My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, October 24, 2016

The New Principal Residence Reporting Requirements – Large Implications for the Average Canadian

On October 3, 2016, the Government announced administrative changes to the reporting requirements for the sale of a principal residence (“PR”) and the designation of the principal residence exemption (“PRE”), which provides for the tax-free sale of your home. The changes were premised on closing a tax loophole that allowed non-residents to buy homes and later claim a tax exemption on the sale by using family members or trusts. While I think the changes in reporting requirements were made in part to close this loophole, a skeptical person may think the government used the “foreign-buyer loophole” issue, to remedy lax reporting requirements for the sale of a PR by all Canadians.

In fact, I suggest the Government will get significantly more revenue from resident Canadians who have been misreporting the sale of their PR, than they will from foreign buyers. I see three (there are more than three, but these are the most obvious) potential areas the new rules will catch the average Canadian:
  1. Misunderstanding of the rules where you own both a home and a cottage 
  2. Divorce
  3. Flipping of houses

The New Reporting Requirements

Starting with the 2016 tax year, the new rules will require you to report the sale of your PR on Schedule 3 - Capital Gains or Losses, of your personal tax return. You will now be required to designate the property as your PR on Schedule 3. Previously, the administrative position of the Canada Revenue Agency (“CRA”) was that you were not required to report the sale of your PR if the property was your PR for every year you owned it.

If you do not designate the property as your PR for all the years you owned the property (such as where you had sold your cottage in a prior year and claimed the PRE for certain years), you are required to also file Form T2091.

I would not be surprised, if in the future, the CRA has follow-up information requests on PR sales, requesting the history of any prior PR sale that was not reportable under the old system to ensure there has been no duplication of the PRE.

History and Rules

Prior to 1982, a taxpayer and their spouse could each designate their own PR and each could claim their own PRE. Therefore, where a family owned a cottage and a family home, each spouse could potentially claim their own PRE, one on the cottage and one on the family home, and accordingly the sale or gifting of both properties would be tax-free.

However, for any year after 1981, a family unit (generally considered to be the taxpayer, his or his spouse or common-law partner and unmarried minor children) can only designate one property between them for purposes of the PRE. Although the designation of a property as a PR is a yearly designation, it is only made when there is an actual disposition of a home. For example, if you owned and lived in both a cottage and a house between 2001 and 2016 and sold them both in 2016, you could choose to designate your cottage as your PR for 2001 to 2003 and your house from 2004 to 2016 or any other permutation +1 (see formula calculation and discussion of the +1 rule below).

In order to decide which property to designate for which years after 1981, you must determine whether there is a larger gain per year on your cottage or your home in the city. Once that determination is made, in most cases it makes sense to designate the property with the larger gain per year as your personal residence for purposes of the PRE.

As if the above is not complex enough, anyone selling a cottage and claiming the PRE must also consider the following adjusted cost base adjustments:

1. If your cottage was purchased prior to 1972, you will need to know the fair market value (“FMV”) on December 31, 1971; the FMV of your cottage on this date became your cost base when the CRA brought in capital gains taxation.

2. In 1994 the CRA eliminated the $100,000 capital gains exemption; however, they allowed taxpayers to elect to bump the ACB of properties such as real estate to their FMV to a maximum of $100,000 (subject to some restrictions not worth discussing here). Many Canadians took advantage of this election and increased the ACB of their cottages.

3. Many people have inherited cottages. When someone passes away, they are deemed to dispose of their capital property at the FMV on the date of their death (unless the property is transferred to their spouse). The person inheriting the property assumes the deceased's FMV on their death, as their ACB.

4. Most people have made various capital improvements to their cottages over the years. For income tax purposes, these improvements are added to the ACB you have determined above. Examples of capital improvements would be the addition of a deck, a dock, a new roof or new windows that were better than the original roof or windows, new well or pump. General repairs are not capital improvements and you cannot value your own work if you are the handyman type.

The Actual PRE Formula

The actual calculation to determine your principal residence exemption is equal to:

The capital gain on the sale of your home multiplied by:

The number of years you have lived in your home plus 1 
The number of years you have owned the property

The one year bonus is meant to ensure you are not penalized when you move from one house to another in the same year.

The Three Potential Issues for Resident Canadians

Misunderstanding of the Rules Where You Own a Home and a Cottage

As noted above, the PRE rules are extremely complex and the formula is often misunderstood. Many Canadians have simply understood or pretended to understand that any sale of a home or a cottage was tax-free if it was used by you and your family. Since there were no reporting required on your tax return until these changes, the CRA could not track whether you were properly reporting the sale of your PR. The new reporting will now allow the CRA to track overlapping ownership periods (i.e. you bought your home in 1990 and your cottage in 2000 and sold your cottage in 2016 and claim the PRE for 16 years. The CRA will now have a record that you have used 16 years of your PRE and you cannot claim those 16 years when you sell your home). This required filing will also force you to consider any prior PRE claims that may have occurred during the 16 years above (say for example you had sold the home you purchased in 1990 in 2010 and purchased a new home that same year. Under this circumstance you could not claim 16 years PRE on your cottage).

