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Income-Splitting for Private Companies

The Government of Canada has proposed technical rule changes that will reduce the tax benefits of income-splitting using private corporations, effective January 1, 2018. Background Opportunity: Canada’s tax system is designed based on the principle of integration, wherein income earned by a corporation and distributed to shareholders via dividends should be subject to the same […]

December 15, 2017/by Chris Lazarte

Andrea Wong CPA, Blog, Tax Tips

Taxation of Insurance for Corporations

Taxation of Insurance for Corporations If you’re incorporated, you might be wondering what the implications are of paying insurance premiums and collecting benefit proceeds through your corporation. Or perhaps you are considering offering employee benefits like life, disability, and extended health and dental insurance coverage as a way of attracting and retaining quality personnel. As […]

December 12, 2017/by Chris Lazarte

Andrea Wong CPA, Blog, Tax Tips

Income-Splitting for Private Companies

December 15, 2017/by Chris Lazarte

Andrea Wong CPA, Blog, Tax Tips

Taxation of Insurance for Corporations

December 12, 2017/by Chris Lazarte

Full Sized Blog Element (Big Preview Pic)

Andrea Wong CPA, Blog, Tax Tips

Income-Splitting for Private Companies

The Government of Canada has proposed technical rule changes that will reduce the tax benefits of income-splitting using private corporations, effective January 1, 2018.

Background

Opportunity: Canada’s tax system is designed based on the principle of integration, wherein income earned by a corporation and distributed to shareholders via dividends should be subject to the same tax as if it was earned directly by an individual via a salary. In other words, there should be no tax consequence to incline people to operate with a corporation over without one, or to pay dividends or salary over the other. Although a positive theory, differences in the top personal and corporate rates make perfect integration complex and hard to achieve.

Motivation: Income-splitting is motivated by Canada’s graduated personal tax rates (i.e. the more you earn, the higher your rate) vs. lower corporate rates. A family’s overall tax can be reduced by using a corporation to defer tax and shift income from a higher-income family member to a lower-income one. One common method is to issue shares of the corporation to family members, then pay dividends out to all shareholders. Adult children attending school often pay zero tax on those dividends due to their low tax bracket and other special tax credits they receive.

Why the Change?

Historically, the government has allowed income-splitting via dividends as a perk for small businesses, and even created other provisions that treat the family as one economic unit. For example, a higher-income spouse can contribute to a Registered Retirement Savings Plan on behalf of a lower-earning one and the Goods and Services Tax Credit is calculated using family income. If the family was the basic tax-paying unit, there would be no point to enacting rules against income-splitting. However, the current Liberal government, elected in 2015 largely with the support of younger voters who are less wealthy and less likely to own businesses, favours the view of an individual-based tax system rather than family-based. This government has also argued that over time, many high-income earners took advantage of the system and incorporated just to avoid paying their fair share. The new legislation is aimed in fairness to maintain a neutral tax system between employees and the self-employed who use corporations.

Proposed Legislation

The current law subjects children under the age of 18 to tax on split income (“TOSI”) at the highest marginal tax rate. Split income is defined as almost any type of income received from non-publicly traded entities other than salary or business income. The proposed revisions include the following:

Application of TOSI not just to minor children, but to anyone related to the income-generator (e.g. uncle, niece, etc.) and who receives income derived from his/her business, partnership, trust, etc.
Expanded definition of who is the income-generator to make it more difficult to avoid this status through indirect ownership or an indirect flow of funds.
Broader definition of split income to include interest and payments made through intermediary arrangements as well as second-order income for family members under age 24 (i.e. subsequent income earned on original income that was caught under the split income rules).
Prohibition of capital gains deductions with respect to capital gains that are TOSI or accrued while an individual was under age 18 or the shares are held in a trust.
Exemption from TOSI of reasonable amounts of income received by adult family members (e.g. if his/her labour contribution is worth $50,000 and he/she receives a $60,000 salary, TOSI only applies to the excess $10,000).
Denial of family members’ contribution (and thus the right to receive income) if the business’ principal purpose is to derive income from property or the contributed asset was financial assistance like guaranteeing a debt.
Additional restrictions on the labour contribution and return on capital for individuals under age 24.
Joint and several liability (i.e. full responsibility) of the income-generator for TOSI of individuals under 24.
Changes to related income-measurement items (e.g. GST/HST credit, Old Age Security clawback, etc.).

The proposed law is still under discussion and it’s likely that more revisions are coming! Attached is a Guide on Income-Splitting for Private Companies. Contact us today to find out what you can expect and how to prepare your company and family for what’s ahead.

