On first reading of the budget summary, it appeared that our national debt problems were going to be solved by taxing the previously exempt Governor General’s salary. Turns out, the salary will be increased to keep the after tax pay the same as it was before. How much time was wasted in thinking this up?

Now, on to the nitty gritty…

SRED changes

Reductions in the SRED program allow the government to play politics. They can provide grants to specific businesses and pick the winners they want now, compared to the equitable, although certainly imperfect, system for all. Fortunately the 35% refundable credit will remain (although after 2013 this will be reduced to 15% for expenditures over $3 million). However the 20% credit for SRED investors will decrease to 15% for tax years ending after 2013.

The proxy amounts are coming down from 65% to 60% in 2013 and 55% thereafter. Deductions and investment tax credits previously allowed on capital expenditures made after 2013 are being wiped out.

Contract payments are being reduced from claims by first eliminating any capital portion and secondly by removing the deemed profits by taking only 80% of the remaining payments into the SRED claim.

Ouch!

Employee profit sharing plans…EPSP beware

While most advisors expected employee profit sharing plans to get dinged as a result of comments in last year’s budget, few would have expected this budget. For EPSP contributions made after March 28, 2012, amounts paid that are greater than 20% of the “normal” salary will be taxed at the top marginal rates. Thus, while CPP can be saved, and games played with instalment payments, for many EPSP users there will be a terrible price to pay.

Foreign ownership

Real estate and other Canadian companies with foreign shareholders should note that deductions for interest paid to those shareholders will become more restricted. The “thin capitalization” rules currently disallow interest on such debt that is in excess of twice the company’s equity. That ratio will fall to 1.5 to 1 in 2013. These rules also will be extended to the debt of partnerships in which the Canadian company has a partnership interest. Essentially the government wants more foreign investment in Canada to be by way of equity versus debt thereby increasing the corporate income taxable in Canada. Interest on the excess debt not only is disallowed as a deduction but it also will be treated as a dividend subject to withholding tax.

Eligible and ineligible dividends

Corporations can pay eligible or ineligible dividends. Eligible dividends are typically paid by larger companies (which do not earn inactive real estate income, as an example) and are taxed at lower rates to individuals. Up until the budget date, corporations had to identify what type of dividend was being paid or substantial penalties could result. Now, a three year window exists to make amendments. To further simplify the dividend tax credit program, dividends can be split between eligible and ineligible.

EI credit for businesses

For 2012, the employment insurance (EI) credit of $1,000 will continue for businesses who pay more EI premiums than the prior year but in total pay less than $10,000 of premiums. This helps employers who have payrolls of approximately $400,000 or less. Further, annual premium growth has been capped to 5 cents for employees per $100 of wages.

Employee insurance as part of income

Group sickness or accident insurance plan payments made by an employer will now be included in the employee’s income, in most cases.

Overseas employment tax credit

Oddly, the overseas employment tax credit will be eliminated over four years beginning in 2013.

OAS

As telegraphed for several weeks, the Old Age Security payments are changing slightly so that those who are 50 years old or less must wait until they reach the age of 67 before claiming the OAS or Guaranteed Income Supplement for lower income seniors. Let’s face it though. If you’re relying on OAS for retirement (it pays approximately $6,000 per year), your financial planning has gone askew.

Registered Disability Savings Plan

Some small changes to the Registered Disability Savings Plan are on their way which will make them a touch more easier for some families.

GST/HST changes

GST/HST changes will result in the elimination of the tax on different expenses such as pharmacist services for non-dispensing health care services, corrective eyewear in certain cases, certain medical and assistive devices ordered by medical practitioners, registered nurses, occupational therapists and physiotherapists.

The thresholds for those using the Quick Method of accounting for GST/HST are going to be doubled beginning in 2013.

Tax shelters

Failure to register in a timely manner as a tax shelter will result in more severe penalties.

Some final thoughts

Overall spending cuts of only $5.2 billion are less than many business owners hoped for as the deficit is allowed to drag on. While most people would agree that the country needed to enter deficit territory during the last recession, the impact of which is still being felt worldwide, the long period of time to emerge from deficit territory and the lack of interest in repaying debt is frustrating. Most real estate investors and business owners understand the value of making intelligent leveraged investments, however, many of us do not trust successive governments will make appropriate fiscal decisions on a consistent basis by properly investing the national (or provincial) debt.

