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The Federal Government continues to tinker with the specifics of their giant subsidy program for Canadian businesses.  We are sending you information based on announcements made, to date.  Draft legislation has yet to be released, so things are still in flux.  But here is what we know at this time:

Payroll Assistance for Employers

1. Corporations, partnerships, proprietors, charities and not-for-profit organizations of all size are eligible for a subsidy from the Government regarding their payroll costs, called the ‘Canada Emergency Wage Subsidy.’

2. To qualify for the subsidy, the entity must be able to prove a greater-than-30% decline in revenues, for the eligible periods March 15 through June 6, 2020, comparing revenues of March of 2019 to March of 2020 through May of 2019 to May of 2020, monthly.  Those businesses who file monthly GST returns will already be set up to make this calculation, even though, as of today, they are almost a month away from the filing due date of the March 2020 GST return.  Others who file less frequently, or who didn’t exist in March of 2019 will have more difficulty in making this calculation.  Details are to follow for those businesses soon, we hope.

3. Starting from March 15, 2020, you can apply for a taxable subsidy for a maximum of 75% the first $58,700 of salary costs per employee, for a maximum of $847/week/employee.  You might ask: why such odd numbers ? There’s no answer offered for that, but the weekly subsidy is calculated as 75% x $58,700 divided by 52 weeks.

4. What about the other 25% ?  At this time, there is no apparent obligation for employers to ‘top up’ the wage by digging into their own pockets.  Therefore, businesses can, if necessary, drop their payroll by 25% and have the Federal Government cover the entirety of their new, lower wage cost.

5. The Government only ‘encourages’ Canadian businesses to maintain payrolls at their previous levels, using their “best efforts” – there is no current obligation to do so.

6. If you have laid off employees for the simple reason that there is no work to be done (for example, restaurants and bars, or many others forced to close due to ‘social distancing’ and other requirements), then you cannot get a subsidy for them while they are laid off.  Those workers may, individually, be eligible for the ‘CERB’ benefit, outlined below.

7. Wages for this purpose apparently include non-arm’s length wages, so long as they remain reasonable as to the amount paid.  Therefore, owner-managers of wage paying entities should be able to include their own wages in the subsidy application.

8. Businesses must apply for the subsidy through a CRA portal that does not yet exist.   It will be available in 3 to 6 weeks.  Another up to 6 weeks could be needed to receive the funds – so your subsidy could be as much as 12 weeks delayed, from now.  If you lack the finances to maintain payroll, even at a 75% level, then you won’t get a subsidy, or the subsidy you receive will presumably have to be repaid.

9. Since the online CRA portal does not yet exist, businesses have time to firstly calculate whether they have indeed suffered a 30% revenue loss, March 2020 vs. March 2019.

10. Those businesses that do not qualify for this new subsidy may continue to qualify for the previously announced wage subsidy of 10% of remuneration paid from March 18 to June 19, up to a maximum subsidy of $1,375 per employee and $25,000 per employer.  Employers can reduce the remittance of payroll income tax according to their calculation of the amount of the subsidy.

11. Your business should register for direct deposit with CRA to ensure the funds are received on a timely basis.  We encourage clients to register for “My Business Account” with CRA online to manage that.

Assistance for the Self-Employed and Other Individuals

There is another program aimed directly at persons who have been laid off, or who otherwise have lost their income.  It is called the ‘Canada Emergency Response Benefit’ (CERB).

1. It also runs from March 15^th, 2020, for up to 16 weeks, maximum.  Applications will begin the week of April 6, 2020.

2. The CERB applies to workers who have stopped working due to COVID-19, are sick, are quarantined, giving care to someone with COVID-19, or who must stay home because they are parents of children who are sick or at home because of school and daycare closures, for at least 14 consecutive days in the initial 4-week period.

3. The CERB applies to wage earners, contract workers, self-employed persons and others not otherwise eligible for EI (Employment Insurance).

