There were a few items of significant interest to small business owners in the 2012 Federal Budget. Most of them are reflected in the government’s expressed concern for closing perceived tax loopholes. Here are some prominent items relevant to small business owners that should be reviewed.
Retirement compensation arrangements
The Canada Revenue Agency has identified a number of arrangements that seek to take advantage of various features of the retirement compensation arrangement (RCA) rules in order to obtain unintended tax benefits.
One example given is a procedure in which a large deductible contribution to an RCA makes its way back into the hands of the contributor. The RCA is left with few or no assets but is still able to claim refundable tax. Concern is also expressed with the potential to obtain unintended tax benefits through the use of insurance in conjunction with RCAs.
New prohibited investment and advantage rules will be put in place to prevent RCAs from engaging in impugned non-arm’s length transactions. These rules will be based very closely on existing rules for tax-free savings accounts and RRSPs. The rules will apply to RCAs where there is a “specified beneficiary,” generally being an employee entitled to benefits under the RCA who has a significant interest in his or her employer.
The prohibited investment measures will apply in respect of investments acquired, or investments that become prohibited investments, on or after Budget Day. As well, a special tax equal to the fair market value of an “advantage” will generally apply to advantages extended, received or receivable on or after Budget Day.
Finally, if RCA property has declined in value, the RCA tax will be refunded only in circumstances where the decline in value of the property is not reasonably attributable to prohibited investments or advantages.
Employee profit sharing plans
Employee profit sharing plans (EPSPs) are trust arrangements that enable employers to share profits with employees.
Following from a review announced in Budget 2011, the government has determined that EPSPs have been used increasingly as a means for some business owners to direct profits to members of their families in order to reduce or defer the payment of income tax on these profits.
The Budget proposes a targeted measure to discourage excessive employer contributions for employees who have a significant equity interest in their employer or who do not deal at arm’s length with their employer.
This measure will apply in respect of EPSP contributions made by an employer on or after Budget Day.
Group sickness or accident insurance plans
Budget 2012 proposes to include the amount of an employer’s contributions to a group sickness or accident insurance plan in an employee’s income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This will not affect the tax treatment of private health services plans.
The measure will generally apply in respect of employer contributions made on or after Budget Day to the extent that the contributions relate to coverage after 2012.
Eligible dividends: Split-dividend designation and late designation
It’s not all bad news.
The rules governing the designation of dividends entitled to the enhanced dividend tax credit are being eased. Under current rules, the enhanced dividend tax credit is available only if, at the time the dividend is paid, the corporation notifies each shareholder in writing that the dividend is designated as an eligible dividend. The designation applies to the entire dividend.
The Budget will now allow a proportion of the dividend to be designated as eligible, and late designations will be allowed within three years following the date the designation was first required to be made.