed to the shareholders for at least one year, followed by progressive distribution of the assets over an additional period of time British Columbia Tax Conference

30 Technical Interpretations and Rulings of Note CRA Position on US LLLPs and LLPs CRA announced in May 2016 its view that US LLLPs and LLPs are corporations for Canadian tax purposes Transitional relief: LLLP or LLP formed and carried on business before July 2016 Was intended the LLLP or LLP to be classified as a partnership for Canadian tax purposes; LLLP or LLP and each of its owners has treated the entity as a partnership for Canadian tax purposes and LLLP or LLP converts to an entity that the CRA recognizes as a partnership no later than British Columbia Tax Conference

31 Technical Interpretations and Rulings of Note CRA position on US LLLPs and LLPs Where classified as a partnership for Canadian tax purposes timing of Canadian and US taxation the same Where classified as a corporation, and investor is a Canadian individual minority investor: Timing of Canadian taxation is dependent on distributions from U.S. entity Increased overall tax cost i.e. due to restrictions on FTCs Losses trapped British Columbia Tax Conference

32 Technical Interpretations and Rulings of Note CRA position on US LLLPs and LLPs Where classified as a corporation, and investor is a Canadian corporation consequences could include: Loss of treaty benefits Timing of income inclusion U.S. entity may be a foreign affiliate or controlled foreign affiliate U.S. entity may not have stated capital Missed filing form T1134 Upstream loan rules may apply British Columbia Tax Conference

33 CRA Audit Initiatives Revised Focus on SME Audits CRA has changed their focus in terms of SME audits overall, taking more of a risk based approach Previously, CRA had focused their SME methodology on organizations with $25 million or less of revenue Threshold for the SME approach is now $250 million or less British Columbia Tax Conference

34 CRA Audit Initiatives Revised Focus on SME Audits Letter writing campaign sending letters to individuals in areas or with attributes considered to be higher risk Making use of taxpayer statistics goal here will be to compare specific taxpayer statistics to that of larger groups to identify anomalies Underground economy (UE) CRA has been conducting more meetings with a UE advisory group Main result so far is that those in sectors where the UE is a concern can expect more frequent audits British Columbia Tax Conference

35 CRA Audit Initiatives Revised Focus on SME Audits CRA will focus more on indirect verification of income (IVI) techniques For most businesses the CRA will assume that the corporation does not have adequate internal controls to prevent the occurrence of unreported income IVI could involve: Net worth statements Auditing unidentified bank deposits Assessments based on projections British Columbia Tax Conference

36 CRA Audit Initiatives Foreign real estate investment activity and unreported income Taxable benefit projects Charitable political activities audit program shut down Mandatory Efiling penalties - education letters British Columbia Tax Conference

37 CRA Audit Initiatives Common GST Audit Issues: Refund integrity audits Holdco ITC s - ETA British Columbia Tax Conference

38 Other Administrative Matters T1135 Foreign Income Verification Statement 2015 Federal Budget proposed simplified reporting for taxpayers holding less than $250,000 of specified foreign property (SFP) Revised T1135 released Two-tier information reporting structure 2015 version of form is required for taxation years ending after 2014 CRA will accept new version of the form for previous years Individuals can file electronically British Columbia Tax Conference

39 Other Administrative Matters CRA E-Services RC59 redesign coming May 2017 RC59 EFile using corporation tax software October 2017 CRA developing future web app for small businesses British Columbia Tax Conference

40 Other Administrative Matters T2 Schedule 89 Capital Dividend Account Phase 1 standardized form for CDA balance requests (T2sch89) Phase 2 display of CDA balance on MyBA (May 2017) Phase 3 electronic filing of CDA balance verification request British Columbia Tax Conference

41 What Will the Future Bring? Tax Gap Estimation study Tax Expenditure study Continued focus on off-shore tax evasion Offshore Compliance Advisory Committee British Columbia Tax Conference