The future is troubling where reliance is predominantly based on hoping for revenue increases that could be gobbled up with future program spending. We appreciate that revenues will increase in the future, and through inflation the debt, if held steady, will over time become a smaller problem. But this is based on many assumptions. Going from two years of reducing the deficit by approximately $10 billion per year and then stalling with a reduction of only $4.7 billion is disappointing. However, if they do hold estimated spending to 2% increases, I will be very pleased. The track record is poor though.

But, let’s please show some interest in planning for spending control and budget surpluses. Yes, compared to many countries we can show wonderful statistics as to how well we are doing with our debt. But surpluses and debt repayments shouldn’t be bad words, particularly given the economic conditions of not only Canada, but most of the world.

We have attempted to describe some of the more important elements of the budget from a tax perspective that will affect more of our clients and friends of the firm. Other aspects of the budget may be relevant to you, your investments and your business.

What do you get when a Form 8938 walks into an FBAR?

Beginning with 2011 tax returns, U.S. citizens and residents who own specified foreign financial assets (SFFAs) may have to file a Form 8938, a Statement of Specified Foreign Financial Assets. An FBAR is required if the total value of foreign bank accounts exceeds $10,000 during the tax year. Now, certain U.S. citizens are required to file Form 8938 with their U.S. tax return along with the FBAR.

So, what is an SFFA?

In addition to the types of non-U.S. financial accounts that are also reported on the FBAR, SFFA is broadly defined to include foreign financial assets held for investment that are not in an account:

• stock or securities of non-U.S. issuers
• any interest in a non-U.S. entity
• any financial interest or contract that has as a non-U.S. issuer or counterparty

In general, individuals are not deemed to own an interest in an SFFA held by a corporation, partnership, trust, or estate solely because of an individual’s status as a shareholder, partner, or beneficiary. But if someone is considered an owner of all or a part of a trust under the grantor trust rules, he or she is considered to have an interest in any SFFA held by that part of the trust. Similarly, an individual with an interest in a disregarded entity is considered to own any SFFAs owned by that entity.

Filing Thresholds

You must file a Form 8938 if:

• Living in the US and filing a return other than a joint return, and the total value of the SFFAs for the year is $50,000 on the last day of the tax year or $75,000 any time during the tax year
• Living in the US and filing jointly, the thresholds are $100,000 and $150,000
• Living abroad and filing a return other than a joint return, the thresholds are $200,000 and $300,000
• Living abroad and filing a joint tax return, the thresholds are $400,000 and $600,000

What are the penalties if you don’t file?

The fines are harsh. Penalties for failing to file Form 8938 or to accurately report SFFAs is a minimum fine of $10,000. If you do not file a correct Form 8938 within 90 days after IRS notice, the penalty is increased by $10,000 for each 30-day period of noncompliance, up to a $50,000 maximum.

Plus, if you don’t pay the correct amount because of an undisclosed foreign financial asset, the penalty is doubled to 40%.

Peter Cuttini, CA, CPA
Partner in Dube & Cuttini,

For more questions on how the new SFFA rules may affect you, or on other US tax questions, please contact Peter at petercuttini@dubecuttini.com.

For partnerships, the CRA has changed an administrative policy that was first proposed in September, 2010. The change triggers additional filing requirements for many partnerships throughout Canada.

Bottom line is more paperwork. But I’ll spell out the details.

The technical details

The reporting rules generally require partnerships to submit a T5013 Partnership Information Return to the CRA by March 31 of each year. This includes a variety of schedules primarily related to the financial status of the partnership and tracking partner capital balances. Previously, partnerships with fewer than six partners were typically exempt from the reporting. Now, the CRA is basing the threshold for reporting on the financial size of the partnership as well as the nature of the partners.

The forms themselves will be changing as well for 2011.

Financial thresholds for reporting

Effective January 1, 2011 (for the March 31, 2012 reporting deadline) a partnership will need to report:

• If, at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets; or
• If, at anytime during the fiscal period,
• the partnership is a tiered partnership (has another partnership as a partner or is itself a partner in another partnership);
• the partnership has a corporation or a trust as a partner;
• the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or
• the Minister of National Revenue requests one in writing.

