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In 2017, new rules were introduced limiting the use of income splitting which allowed people the ability to income split with family members. The new rules were called Tax on Split Income (‘TOSI”). TOSI applies to situations where a family member has not contributed or worked in a family business and is applicable depending on age. For family members under 18, income splitting is restricted. The rules are less restrictive to family members 18-24 years old and less restrictive still for family members over 24 years old. There is also a special exclusion for those whose spouse is 65 years or older and was active in the business.
The details of the rules are beyond the scope of this article. However, we would like to highlight one corporate structure that has unexpectedly been caught in these rules: a structure where an operating company is owned by a holding company, the holding company is owned by an owner/operator and his/her spouse and adult children (over 25 years old), and the family members are not active in the business.
There is a special exclusion from TOSI dividends known as “Excluded Shares”. Excluded shares are defined as a corporation that is owned by the taxpayer where the following conditions are met:
The rules state that even if the 10% shareholding test is met, holding companies do not meet the test of Excluded Shares for a few reasons.
Firstly, they earn no business income. As per “b” above, it states that less than 90% of the business income is from the provision of services. CRA interprets this to mean that the corporation must have business income in the first place and that 90% of that business income is not from services. If a holding company only earns dividends from its subsidiary and/or investment income on its assets, it earns no business income and will therefore not qualify as an excluded share.
If the Holdco earns fees from the operating company so as to earn business income, the test in “d” would be a problem. The business income must come from a non-related business.
Bottom line is that having a holding company can be a problem to avoiding TOSI. Seek the advice of your advisor to determine your exposure to TOSI and tax planning options.
Contributed by Howard Wasserman, CPA, CA, CFP, TEP from Segal GCSE LLP, Toronto. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.
This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
Separation and divorce are becoming more and more common in our society. It is important to consult and include your accountant in your divorce or separation proceedings since there are important financial and tax considerations that must be considered. Failing to do so may result in either an immediate tax burden or one that will appear a few years later.
Here are important issues to discuss with your accountant:
Spousal and Child Support and two separate forms of support. The first is paid to support the spouse and the other for the children as the wording implies. It is important to itemize your Separation Agreement to distinguish both child and spousal support. This is because spousal support is considered a tax deduction to the payor (the person actually paying the other spouse), and taxable income to the payee (the spouse receiving the support). Child support, however, does not have any tax ramifications.
Also, the tax implications may differ for both parties if an amount is paid on a periodic basis or as one lump-sum.
Your accountant can advise you on how to structure your support.
CCB is calculated based on the adjusted family net income. Therefore, both parents’ income is considered by the Canada Revenue Agency (“CRA”) to calculate the CCB.
In the event of a divorce or a separation of more than 90 days, it will be important to advise CRA as soon as possible of the change in marital status which will change the adjusted family net income and therefore change the CCB payments.
In order to be able to balance your budget post-separation or divorce, you should consult with your accountant to determine what each parent will be receiving in CCB.
When a couple is negotiating a possible sale of their former family residence during their divorce proceedings, they may need to consider capital gains tax following the sale. Different factors must be considered, such as when the home was purchased, and how much equity the parties have accumulated in the property since they have lived there. Your accountant should be able to advise you regarding whether or not you need to be concerned with capital gains tax and what you can do to plan around it.
Many times, one spouse intends to cash out their retirement account in order to buy another spouse out of a different asset. There are commonly tax consequences to transactions like these, and the couple should speak to their accountant about how to avoid negative tax ramifications.
There are often many different types of assets involved in a separation or divorce mediation. People own real estate, investment property, stocks, bonds, retirement and investment accounts, pensions, antiques, and more. Because of how diversified some people’s investments are, it is important to consider that all assets are not created equal. Some retirement accounts, for example, are pre-tax and some are post-tax. Therefore, if someone gets a home with $100,000 in equity and the other gets a retirement account that will be taxed when they take the money out that is currently worth $100,000, these assets may not be worth the same. This depends on the specific tax consequences that flow to each individual asset. It is important to also take into account the hidden tax costs that may be associated with an asset that will be transferred in a divorce proceeding.
Contributed by Valérie Marcil and Carl-Philippe Finn-Côté from Marcil Lavallee. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.
