Canadian Income Splitting Rules and Information Income splitting refers to splitting the income received from a corporation among family members. This was used to reduce tax owed if those family members were taxed at a lower rate than the primary individual. The government put measures in place to limit this activity such as the “kiddie tax”. This involved taxing dividends paid to children at the highest rate but now taxes more types of income and can also cover adults. Further expansions of the split income rules include expanding the tax to amounts received by adults. This includes dividends or interest paid by a private corporation to an individual from a related business, unless it falls under a specific exclusion. Income Splitting Exclusions Adult Individuals: Excluded Business Amounts that come from a related business where the individual was engaged actively on a regular, continuous and substantial basis are excluded from the income splitting rules. This means that they are “Actively Engaged” and involves meeting this criteria. They should have worked in the business for at least an average of 20 hours per week during the portion of the tax year of the individual that the business operates, or in any of the five prior years. Individuals Age 25 or Over: Excluded Shares Income or taxable capital gain from selling excluded shares or a payment that is a reasonable return fall under another exclusion. To fall under this exclusion: Individuals Age 25 or Over: Reasonable Return These payments are reasonable returns for the individual and fall under the exclusion if any of this criteria is met: Income Splitting for Individuals Between the Ages of 18 – 24 Safe Harbour Capital Return: Return on property that was contributed by the individual to support the related business and doesn’t exceed a set capital return than can be dervided by formula can be excluded. Arm’s Length Capital: For an individual’s property that is not derived from property income in respect to a related business, borrowed under a loan, or is transferred/inherited from a related person, the amount can fall under an exclusion as well. With tax season coming up, it is crucial to prepare and consult with an accounting professional if you aren’t sure on how the CRA will tax your income. Before attempting any form of income splitting, get advice on what the best way to obtain income from a related business with an accountant. For more information, visit the CRA’s section on Income Splitting by clicking here.
Author Archives: Advanced Tax
The Management Salary Deadline is Almost Here! It’s that time of the year where business owners need to finalize how they’ll be paid and can be done in a few different ways. Management salary is one way to do so and involves paying remittance on the salary paid. The deadline for paying management salaries is December 31 and will be counted as a deduction that will reduce your corporate net income. It will be taxed on your personal tax return instead. Advantages of Paying Yourself a Management Salary Some benefits of using this method include: Some Disadvantages of Paying Yourself the Salary Paying Yourself in Dividends Instead of a Management Salary There are some benefits of paying yourself in dividends instead, and include: Key Aspects of Dividends to Take Note Of Using the dividend method to assist in cash flow management while accepting the penalties and interest instead can prove to be quite costly. The Q1 2023 interest rate on late tax payments is currently 8%, and installment interest is an additional 8%. Penalties can also be charged on top of the amount making it even tougher to manage cash flow. While it is technically simpler to just let the accountant deal with preparing your taxes after taking cash out of the company, it does lead to some consequences. Due to the strict nature of remittance and calculating withholding taxes and CPP on salaries, many business owners seek to avoid the process. With the way technology and accounting services have evolved, preparing T4 slips for employment income versus T5 slips has reduced in difficulty. Of course there are penalties for late remittance, but if you get yours in before the end of this year, it won’t be something to worry about. Find out more about the different methods of paying yourself as a business owner by checking out these links to other articles like on FilingTaxes.ca and ConnectCPA.ca
Learn About the Interim Canada Dental Benefit The Canadian government has brought in the interim Canada Dental Benefit. This helps lower dental costs for eligible families earning less than $90,000 annually. It applies if the child receiving dental care is under 12 years old and doesn’t have access to a private dental plan. Children eligible must be under 12 years old as of December 1, 2022 and receive dental care between October 1, 2022 and June 30, 2023. Dental Benefit Payments Depending on your adjusted family net income, AFNI, the dental benefit involves a tax-free payment per child of: Each eligible child can get a maximum of 2 payments and the interim dental benefit is available for only 2 periods. Eligibility for the First Dental Benefit Period To qualify for the first benefit period of October 1, 2022 to June 30, 2023, this criteria must be met: Eligibility for the Second Dental Benefit Period The second benefit period is from July 1, 2023 to June 30, 2024 and has the same criteria as the first benefit with the following differences: The Additional Payment for Higher Dental Costs If you are not applying for both benefit periods and the child‘s dental costs are more than 0 in the period of application, you may meet the criteria for an additional payment. This payment will be available starting on July 1, 2023. You must have already applied and been eligible to qualify for the additional payment. Benefit Amounts by Adjusted Family Net Income Adjusted Family Net Income Full Custody Amount Less than $70,000 $650 $70,000 to $79,999 $390 $80,000 to $89,999 $260 $90,000 or More Not Eligible For more details, check out the CRA’s guide to the Canada Dental Benefit by clicking here or contact us.