As noted above, I would expect at some point in the future, to see information requests and audits of reported gains by the CRA, specifically asking about prior PRE claims to ensure there was no overlapping of of PRE claims.


In June of this year, I wrote a post on the income tax implications of divorce where you owned a home and a cottage and the various misunderstandings of how to claim the PRE exemption that arise on divorce. You can read this post if it is of interest to you, but some of the key points I made were as follows:

1. A couple can only claim one PRE during the marriage (other than when a spouse who was throughout the year living apart from and was separated under a judicial or written separation agreement). This one PRE rule per couple is clearly noted in this interesting case, Balanko v The Queen.

2. It is vital that the right to the PRE or the allocation of the PRE must be accounted for in any marriage settlement, for both purposes of the actual claim, and the related income tax one of the spouses may incur. If the use of the exemption is not addressed in the separation agreement, it is then a first-come, first-served claim.

I would suggest that many divorced couples have inadvertently double claimed the PRE.

Flipping of Houses & Condominiums

The CRA has been going after “house and condominium flippers” for the last few years. However, since there has been no reporting requirement for the sale of a PRE, if a “flipper” felt or considered the sale to be of their PR, the CRA was constrained in tracking these house flips. While prior sales may be hard to audit, the new rules force someone flipping a house to report the gain as a PRE and I am sure any sale of homes and condominiums that are of short duration will be subject to follow-up or audit.

Assessment and Penalties

For the sale of a PR in 2016 or later years, the CRA will only allow the PRE if you report the sale and designation on your tax return. If you fail to report the sale, you will have to ask the CRA to amend your return. Under the proposed changes, the CRA will be able to accept a late designation but a penalty may apply, equal to the lesser of $8,000 and $100 for each month you are late from the original required filing. This is a potentially fairly large penalty for non-compliance. The period of re-assessment will also be extended where a disposition has not been reported.

Wow, what some may have seen as a fairly innocuous change to catch non-residents, will certainly have substantial implications on resident Canadians going forward and in some cases, on previous non-filings related to PRE claims.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, October 17, 2016

The Registered Disability Savings Plan – A Government-Assisted Savings Plan for Family Members that Qualify for the Disability Tax Credit

Last week, Katy Basi wrote about using Henson Trusts to estate plan for disabled beneficiaries.

Today, Howard Kazdan, a tax expert with BDO Canada LLP, discusses what a Registered Disability Savings Plan is and where it may be a useful tax planning vehicle for the parents of a disabled child.

I thank Howard and Katy for their excellent posts.

The Registered Disability Savings Plan – A Government-Assisted Savings Plan for Family Members that Qualify for the Disability Tax Credit

By Howard Kazdan

A Registered Disability Savings Plan (“RDSP”) is a savings plan that is intended to help parents and others save for the long term financial security of a person who is eligible for the disability tax credit (“DTC”). A person is eligible for the DTC only if a medical practitioner certifies on Form T2201, Disability Tax Credit Certificate, that this person has a severe and prolonged impairment in physical or mental functions. This form must also be approved by the CRA.

Where you have a family member living with a physical or mental disability, consideration should be given to opening a Registered Disability Savings Plan.

What is an RDSP?

RDSPs are tax deferred savings plans which can provide long-term financial benefits for a disabled individual resident in Canada. Qualifying individuals may receive grants and bonds that the Government of Canada contributes to the RDSP.

How does the RDSP work?

RDSPs can be opened by either a beneficiary who has reached the age of majority and is contractually competent to open an RDSP for themselves or, before 2019, by their parents or other legal representative.

There is no limit to how much can be contributed to an RDSP in any particular year, however, the lifetime maximum contribution limit is $200,000. Contributions can be made until the end of the year in which the disabled person turns 59.

It is important to note that there is no tax deduction for contributing to an RDSP. These plans are somewhat similar to a Registered Education Savings Plan (if you have opened such an account for your child’s education). On the flip side, when the original contributions are withdrawn, the disabled individual will not be taxed on those contributions. However, income earned and government grants (discussed below) and bonds received will be taxed when they are paid out of the RDSP. If the plan is established for a long period of time, and the investments earn a good rate of return, then this may provide a long deferral from paying tax.

