The Underused Housing Tax (“UHT”) is a new Federal tax of 1% on the value of vacant or underused housing in Canada thattook effect on January 1, 2022. In reading that first line, you probably think this doesn’t apply to you. Think again. Think of penalties of $5,000 for individuals and $10,000 for corporations.
Contact your Padgett advisor to discuss your situation.
There are many situations where there will be an exemption from this 1% tax, but you’d still be required to file the new UHT annual return (UHT-2900) or be assessed those penalties. We’ve heard of many cases in the past where people have been assessed a $1,500 penalty for not filing a T1135 form reporting their foreign assets, even though they declared all the income on those foreign assets. So don’t assume CRA won’t assess those penalties, just because you qualify for an exemption from this tax. There are many details about this new tax and its exemptions.
Here are a few key points to consider:
Only residential properties are affected – detached or semi-detached homes that contain 3 dwelling units or less; a townhouse; a condo; duplexes and triplexes.
Canadian citizens and permanent residents qualify for an exemption from the 1% tax and filing of the annual return – but this exemption doesn’t apply if you are a partner of a partnership, or a trustee (other than a personal representative for a deceased taxpayer).
There’s no exemption from filing the return for private corporations.
Don’t confuse this tax with other “vacancy” taxes on residential properties that are provincial or municipal-based. This is a federal tax.
There is no time limit for the CRA to assess the UHT, penalties, and interest. The first UHT return is due on April 30th, 2023, for residential properties held as of December 31, 2022.
RRSP Contributions March 1, 2023, is the deadline to make RRSP contributions to be eligible for a deduction in your 2022 personal tax return. Contributions made after this date will not be deductible against 2022 income. The contribution limit for 2022 is $29,210 although this may be less if you have an employer-provided pension plan or deferred profit-sharing plan. Your overall contribution room may also be reduced if you overcontributed in prior years, or higher if you haven’t maximized your past years’ RRSP contributions. There is only a $2,000 margin for overcontribution errors. Beyond this amount, you will have to pay a 1% per month penalty tax on overcontributions. You should review your RRSP contribution room on the Notice of Assessment for your 2021 tax year issued to you by the Canada Revenue Agency (“CRA”).
TFSA Limit The Tax-Free Savings Account limit was increased to $6,500 for 2023. Be sure to track your TFSA contributions since there are penalties for overcontributions and there’s no margin for error like with the RRSP. Although CRA does keep track of your TFSA contribution room, information on contributions you make to your TFSA is not automatically uploaded to CRA by your financial institution. The CRA receives this information only annually and it takes time for CRA to process this information. So be careful of this timing delay if you are verifying your TFSA contribution room through the CRA portal “My Account”.
First-time home buyers tax credit – also known as the Home Buyers Amount. This credit will be doubled from $5,000 to $10,000 as of 2022. At a 15% tax credit rate, this translates into $1,500 of tax savings for qualifying home buyers. You are a “first-time” home buyer if neither you nor your spouse/common-law partner, owned a home in the year you bought the new home, nor in any of the previous 4 calendar years. If you have a disability, you might not have to be a “first-time” home buyer to qualify if the reason for the new home purchase is to live in a home that is more accessible and suited to your needs. Be sure to advise your Padgett advisor if you bought a home in 2022 and you think you may qualify. Also, be sure you’ve advised CRA of your change of address.
Home Accessibility Credit – this credit has also doubled. The amount of expenses eligible for credit for 2022 has increased from $10,000 to $20,000. At the 15% tax credit rate, this converts to $3,000 of tax savings on eligible expenses. This credit is to assist individuals to gain access to, or to be more mobile or functional in their dwelling, or reduce their risks related thereto. Modifications will generally qualify if the individual qualifies for the disability tax credit or is 65 years or older.
These expenses can be paid on behalf of yourself, or in some cases for certain dependents. The expenses should be of an enduring nature and integrated into the home. In general, if the item purchased will not become a permanent part of the home, it is not eligible. Of course, detailed invoices, agreements, and receipts need to be kept should the CRA want to verify the claim. The expenses will not be reduced by any federal or provincial government assistance provided. Examples of qualified renovations include grab bars and handrails, walk-in bathtubs or wheel-in showers, wheelchair ramps, widening doorways for wheelchair accessibility, or lowering existing counters and cupboards among others. The expenditures may also qualify for the medical expense tax credit, and some provincial credits as well (British Colombia, Ontario, New Brunswick, and to a lesser extent Quebec) – a potential double or triple claim.
