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Here We Go Again!

At the end of August 2011, BC’s referendum on the HST returned a very narrow majority in favour of eliminating the HST.  Unfortunately, only about half of the province actually voted, so we’re now moving back to a GST/PST regime based on the preference of only about one quarter of our population.

However, it comes as little surprise.

The fact that BC held a referendum at all, let alone the administrative concessions allowed for the outcome, all seem to point to a government bending over backwards to take back a regretted decision.

Tax policy is extremely complex.  It involves a delicate balance between administrative costs, economic and business drivers, revenue needs, and public expenditures.  It is not something that can (nor should) be boiled down to one simple question requiring only a ‘yes’ or ‘no’ answer.  Nor is it a decision that should be made by the voting public.  Not surprisingly, the public votes in favour of the wallet held in each individual’s back pocket. The public does not thoughtfully weigh the compromises that need to be made between the various  tax policy interests.  It does not gather expert opinion.  It does not compromise.

What is best for the province as a whole does not often better our wallets as individuals in the immediate.   It was no secret that while the HST did not likely generate much more tax revenue, it did result in an initial shift of the tax burden from businesses to individuals.  However such shifts can often be offset by rebates and other income tax measures to limit the impact on the poor.

Question: Are you in favour of eliminating the HST?  Translation by the Public: Do you want to pay less tax and have more money in your wallet?

Answer – not so surprising.

Now we must clean up the mess.  The $1.6 million received from the federal government to assist in the transition to HST has been allocated for repayment in this year’s budget.  The government has formed a tax panel to consider tax strategies in helping with its job creation mandate, and also consider streamlining alternatives for the new PST regime.

Business interests are not wasting time in making submissions.  Much of the business community will lobby for some form of provincial value-added tax regime.  Their success will depend on the speed at which an entirely new piece of legislation can be created, the extent to which it can be incorporated into the promises already made by Kevin Falcon, and whether any balance can be achieved between these and the remaining interests.   Now Kevin Falcon must once again find that delicate balance of interests in tax policy, and do so from behind the eight ball, and with the clock ticking.  Because everyone wants this fixed yesterday.  It sucks to be Kevin right now.

This will cost everyone.  People voted ‘yes’ because they thought it would mean paying less taxes.  Yes, perhaps less taxes paid directly at the till on personal expenditures.  But the $1.6 million to be repaid to the federal government was not just laying around earning interest.  It is going to have to come from somewhere.  Government services will suffer.  There is a direct link between the revenues collected by the government (yes, through taxes) and the public expenditures it can afford to make (duh, really?). And business now must also now incur the costs of changing over their systems again to PST.  Many businesses will likely experience increased business costs under PST, depending on the tax base and regime that are implemented.    And depending on the tax base and regime that are implemented, foreign business investment may also suffer.  When business suffers, tax revenues suffer, and we are back at government and it becomes  a vicious cycle.

The referendum could have been avoided – the government could have sent the issue to the provincial legislation assembly.  The outcome could have adhered to the original referendum rules, rather than the government accepting a simply majority outcome (regardless of participation level) as binding. The question could have allowed for a more careful polling of true public opinion.  “Would a’ . .  .could a’ . . .should a’. . . ”

Bill Vander Zalm touted the referendum as a “victory for democracy”.  Really?

 

The Capital Gains Exemption

It’s the most sought-after word in tax planning  – “exemption”.  It’s better than reducing, or deferring tax.  It means eliminating tax.  But eligibility for the capital gains exemption is a seed that must be nurtured and monitored.

The government began taxing capital gains in 1972.  The percentage of gains taxed (often referred to as the “inclusion rate”) has varied, beginning at 50%, at some periods going as high as 75%.  However currently only 50% of net capital gains realized are included in taxable income.  This inclusion rate applies to all taxpayers – individuals, corporations, partners and trusts alike.

Between 1985 and 1994 there was a $100,000 lifetime exemption on capital gains earned by individuals.  This is no longer available at all.