This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
No companies are safe from fraud, no matter how big they are or what industry they’re in. According to the International Trade Council, 5 per cent of revenues (representing US$800 billion worldwide) are lost to internal or external fraud.
The most common fraud tactics include corruption, misappropriation of assets, and financial statement fraud. And with cybercrime on the rise (the Online Trust Alliance reported an 18.2 per cent in reported breaches in 2017 compared to 2016), fraud prevention and detection measures are becoming more and more important.
In Canada, the total financial losses due to fraud[1] have reached an average of $200,000 in 2018. It should be noted that this average may be under-estimated, especially because a lot of fraud goes undetected by companies, and some firms are too embarrassed to report fraud — especially if it came from an internal source.
Organizations without effective fraud prevention and detection measures expose themselves to serious consequences that go beyond cost: it could affect employee morale, the company’s reputation, business relationships, and share price. All that to say that the cost of establishing a fraud prevention and detection system are almost always going to be lower than the cost of not establishing one.
While there are many fraud prevention and detection measures a company can take other than a system, including employee education, a culture of honesty and third-party support in this area, a system is considered the most effective detection measure, with an effective rate of nearly 50 per cent[2], as demonstrated by these 2018 findings on the reasons for fraud compiled by StatsCan.[3]
A forensic accountant familiar with the specific risks in your industry can help you establish an effective system. They know fraudsters’ tricks, how to detect them and how to create a system that neutralizes them.
Contact us to learn more about setting up a fraud prevention and detection system specifically for your company.
Contributed by Jacqueline Lemay, CPA, CA, CA-EJC, CFF, from Demers Beaulne. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.
This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
News about another successful cyberattack, on government or on a private company, in a single country or worldwide, is now almost routine. What such events usually have in common is a desire by the hackers who perpetrate the attacks to profit by it — either by demanding payment from the entity whose systems have been compromised, or by obtaining confidential personal information about individuals, which the hackers can then use fraudulently or sell to others who wish to do so.
In September of this year, the credit reporting firm Equifax announced that it had been subject to such a successful cyberattack, and that attack was especially concerning, both because of the nature of the information Equifax holds.
Most Canadian adults have used credit at one time or another. Whenever an individual obtains and uses credit — whether through a credit card, line of credit, car loan, or otherwise, the financial institution which provided the credit provides information about that credit use to a credit reporting agency like Equifax. The information provided includes the original amount of the debt, the payment history, whether any payments were made late, and the current balance. The file held by the credit reporting agency also includes personal identifying information about the individual, which can include the individual’s social insurance number (SIN). Such information is accumulated throughout the individual’s financial life and is used by credit-granting institutions to assess an individual’s creditworthiness whenever he or she makes an application for credit.
It’s readily apparent that credit rating agencies have a great deal of personal and financial information about individuals and it was that information which was compromised in the cyberattack on Equifax which took place between mid-May and July 2017. Equifax has confirmed that personal and financial information of about 100,000 Canadians had been accessed in the cyberattack. (That number is subject to change and increase, as the investigation continues.) The information accessed included individuals’ names, addresses, credit card numbers, and – most ominously – SINs.
Equifax has committed to contacting, by mail (not e-mail or phone), the 100,000 Canadians whose personal information has been compromised. It will also be providing such individuals with credit monitoring and identity theft protection for a period of 12 months, at no charge. Individuals who are not contacted but have questions can contact Equifax at 1-866-699-5712 or by email at EquifaxCanadaInquiry@equifax.com.
Anyone whose personal and financial information is stolen, whatever the circumstances, has good reason to be concerned. And, given the number of instances in which Canadians routinely provide such personal and financial information, online or otherwise, the chances of being affected by an information security breach continue to increase.
As a practical matter, there is really nothing individual Canadians can do to ensure that companies, institutions and governments which have and hold their personal information are not subject to a cyberattack or other information breach. What Canadians can (and should) do is to restrict the personal and financial information which they provide to others to that which is required by law or absolutely necessary in the particular circumstances. And there are a number of steps which individuals can take to protect the personal identifying and financial information which they do disclose, and so minimize the risks that such information will misused or that they will become victims of identity theft.