Multi-Generation Home Renovation Tax Credit – this is a new tax credit effective January 1, 2023. Its purpose is to help taxpayers to care for adult relatives in their own homes by providing some tax relief on expenses incurred to build a secondary suite for the family member who is a senior, or an adult who has a disability, to move into. The secondary suite must be a self-contained housing unit that has a private entrance, kitchen, bathroom, and sleeping area. Additionally, the home being renovated must be inhabited or reasonably expected to be inhabited within 12 months after the end of the renovations. Routine repairs, appliances, electronic home-entertainment systems, security monitoring, housekeeping, and interest costs relating to the renovation won’t qualify for the credit. The tax credit is 15% of the expenses, a maximum of $50,000, which works out to a maximum credit of $7,500. The credit is also refundable. This means that if the tax credit is more than your taxes payable, you will get a refund.
In Budget 2022, the federal government proposed the Tax-Free First Home Savings Account (FHSA). The most recent draft legislation has proposed April 1, 2023 as an effective date. Here is a summary of this new registered plan which is based upon the draft legislation to date:
The FHSA gives prospective first-time home buyers the ability to save $40,000 on a tax-free basis. It’s a bit of a hybrid between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Contributions would be tax-deductible like an RRSP, and withdrawals to purchase a first home – including the investment income earned in the plan – would be non-taxable, like a TFSA.
To open a FHSA, you must be a Canadian resident who is 18 years of age or older. In addition, you must be a first-time home buyer. This means neither you nor your spouse has owned a home in which you lived in the year the account is opened or in the preceding four calendar years.
The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. You can claim an income tax deduction for contributions made in a given year. Unlike RRSPs, contributions made within the first 60 days of a given year could not be attributed to the previous tax year. However, like RRSPs, you aren’t required to claim the deduction right away. Instead, you can carryforward non-deducted contributions and claim them in a later year if you are expecting to be in a higher tax bracket in the future.
You are allowed to carry forward unused portions of your annual contribution limit but only up to a maximum of $8,000. For example, if you contributed $5,000 to a FHSA in 2023 you would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). So, unlike a RRSP and a TFSA, unused contribution room of prior years doesn’t carryforward except for a maximum amount of $8 000.
The FHSA can remain open for up to 15 years. So there needs to be some consideration as to when the FHSA should be opened to start saving. Starting too young may mean the account has to be closed before a home is purchased. However, any savings in the FHSA not used to buy a qualifying home can be transferred on a tax-free basis into an RRSP. It can also be withdrawn on a taxable basis. If transferred to a RRSP, it would not reduce the RRSP contribution room.
One of the more recent changes made to the draft legislation is that you can now use both the FHSA and the Home Buyer’s Plan (HBP). The HBP provides for a tax-free withdrawal from your RRSP, up to $35 000, but the amount must be repaid into the RRSP in equal annual instalments over 15 years. Otherwise, the unpaid instalment amount is included in your taxable income for that year. The goal is to provide some cashflow for first time home buyers and eventually replenish the RRSP to continue the non-taxed investment growth to save for retirement. With the FHSA, you can preserve your RRSP contribution room and contribute to the FHSA instead. Plus, unlike the HBP, the FHSA withdrawals don’t need to be repaid to avoid taxation, so that’s more tax advantageous.
Using both the HBP and the FHSA will provide a total of $75 000 of capital, plus the growth on the funds contributed to the FHSA.
It’s also possible to transfer money from the RRSP on a tax-free basis to the FHSA subject to the annual contribution limits. Since those RRSP contributions were deducted for tax savings when contributed, you won’t get a deduction on the transfer to the FHSA. The advantage is that the withdrawal will be tax free, but without the requirement to repay it as with the HBP. That’s good on cashflow, but not great for saving for retirement as the RRSP doesn’t get replenished and the RRSP contribution room isn’t reinstated for the amount transferred to the FHSA.
Bottom line, the FHSA provides some additional tax advantages and flexibility, but some tax planning relative to your specific case may be needed.
Self-employed Contractors – both payer and payee beware!
Whether a worker is considered self-employed, or an employee can be a grey area. However, the distinction is important. A self-employed person is in business for themselves and has a level of independence from the payer. They have a risk of profit or loss. These are only a few of the facts to be considered in determining employment or self-employment status. If a business engages a self-employed person to provide services and the CRA determines that the self-employed person is really an employee of the payer, then the self-employed person is denied certain business expenses they may have deducted on their personal tax return. This is because the employees are more limited in the types of expenses they can claim as a deduction in their personal tax return compared to self-employed persons.