Currently, only the more restrictive capital gains exemptions remain available to individuals and trusts (except trusts that are not personal trusts) – such as the $750,000 exemption on the sale of qualified small business corporation (“QSBC”) shares or the sale of qualified farm property(“QFP”).  However there are a number of conditions that apply to these exemptions, and in the case of the QSBC exemption, just because you qualify today, does not guarantee that you will qualify tomorrow or thereafter.

QSBC Exemption

The capital gains exemption applies to the sale of QSBC shares and is available for the first $750,000 of net capital gains realized. Since only 50% of capital gains are included in taxable income, the exemption itself is for the first $375,000 of taxable capital gains.  However in order to qualify, the individual or related person must have held the shares throughout the 24 month period prior to disposition and have been resident in Canada throughout the year.  In plain english, you or a relative held the shares for at least 2 years and you live here.

What is a QSBC?  It’s not as simple as being a small business.    It must be one where:

  • 90% or more of the fair market value (not book value) of the assets have been principally (50% or more) used in an active business carried on primarily in Canada at the time of sale (there are a lot of proportions built in here!);
  • throughout the 24 month holding period, more than 50% of the value of assets were used in an active business carried on primarily in Canada.

Again – in plain english?  It can get a little complicated.  “Active business” generally refers to the generation of income other than investment income or income from property (like rent).  So if your business holds significant investments or rental property it may not qualify. Furthermore,  assets held by a business can include shares of another corporation.  There are special “look through” rules for determining whether shares in a subsidiary qualify as assets used in active business.  Note that there is an asset test for time of sale and a separate one related to a 2 year holding period.  Note also that you are using fair market value, not book value of assets.  Fair market value can sometimes fluctuate.

Bottom line?  If you think you may be selling your small business in the next few years, it pays to determine now whether you qualify for the QSBC exemption and make yourself aware of the steps you need to take to ensure you will still qualify upon sale.  There are planning measures that can sometimes be taken to ensure eligibility.

QFP Exemption

If the QSBC exemption left you shaking your eyeballs into readjustment, the QFP exemption could render you mute so I will try to keep it simple.

The exemption on the sale of QFP is available for the first $750,000 of net capital gains realized. Again, since only 50% of capital gains are included in taxable income, the exemption itself is for the first $375,000 of taxable capital gains.  In order to qualify, the individual or related person must have been resident in Canada throughout the year.  When you acquired the property is key. There may be a 2 year holding test (similar to the QSBC exemption) if the property was acquired after June 17, 1987.   Regardless of when the property was acquired, there are some tests pertaining to the level of farming activity but they differ depending on whether the property was acquired before or after June 17, 1987.

A QFP isn’t limited to just farmland.  It can include shares in a family farm corporation, interest in a family farm partnership, or eligible capital property used for farming purposes (such as a dairy quota).  Farm assets must generally have been “principally used” in a farming business.   This is interpreted in different ways if you acquired the property before, or after, June 17, 1987.    Where the farm was acquired after this date, there is generally a 2 year holding period, and a requirement for at least 2 years that the farm was continuously active and was the principal source of income for the individual.  If the farm was acquired before June 1987 this test must generally be met in the year of disposition or in at least 5 prior years.

Once again, bottom line?  Don’t wait until you are about to sell your farm before investigating whether you qualify for the QFP exemption.  It could cost you dearly.

2010 Personal Tax Season

March and April comprise the peak of personal tax season, with most returns and all balances owing required to be filed and paid by April 30th.  Although persons with business income have until June 15th to file their tax returns, they are still required to submit amounts owing by April 30th.

For the mainstream, there were not really any earth-shattering changes announced that affected 2010 personal taxes in BC.   In line with earlier announced reductions to corporate tax rates, there was a slight increase to the personal tax rates on eligible dividends, thus maintaining integration.

For separated parents who share custody of children, many of the child benefits such as the CCTB, UCCB and HST credit can now also be shared by the parents.

For those with infirm children, it is now possible to roll over amounts from an RRSP or RRIF on the death of a parent to an RDSP of an infirm child.

The accelerated CCA rate of 100% still applied to computers purchased in 2010.

Effective March 2010, medical expenses incurred solely for cosmetic reasons no longer qualified for the medical expense credit.

