The previous two years have seen a larger number of tax changes than at any other time in recent memory. Many of these changes are significant to individual taxpayers and owners of small businesses. Fortunately, there is still time to take action to reduce the impact of many of these new changes. Below is our list of action items that every taxpayer should consider in 2018.
1. Voluntary Disclosures
The CRA offers a voluntary disclosure program that allows taxpayers to reveal the "tax skeletons" in their closet, without penalty or prosecution. However, as of March 1 the voluntary disclosure program is changing. These changes will limit the types of relief available and the circumstances where relief will be considered. This means that a voluntary disclosure filed prior to March 1 may see a substantially better result than a voluntary disclosure filed March 1 or later. If you have an outstanding tax skeleton that you need to deal with, we strongly recommend making a voluntary disclosure immediately, so that it is considered under the old rules.
2. Share Reorganizations for Income Splitting
The federal government has introduced updated rules regarding their plan to limit income splitting among family members. These new rules are discussed in our previous update. Income splitting is still permitted under the new rules in some circumstances, including where family members directly own a 10% interest in the corporation. To take advantage of these rules in 2018, the share ownership must be in place prior to the end of 2018. Small business owners who own shares personally or through a family trust should review their options as soon as possible.
3. Loans to Family Members
Another tax planning strategy allows family members to loan funds to lower-income family members such as spouses. The lower-income family member then uses the loaned money to earn income and pay tax at their lower marginal tax rates. For several years the prescribed rate of interest that must be charged on these loans has been 1% per year, meaning that the spread between what a family member can earn and what that family member has to pay in interest was significant. As of April 1, 2018 it is likely that the prescribed rate will increase to 2%, reducing the effectiveness of this strategy. This is another solution to the income splitting rules if you have cash available to lend, but will be more effective if you act prior to April 1. This is also relevant if you need to sell shares to a family member for debt, as a way of implementing item 2 above.
4. Ensure Payments to Spouses Meet Requirements
A recent Tax Court of Canada decision held that a husband could not deduct salary "paid" to his wife for administrative support, in part because he had no evidence of paying her. The taxpayer argued that because they shared a joint bank account, it made no sense to write a cheque from that account to his wife, only for her to deposit it back into the same account. The Court did not accept this explanation. The takeaway for taxpayers is that to ensure that proper documentation is in place showing payments to spouses, ideally with cheques or electronic deposits across separate bank accounts. Taxpayers should review their current arrangements as soon as possible to see if there are ways their own process can be improved, to avoid ending up in the same situation.
5. Tax Planning "Surplus Stripping"
In the July 2017 income tax proposals released by the federal government (discussed here), a number of the proposed changes aimed to reduce opportunities for "surplus stripping" (essentially taking out corporate profits as capital gains instead of as dividends). Due to some unexpected side effects of these rules the government abandoned that legislation (for now). We anticipate that the rules to reduce surplus stripping will be reintroduced in a modified form once the "bugs" are worked out. In the meantime, however, there is a limited window of opportunity to take advantage of certain planning techniques that work under the existing rules but that will likely cease to be effective when the next version of the new rules is released. Taxpayers who are concerned about the high rate of tax on dividends should discuss with us about lower-tax alternatives that are available during this window of opportunity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