In addition, the payer will be liable for CPP and EI contributions that were not withheld from the payment for employment services. The payer will often protect themselves from this risk by requiring service providers to incorporate their business. Should the CRA conclude that the workers were, in fact, not independent contractors, the corporation cannot be considered an employee and the payer is protected from paying CPP and EI contributions on the payments. Sometimes the service provider wants to incorporate to benefit from a special lower corporate tax rate on small business income. However, this can be detrimental if the CRA determines the service provider is just an “incorporated employee”, called a “personal services business” in tax jargon.
The payer is protected from any negative tax consequences in this situation. It is the incorporated service provider who will bear the negative tax consequences such as a punitive corporate tax rate compared to typical small businesses, and the denial of almost all business expenses. As several years can be reassessed by CRA at one time, with interest charges, this can be very costly. CRA is in the process of running an “educational campaign” on this issue by sending out letters from June to December 2022 to taxpayers in certain industries, requesting information about their payer/payee relationships. Participation is voluntary. If you receive one of these letters, you are not under audit.
However, in the past CRA has conducted audit projects to review payer/payee relationships in certain industries and issued tax assessments as a result. So, this may be an indication that CRA is going to undertake an audit project in the future. Or, the information obtained from some self-employed persons who wish to be considered employees, may be used by CRA to reassess the payer for EI and CPP withholdings. CRA does evaluate the facts of each case given specific criteria. So, whether you are the payer or the payee, now is a good time to re-evaluate with your Padgett advisor if your current working relationships are properly categorized and documented.
New Trust Reporting Requirements
New trust reporting requirements that the government intended to apply last year, will now apply for tax years ending as of December 31, 2022. One of the more significant changes is that bare trusts will be subject to the new reporting requirements. Previously only trusts that had taxes payable, or disposed of an asset, were required to file a tax return. Now, even if a trust has no income or did not make any distributions to beneficiaries, it may be required to file a return. So, if you have a trust that previously was not required to file a return, you should consider whether you now have a filing requirement. There are penalties for filing late. There are exceptions to these rules, the most common being graduated rate estate returns, qualified disability trusts, or trusts that have been in existence for less than 3 months.
Other significant changes are the new requirements to disclose the following information: • The names, address, date of birth, jurisdiction of residence, and taxpayer identification number (SIN, BN, foreign TIN) for each: o trustee o beneficiary o settlor o any person who can exert influence over trustee decisions While these new and revised rules have not been finalized into law yet, it is expected to be finalized before year end. Since it may take time to collect information for the additional disclosure requirements, you should consider these new changes well before the filing deadline of March 31, 2023.
Income splitting is a term used to describe a method of shifting income from a higher income earner to a lower income earner. In the case of spouses, it is possible to achieve income splitting using a “prescribed rate loan”. The loan needs to be properly documented in a loan agreement. The lower income spouse borrows the funds and invests them. For tax purposes, it is important that the loan carries interest at the prescribed rate. It is the prescribed rate at the time the loan is set up that will be “locked in” for the duration of the loan, regardless of future prescribed rate increases. The lower income spouse needs to pay the interest on the loan annually to the higher income spouse, no later than January 30th. If this deadline is missed, even once, the loan becomes “offside” and for tax purposes, all the investment income would be taxed in the hands of the higher income spouse. Therefore, it is important to keep proof that the interest payments were made.
The prescribed interest rate increased from 1% to 2% on July 1st, 2022 and is set to increase to 3% on October 1st, 2022. This means that the benefit of income splitting using “prescribed rate loans” will be mitigated for loans established after September 30th, 2022. If you wish to take advantage of this tax planning, the loan and documentation must be set up by September 30th 2022.
Business Investment Losses
A loss on an investment in a company you own or made in another person’s small business can qualify for some advantageous tax rules to help ease the impact on your finances. Whether the investment was in shares or a loan to a small business it may qualify for a full deduction against your personal income.
Typically, only half of an investment loss would be deducted and only against investment capital gains. The ability to deduct these business investment losses against any type of personal income can reduce income taxes for the year by a substantial amount. It’s important that the nature of the investment be properly analyzed to ensure it meets the criteria. Many small businesses will meet the criteria.
Furthermore, if the loss exceeds your income for the year, it is possible to carryback the loss against income you earned in the three previous years or carry them forward to apply against future income.
The Canada Revenue Agency will typically ask for some documents to support your claim. If this unfortunate situation has impacted you, consult with your Padgett advisor to make sure that you can at least minimize your income taxes. Your Padgett advisor can also help you determine if the loss can be claimed even though the investment still exists, but the likelihood of recovery is very low.