Did you know it’s now easier than ever to pay your taxes electronically?  Using CRA’s “My Payment” portal,  (http://www.cra-arc.gc.ca/esrvc-srvce/tx/mypymnt/menu-eng.html), you can process a payment online provided that you are set up for online banking with an accepted financial institution.  Currently, the following institutions are participating:

  • BMO Bank of Montreal (Personal accounts only)
  • Scotiabank
  • RBC Royal Bank
  • TD Canada Trust

Payments can be made for both instalments and balances owing, for personal taxes, GST/HST, corporate taxes, payroll and excise (to name a few).

Associated Corporations

There are a number of areas in the tax legislation where the concept of “association” in reference to two or more corporations becomes relevant.  For example, associated corporations:

  • must share the Small Business Deduction between all members of the associated group;
  • will not be viewed as providing personal services to one another;
  • can lease real property to one another, and have the associated income treated as active business income rather than inome from property;
  • one of which is a developer, must share the Base Level Deduction in respect of interest and property taxes on vacant land; and
  • must share the SR&ED Business Limit  between all members of the associated group.

There is a distinction between “related” corporations and “associated” corporations.   Two corporations may be related, but not not necessarily associated – the distinction largely rests on the extent of common control.   Whether corporations are related depends simply on the relationship between owners.

Two corporations are associated if they share common control.  De jure control  generally comprises 50% or more of the voting control, but control can also refer to de facto control where a particular person holds less than 50% of the votes, but exerts control in some other manner such as by possessing significant influence.  A related group can together control a corporation. There are also some provisions which deem control to exist in certain circumstances, and as a result a corporation can be controlled (or so deemed) by more than one person or group at the same time.  Therefore, there are several permutations that must be considered.

Accordingly association is something that owners of corporations can fall into rather unwittingly.  The most common example is in the drafting of shareholder agreements.   Where a person has a right to shares in a corporation or a right to acquire shares in a corporation, that person is deemed to have done so for purposes of the control test, with certain specific exceptions.

RRSPs vs. TSFAs

After decades of having only one obvious method of tax-effected savings, in 2009 we Canadians were finally treated to the extravagance of choice.

If I may digress to a rant for one moment – I continually hear people saying they only have “one choice” when left with only one course of action to take.  A “choice”, by definition, requires an opportunity for selection from two or more options.    So.  Now that we have two options, we have a choice.

RRSP’s were introduced in the 1950’s by Premier St Laurent, shortly before he left office.  While the savings plans offered then were much different than they are today, they were nonetheless ground-breaking, being offered before even the Canada Pension Plan was established.

In 1957, the deduction limit was the lesser of 10% of earned income and $2,500.  While these parameters have increased over the years, it was not until 2009 that indexing was finally applied to the annual maximum deduction limit.

However, the flexibility of RRSP’s has also been improved over the years, offering some alternatives within our lonely savings method.  In the 1990’s, unused deduction room could be carried forward. The Home Buyer’s Plan was introduced in 1992.   In 2005 foreign content restrictions were lifted. In 2007, the upper age limit for making contributions was increased from 69 to 71 years of age.

And in 2009, the birth of the TSFA.  We’ve come a long way, baby.

There has been a lot of information supplied regarding the TSFA, so I won’t get into that here.  The more interesting question is “when should you utilize each option?”

There are always arguments for making things more complicated, but the simple rule of thumb  – invest first in an RRSP if you expect that your taxable income level (and therefore the tax bracket you will be subject to) will be lower when you retire than it is today.  By investing in an RRSP now, you have the benefit of the deduction today at the higher tax bracket, and will pay tax on the income later at a lower tax rate.  Alternatively, if you are blessed with the expectation of a higher income on retirement, opt to pay tax on the income now and invest your after-tax dollars in the TSFA.

There is, of course, a third dark-horse option – pay down your existing personal debt.  Unless your debt has been acquired for the purpose of earning income and that interest is deductible, you are paying interest with after-tax dollars.  However, the attractiveness of this option can only be measured with a more complicated analysis of rates of return vs interest rates and current and future tax rates.

Three options, two choices.  Get it straight.

