Mark Your Calendar: Critical Deadlines for May and June

Tax season never truly ends, it seems, as there are many more upcoming tax filing, investment planning and education milestones to discuss with your clients over the next six months. Check out our handy checklist below and then test yourself – what are the conversation openers you’ll use and with which clients? It’s your opportunity to shine with every member of the household:

In a volatile marketplace, investors, small business owners and seniors should keep a tight rein on their quarterly instalment payments. Now is a good time for tax advisors to consult with their clients to ensure there is no capital encroachment as a result of a mistaken overpayment to the upcoming quarterly instalment. An estimation of the income for the year can be used as an instalment base. Current-Year Option Under this option, the taxpayer's income tax liability for the current taxation year is estimated and, if the estimate exceeds $2,000, then one-quarter of the estimated amount is due on each of the four due dates. Prior-Year Option Under this option, the first two instalments are estimated at one-quarter of the taxes due in the second prior year (since the prior year's return is not available when these instalments are due) and the last two instalments are calculated at one-half of the excess of taxes due in the prior year over taxes due in the second prior year. Example: Instalments Issue: In the prior two years, Peter's taxes owing when he filed his return were as follows: Last year: $3,500 Year before last: $4,000 At what amounts would Peter's quarterly instalment payments be under each option? Answer: Using the Prior-Year Option, Peter's first two instalment payments are $1,000 (= $4,000/4) and his third and fourth instalments are $750 each (= ($3,500 - $1,000 - $1,000) / 2). If Peter estimates that his current year tax liability will be $3,400 he may use the current-year option and make instalment payments of $850 ($3,400/4) each quarter. Click on these links now for more information on the Knowledge Bureau's Tax Services Specialist programs or EverGreen Explanatory Notes.

As discussed in last week's Knowledge Bureau Report, the June 15th filing deadline for proprietorships is around the corner, and some consideration should be given to the implications of selling a business and encouraging discussion between a business owner and their advisory team.   An earn-out agreement is a purchase and sale agreement in which the ultimate price to be paid is dependant in whole or in part on the economic results the business produces.   Where an earn-out has been negotiated it is not possible at the date of closing of the sale to determine the exact proceeds of disposition the vendor is to account for. For this reason mechanisms must exist to adjust the tax accounting for the disposition as the proceeds become known.   The treatment of an earn-out payment depends of whether it relates to the purchase of assets or the purchase of shares. In this issue we will review the earn-out payment where the purchase of assets is used. Asset Purchase The tax treatment of earn out payments that do not qualify under the conditions required for a sale of shares differs because there is a statutory rule in the Income Tax Act that deals with them. This rule normally applies where the payment to be made for assets is based on the gross revenue, net income or production that the assets are to generate. Where this is the case, the non-variable portion of the proceeds is accounted for in the normal way. Any payment that is based on production or use is treated as business income to the vendor. This is true even where the payment represents part of the capital cost of the property purchased to the vendor. This treatment does not apply where the purchaser and vendor agree on a fixed price which can be adjusted downwards if revenue, income or production targets are not met. In those cases, the vendor accounts for the sale based on the agreed price. If it turns out that the price is adjusted downwards, an amendment is made to the return(s) on which the disposition was reported.       ADDITIONAL EDUCATIONAL RESOURCES: EverGreen Explanatory Notes Fundamentals of Succession Planning Accounting For Business Transitions  