Subject to certain contribution and age limits, RRSP/RRIF proceeds can be transferred to an RDSP through a will if the disabled individual is financially dependent upon the deceased. This allows parents or grandparents of a disabled individual, to tax and estate plan for a future contribution to an RDSP and may provide you with comfort if it is not otherwise possible to maximize the contributions before this point.

Government Grants

The Government of Canada pays a grant to the RDSP, until the end of the year in which the beneficiary turns 49, that is dependent on the beneficiary’s family income and the amount contributed. The maximum grant is $3,500 each year, to a lifetime maximum of $70,000. The contribution rules allow for a 10-year carryforward of entitlements, for those who qualify but cannot contribute every year.

Beneficiary's family income
$90,563 or less

on the first $500
$3 for every $1 contributed
on the next $1,000
$2 for every $1 contributed
more than $90,563 or no income information at available at CRA
on the first $1,000
$1 for every $1 contributed
**The beneficiary family income thresholds are indexed each year to inflation. The income thresholds shown are for 2016.

For minors, family net income is that of their parent(s) or legal guardian(s). From the year the beneficiary turns 18, family net income is the combined net income of the beneficiary and their spouse.

The Government of Canada may also pay up to $1,000/year, to a maximum of $20,000, in a Canada disability savings bond to low-income Canadians until the beneficiary turns 49. No contributions are required once the RDSP is opened.


Since RDSPs are intended to be a long-term savings vehicle, if money is withdrawn, all or part of the government grants and bonds that have been in the RDSP for less than 10 years may have to be repaid. The beneficiary must repay $3 for every $1 that is taken out, up to the total amount of grants and bonds paid into the RDSP in the last 10 years. This can be very punitive if funds are required urgently.

The minimum regular scheduled payments that must begin when the beneficiary turns 60 are determined by a complicated formula.

If an RDSP terminates because the beneficiary no longer qualifies for the DTC or dies, then:
  • grants and bonds that have been in the plan for less than 10 years must be repaid, and
  • amounts paid to the beneficiary or his/her estate related to investment income, grants and bonds will be taxable.
If you are disabled, or have a disabled child, you should consider opening an RDSP if you have not already done so, to provide additional government-assisted long-term financial security.

Before opening the plan, confirm with the Canada Revenue Agency that the DTC eligibility status of the plan holder is up-to date so the DTC can be claimed and the benefits of an RDSP can be enjoyed. This should be monitored in the future so the benefits are not lost.

RDSPs can be a useful tax planning tool for the parents of a disabled child. However, as noted above, there are many rules for which you need to familiarize yourself with.

Howard Kazdan is a Senior Tax Manager with BDO Canada LLP. He can be reached at 905-946-5459 or by email at

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, October 10, 2016

Estate Planning for Disabled Beneficiaries – Henson Trusts

I have received several requests to write about tax and estate planning for disabled individuals. Thus, this week I have enlisted the help of Katy Basi, my resident wills and estate planning contributor, to write about Henson  trusts, an estate planning opportunity for disabled beneficiaries. Next week Howard Kazdan, a tax specialist with BDO Canada LLP, will write about Registered Disability Savings Plans ("RDSP's").

As Henson trusts are complex, I appreciate Katy providing a detailed analysis of the important issues to be considered in whether or not to use such a trust. So without further ado, here is Katy.

Estate Planning for Disabled Beneficiaries - Henson Trusts

By Katy Basi

It is fairly common for a client to come to me and say "my child has a disability and I've been told I need a Henson trust in my will - whatever that is...." My usual answer is "maybe - let's discuss your situation" - typical lawyer-speak but true nonetheless!

What is a Henson Trust

A Henson trust is a trust created in a will, or by way of a free-standing trust deed, which is completely discretionary and has a disabled beneficiary who is not also a trustee of the trust. “Completely discretionary” means that the trustee will have all decision making power with respect to the timing and amount of all payments made out of the trust. The benefit of having a Henson trust is that the disabled beneficiary’s interest in the trust is not considered to be an asset for purposes of the rules surrounding disability benefits in Ontario and in some other provinces (the “asset test”, in particular, limits the value of assets a recipient of disability benefits may own – further discussed below).

The term “Henson trust”, while common, does not have legal meaning in and of itself, but is generally taken to mean a trust having the attributes set out in the above paragraph. These trusts are called “Henson trusts” due to a court case in Ontario involving a father (last name being Henson) who established a trust of this nature for his disabled daughter. Her right to claim disability benefits was challenged (the government’s position was that her beneficial interest in the trust was a valuable enough asset to disqualify her). The Hensons won the case, based on their position that the beneficial interest in the trust did not have any value due to the discretionary nature of the trust. As the trustee could choose not to pay any of the trust funds to or for the benefit of the daughter, the beneficial interest was held not to have value for purposes of the disability benefit rules.