Should You Incorporate Your Business?
If you own a business, you may have wondered if you should incorporate. Historically the income tax system in Canada has benefited incorporated Canadian small businesses. Although the income and deduction calculations are almost identical to an unincorporated business, the major differences are in the corporate taxation structure and tax planning opportunities. When developing the tax plan for your business, you and your advisor should look for opportunities in the following areas:
Income splitting with family members;
Tax deferral to the future;
Estate planning for you and your family;
Utilization of the capital gains exemption; and
Planning your retirement, including disposing of your business.
Since personal and corporate tax as well as family law issues can make this issue complex, please contact our office to discuss your situation.
This information originally appeared on https://smallbizpros.ca/
To encourage small businesses to invest in better ventilation and air filtration to improve indoor air quality, the Federal government introduced a temporary Small Businesses Air Quality Improvement Tax Credit. This refundable tax credit would be available in respect of qualifying expenditures attributable to air quality improvements in qualifying locations incurred between September 1, 2021 and December 31, 2022.
Tax Credit Rate and Limits
The tax credit would be refundable and have a credit rate of 25 per cent of the qualifying expenditures. There is a maximum of $10,000 in qualifying expenditures per location and a maximum of $50,000 overall (total locations and for the entire program). The limits on qualifying expenditures would need to be shared among affiliated businesses.
Who is Eligible?
sole proprietors
Canadian-controlled private corporations (“CCPCs”) with taxable capital of less than $15 million in the taxation year immediately preceding the taxation year in which the qualifying expenditure is incurred. For this purpose, the taxable capital of associated corporations is also counted.
partnerships. The credit would be claimed by members of the partnership that are CCPCs or individuals (other than trusts) and would be based on their proportionate interest in the partnership.
Qualifying Expenditures
Qualifying expenditures would include:
expenses directly attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation and air conditioning (HVAC) systems, as well as the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters, the primary purpose of which is to increase outdoor air intake or to improve air cleaning or air filtration.
expenses attributable to an HVAC system would only be considered qualifying expenditures if the system is
designed to filter air at a rate in excess of a minimum efficiency reporting value (MERV) of 8; or
designed to filter air at a rate equal to MERV 8 and to achieve an outdoor air supply rate in excess of what is required for the space by relevant building codes. For a system that is upgraded or converted, prior to the improvement the system must have been designed to filter air at a rate equal to MERV 8.
Qualifying expenditures would exclude an expense:
made or incurred under the terms of an agreement entered into before September 1, 2021
related to recurring or routine repair and maintenance;
for financing costs in respect of a qualifying expenditure;
that is paid to a party with which the eligible entity does not deal at arm’s length;
that is salary or wages paid to an employee of the eligible entity
An expense that may be considered a qualifying expenditure would be reduced by the amount of any government assistance received by the eligible entity in respect of that expense.
Qualifying Locations
Qualifying locations generally mean real or immovable property used in the course of ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments (i.e., a place of residence in which a person generally sleeps or eats).
Timing
The tax credit would be available in respect of qualifying expenditures incurred between September 1, 2021 and December 31, 2022.
The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred:
Qualifying expenditures incurred before January 1, 2022 would be claimed in the first taxation year that ends on or after January 1, 2022. For example, a sole proprietor or individual member of a partnership would be able to make a claim in their 2022 tax return. A CCPC could make the claim in its first taxation year that ends after January 1, 2022.
Qualifying expenditures incurred on or after January 1, 2022 would be claimed as normal in the taxation year in which the expenditure was incurred.
About Padgett
The team at Padgett is committed to being a trusted partner, allowing your business to prosper and grow. We’re an accounting firm with a national network of offices that will work closely with you in the areas of accounting, tax planning and preparation, payroll, compliance and business advisory services. Our name is backed by a proven track record of success that spans more than 50 years and is fueled by a national network of accountants and tax professionals. This article originally appeared on https://smallbizpros.ca/
According to a recent report by the Chartered Professional Accountants of Canada, our tax system has been described as “outdated” and “overly complex”. The nature of how we’ve designed it has meant negative consequences on both taxpayers and business owners.
There’s no disputing that Canada’s tax system sometimes seems to be endlessly complex. Some have argued the tax system does not do enough to help businesses grow, while others will demonstrate there’s a lack of compliance with the tax system among corporate clients. In an effort to deliver maximum social benefit, the government has focused on tax expenditures – something which the CPA has criticized for the complexity it adds in.