December 15, 2017/by Chris Lazarte

Andrea Wong CPA, Blog, Tax Tips

Taxation of Insurance for Corporations

If you’re incorporated, you might be wondering what the implications are of paying insurance premiums and collecting benefit proceeds through your corporation. Or perhaps you are considering offering employee benefits like life, disability, and extended health and dental insurance coverage as a way of attracting and retaining quality personnel. As accountants, we’re starting to see the same question come up time and time again:

“How is insurance treated for tax purposes in corporations?”

We always recommend seeking personal tax advice for your specific situation. But if you’re looking for some general guidance, here’s what you need to know…

Life Insurance

If the corporation owns the life insurance policy and is its beneficiary, it can pay the life insurance premiums and collect the proceeds upon the death of the covered person. The corporation cannot deduct the premiums as a business expense, but since a corporation’s tax rate is usually lower than the personal tax rate, it’s likely still advantageous (i.e. cheaper) to fund the premiums with corporate dollars rather than paying for it personally. Proceeds are received tax-free to the corporation and an equivalent amount (net of the adjusted cost basis) is added to the company’s capital dividend account which can then be paid out tax-free to shareholders as a capital dividend.

If a shareholder owns the policy, corporate-paid premiums are included in the shareholder’s income as a shareholder benefit and are not deductible for the corporation. Benefit proceeds are still collected tax-free.

If an employee owns the policy, corporate-paid premiums are included in the employee’s income as a taxable benefit, but may be deducted against the corporation’s business income provided the premiums are a reasonable business expense. Again, benefits are collected tax-free. Note this applies for group term life insurance as well as for individual life insurance policies owned by an employee where premiums are paid by the corporation.

Another case where corporate-paid life premiums may be tax-deductible is when the policy is assigned to a financial institution as collateral security for a loan. If certain criteria are met (e.g. the lender requires the collateral assignment as a condition for granting the loan, interest on the loan is deductible, etc.) then the corporation is allowed to deduct the lesser of the premiums and the net cost of pure insurance.

Disability Insurance

When a corporation pays premiums for an individual disability insurance policy owned by an employee, the premium is added to the employee’s income as a taxable benefit and can be deducted by the corporation as a reasonable business expense. Benefit proceeds are not taxable.

For group sickness or accident insurance plans (i.e. a group of disability insurance policies owned and premium-paid by the corporation with benefits directly payable to employees), corporate-paid premiums are not considered taxable employee benefits and are tax-deductible to the corporation. However, any disability benefits collected in the future will be taxable to employees. Because of this, experts typically advise employees to pay for disability insurance themselves via payroll deductions so that they receive a taxable benefit for the premiums but the benefit amount becomes non-taxable.

Note that in owner-manager situations, different tax consequences will result if disability coverage is received by the insured in his/her capacity as a shareholder rather than an employee. Premium payments will be included in the shareholder’s income with no deduction to the corporation, and benefit proceeds will be non-taxable.
Extended Health and Dental Insurance

In general, corporate-paid premiums are treated as taxable income for the employee and can be deducted as a business expense by the corporation. The only exception are premiums paid towards private health services plans (PHSPs), which are not included in the employee’s income but are still tax-deductible for the corporation.

Benefit proceeds are received tax-free. Any portion of the premiums paid by the employee qualifies as a medical expense of the employee in calculating their medical expense tax credit on their personal income tax return.

For the above to apply in owner-manager situations, a shareholder must receive the benefit in his/her capacity as an employee, not as a shareholder. This means he/she must be actively engaged in the business activities of the corporation, and the benefits must be reasonable and consistent with what would be offered to an arm’s length employee providing similar services. If not, the premiums payments will be included in the shareholder’s income and be non-deductible to the corporation, and benefit proceeds remain tax-free.

Conclusion

As you can see, the tax treatment of premiums and benefits of insurance policies depends on various specifics such as the purpose and ownership of insurance, status as a shareholder vs. employee, etc.

Do you want to make sure your corporation is achieving optimal tax efficiencies for insurance payments?

We’re here to help! Contact us today and a licensed accounting and tax professional will be in touch to help you take a closer look.

December 12, 2017/by Chris Lazarte

Half Sized Blog Element (Single Author Style)

Half Sized Blog Element (Multi Author Style)

Income-Splitting for Private Companies

Taxation of Insurance for Corporations

Income-Splitting for Private Companies

Taxation of Insurance for Corporations

Full Sized Blog Element (Big Preview Pic)

Income-Splitting for Private Companies

Taxation of Insurance for Corporations

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