2016 income tax update - canada

INCOME TAX UPDATE2016

Subhash Sharma CPA, CMA, MBA

Agenda

Sale of Principal ResidenceOther significant tax changesForeign Income and Assets

Canada Child BenefitCRA Happenings


Sale of Principal Residence

• Housing Property used mainly as residence

• Taxpayer or family member live in the property

• Only one property between husband, wife and minor children

• Cottage can be designated as Principal Residence

• Only one property can be designated in a given year

• Property can be outside Canada



• Property owned by Trust; if beneficiary uses as Principal Residence

• Limitations on land associated with property

• Change of use rules; moving in or out- rental/ business

• Plus one year rule; sale and purchase of another house

• 4 year election; moving out and back

• Deemed sale upon death of tax payer



• Common misconceptions• Sale of house is always tax exempt• Buy and live for one year and sell • Gain on sale of property is always considered Capital Gain • Partial use for business/ rental – no reporting required• There is no GST/ HST on sale of house


Sale of Principal Residence – new reporting requirement

• Sale in 2016 and beyond must be reported on tax return • Basic information; Description, Sale proceeds and Date of

purchase• One year plus rule; not available for non residents • Subject to audit beyond normal assessment period of three years • Deemed sale upon death of taxpayer• Deemed sale if there is change in use


Sale of Principal Residence – new reporting requirement • Rule changes aimed primarily on foreign investors to enhance

compliance

• But can effect Canadians who • own House and cottage or multiple properties• if house is used partly for business/ rental• Upon death of taxpayer

• Gain on sale is tax exempt if used as principal residence for all years

• Designation of Principal Residence by filing T2019

• Designation of PR for deceased person by filing T1255


Deemed Sale of Principal Residence-new reporting requirement

Change in use • from Principal Residence to Rental/ or Business; Whole or in part• Principal Residence Exemption applies• Must be reported; no tax

• from Rental/ Business to Principal Residence; Whole or in part• Principal Residence Exemption does not apply• Must be reported; income tax payable


Sale of Principal Residence- part exempt

• Capital gains• Lived some years of total ownership• Partly used for rental/ business• 2nd property; cottage or rental

• Business Income• Buy and sell; flipping• GST/ HST on total sale price; if no one lived


Sale of Principal Residence- part exempt

• Taxable capital gain/ business income on non exempt part• Portion of Sale price less portion of selling costs and Adjusted Cost

Base (ACB)• ACB; Purchase price plus closing costs plus major renovations • Keeping track of capital improvements; bills and receipts


Other tax changes

• Federal Home Accessibility Tax Credits• Eligible individuals; seniors and individuals with disability• Up to $10,000 of renovations –mobility and safety• $1,500 non-refundable tax credit

• Healthy Homes Renovation tax credit (Ontario) eliminated in 2017

• Family tax cut-eliminated


Other tax changes

• Children’s Fitness tax credit, refundable, reduced to $500 for 2016 (from $1,000) and eliminated for 2017

• Children’s Activity tax credit (Ontario) eliminated in 2017

• Children’s Art tax credit – non refundable, reduced to $250 for 2016 and eliminated for 2017

• Disability supplement stays $500 for both credits


Other tax changes

• Federal Donation tax credit; 33% on the donations up to the income taxed at new 33% marginal tax rate; 29% of the balance donation over $200

• Education and Text books tax credits eliminated in 2017; Unused amounts from previous years can be used in future years

• No change to tuition tax credits


Other tax changes

• Teacher and Early Educator School Supplies tax credit; 15% refundable credits for supplies up to $1,000

• Flow through tax credits extended by one year

• TFSA Annual Contribution limit reduced to $5,500 (from $10,000) for 2016, indexed to inflation each year in increments of $500


Other tax changes

• Labor sponsored Venture Capital Corporation (LSVCC) tax credit• Federal tax credit 5% for 2016 (down from 10% in 2015) for investment up

to $5,000. Eliminated for 2017• 15% tax credit for provincially registered LSVCC for 2016 and beyond