Planning Using a Henson Trust

In order to ascertain whether a Henson trust is appropriate planning for a client, I will usually ask about the nature of the disability, as this may impact:

  • the child's ability to eventually make capacitated financial and or health care decisions for him or herself,
  • their prospects of getting married and having children,
  • their life expectancy,
  • their ability to be financially independent,
  • their care requirements at various life stages, and
  • other factors that are relevant to their parent’s estate plan.

I will ensure that my client has investigated whether the disability tax credit (“DTC”) is available in relation to their child. We then discuss whether the child is likely to start claiming provincial disability benefits when they attain age 18, as the value placed on the availability of disability benefits varies greatly from parent to parent and affects whether Henson trust planning is appropriate.

Some disabled beneficiaries have good employment prospects, now or in the future, in which case disability benefits are really not relevant. When a disability does not affect the financial acumen of a beneficiary, and they are a relatively high functioning adult, the beneficiary may even receive an outright inheritance (i.e. not in any form of a trust, Henson or otherwise).

Some parents have a large estate, and want their child to have more access to their inheritance than would be permitted by Henson trust planning. These clients find the rules surrounding disability benefits very limiting and essentially assume that their child will not apply for benefits, which in turn makes other estate planning options available.

If disability benefits are important, then we discuss whether the child should inherit by way of a Henson trust set out in the parent’s will. Unfortunately, inheritances received in any way other than a Henson trust usually result in the recipient being cut off from disability benefits (for having access to assets valued at greater than $5,000 (the “asset test”)).

A Henson trust is, by necessity, limiting. As noted above, in order to have the Henson trust assets excluded from the asset test, the Henson trust must be drafted as a fully discretionary trust and the beneficiary cannot be the trustee. Essentially, the beneficiary cannot have the right to demand trust assets at any time, but must rely on the good judgment of the trustee. I have had a few clients decide against Henson trust planning for this reason alone.

When a Henson trust is a good choice, the selection of the trustee, and alternate trustees, is very important given their broad powers. The trustee has the fairly onerous task of managing the trust funds to optimize the quality of life of the disabled beneficiary, without cutting them off from disability benefits – like walking on a tightrope, with significantly more reading and longer telephone calls to the government.

Also, a beneficiary in addition to the disabled beneficiary is usually named in the Henson trust in the event that the trust lasts longer than 21 years. (After 21 years, all trust income must be distributed by an Ontario trust to or for the benefit of a beneficiary. Without an alternate beneficiary, this rule could force a trustee to allocate income to a disabled beneficiary, and disability benefits could potentially be lost.) Sometimes the alternate beneficiary is a charity, and sometimes a family member such as a sibling.

When, as commonly happens, a sibling is both the trustee and alternate beneficiary, there can be a conflict of interest, and the parent needs to be very sure that the sibling will “do the right thing” and not profit personally from the Henson trust unless absolutely necessary. In addition, Henson trusts are often drafted to last for the lifetime of the disabled beneficiary unless the trustee decides to wind up the trust early. (In the latter case, common planning is to require the trust funds to be paid to the disabled beneficiary, which may, or may not, be appropriate under the circumstances.)

Upon the death of the disabled beneficiary, there is often a distribution of remaining Henson trust funds to the siblings of the beneficiary. If a sibling is also the trustee, we can have a conflict of interest, as minimizing distributions for the benefit of the disabled beneficiary during their lifetime maximizes the funds potentially received by the sibling/trustee upon the death of the beneficiary. Obviously, the trustee must be a very trustworthy, morally upstanding sibling!

We also generally ensure that the Henson trust terms specifically permit the trustee to make contributions to a Registered Disability Savings Plan (“RDSP”) set up for the disabled beneficiary in order to optimize the payment of government grants and bonds. We usually advise that the trustee exercise some caution here, as any funds left in the RDSP upon the death of the disabled beneficiary flow in accordance with the disabled beneficiary’s will (or the law of intestacy if there is no will). This may, or may not, be the result desired by my client…

Finally, as of 2016 it will be helpful, from an income tax perspective, if a Henson trust meets the “qualified disability trust” (“QDT”) definition. QDTs are one of the few remaining trusts able to access the graduated rates of tax on income. (All trusts other than QDTs and graduated rate estates pay tax at the highest rate). For a Henson trust to qualify as a QDT, the disabled beneficiary must receive the DTC and elect with the trustee that the Henson trust is their one and only QDT. One issue (yet to be resolved) is that a recovery tax is applicable if anyone other than the disabled beneficiary receives capital from the trust. As noted above, this can easily happen upon the death of the disabled beneficiary. Another issue is that many disabled beneficiaries are not sufficiently mentally capacitated to sign the QDT election form for themselves, and have no court-appointed guardian to sign the election form for them. (Contrary to common belief, parents are not automatically the guardians of an incapacitated adult beneficiary, at law). To ensure QDT status, it may be necessary to apply to the court for a formal appointment of a guardian for the incapacitated beneficiary – which is, of course, costly and time consuming.