4. It is for a maximum of $2000 for a 4-week period ($500/week).

5. You will be able to apply online or by phone.  We encourage clients to register for “My Account” with CRA online.

Business Credit Availability

The Government of Canada has announced a small business lending program to provide greater access to capital.  It is called the ‘Canada Emergency Business Account.’

1. Applications must be made through your financial institution.

2. The program will provide interest-free loans of up to $40,000 to small businesses and non-profits to help cover operating costs where their revenues have been reduced due to COVID-19.

3. Repaying the balance of the loan by December 31, 2022 will result in loan forgiveness of 25% (up to $10,000).

Please contact us for any additional information.

The Lohn Caulder Team

Dear Clients and Friends –

We at Lohn Caulder are still at work !  However, ‘work’ happens to be at 45 different locations across the city, all connected electronically on a secure communication system.

While there are some staff in our regular office, generally they are not accessible from the outside.  Our building has been, more or less, ‘locked down’.

Please have patience during this difficult time.  We hope to be as accessible as ever over the phone, or e-mail.

Here’s a video message from Jason Nakano, our managing partner, to bring you up to date:

Since the beginning of March, restrictions and measures related to COVID-19 have rapidly escalated. While the first stages focused on public health and safety, in very short order, businesses and personal finances began to be affected. It is clear that these challenges will become worse before they get better. In an effort to combat these effects, the Government of Canada released a series of financial measures in mid-March.

This newsletter summarizes selected government comments up to March 18, 2020.

INDIVIDUALS

Tax Return Due Date Deferral: The personal tax filing due date will be deferred until June 1, 2020. However, those expecting refunds or benefits (such as the GST/HST credit, Guaranteed Income Supplement and Canada Child Benefit) should file as early as possible. The government release encourages Canadians not to delay their filings in order to ensure their income-tested benefits are accurately computed.

Tax Payment Deferral: Taxpayers may defer, until after August 31, 2020, the payment of income tax amounts that become owing on or after March 18, 2020 (also including installments) and before September 2020. The government documents indicate that payment will be deferred “until after August 31, 2020”, which seems to imply payment will be due on September 1. No interest or penalties will accumulate on these amounts during this period.

Individuals Without Paid Sick Leave: For Canadians without paid sick leave (or similar workplace accommodation) who are sick, quarantined or forced to stay home to care for children, the government is:

• Waiving the one-week waiting period for those in imposed quarantine that claim Employment Insurance (EI) sickness benefits, effective March 15, 2020.
• Waiving the requirement to provide a medical certificate to access EI sickness benefits.
• Introducing the Emergency Care Benefit providing up to $900 bi-weekly, for up to 15 weeks (comparable to EI sickness benefit). This benefit would provide income support to:

• workers, including the self-employed, who are quarantined or sick with COVID-19 but do not qualify for EI sickness benefits;
• workers, including the self-employed, who are taking care of a family member who is sick with COVID-19, such as an elderly parent, but do not quality for EI sickness benefits; and
• parents with children who require care or supervision due to school closures, and are unable to earn employment income, regardless of whether they qualify for EI or not.

Application for the Benefit will be available in April 2020, and require Canadians to attest (and continue to attest every two weeks) that they meet the eligibility requirements. Individuals can apply through CRA’s MyAccount, their My Service Canada Account, or by calling an automated toll-free number not yet released.

Longer-Term Income Support

• An Emergency Support Benefit will provide up to $5.0 billion in support to workers who are not eligible for EI and who are facing unemployment. The individual amounts and process will be disclosed shortly.
• Implementing changes to the EI Work Sharing Program, which provides EI benefits to workers who agree to reduce their normal working hour as a result of developments beyond the control of their employers, by extending the eligibility of such agreements to 76 weeks, easing eligibility requirements, and streamlining the application process.