• Northern Residents deduction increased by 33% to $22 per day


Other tax changes• Automobile rates• CCA Capital cost limit $30,000 plus HST (no change)• Maximum interest deduction on loan $300 per month (no change)• Leasing cost limit $800 plus HST (no change)• Tax exempt employee allowance $0.54 for first 5,000 kms and 0.48 for

additional kms

• EI Premium reduced to 1.63% in 2017 (down from 1.88% in 2016)


Other tax changes

• Combined marginal income tax rates in Ontario• Decreased by 1.5% for middle class ($45,282 to $90,563)• Decrease also applies to high income earners; graduated tax rates• Increased by 2.44% for individuals earning $200,000 to 220,000• Increased by 4% for individuals earning higher than $220,000


Other tax changes

• Highest combined marginal tax rates in Ontario• Salary and other income 53.53%• Capital gains 26.76%• Dividends Eligible 39.34%• Dividends non-eligible 45.30%• Total tax on dividends from small business corporation 60.80% • (45.30% on dividend plus 15.5% on Corp)


Other tax changes

• Ontario Retirement Pension Plan shelved

• Enhanced CPP will be implemented (proposed)• Replace about 33% of pre-retirement income compared to about 25% now• Raising the level of earning to 82,700 when fully implemented• Phased increases over seven years starting Jan 01, 2019• Contribution to Enhanced CPP will be tax deductible (vs tax credit current)• Contribution to regular CPP will still be tax credits


Other tax changes

• Corporate Class Funds• Exchange of shares within Mutual Fund Corporation will be treated as

disposition at fair market value• May attract tax on capital gains

• Land Transfer Tax Refund for first time home buyers (Ontario) • Refund doubled to $4,000 in 2017• Exemption on first $388,000 of purchase price


Other tax changes

• Reversed:• Previously legislated reduction of Federal income tax rate on small

Business income • Federal income tax rate on small business income subject to Small

Business Deduction will stay 10.5% for 2016 and future years; total 15.5% in Ontario

• Small Business Deduction among associated Corporations• Anti avoidance measure to curb multiplication of small business deduction

limit among associated corporations and partnerships• Corporations under common control deemed to be associated for SBD


Other tax changes

• Eligible Capital Property rules• Intangible assets such as goodwill, trademark, patents• rules changed to treat them as depreciable capital property• New Class 14.1; 100% inclusion rate; 5% depreciation


Other tax changes• Personal Service Business Income• Employee leaves corporate job and becomes incorporated contractor• Federal income tax rate increased by 5% (from 28% to 33%) to correspond

with highest marginal tax rate

• Taxation of Trusts• Graduated tax rates similar to individuals eliminated and replaced with

highest marginal tax rate• Exemptions:• Graduated Rate Estate; up to 36 months after death of taxpayer• Qualified Disability Trust; continue to be eligible for graduated tax rates


Foreign Income and Assets

• Canadian Residents have to report world wide income in Canada• Interest (cash/ accrued), dividend, rental income and capital gains• May or may not repatriate the cash proceeds• Exchange rate on the day of transaction or average rate for year• Foreign tax credit for taxes paid in foreign country which have tax treaty• Tax return filed in foreign country and Notice of Assessment required



• Assets over CAD 100K during the year (at cost)• You are required to file Form T1135 each year with tax return • Assets between 100K and 250K; simplified method• Over 250K; Detailed reporting method• Re-assessment period extended by 3 years from date of assessment

• Exemptions• Property used in active business• Personal use property• Shares of foreign affiliate



Form T1135; Detailed Reporting• Funds; Name of bank, Country, max funds during year, funds end of year,

income• Shares; Name of company, Country, max cost during year, cost end of year,

income, gain/loss on sale• Loans to non-resident; Description, Country, max amount during year, amount

end of year, income• Real estate; details as above• Other properties; details as above• Shares held through Canadian Securities dealer; Name of dealer, Max fair

market value during year, fair market value end of year, income, gain/ loss on sale