The good news is that careful estate planning can ensure that disabled beneficiaries are well cared for their entire lives, even after their parents are deceased, giving peace of mind to the entire family.

Please note that as I am licensed to practice law in Ontario only, this post is based on Ontario law. If you live outside of Ontario, it is strongly recommended that you consult with an estates lawyer licensed to practice in your province – the member directory of the Society of Trust and Estate Practitioners (“STEP”) at is a good place to begin.

Katy has written numerous popular estate planning posts for this blog over the years including Estate Planning for Blended Families, Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets, the family cottage and a very well received post titled, An Estate Fairy Tale.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at More articles by Katy can be found at her website, 

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. 

Monday, October 3, 2016

What Small Business Owners Need to Know - Eligible Capital Property Changes on the Horizon

In the 2014 Federal budget, the government announced it would begin public consultations (consultation is a code word for: we are making changes, but we will consider your thoughts on the matter) into repealing the rules that governed eligible capital property (ECP). They also proposed, subject to these consultations, that the ECP regime would be replaced by a new capital cost allowance (CCA) class.

Two years later, the 2016 Federal budget was released and not surprisingly, the legislation proposes the removal of the ECP regime and the introduction of a new CCA Class 14.1 effective January 1, 2017.

Many of you are probably saying to yourself, what the heck is ECP and why do I even care. Today, I will explain what ECP is and why you as a business owner should care about these changes.

What is ECP?

ECP is essentially “intangible assets” that do not qualify for the CCA rules (CCA is the tax word for depreciation). ECP also includes internally generated assets, such as goodwill, which are not reported on the balance sheet or tax return until there is a disposition of such. In addition to goodwill, some other common examples of ECP are:

  • Incorporation expenses
  • Customer lists
  • Trademarks
  • Farm Quotas
  • Patents and Licenses with indefinite life

What are the main changes?

The most impactful change will be to Canadian-Controlled Private Corporation’s (CCPC) and how the disposition of ECP is treated subsequent to December 31, 2016, which I will address separately in a bit more detail below.

The way the ECP regime works now is; 75% of any expense for ECP is added to a pool, and each year 7% of the remaining pool can be deducted on a declining balance in the company’s return against income. When ECP is sold, there may be recaptured depreciation which is fully taxable, plus effectively 50% of any resulting gain which is taxable as active business income. The other 50% of the gain goes into the Capital Dividend Account ("CDA"), which can be distributed to the shareholders tax free. See my blog post on the CDA if you are not familiar with this account.

The new rules will allow 100% of any expense for ECP to be included in a new CCA class (14.1), and each year 5% of the remaining pool can be deducted. Rules that currently govern CCA such as the half year rule and recapture will apply to the new 14.1 CCA class. When ECP is sold after December 31, 2016 in excess of capital cost, the resulting gain will be treated as a capital gain (unlike the active business income treatment noted above), such that 50% of the gain is taxable and taxed at the high investment income tax rates. This change will have the largest impact of these new rules.

I know this discussion is technical and complicated, but I need to set forth the new rules. I have an example below that will hopefully bring everything together and clarify the issue.

There are a number of other transitional rules (e.g. pre 2017 dispositions for non-calendar year ends straddling January 1, capital cost determinations) which this blog will not cover due to the complexities involved.

The new rules will allow you to deduct immediately the first $3,000 of incorporation expenses, with anything above the $3,000 going into class 14.1. In prior years only 75% of the expense was allowed and it took years and years to get the tax benefit.

What happens to my current ECP pool after December 31, 2016?

In general terms, whatever your ending ECP pool balance (Schedule 10 of the corporate tax return) is on December 31, 2016 will become the opening balance of Class 14.1 on January 1, 2017. As noted above, there are separate transitional rules for companies that have year ends that straddle January 1, 2017 but in general terms the ending ECP balance will equal the opening Class 14.1.

For any ECP incurred before 2017, the company will be able to use a 7% CCA rate for 10 years, consistent with the deduction rate of ECP that is currently in place. After 10 years the CCA rate will revert back to the 5% rate applicable for Class 14.1. In addition, in order to allow any small balances of pre 2017 ECP to be written off quickly, the Class 14.1 CCA deduction for 10 years will be the greater of $500 and the amount otherwise deductible (i.e. 7% of the pool).