• Low/Modest Income Individuals
  • A one-time special payment by early May 2020 through the Goods and Services Tax credit (GSTC) will be made. This will double the maximum annual GSTC payment amounts and result in an average boost to income for those benefitting by close to $400 for single individuals and close to $600 for couples.
  • The maximum annual Canada Child Benefit payment amounts would be increased by $300 per child for the 2019-20 benefit year. This will be added to the May, 2020 benefit cheque.
• Canadians Abroad: The Emergency Loan Program for Canadians Abroad will provide the option of an emergency loan to Canadians in need of immediate financial assistance to return home or to temporarily cover their life-sustaining needs while they work toward their return. Each application will be assessed according to their specific situation and needs. This emergency assistance is a repayable loan. Eligible Canadians currently outside Canada and needing help to return home can contact the nearest Government of Canada office (https://travel.gc.ca/assistance/embassies-consulates) or Global Affairs Canada’s 24/7 Emergency Watch and Response Centre in Ottawa at +1 613-996-8885 (collect calls are accepted where available) or email sos@international.gc.ca.
• Students: A six-month interest-free moratorium on the repayment of Canada Student Loans for all individuals currently in the process of repaying these loans will be provided.
• Minimum RRIF Withdrawals: The required minimum withdrawals from Registered Retirement Income Funds (RRIFs) will be reduced by 25% for 2020. Similar rules would apply to individuals receiving variable benefit payments under a defined contribution Registered Pension Plan.\

BUSINESSES

Tax Payment Extension:
Businesses may defer, until after August 31, 2020, the payment of income tax amounts that become owing on or after March 18, 2020 and before September 2020. This relief would apply to tax balances due, as well as instalments. No interest or penalties will accumulate on these amounts during this period.

Other Payment and Filing Extensions: No comment was made about changing the filing and payments dates for payroll, GST/HST, and other non-income tax items.

CRA Audit Activity: CRA will not contact any small or medium businesses to initiate any post assessment GST/HST or Income Tax audits for the next four weeks. For the vast majority of businesses, the CRA will temporarily suspend audit interaction with taxpayers and representatives.

Liaison Officer Service: The Liaison Officer service is now available over the phone and will be customizing information by ensuring small businesses are aware of any changes such as filing and payment deadlines, proactive relief measures, etc.

Payroll Subsidies: The government is proposing to provide eligible small employers a temporary wage subsidy for a period of three months. The subsidy will be equal to 10% of remuneration paid during that period, up to a maximum of $1,375 per employee and $25,000 per employer. Businesses will benefit immediately from this support by reducing their remittances of income tax withheld on their employees’ remuneration. Employers benefiting from this measure will include corporations eligible for the small business deduction, as well as non-profit organizations and charities.

OTHER FILINGS AND ADMINISTRATION

Trust Filing Due Date Deferral: For trusts having a taxation year ending on December 31, 2019, the return filing due date will be deferred until May 1, 2020.

T3 Slips Submission Date: No specific statement was made regarding the deadline for filing T3 slips reporting income taxable to the trust beneficiaries.

Other Returns: Many taxpayers are required to file other tax and information returns. No mention was made of these, including partnership returns and NR4 reporting slips.

EFILE Signatures: In order to reduce the necessity for taxpayers and tax preparers to meet in person, effective immediately the CRA will recognize electronic signatures as having met the signature requirements of the Income Tax Act, as a temporary administrative measure. This provision applies to authorization forms T183 or T183CORP.

FINANCIAL ASSISTANCE

Individuals: Canada’s large banks have confirmed that this support will include up to a 6-month payment deferral for mortgages, and the opportunity for relief on other credit products. Banks have affirmed their commitment to working with customers to provide flexible solutions, on a case-by-case basis, for managing through hardships caused by recent developments. This may include situations such as pay disruption, childcare disruption, or illness.

