Frankie Fenton CMA

Tax Information

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).

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.