Dispositions of ECP After 2016

As mentioned above, the biggest change going forward for CCPC’s is that for a sale prior to January 1, 2017, the gain is taxed as active business income, and for a sale subsequent to this date, the gain will be taxed as a capital gain. This is best reflected by using an example. So, let’s assume an Ontario CCPC sells goodwill that results in a $200,000 gain.

If the sale takes place on December 31, 2016, $100,000 (50% of the gain) will be taxable to the company as active business income, resulting in taxes owing of $15,000 if the small business deduction can be applied against the income, or $26,500 if the company’s income for the year is already over $500,000.

If the sale takes place on January 1, 2017, $100,000 (50% of the gain) will taxable to the company as a capital gain, resulting in taxes owing of $50,170, a portion of which would be refundable only after a taxable dividend is paid to the shareholder. The immediate taxes owing on this sale are $23,000 - $35,000 higher than if the sale had occurred one day earlier. It is important to note this is essentially a loss of a tax deferral, not an absolute tax cost; as the deferral of tax by retaining funds from the sale in the company is essentially lost under the new rules.

In both of the above scenarios, the other half of the 50% gain is still added to the Capital Dividend account of the company, and available for distribution to shareholders tax free, so no change in that regard. One small advantage to the new rules will be be the date you can make the tax free payment out of the capital dividend account. For sales of ECP before January 1, 2017 you would have to wait until the first day of the following tax year to pay out the capital dividend, whereas the new rules will allow the payment of the capital dividend as early as the day after the sale. 

Asset sales that include ECP will likely prove to be more difficult to negotiate after 2016 due to the higher tax cost, as the seller will be looking for a higher purchase price to cover the additional tax.

It may be prudent, in situations where your current accountant would not have this information, to begin compiling the following information:

  • Original cost and date of purchase of any ECP purchased in the past
  • Any ECP pool deductions taken from the time of purchase on any assets identified above

This information will assist your accountant in determining the gain on a disposition of ECP that occurs after January 1, 2017.

What planning can be done?

If your CCPC is planning on selling its business in the future via an asset sale or hybrid sale (versus a sale of shares), or selling any ECP of the company, serious thought should be given to completing this sale before January 1, 2017.

If your CCPC has a significant amount of internally generated goodwill, and no external method of sale is available before January 1, 2017, it may be possible to complete an internal reorganization to take advantage of the current ECP rules. This is extremely complicated and before you consider undertaking this type of transaction, you must speak with your accountant/tax advisor to determine if this is a viable option.

With less than 3 months until the transition date, if you think your company may be adversely affected by the new rules, now is the time to speak to your advisors.

I would like to thank Colin Sirr, Manager, Tax, for BDO Canada LLP for his extensive assistance in writing this post. If you wish to engage Colin for ECP tax planning, he can be reached at

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 19, 2016

Canadians Don't Have the Will

Over the last few years, I have often referenced a 2012 survey by LawPRO reflecting that 56% of Canadians do not have a Will. I have used this startling statistic to urge you to have a Will drafted (or updated) and to suggest you also put in place powers of attorney for property (financial decisions) and personal care (health decisions). The fact that Prince did not leave a will (which I find incomprehensible, given the number of advisors he would have had) has brought further attention to this issue.

Shockingly, in a new Google Consumer Survey conducted by, the number of Canadians without Wills has increased to 62%. The survey also notes that 12% of Canadians have an outdated Will (most never updated their Wills once they married and/or had children), which means that 74% of Canadians do not have an up-to-date Last Will and Testament.

In general, I consider this behaviour selfish and I cannot understand how anyone that is part of a functional family unit would ever want to leave their family the chaotic mess that follows when there is no Will in place.

Here are some facts from the survey, which can be found here.

Some Startling Numbers

The survey showed a correlation between age group and the probability of having a Will:

Age 18-24: 87% do not have a Will, 5% have an out-of-date Will, and 8% have an up-to-date Will.
Age 25-34: 77% do not have a Will, 10.5% have an out-of-date Will, and 12.5% have an up-to-date Will.
Age 35-44: 68% do not have a Will, 8% have an out-of-date Will, and 24% have an up-to-date Will.
Age 45-54: 53% do not have a Will, 13% have an out-of-date Will, and 34% have an up-to-date Will.
Age 55-64: 32% do not have a Will, 19% have an out-of-date Will, and 49% have an up-to-date Will.
Age 65+: 28% do not have a Will, 21% have an out-of-date Will, and 51% have an up-to-date Will.

As the survey notes, even when discounting younger adults, 48.5% of Canadians aged 35 and older responded to not having a Will and 13.5% responded to having a Will that is out-of-date, leaving only 38% with a Will that reflects their current financial and personal situation.

Unexpected Income Correlation

The survey found a surprising inverse relationship between income levels and the probability of having an up-to-date will.