Guide to Payroll Tax Deductions and Remittances Any employer, including non-residents, are required to withhold amounts of the income tax liability of an employee in Canada even if they will be exempted in other forms such as tax treaties. If an employer doesn’t want to withhold the payroll tax amounts, they would have to apply for and get an income tax waiver from CRA. Eligibility for a Payroll Program Account If you meet any of the following criteria, you need to register for a payroll program account: If you already have a business number, you just need to add a payroll program account to it. Otherwise, if you don’t have a BN, it needs to be setup and registered for a payroll program account before the date your first remittance is due. Payroll Tax Remittance Due Dates Depending on the withholding amount for your remittance, there are different due dates assigned by the CRA to receive the payments. If the due date is on a Saturday, Sunday, or public holiday that is recognized by the Canada Revenue Agency, it is then due on the next business day. The four types of remitters are: Remitter Type Due Dates Regular Remitter The deductions must be received on or before the 15th day of the month after the month you pay your employees. Quarterly Remitter The deductions must be received on or before the 15th day of the month following the end of each quarter. These dates are April 15, July 15, October 15, and January 15 and are based on quarters in a calendar year. Accelerated Remitter Threshold 1 The deductions for this remitter type must be received by the 25th day of the month in which payroll is completed in the first 15 days. For payroll completed from the 16th to the end of the month, remittances are due by the 10th day of the following month. Accelerated Remitter Threshold 2 The remittances must be received within three working days after the last day of the following pay periods: – 1st to the 7th day of the month– 8th to the 14th day of the month– 15th to the 21st day of the month– 22nd to the last day of the month Have Questions on Managing Your Payroll Tax? Managing payroll in Canada can seem complicated, but it is important that you consult with a tax specialist when doing so. Contact us if you have any questions or visit the CRA’s guide to payroll deductions and remittances by clicking here.
How the Canadian Luxury Items Tax Affects You There is a new tax called the Luxury Items Tax that came into effect on September 1, 2022. This luxury tax applies to the sale or import of certain vehicles, aircraft, and vessels. Vehicles and aircraft priced or valued over $100,000 along with vessels over $250,000 will incur the tax. Vehicles That Are Subject to the Luxury Items Tax If a motor vehicle is priced or valued at more than $100,000 and meets the criteria listed below, the luxury items tax will be applied on its sale or import. Basically, this includes sedans, coupes, hatchbacks, convertibles, SUV’s, and light-duty pickup trucks. Exclusions to the Definition of a Subject Vehicle Here is the list of motor vehicles that are not subject to the luxury tax: Recreational vehicles designed or adapted to provide temporary residential accomodations and have at least four of the following features: Other exempted vehicles: How to Calculate the Tax Amount To calculate the amount of luxury tax owed on a purchase or import, the taxable amount of the purchase is used. The amount owed is equal to the lesser of 10% of the taxable amount or 20% of the amount above the price threshold. Here are the two calculations needed and only the lower result is used to calculate the luxury tax: Keep in mind that this applies to certain motor vehicle leases as well. To find out more information, please visit the CRA’s website and their information section on the Select Luxury Items Tax Act. Primarily, it will go into further details about subject (motor) vehicles and how the tax is applied. Click here to visit the page.