SUNIL AND NITA LLP

As expected,  2018 federal budget was big on gender equality. The budget aimed to encourage greater participation of women in the work force.  We think it’s about time that we recognize the importance of women in socio economic growth of our great country. There are also some small initiatives to help small businesses and entrepreneurs. However, the real impact is unclear at this time.  Below are few changes for personal income tax: 

• Parental Leave – under new rule, year-long parent leave, parents can share up to 40 weeks of leave as long as second parent takes at least five weeks of leave to take care of  new born. 
• Medical Expense Tax Credit – The medical expense tax credit will be expanded to include trained animal to perform tasks for a patient suffering with a severe mental impairment. However, the expenses will not be eligible if an animal is there to provide comfort or emotional support. 
• Canada Worker benefit – This refundable credit is re-named from the Working Income Tax Benefit. The benefit will be increased (effective 2019) to help low –income Canadians
• Canadians may claim the charitable donations tax credit for donation made to registered universities outside Canada. 

Small Business Corporation Tax Changes: 

• Passive Income – As we know active business income is taxed at lower rate as compared to the personal income tax rates.  The rationale behind lower corporate tax rate is that businesses will reinvest the tax savings back in to the business to promote overall growth in Canadian economy. Now government wants a bigger share of Tax in your passive income (i.e. income from investments). Under new budget, the Small Business Deduction limit will be reduced if your corporation earned investment income between $50,000 and $150,000. In other words, don’t worry if your corporation investment income is less than $50,000.
• The budget also proposed to limit tax advantage that currently small private corporations are enjoying by recovering refundable taxes on the payment of dividends.   
• Accelerated depreciation on investment in specific clean energy generation
• Small business tax rate decrease from 10.5% to 10% effective January 1, 2018 and to 9% effective January 1, 2019

FAPI stands for foreign accrual property income and comes into play when taxpayers own a foreign corporation that is earning passive income. Passive income includes royalties, interest, rent etc. If a taxpayer incorporates a foreign company, and has that company buy a rental property offshore, most people think if they do not repatriate any of the income (i.e. sending money to themselves), the money the company receives is not subject to tax in Canada. This assumption is incorrect. For Example, A foreign corporation, owned by a Canadian resident spends $500,000 on a rental property in the Bahamas. FAPI will now come into play.

If a corporation earns rental income, that income is taxed in your hands personally here in Canada. If the passive (rental) income is being earned in a country that has a tax treaty with Canada, then taxpayers would receive tax credits in the amount already paid in the other country

However, if a foreign corporation's main business is selling and renting homes then income would be considered active income if corporation employs more than five full time employees to earn income. There are separate active income test in order to avoid FAPI.  We would be glad to help you if you want to know more about FAPI tax.

If your employer requires you to pay expense to earn employment income then you can deduct most of your employment expense on line 229 of your personal Income tax return. You should maintain a good record keeping of all your expenses.  Your employer must complete and sign form T2200 (Declaration of Condition of Employment) which you need to attach with your tax return. Depending upon your circumstances, you may be able to deduct following expenses:

• Home office expenses 
• Accounting and legal fee
• Advertisement and promotion
• Allowable motor vehicle expenses
• Food, beverage, and entertainment expenses 
• Lodging
• Parking 
• Supplies 
• Other related expenses

Sometime it is difficult to determine whether rental income from property or from business.  The most important factors in determining income source are the number and kinds of services you provide for your tenants.  It is property income if you are earning income from property by renting space and providing basic services only which includes heat, light, parking and laundry services. If you provide additional services to tenants such as cleaning, security, and meal then you may be carrying on business. Bottom line is, more services you provide, the greater the chance that the rental operation is a business

You started your business as proprietor and over the year your business has grown. You want to incorporate a company to optimize your tax savings. Section 85 of The Income Tax Act allows you to transfer property (in proprietorship business) to your corporation without any immediate tax impact. This transfer is called “rollover” which allows you to avoid immediate capital gain taxes.   For Example, You transfer a capital property to your corporation. The fair market value (FMV) at the time of transfer is $100,000 which you purchased  at $25,000. You incorporated a company and received 100 common shares in the corporation and elected to transfer the property at $25,000 (cost) to the corporation. By this section 85 rollover, you will not pay capital gain tax on $75,000 gain (i.e. FMV - $100,000 minus cost $25,000). The corporation’s cost of the property will be $25,000 and the cost of 100 common shares will be $25,000.  Please note that 85 rollover is a defferal of capital gain tax rather than complete exemption from tax. For more info, please contact us.

Property can be owned as joint tenancy. On the death of one joint owner, the property held in joint tenancy normally passes by right of survivorship to the surviving owner which is normally not considered part of the estate of the deceased joint owner. In this situation, the property can be transferred without probate and is not subject to probate fees.  Please contact us to know more.