“The group least likely to have up-to-date Wills was in the $100,000+ annual income range; respondents in this group were also three times more likely to have an out-of-date Will than those with lower incomes. The group most likely to have up-to-date Wills was in the lowest annual income range of $0-$24,999. As annual income increased, the proportion of respondents with an up-to-date Will decreased”. suggests “The cause of this is likely because those with higher incomes can more easily afford to use a lawyer to write their Will; making modifications to a Will with a lawyer requires setting a meeting, and costs hundreds of dollars. To the contrary, those with lower incomes are usually inclined to use more affordable alternatives, such as online services, where the testator can make modifications to his or her Will at any time without extra costs”. (It should be noted that provides online services to custom-make Wills, Power of Attorney and Living Wills for Canadians and thus, they have a bias to online services).

Observations from the Survey make some interesting observations from the data, a few of these include:

1. The system for creating and updating Wills is broken – their opinion is the current system is not working for most people.

2. People wait for the perfect time to have their Wills prepared – I agree with this comment. The issue here is; our life circumstances are constantly changing. Consequently, our Will is really a living document that requires various updates throughout our life.

3. references a quote from Forbes Magazine by the rapper Snoop Dogg, saying essentially: who cares about his Will, he will be dead. This is not an unusual comment. says “unfortunately, what Mr. Dogg doesn’t realize is that writing a Will was never about you. It’s about taking care of your loved ones – the people that you care for through your life, I’m not sure that many people would deliberately inflict trauma on their own family at a time when they can least handle it, but not writing a Will is setting your family up for heartache and emotional turmoil. It all too often leads to acrimonious fallouts between family members who seemed to get along just fine until they
had to work together to administer an estate without a Will”.

4. suggests that not having a Will is a huge missed opportunity. They suggest you can do wonderful things in a Will, for example:

  • Leave a few thousand dollars to a charity
  • Give your favourite niece some funds to travel the World
  • Set up an event in your memory
  • Create a scholarship fund
  • Organize and pay for some social events for your best friends
  • Leave a cherished item to somebody who will really appreciate it
  • Make sure your digital accounts are all taken care of appropriately
  • Make sure that your pets are taken care of

Whether you have a complex estate and need a lawyer to draft or update your Will, or have a simple estate for which you can use an online service, as Nike says “Just Do It” and get your Will and powers of attorney in place. You will have peace of mind and your family will be appreciative that you made their financial lives simpler at a time of grieving.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 12, 2016

Steve Stamkos, Olympic Medals and Income Taxes

As a sports enthusiast, I am always interested in stories that combine sports and income tax. Today, I want to discuss a couple of these stories:

1. Steve Stamkos resigning with the Tampa Bay Lightning in June and the income tax considerations he would have had to ponder (if he ever truly considered the Toronto Maple Leafs as a final destination).

2. The income tax that Canadian Olympic gold, silver and bronze medalists have to pay on the bonuses they earned in winning their medals.

Steve Stamkos Signing

If you are a hockey fan, you were well aware that Steve Stamkos ("Stamkos") was a free agent this spring and that there were rumours negotiations were not going well with his current team, the Tampa Bay Lightning. As result, many Toronto Maple Leafs fans were hopeful Stamkos would sign with the Leafs, his hometown team (some fans felt that spending money on Stamkos at this time would
impact the current Leafs rebuild and thought such a move would be a year or two early - but I digress).

In the end, Stamkos resigned with Tampa Bay for a reported contract of $68,000,000 over eight years (or, an average $8.5 million a year), paid as $9.5 million in each of the next five years, followed by $7.5 million, $6.5 million and $6.5 million in the final three years. It was also reported that Stamkos' base salary will sit at $1 million each year, with the rest being paid as a signing bonus.

While Stamkos was deciding where to sign, there were various discussions on whether he would provide Toronto with a hometown discount to offset the preferential U.S. tax system. With the possibility that one of the NHL’s top players would potentially be moving teams, sports writers quickly had to get up to speed with economic and income tax issues.

I asked a friend last June (who prepares U.S. tax returns) to run some numbers comparing Stamkos’s average $8.5 million salary for a Florida resident to an Ontario resident assuming there was no foreign exchange issue (I did this to solely isolate the income tax consequences and to avoid the complications of dealing with fluctuating F/X rates and the purchasing power of the $U.S. – but yes, this would be a large factor in any decision). BTW: I understand that all NHL players are all paid in $U.S.

My friend ran some tax numbers based on a U.S. resident with single filing status using 2015 tax rates/brackets, and assumed no itemized deductions to keep things simple. He determined the income tax on an $8,500,000 salary would be around $3,320,000, or about 39.06%. Given the top U.S. federal marginal rate for 2015 and 2016 is 39.6%, this rate is in the ballpark as the top bracket for a single taxpayer is reached at $413,201 for 2015 ($415,051 for 2016).