It’s been years since the CPA first requested a comprehensive review of Canada’s tax systems. Countless other organizations have followed suit with their own requests, including the CD Howe Institute, the OECD, and our Senate’s own finance committee.
In the CPA Canada report, they maintain the more complex the system is, the more this is shutting out low-income Canadians from benefiting from certain income supports. Subsequently, it also challenges small business owners with ever-changing conditions that they must comply with. If the report’s to be believed, the ultimate result of our complex tax system is a loss of competitive edge in personal and corporate taxes, and discouraging foreign investment.
The tax system has been one of several systems wherein there’s constant battle between business/corporate interests and that of the general population. On one hand, the lower and more simple the tax rate is, the more jobs that can be created, the more investment Canada can attract from foreign stakeholders, and the more competitive we can be among companies selecting between us and United States for headquarters, manufacturing facilities, and more.
On the other hand, there’s been call to grant Canadians more income supports to combat rising inequality, to incentivize education in an attempt to motivate labor force growth, and more.
Can all interests be satisfied in our tax system – in some cases, yes and in other cases, definitely not. This is why low-income and vulnerable Canadians do not have enough income supports while simultaneously Canada has lost its corporate tax advantage compared to the US and elsewhere where rates have fallen.
Tax = government income. When one lowers the tax rate, they lower the income the government has to use to provide services and make investments. Canada’s been hesitate to lower the corporate tax rate at the same intensity of similar countries because we don’t want to lose that income.
Beyond these issues, there’s also the complexity of the tax system which needs to be highlighted. When a small business owner or everyday Canadian is unclear on how to file, what they can claim as expenses, or what they’re eligible for, risk of non-compliance rises. Aligning ourselves with the CPA Canada report, we believe there’s an unreasonable level of complexity as it pertains to Canada’s income tax, GST/HST, and corporate tax systems. It is an imperative that we fix our tax system, not only to allow our business environment to remain competitive internationally but to help everyday Canadians receive the tax support they are eligible for.
As years come and go, with them comes new tax laws. For everyday Canadians, business owners and independent contractors, you may see some noticeable differences with your tax rate and what you can claim this year. For example, the small business corporate tax rate has been reduced to 10 percent in 2018 and will go down again to 9 percent come next year. Counting down some of the other major tax changes you may have heard about, here are a few things to look at.
New EI parental sharing benefits.
When both parents agree to share a parental leave, they are now able to claim an additional five weeks of benefits. This was added to 2018’s budget as a supplemental parental sharing benefit.
Eliminating the home relocation loan.
For the first time, no longer can you claim home relocation loans deductions for this year and any year to come.
Higher rates for accelerated capital cost allowance.
For Canadian business owners claiming CCA, they are now able to tap into what’s called ‘accelerated investment incentive’. This provides business owners 150 percent of their normal CCA rate which can be claimed in the year of purchase. Previously, the amount one could claim in the year of purchase was subject to a half-year rule. Simply put, what these business owners can claim has just tripled.
Pension splitting for veterans.
Retirement income security benefits received by veterans are now eligible for pension income splitting. A great detail of this is it’s retroactive to 2015 as well. The amount split is subject to a cap of $103,056 for 2018’s tax return.
‘Working while on claim’ rules.
Working while on claim rules now apply to sickness and maternal benefits. If you’re on maternity and you decide you want to return to work before your EI benefits are set to end, an adjustment needs to be made. Normally, a claimant is permitted to receive 55 percent of their weekly salaries for EI benefits. When they return to work, 50 cents from every dollar they earn must be subtracted. The amount they end up with is subtracted from overall EI benefits.
More medical expenses you can claim.
A taxpayer who has severe mental impairments are now allowed to claim the cost of animal care for a service animal. If you’re animal has not been specially trained however, they’re not eligible.
Climate action incentive.
Residents in New Brunswick, Ontario, Manitoba, and Saskatchewan are now eligible for a tax credit called the ‘Climate Action Incentive’. The average household is eligible for the following: $248 in NB, $300 in Ontario, $336 in Manitoba, and $598 in Saskatchewan. Clients living in rural areas may be eligible for up to 10 percent more than people living in cities, as rural households are likely to use more energy and don’t have the same public transportation options to reduce fuel consumption.
Canada Workers Benefit.
Formerly known as the ‘Working Income Tax Benefit’, the Canada Workers Benefit incentivizes participation in the workforce among low-income individuals. Amounts have increased this year to a maximum benefit of $1,355 to single individuals without children and $2,335 for eligible families.
