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. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Friday, October 26, 2012

Legislative Update on Personal Service Businesses and Limited Liability Professional Partnerships

On Wednesday, Jim Flaherty, Minister of Finance, tabled a Notice of Ways and Means Motion to implement outstanding technical tax amendments. Included in the amendments are changes to the taxation of Personal Service Businesses (“PSB's”) and professional limited liability partnerships.

PSB's


My blog of January 24, 2012, “Is Your Corporation a Personal Service Business?” generated significant interest amongst many “incorporated employees”. I keep getting asked about the status of the legislation, so today; I thought I would provide an update. The Notice of Ways and Means has introduced an amendment for PSB’s which essentially means that the general rate reduction of 13% currently available to PSB’s will be removed. The Federal tax rate will thus increase to 28% from the current 15%. For Ontario, you will tack on an additional 11.50%, bringing the corporate income tax rate to 39.50%. If you have filed previously as a PSB, your rate would have been 26.50%. If you have filed as a non-PSB with income eligible for the small business deduction, your rate would have been 15.5%.

Clearly this amendment is punitive. The amendment states that it applies to taxation years that begin after October 31, 2011. Thus, this legislation is now as good as passed, so if you have not already considered this legislation in planning, you should do so for any year-end that began after Oct 31, 2011.

Professional Limited Liability Partnerships


The CRA takes the position that the income earned during the fiscal year is not added to a partner's adjusted cost base (“ACB”) until the first day of the following year. However, any partner draws reduce the ACB in the current year. Thus, if you draw $10,000 and make $40,000, your ACB in the current year is negative $10,000, even though you are truly net $30,000. Where you are a limited liability partner, you have a deemed disposition when you have a negative ACB. For example, in the case above, you would have to report a $10,000 capital gain.

This provision was intended to deal with limited partners such as those in a tax shelter. However, it has caught full-shield limited liability partnerships for various professionals. However, the Notice of Ways and Means has introduced an amendment for professional partnerships that will allow the income earned in the current year to be considered in the ACB calculation, such that the negative ACB issue should be alleviated.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

6 comments:

  1. Does this only apply if your are only billing/invoicing one client? I have two companies right now, and another one soon which I'll be billing for IT Services.

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    1. It is a question of fact. The more clients you have the more reflective that you are not a PSB. Three clients in general would be indicative you are not an employee of a single company

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    2. But does the amount of income generated per client come into play? For instance, what if you have 3 clients, but 95% of your corporation's income comes from just 1 of the clients?

      In that scenario, are you still potentially classified as a PSB even though you have more than one client?

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    3. Anon, that is the Million Dollar Question. I just discussed that issue with someone today. Question of facts, often not entirely clear even with all the facts. Sorry, no clear answer on that one

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  2. Any idea how the mentioned "crackdown on tax loopholes" from today's federal budget release would affect the PSB issue?

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    Replies
    1. Hi Anon, just getting ready to post my budget update, nothing new on PSBs

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