With the upcoming June 15th filing deadline for proprietorships around the corner, it's worthwhile to consider the implications of selling a business and encouraging a preparatory discussion between a business owner and their advisory team. Talking about succession planning with your business owner clients and what the future holds for them is a now conversation because planning can take several years.    In particular, a business sale will typically contain several layers of financial consideration, today we will discuss the earn-out. An earn-out agreement is a purchase and sale agreement in which the ultimate price to be paid is dependant in whole or in part on the economic results the business produces. An earn-out may be negotiated where the purchaser is unable to obtain sufficient information to be comfortable with the quality of the business's earnings, or where there are significant risks associated with operations that the purchaser is not willing to take on. Where an earn-out has been negotiated it is not possible at the date of closing of the sale to determine the exact proceeds of disposition the vendor is to account for. For this reason mechanisms must exist to adjust the tax accounting for the disposition as the proceeds become known. The treatment of an earn-out payment depends of whether it relates to the purchase of assets or the purchase of shares. This week we will review the earn-out payment where the purchase of shares is used. Share Purchase There are no rules in the Income Tax Act which deal specifically with accounting for an earn-out where shares are sold. CRA has an administrative policy, however, which can be applied and which permits the vendor to account for the disposition using the cost recovery method. Under the cost recovery method, the vendor applies sales proceeds as they become known against the adjusted cost base of the shares sold. Once the cost base has been fully recovered, any addition proceeds are accounted for as a capital gain. The CRA outlines its policies on this matter in IT-426. It provides that the cost recovery method can be used where: the vendor and purchaser are dealing with each other at arm's length; the gain or loss on the sale of shares of the capital stock of a corporation is clearly of a capital nature; it is reasonable to assume that the earn out feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale; the earn out feature in the sale agreement must end no later than 5 years after the date of the end of the taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earn out feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement; the vendor submits, with his return of income for the year in which the shares were disposed of, a copy of the sale agreement. He or she also submits with that return a letter requesting the application of the cost recovery method to the sale, and an undertaking to follow the procedure of reporting the gain or loss on the sale under the cost recovery method. Join us next week in the Knowledge Bureau Report when we discuss the implications of a purchase of assets when a business changes hands.       ADDITIONAL EDUCATIONAL RESOURCES: EverGreen Explanatory Notes Fundamentals of Succession Planning Accounting For Business Transitions

The Minister of Finance, The Honourable Jim Flaherty, has announced new regulations that will restrict Canadian banks, trust and loan companies from promoting non-authorized insurance on their web pages. Authorized products such as travel related insurance as well as credit insurance could still be sold under the new regime, but non-authorized products such as property and life insurance would no longer be allowed. Mr. Flaherty stated the following "We intend to prevent banks from using their web pages to promote non-authorized insurance products, which is not permitted in their branches. These measures were made necessary by the evolving use of technology by banks.î To view the full news release, click here.   <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />Educational Resources:  Now is a good time to review insurance considerations and strategies for your clients. Consider the following Educational Resource available from The Knowledge Bureau: Insurance Strategies for the Small Business Owner

In a war on the underground economy, an Atlantic-Canada wide campaign was launched on May 18 by the CRA and the Canadian Home Builders' Association to crack down on home reno cheats and their clients operating "under the tableî. The campaign urges homeowners to "get it in writingî as part of prevention, audit and enforcement activities. Advisors in the tax and financial services industries can be proactive in helping non-compliant service providers avoid penalties, interest and potentially jail by making themselves available to make adjustments to prior filed returns which may contain errors like understated income or overstated deductions. For more information see CRA links: Get it in Writing Campaign http://www.cra-arc.gc.ca/gncy/lrt/ndrgrnd-eng.html#q6 Voluntary Disclosures Oppportunities http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html Click on these links now for more information on the Knowledge Bureau's Tax Services Specialist programs or EverGreen Explanatory Notes.

Taxable benefits are so important to the payroll cycle that CRA has written a separate payroll guide to explain them, T4130, Employers Guide - Taxable Benefits and Allowances. Every payroll clerk should have this guide at hand to determine income reporting and statutory deduction withholding requirements on an ongoing basis. In all cases, where a taxable benefit arises the value of the benefit to be included in income is reduced by any payment the employee makes to the employer with respect to the benefit. There are four basic facts about taxable benefits to remember in processing a payroll: 1. Add their Value to Gross Pay. The taxable benefit must be added to the employee's cash compensation each pay period and normal statutory deductions must be withheld from the total amount. Remember that the value of the taxable benefit is reduced by any payment the employee made to compensate the employer for providing the benefit. 2. Annualized Tax Withholding is Possible. Where a non-cash benefit is very large so that withholding of income tax will cause undue hardship, the value of the benefit and the related withholdings can be spread over the remainder of the year. 3. CPP Deductions Required. If the benefit or allowance is taxable, it will also be pensionable. Therefore Canada Pension Plan (CPP) contributions will be required to be withheld, as will income tax. 4. EI Deductions May Be Required. If the taxable benefit is paid in cash and relates to insurable employment, it is insurable. Employment Insurance (EI) premiums will therefore be required. However, if the employment is not insurable under the Employment Insurance Act, taxable benefits paid in cash are not insurable and are not subject to EI premiums. Finally, if the taxable benefit is a non-cash benefit, it is not insurable. In that case, the benefit does not attract EI premiums. The T4130 Guide is also available in EverGreen and it contains a chart which clearly identifies, in alphabetical order, the various types of taxable benefits and their source remittance. This table is also reproduced electronically on the CRA web site. Excerpted from Advanced Payroll for Professionals, one of the courses that comprise the Bookkeeping Services Specialist program.