RRSPs

The first two months of the calendar are the most popular time for making RRSP contributions.   Contributions made on or before March 1, 2011 can be deducted in the 2010 tax year, generally computed at 18% of prior year’s earned income.  The maximum deduction limit for the 2010 tax year is $22,000.  Note however, that if you have unused deduction room from prior years, your total available deduction limit for tax year 2010 may be higher.  It is often best to consult the RRSP Deduction Limit Statement of your latest Notice of Assessment to be sure, or phone the CRA automated phone service at 1-800-267-6999.

Contributions can also be made to a spousal RRSP.  The contributions must fit within the contributor’s RRSP deduction limit, and must also be deducted by the contributor.  They cannot be deducted by the spouse.

Sometimes, clerical errors can occur, and an individual may contribute more to their RRSP than their available deduction limit in a particular year.  Or it may be determined that contributions made in a particular year would serve a better tax advantage by being deducted in a subsequent tax year.  These are referred to as unused contributions.

Excess contributions (made in excess of the particular year’s deduction limit) of up to $2,000 are allowed, and form part of unused contributions to carry forward for deduction in the following year.  Note that excess contributions are subject to a  tax of 1% per month computed on the contributions made in excess of your RRSP deduction limit plus the $2,000 grace amount.

Transition to HST

It’s here folks.   Deal with it.

Over the past year, there has been a surprising backlash in British Columbia over the implementation of HST.  Yes, HST will apply to more services acquired by individual consumers.  And yes, the provincial portion of HST now applies to restaurant tabs, haircuts and chiropractor visits.  In contrast, PST had always applied to restaurant tabs in Ontario, and I can’t help but muse that our obsession with all things gastrointestinal is the single distinction between BC’s overwhelming hostility to the tax’s implementation in comparison to Ontario relatively weak  “yeah, but. . .”

Admittedly, I know, we take issue with the WAY it came to pass.  But it’s now time to be adult, and take responsibility for the fiscal management of this glorious province.  We need to grow up, set aside our bruised egos, and recognize that in a global economy largely predicated on transaction VATs, HST is what makes the most sense.

Yes, I am telling you all to grow up and get over it.

HST is a transactional tax, applied at all levels of the supply chain, and recoverable to most intermediaries in the supply chain.  All are taxed without prejudice.   Commercial administration is simpler, government administration costs are likely cut in half. The true tax cost only sticks to the consumer.

I know that doesn’t sit well.  You and I, as individuals, are consumers.

But we have a choice to consume.  We have much less of a choice in our need to earn income.  And in this ego-centric society we now live in, where it is cheaper to replace our possessions than repair them, where we carelessely create mountains of garbage replacing all of those things that no longer satisfy our vanity, should we not be taxed on that choice we are daily making?

You may rebut in saying you need to get your hair cut on a regular basis to maintain employment.  Your visits to the chirporactor reduce the government’s burden for the healthcare system. These activities don’t add to our environmental waste, why are they equally punished?

Because life isn’t fair and Canada’s tax system is complicated enough without making it rocket science.  BC (and other harmonized provinces) was alloted only a few exceptions from the national tax base and it made those choices in your best interest: auto fuel,  children’s clothing and footware, diapers and car seats, feminine hygene products.  Which of these would you have had our Ministry foresake in favour of restaurant meals or chirporactor services?

At the end of the day, this earth is increasingly driven by a global economy and if we wish to remain competitive, we must offer terms of business equal to those offered elsewhere.  Because if business fails in this province, our government services deminish, our taxes increase, and our quality of life deteriorates.

It is asserted that BC is entitled to receive $1.6 billion in federal transfer payments for the adoption of HST.  We can quibble about the true number, but the point to retain is that is a big number.  And we owe the money back if we renege.  How much are you willing to cough up for payback if you vote to abolish HST?  Think long and hard about that.  Because the money must come from somewhere.

So if , the Lord help us, this actually does go to a referendum, I urge you all to to put on your “big girl pants” and take a sober moment to be an adult and vote for what is best for this province, and the earth’s enviroment.  Leave your vengence and personal vendettas at the curtain.  Now is not the time to be petty.  We’ve wasted enough taxpayer’s dollars on that just getting to this place.