A huge factor in calculating the income tax variance between the U.S. and Canada is there is no state personal tax in Florida. However, hockey players are taxable in the various U.S. states/cities where they play away games (which would likely push the average tax rate into the low 40s).

If Stamkos had decided to play for the Leafs in 2016 (again, assuming a neutral exchange rate for purposes of this discussion), his tax payable would have been approximately $4,510,000 and his average tax rate at 53.10% and his marginal rate at 53.53% (accounting for the increase in tax rates implemented by the Liberals). Thus, if Stamkos had decided to play for the Leafs, he would have owed approximately $1,190,000 more in income tax than in the U.S. and his average tax rate would have been 10-13% higher depending upon all the facts.

It is interesting to note that if the U.S./Canada exchange rate was $1.30 for his entire contract, Stamkos would have been neutral, from a purely cash flow perspective, in signing with Toronto.Yet, per this article, totally speculative and without confirmation, Stamkos supposedly wanted $14million to come to Toronto.

After reviewing the above, you now know why Stamkos and many other players must take into account the income tax considerations when deciding on which team and country to play.

Olympic Gold – Not Tax-Free

During the Olympics, The Globe and Mail ran a story written by Alicia Siekierska titled “It’s gold – for the taxman. In this article she noted that the Canadian Olympic Committee awards Olympic athletes with bonuses (wow, I never knew this. How un-Canadian to incentivize winning for our athletes :)  if they make the podium: $20,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal).

The article discussed that the Income Tax Act paragraph 56(1)(n) considers only certain prescribed prizes as tax exempt. As noted in Income Tax Folio S1-F2-C3, “Section 7700 of the Regulations defines a prescribed prize as any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public. It is a question of fact whether a prize is considered to have been recognized by the general public for purposes of section 7700 of the Regulations. In making such a determination, one should consider whether there is evidence suggesting a high level of public awareness of the prize and the extent to which the announcement or receipt of the prize is widely publicized by the media. For example, a Nobel Prize given to a scientist or the Governor General's Literary Award given to a professional writer would qualify”.

The article noted that the Olympics are not considered a public service and thus, the medal bonuses paid to athletes such as Penny Oleksiak and Andre De Grasse will be taxable.

The article quotes William Innes, a tax litigator with Reuters LLP. Mr. Innes states the CRA’s position on taxing Olympians prize money is “outrageous”. He feels winning an Olympic medal should fall under the service to the public section noted above. He goes on to say “I would think that the average man or woman on the street would hold that somebody getting an Olympic medal is providing a service to the public”.

For the Penny Oleksiak’s and Andre De Grasse’s of the world, this is probably a bit of a mute issue, as they will receive significant endorsement opportunities dwarfing the bonus money. But for the typical less high profile medal winners who do not have significant funding, it seems unfair they are taxed on their Olympic bonuses. You would think there would be some co-ordination in policy between the Olympic Committee and the CRA.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 5, 2016

Blogger Blues

This summer, my intention was to play some golf, spend some time with my family and write a few blog posts. As they say, the best-laid plans of mice and men often go awry.

Unfortunately, injuries waylaid my golfing. First I got shoulder tendinitis. (Household tip: If you have a pot light that will not come out and you get frustrated, do not, I repeat, do not, pull as hard as you can downwards and ruin your shoulder). In addition, I had a strained groin (Golf tip: when your feet are in an awkward position due to an awkward lie and the grass is wet, do not swing as hard as possible). I did however eventually recover from both my injuries by late July and got in some golf including a 74 after 17 holes in my club championship that became an 82 after I choked with an 8 on the final hole (2nd golf tip: If you have been using your 5 iron to drive since your driver was inconsistent, do not switch back to your driver on the last hole).

Switching gears, I was much busier with client matters than I anticipated this summer and was unable to find the time I hoped to write some of my blog posts for the fall. In addition, after six years of writing this blog, I had a bit of a writer’s block, that seemed to break in late August.

In any event, I realized that I’m unable to continue to commit the energy and time required to write this blog on a weekly basis. I will be shooting for two to three posts a month, including guest blogs, which will likely increase in number.

This fall, some of the themes I will be writing about include:

1. Tax planning for those with disabilities. I will have a couple guest posts on that topic.

2. “The Taboo of Money”

3. Canada/ U.S. tax issues

4. I will also continue my “What Small Business Owners Need to Know” series.

So, in summary. I will be writing less this year and in all honesty, I am unsure whether I am staggering to the end or I will get a second wind and will be good for a few more years. See you next week.