With tax season upon us, corporate taxpayers must acknowledge their legal obligations to pay taxes. Staying informed about the latest tax developments and best practices is crucial to fulfill this responsibility while optimizing tax savings.
In this blog post, we’ll delve into the latest amendments to Canada’s tax laws that apply to corporate taxpayers. Equipping yourself with the knowledge to navigate these changes with ease is essential for maintaining compliance and maximizing tax benefits.
Introduction
As the Canadian tax system continues to evolve and adapt to the needs of taxpayers, it’s critical to stay informed and prepared for what lies ahead. Read on to discover a comprehensive list of the key changes in 2023 that will significantly impact corporate taxpayers.
1) Critical Mineral Exploration Tax Credit (CMETC)
One major change for businesses in Canada for 2022-2023 is the introduction of the critical mineral exploration tax credit (CMETC). The CMETC is a new 30% investment tax credit for the exploration of specified minerals.
The CMETC will only apply to expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022 and before April 1, 2027.
2) Proposed Mandatory Disclosure Rules for Specific Transactions
The government is planning to introduce New Mandatory Disclosure Rules that will apply to specific tax transactions. These rules will become effective once they are incorporated into the legislation and approved by the Royal Assent.
Under these rules, taxpayers and advisors will be required to report certain transactions that are primarily intended to obtain tax benefits. Specifically, if a transaction displays at least two of the following three characteristics, it will be considered a reportable transaction and must be disclosed:
- The transaction involves a confidentiality agreement
- The transaction includes a premium fee arrangement
- The transaction has standardized documentation or structure
To determine whether a transaction is reportable, a threshold probability of tax benefit must also be met. The rules are designed to increase transparency and compliance in tax reporting.
Under the New Mandatory Disclosure Rules, only one of three hallmarks above will need to be met in order for the transaction to be a reportable transaction – which is a major reporting change.
New Obligations for Certain Transactions
The Canadian Federal Government is considering the creation of new reporting requirements for specific transactions that have been identified by the Canada Revenue Agency (CRA) as potentially abusive. These transactions will be referred to as Notifiable Transactions.
Uncertain Tax Treatments
In addition, the Federal Government has proposed that specific corporate taxpayers be required to report some “uncertain” tax treatments to the CRA. This requirement will only apply if particular conditions are met, and we will provide more information about these conditions in subsequent blog posts.
3) Changes to Small Business Deduction Cutoff for Taxable Capital Levels
Previously, Canadian Controlled Private Corporations (CCPCs) were subject to a reduction in their small business deduction on a straight-line basis if their combined taxable capital employed in Canada, along with any associated corporations, fell between CA$10 million and CA$15 million.
However, Bill C-32, granted Royal Assent on December 15, 2022, increased the upper limit of taxable capital employed in Canada (at which point the small business deduction is phased out), from $15 million to $50 million for taxation years starting on or after April 7, 2022.
Canadian-controlled private corporations (CCPCs) and their associated corporations, with a combined taxable capital employed in Canada of less than $50 million, will now be eligible to receive the small business deduction.
- Changes to Trust Reporting Requirements
Currently, trusts are required to file a T3 Trust Income Tax and Information Return for a tax year if they have taxes payable, dispose of capital property, or distribute income or capital to beneficiaries. However, new reporting rules will be introduced for applicable trusts with a taxation year ending on or after December 31, 2023.
New Reporting Rules for Trusts
Most trusts will now be required to file a T3 Return every year, regardless of whether there are taxes payable, capital property disposition, or income or capital distribution.
In addition, trusts must provide more information in their T3 Return, including the name, address, date of birth, jurisdiction of residence, and taxpayer identification number for trustees, beneficiaries, settlors, and anyone who can influence a trustee’s decision regarding the appointment of income or capital.
Bare Trusts
Bare trusts are now also obligated to file a T3 Return each year. However, there are certain trusts exempt from filing T3s, such as trusts in existence for less than three months, or hold assets with a total fair market assessment under $ 50,000, certain non-profit organizations or registered charities, mutual fund trusts, segregated funds, and master trusts.
This new requirement significantly changes reporting obligations for most trusts, including bare trust arrangements. To be prepared and ready for these new reporting requirements, taxpayers and financial advisors should review all arrangements of trusts and bare trust arrangements at the earliest.
5) Proposed Changes to Excessive Interest and Financing Expenses Limitation Rules
The Department of Finance Canada released proposed legislation in February and November 2022, concerning new Excessive Interest and Financing Expenses Limitation (EIFEL) rules. These rules aim to address concerns arising from taxpayers who deduct excessive interest and other financing expenses, particularly in the context of multinational enterprises and cross-border investments.
The new rules apply to corporations or trusts that are taxpayers and in the computation of taxable income earned in Canada by non-resident taxpayers. They also apply indirectly to partnerships, as interest and financing expenses and revenues of a partnership are allocated to members who are corporations or trusts, according to their interests in the partnership.
However, these new rules do not apply to “excluded entities,” such as:
- Canadian-controlled private corporations that have taxable capital employed in Canada less than $50 million, when tallied together with their associated corporations,
- Groups of Canadian corporations and trusts, with a combined net interest expense among members of $1 million or less.
- Canadian resident corporations and trusts that operate mainly in Canada, as well as groups comprising solely of Canadian resident corporations and trusts.
In conclusion, the 2022-2023 tax season brings significant changes for all corporate taxpayers. It’s imperative to stay informed and understand how these changes will impact your tax obligations to avoid any potential compliance issues.
As a leading tax advisory and accounting firm in the Mississauga and GTA, Taxvisors specializes in delivering tailor-made corporate financial solutions. With two decades of experience, our team of seasoned professionals excels at streamlining your company’s accounting, tax, and bookkeeping processes, ensuring compliance and maximizing efficiency.
Let us help your corporation thrive in today’s fast-paced business environment. Schedule a call with one of our corporate accounting specialists now.