December 2018 Newsletter

It’s December, and time to think of some tax planning ideas. If you wait until your tax return is due next April or June, it will generally be too late to change your tax situation for this year.

Private Companies — Pay out Dividends before the Tax Cost Goes Up

The so-called “gross-up” and dividend tax credit apply when you receive dividends from a Canadian corporation. The purpose of these rules is to put you in the same position as you would be if you earned directly the income earned by the corporation — taking into account that the corporation has already paid corporate income tax. The “gross-up” brings into your income an amount that theoretically reflects the pre-tax income earned by the corporation to pay you the dividend, and the dividend tax credit then gives you a credit for the corporate tax that the corporation theoretically paid on that income. This so-called “integration” is often not exact, especially when varying provincial tax rates are taken into account.

The federal corporate tax rate on small business active business income (up to $500,000 per year for most Canadian-controlled private corporations) will drop from 10% in 2018 to 9% in 2019, and the gross-up and dividend tax credit will be reduced to match. (But the 2019 changes to the gross-up and credit will apply to all dividends, even if the corporation originally paid tax at a rate higher than 9%.)

This means that the effective personal tax rate on “non-eligible” dividends from private corporations will increase for 2019. For example, if you are in the top bracket in Ontario, the rate will increase from 46.84% to 47.78%.

Other things being equal, if you are planning to have your corporation pay out dividends in the near future, do it before the end of 2018.

If you buy a pick-up truck, van or similar light truck for your business, you do not want it classified as an “automobile” or “passenger vehicle” for income tax purposes. If it is, there are certain tax costs, such as the “standby charge” applying to your personal use of the vehicle, and a cost limit of $30,000 (before sales taxes) for purposes of claiming capital cost allowance.

To avoid it being an “automobile”, you generally must be able to show that your vehicle meets one of the following conditions:

If you are on the board of a charity, or involved in helping a charity, you should make sure the charity knows about the special complications for charities in complying with the GST/HST.

(A “charity”, for this purpose, means a registered charity for income tax purposes. However, it does not include a university, hospital, school, college or a local authority that has been determined by Revenue Canada to be a municipality — these are called “public institutions” under the GST/HST and are subject to different rules.)

There is a Public Service Body rebate for charities. Charities are entitled to claim a rebate of a portion of the GST/HST they pay on their purchases. For the 5% GST (or 5% federal portion of the HST), the rebate is one-half of the 5%. For the 8% or 10% provincial portion of the HST, the rebate is 82% of the 8% in Ontario; 35% of the 10% in PEI; and 50% of the 10% in the other three Atlantic provinces. The total rebate can be quite substantial. For example, in Ontario a charity gets back 9.06 points of the 13% HST. 

Dangers of buying real estate from a person who may be non-resident

If you buy real estate — such as a house or condo — from a non-resident of Canada, you have an obligation to withhold 25% of the purchase price as tax unless the vendor provides you with a “section 116 certificate” from the CRA.

Non-residents generally are subject to Canadian income tax only on certain Canadian-source income. One such source is capital gains on “taxable Canadian property”, which generally includes Canadian real property, shares of corporations whose value is primarily attributable to Canadian real property, and certain other items.

Of course, a non-resident who sells Canadian property might not have any other property in Canada, and so the CRA might not be able to enforce collection of the tax that is payable on the gain. To solve this problem, section 116 of the Income Tax Act makes the purchaser potentially liable for the vendor’s capital gains tax.