• Emigrants leaving Canada, departure tax• Form T1161-List of properties• Form T1243-Gain/ loss on deemed disposition of properties• Form T1244-Election to defer tax on gain on deemed disposition • Moving costs not deductible except for students who remain Residents• NR73-Determination of Residency Status; recommended• Taxes on Canadian income



Non Residents• Reporting taxes on Canadian income• Non resident income tax return; employment, interest, dividend etc.• Tax return filing not required if only NR4 slips, unless requested by CRA

• Rental income only• NR4 Slips and Summary; 25% tax withholding on gross rent• Section 216 tax return• NR6 election; 25% tax withholding on net rental income



• Sale of property by Non resident• 25% tax withholding on Gross sale proceeds by lawyer• T2062; Certificate of compliance; filing due within 10 days of sale• Failure to file penalty; $25 per day, subject to $100 minimum and $2,500

maximum • Failure to file penalty; $25 per day, subject to $100 minimum and $2,500

maximum • Comfort letter issued by CRA• Remit 25% of Net sale proceeds (Sale price less Purchase price) to CRA• File Non resident income tax return to get tax credit for closing costs


Canada Child Benefit - CCB

• Replaces Canada Child Tax Benefit (CCTB), National Child Benefit Supplement (NCBS) and Universal Child Care Benefit (UCCB)

• Non-taxable, monthly payment

• Eligible families; with children under 18 years of age

• Eligibility; resident Canadian, living with children


Canada Child Benefit (CCB)-contd.

• Max $6,400 per year ($533 per month) for each child under age of 6

• Max $5400 per year ($450 per month) for children 6 to 17 years

• Reduced after $30,000 adjusted family income

• Amounts vary depending on number and ages of children and family net income

• Ontario Child benefit maximum up to $113 per month for each child under 18

• Ontario child benefit is reduced after $20,706 family net income


Canada Child Benefit - disability

• Child disability benefit• Additional monthly benefit included in CCB• Child who qualifies for Disability tax credit• Has filed Form T2201 Disability Tax Credit Certificate• Up to $2,750 per year ($227.50 per month) for each child with disability• Amounts reduced after $65,000 family net income


CRA Happenings

• My account; individuals

• Online mail; individuals and tax preparers

• Auto Fill My Return; tax preparers• Client data downloaded and populated in tax software• T Slips, RC62, RRSP, HBP, LLP, Carryover amounts, instalments• Saving time and avoid errors; but avoid duplication


CRA Happenings

• Refile - tax preparers• 2015 and 2016 tax returns• Can e-file amended tax return vs T1 adjustment• Only available after NOA is issued• Can not refile if reassessment in progress• Can not use for Canada Child Benefit• Can not use for Disability tax credit


CRA Happenings

• Accelerated Notice of Assessment• Direct in the tax software; next day• No paper copy mailed to taxpayer

• Improving tax compliance• $444 Million allocated over 5 years; enhance CRA efforts to combat tax

avoidance; goal; recover over 2.6 billion dollars over 5 years• $351 million over 5 years to improve CRA ability to collect outstanding

taxes; goal 7.4 billion dollars over 5 years


CRA Happenings

• Review and audit activity• Pre-assessment review; credits and deductions; prior to issuing NOA• Processing review; after NOA; Aug to Dec• Matching program; filed information compared with 3rd party information• Targeted reviews; based on complex scoring criteria• Special assessments; detailed examination of tax returns; trends


CRA Happenings

• Risk items• Employment expenses; Form T2200 not approved• Public transit; single ride • Moving expenses; strict eligibility criteria• Medical expenses for dependents; proof of payment by taxpayer• Donations; official receipts, duplicate receipts, pledge, foreign donations• Foreign tax credit; Tax Return and Notice of Assessment


CRA Happenings

• Preauthorized Debit Agreement• for one time payment of tax• tax preparers

• BEPS; Base erosion and profit shifting arrangements• Country by country reporting; Transfer Pricing Rules• Exchange of information with other tax administration


Subhash Sharma Tel: 416-439-4648Email: [email protected]


2016 income tax update - canada

Economy & Finance