So, what does this mean? If you have a partnership, you’re more likely now to require additional reporting to the CRA. This can be as simple as a partnership with:

• your spouse in owning different pieces of real estate
• another entity such as a corporation or a trust (which includes an estate – so for example if your partner passed away you’ll need the additional reporting)
• another partnership

The financial thresholds will get easier and easier to breach as the investment portfolio grows, and given the CRA’s reluctance to regularly update many threshold levels over the years for inflation. Initially, I think the financial thresholds seem relatively reasonable.

A word of caution on “joint-venture partnership”

Further, to all of those who have been ignoring my words of caution related to calling your business/investment relationship with others a “joint-venture partnership”, I really hope that the additional reporting requirements don’t affect you. However, I have serious concerns. Partnerships and joint ventures can be very different creatures. Please don’t confuse them or invite the CRA to distinguish them on your behalf.

While more reporting to the CRA is not the end of the world, this is another administrative burden imposed on real estate investors that investors may regard with frustration.

More recent changes to the partnership rules will effectively result in changes in the year-ends for different corporations, but we’ll talk about that in a future article.

For additional information you can refer to http://www.cra-arc.gc.ca/tx/bsnss/tpcs/prtnrshps/menu-eng.html

George E. Dube, CA

• Please forward us the accounting documentation for completing the trust’s financial statements and tax return by the end of January.
• It is absolutely critical that if the trust has any loans to non-arm’s length parties (for example yourself, spouse, a company that you or family members have partial ownership of), the interest must be paid by January 30th (not the 31st) to avoid income tax “attribution”.

If you have any questions please email George (georgedube@dubecuttini.com).

If we have your information already, please confirm that we will be preparing T4s or T5s for you. Please email Cynthia (cynthiaparent@dubecuttini.com) or Joseph at (josephmartins@dubecuttini.com).

Holiday Office Hours

As is our tradition, our office is closed at noon on  Friday, December 23rd, reopening Monday January 2nd.

The CRA has posted an article outlining what you should beware of when you receive a communciation from someone purporting to be CRA: Beware of fraudulent communications.

They have also provided samples of fraudulent communications that taxpayers have been receiving:

• Samples of fraudulent emails
• Samples of fraudulent Online Refund Forms

As they note in the article, the CRA does not do the following:

• The CRA will not request personal information of any kind from a taxpayer by email.
• The CRA will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.
• The CRA will not leave any personal information on an answering machine.

The CRA urges that when in doubt, ask yourself the following:

• Am I expecting additional money from the CRA?
• Does this sound too good to be true?
• Is the requester asking for information I would not include with my tax return?
• Is the requester asking for information I know the CRA already has on file for me?
• How did the requester get my email address?
• Am I confident I know who is asking for the information?

Having a healthy dose of caution when receiving unexpected emails is a good policy.

There are some restrictions when making online payments. For example, the banks from which you can make the payments are limited. As well, there are limits to the total amount you can pay each day. But this is definitely worth checking out.

1. Go to the CRA’s web site: http://www.cra-arc.gc.ca/menu-eng.html
2. Follow the instructions to make either instalment or tax payments on filing.
3. About half way down the page, under “Links for businesses” select “My Payment” and it will take you to another screen.
4. Then click the box that says “Start My Payment” and it will take you to another screen.
5. Then click the box that says “Continue” and it will take you to another screen.
6. Then under the title “Business” select “Corporation Income Tax (T2)” and it will take you to another screen.
7. If you are making an instalment payment, then click the line that says “Interim” and it will take you to another screen. If you are making the payment identified on your corporate tax return then select “Payment on Filing” and it will take you to another screen.
8. You will then have to enter in you corporate account number, the corporation year end that you want the payment to apply to and the amount. Then select “Continue” and follow the instructions.

And, that’s as far as our instructions can go as the next screens are available only to those making payments.  However, the next steps should ask you to confirm the transaction. Once you do that, you will be directed to your financial institution’s online banking page, you log in and proceed as you would to pay bills.  Once you authorize the funds transfer, you will be redirected back to CRA’s web site and you can print out a receipt.  If you are not redirected back to CRA’s web site, the payment service provider will present a default receipt. We always recommend printing the receipts for your records to prove the payment was made.

• Choosing a real estate accountant
• When, if ever should I incorporate?
• New rules for JV’s and partnerships
• Court cases you need to know about

• Structure
• Liability
• Withholding taxes
• Income, capital gains and estate taxes