Businesses:

• The Business Credit Availability Program will allow the Business Development Bank of Canada and Export Development Canada to provide more than $10 billion of additional support, largely targeted to small and medium-sized businesses. The near-term credit available to farmers and the agri-food sector will also be increased through Farm Credit Canada.
• The Office of the Superintendent of Financial Institutions (OSFI) announced it is lowering the Domestic Stability Buffer by 1.25% of risk-weighted assets, effective immediately. This action will allow Canada’s large banks to inject $300 billion of additional lending in to the economy.
• For Exporters: The Minister of Finance would now be able to determine the limit of the Canada Account in order to deal with exceptional circumstances. The Canada Account is administered by Export Development Canada (EDC) and is used by the government to support exporters when deemed to be in the national interest.
• Interest Rates: The Bank of Canada cut the prime interest rate to 0.75%. Other banks have also reduced rates.

OTHER FUNDING

• Indigenous Community: $305 million for a new distinctions-based Indigenous Community Support Fund will be provided to address immediate needs in First Nations, Inuit, and Métis Nation communities.
• Homelessness: The Reaching Home initiative will be provided with $157.5 million to continue to support people experiencing homelessness during the COVID-19 outbreak. The funding could be used for a range of needs such as purchasing beds and physical barriers for social distancing and securing accommodation to reduce overcrowding in shelters.
• Domestic Abuse Shelters: Women’s shelters and sexual assault centers will receive $50 million to help with their capacity to manage or prevent an outbreak in their facilities.

CLOSING

Many of the measures listed above have only been announced recently (March 18, 2020) and are noted as requiring Royal Assent. In recent public comments, it was indicated that the opposition parties have promised their support to move these measures quickly, therefore, we can presumably expect draft legislation in the short term.

Over the next days and weeks, the specifics on these programs will be released. Most of the details for these initiatives will be released on one of these four webpages:

General: https://www.canada.ca/en/public-health/services/
diseases/2019-novel-coronavirus-infection/canadas-reponse.html

CRA: https://www.canada.ca/en/revenue-agency/campaigns/
covid-19-update.html

Travel: https://travel.gc.ca/assistance/emergency-info/financial-assistance/covid-19-financial-help

Employment and Social Development Canada: https://www.canada.ca/en/employment-social-development/corporate/notices/coronavirus.html

As the situation develops further, there may be additional government measures, or modifications to those already announced.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Believe it or not, it might have been.  But the Budget released by Finance Minister Morneau on February 27th nevertheless levied a heavy blow to successful businesspeople across this country.

The Small Business Deduction: are its days numbered ?

The small business deduction (“s.b.d.”) sets the low rate of tax for active business profits earned by private corporations – in BC, that rate is currently 13% – admittedly, a very low rate.

Now, thanks to this Budget, it will drop even further: to 12%, and then 11% in 2019 (these rates factor in current BC tax, as well).

All that looks very good.  But then: what can you do with the earnings retained inside the corporation ?  The Government wants you to spend that money on things that will generate even more active business income.  And if you do – no problem.  But if you don’t want to do that, or if such a level of investment is not needed or appropriate in your circumstances, you have little choice but to accumulate the earnings, for long-term investment.  Certainly, that’s nothing to be ashamed of, given the relatively poor opportunities for retirement savings that entrepreneurs have (RRSPs being the principal tool here).  That’s a big contrast to the kinds of pensions that highly paid employees or Government employees – particularly cabinet ministers – get to enjoy.

And do not forget that the taxes levied to individuals on the eventual extraction of those accumulated profits has been increasing dramatically in the past few years – such extractions will generate taxes that the Government will rake in at a top rate of tax of either 49.8%, or 43.73% for ineligible dividends, 34.2% for eligible.  That’s a big rake !

The new rules will also change the long-established method of dealing with corporate refundable tax (“RDTOH”), by making things much more complicated.  In future, it will be necessary to specify whether dividends are intended to be paid out of “eligible RDTOH” or “ineligible RDTOH”.  A new ordering rule will require companies to pay out ineligible dividends beforeeligible dividends.  Since taxes are much higher on ineligible dividends, the Government wins again.