Perhaps the most important of those steps is the need to protect one’s SIN. Having someone else’s SIN can give an unauthorized person significant access to additional information about that person, and can even allow them to impersonate that person, especially online, where bona fides can often be established simply by providing requested personal identifying information.
The circumstances in which Canadians are legally required to provide their SIN are relatively few. We need to include on the annual tax return, we must provide to financial institutions where the individual holds an interest-bearing account, a registered retirement savings plan, a registered education savings plan, or a tax-free savings account. There are not many other instances in which providing one’s SIN is required.
Online shopping is now ubiquitous and, of course, purchasing anything online requires an individual to provide a method of payment, which is usually a credit card number. The major online shopping sites have security protocols in place, but the reality is that providing one’s credit card number online will always carry a risk. There are ways to minimize that risk. Individuals who shop online on a regular basis might consider obtaining a credit card which is used only for online shopping, and which has a relatively low credit limit.
For those who wish to obtain personal information about someone else for fraudulent purposes, all forms of social media are, of course, a gold mine. Everyone has heard of the need to exercise caution with respect to the personal information disclosed on social media. What many don’t recognize is the need to consider the totality of information that is being “shared” on all social media platforms in the aggregate, not just on a single site like Facebook, Twitter, or Instagram, or in a single post on any of those sites. Anyone seeking to collect personal information about an individual for identity theft or other fraudulent purposes will certainly put together information from all available sources. And, while a single piece of information disclosed in passing, or in isolation, may not seem to pose a risk, it doesn’t take much information to create that risk. For instance, no one would post their bank account number on social media. But, someone who posts on Facebook about their frustration with a particular interaction with their (named) financial institution has created an opportunity for someone to approach them (weeks or months later) with fraudulent intent, purporting to be from that financial institution and asking them, for instance, to confirm their bank account number as part of the bank’s regular fraud prevention program. And too often, recipients of such approaches don’t consider that the caller might have obtained information about who they bank with from a months-old social media post. Such fraudulent approaches rely on the fact that most recipients don’t think to verify the authenticity of the call or the caller.
Not disclosing one’s SIN unless legally required to do so, and taking care when online shopping or in posting on social media are only some of the precautions which can be taken to protect one’s personal information. There are many others, and there’s a lot of information available on how to protect yourself and what to do if your personal or financial information falls into the wrong hands. The following websites are a good place to start:
www.rcmp-grc.gc.ca/scams-fraudes/id-theft-vol-eng.htm and https://www.getcybersafe.gc.ca/cnt/prtct-yrslf/prtctn-dntty/index-eng.aspx
Disclaimer
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact your Segal advisor at 416-391-4499 for more information on these subjects and how they pertain to your specific tax or financial situation.
If you are planning to buy shares in a company in the hope of receiving regular dividend payments, take some time to review how the Canada Revenue Agency (CRA) taxes income from directly held shares.
The first step is to realize that your tax bill on dividend income will depend on where the company is located. The CRA treats domestic and foreign dividend income differently.
For a conservative portfolio, you might look for disciplined, well-run, profitable companies that have a record of regularly boosting their payouts.
You can find blue-chip stocks that provide yields competitive with short-term bonds and Guaranteed Investment Contracts.
But remember, companies can cut their dividend outlays for any number of reasons and that can cause the stock’s price to slide.
Domestic Dividend Income: If you own shares in a taxable Canadian corporation, you are eligible to take a dividend tax credit aimed at preventing double taxation. Dividends are paid out of a company’s after-tax earnings, which means that when you get your payout, the company has already paid taxes on it.
Foreign Dividend Income: Taxation is more complicated when you receive dividends from a foreign company, although you may be eligible for a foreign tax credit. The tax due on foreign income is based on treaties between Canada and the countries where the companies are domiciled. Generally, Canadians will pay tax on foreign dividend income in Canada and get credit for foreign taxes withheld.
More than 750,000 Canadians hold U.S. investments directly or through a registered account. American companies generally withhold taxes on your dividend payments but the exact amount depends on whether you certify that you are a Canadian resident. When your Canadian tax return is prepared, you may receive a foreign tax credit.
The tax credits for Canadian dividends make them a very tax-efficient source of income for most Canadian investors.
Taxation of dividend income can be complicated and it’s best to consult with your tax adviser, who can ensure you pay the least amount of tax possible.
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