The plan has always been to structure extraction of funds at a pace that avoids, if possible, those high rates.  And, to some extent, those opportunities will remain.  However, recent developments in income tax disclosure, which includes the mandatory provision of asset holdings has provided the minions at the Department of Finance with a wonderful array of statistics as to the accumulating wealth of successful Canadians.  And while the prospects of seeing these funds eventually pass out of these corporations encourages them, it seems they have grown impatient with the wait.

So, they have invented a new way to raise taxes on these funds in the meantime.  The small business deduction for all private corporations will be eroded, starting for fiscal years that begin after December 31, 2018, by the income earned on the investment wealth inside the corporation, or by associated corporations (such as holding companies) under common control. No erosion of s.b.d. will occur until “adjusted aggregate investment income (aaii)” (a new term) exceeds $50,000 per year (recall some press recently that this presumes a 5% return on an investment portfolio of $1 million).  Whatever – what counts is what investment income is actually realized.  But once the $50,000 threshold is exceeded, the small business deduction shrinks at the rate of $5.00 for every dollar of investment income higher than that.  So the s.b.d. completely disappears at passive income levels of $150,000, or more.

Obviously, the quantum of a corporation’s a.a.i.i. will be essential information.   And it will, of course, add to the cost of calculating and filing tax returns.

Since no “grandfathering” has been offered (despite being promised by the Government in recent months), all those with investment portfolios that exceed, perhaps, $2 million or so at this time (again, the s.b.d. “grind” will be determined by actual, realized investment income) will no longer get the small business deduction.

The tax rate differential between the small business rate and the general business rate will be 15% in B.C. in 2018.  This means a corporate tax increase of $75,000 per year to those successful corporations who are suddenly caught by this rule.  Ouch !

Of course, there are also some traps in these rules, just to keep things interesting.  One particularly sneaky trap is the inclusion of income from savings in a “non-exempt” life insurance policy in the definition of a.a.i.i.  This type of information has, until now, seldom been needed by accountants in determining corporate taxes.  No longer.  Insurance companies and agents will have to be far more communicative and proactive than they have been in the past in order to assist in the preparation of annual corporate tax returns.  Thankfully, most insurance policies sold these days are generally ‘exempt’.

Also, the passive income grind will be based on actual investment income realized and taxed in the year.  So, if you have invested in various low-yielding assets, such as real estate or low-risk debt instruments, you may be able to keep your actual income fairly low, and perhaps under the limit.  Investments in companies that do not pay dividends, but rely on capital growth, may become more desirable – or perhaps we will see more offerings of “dividend deferral” schemes in the investment market.

A useful exclusion from the “investment income” definition is for dividends received from connected corporations, which, thankfully, means that holding companies can still be put to their useful purpose of storing the money, in a place where it is hoped to be more or less safe from general business liability concerns.

Consider also what may happen in a year when you may have “re-balanced” your investment portfolio (perhaps on the suggestion of your investment advisor) and, just for one year, spiked up your investment income because of realized taxable capital gains ?  Well, in the next year you could very well lose your s.b.d.  If your money goes “quiet” in the next year, the s.b.d. could be reinstated, however.

And how will we manage the issue of “working capital”, and corporate savings for future business asset acquisitions ?  Generally, until now, the Canada Revenue Agency has considered the interest earned on the deposit of monies kept for these purposes as active, not passive income.  Since so much will hang on this determination in the future, suddenly a whole new level of uncertainty has crept into the management of taxes for corporations.

All of this, will, of course, play havoc with tax payment deadlines, as because those are directly affected by whether or not a corporation is entitled to the s.b.d.  Prepare for a future in which unintended interest charges are levied by CRA at random times, and due to random events.

The whole process of Budget making has been under scrutiny for several months, since last summer’s rash and disturbing release of much more draconian measures.  Thankfully, at least most of these have been scrapped.  But a total lack of sympathy for the concerns of small business is strongly evident in the current Government’s proposals, its statements, and its proposed legislation.

Hidden away in the commentary were questions raised as to the need for the small business deduction, at all.  So could this be the beginning of the end of the small business deduction ?  Don’t count that out – there has to be something for future Budgets to tax !