Tax Implications for Buying and Selling Cryptocurrency
Investors be aware that tax obligations apply when trading and investing cryptocurrencies. The CRA classifies cryptocurrency as a type of capital property subject to tax upon purchase and sale. The tax treatment for trading cryptocurrencies such as Bitcoin would be the same as if you were to trade any other commodity; you would be required to report either as income gain or loss, or as a capital gain or loss.
Tax Changes for 2018
To address finance concerns of paying dividends to related shareholders who are not active in the business (income sprinkling), solutions were recommended to expand Tax on Split Income (TOSI) or "kiddie tax" Income Tax Act Section 120.4. These tax changes were implemented January 1, 2018.
Past Rules on TOSI only applied to individuals under 18 years old and ceased to apply in the calendar year in which the individual turned 18 years old. The new rules on TOSI apply to individuals over 17 years of age.
Under TOSI rules, income is taxed at the highest marginal income tax rate; capital gains generated by the sale of shares to non-arm’s length family members (includes: aunts, uncles, nieces and nephews) are re-characterized as non-eligible dividend income; and dividends are taxed on the grossed up amount. There are no personal tax credits to offset income included under TOSI rules.
December 13, 2017 update: Income Sprinkling
Finance amendments clarify whether a family member is significantly involved in a business, and thus potentially excluded from being taxed at the highest marginal tax rate (i.e. subject to the new income sprinkling rules, referred to as the “tax on split income” or “TOSI”) on non-salary income or gains derived from that business.
Amounts received in a year in the following situations will be excluded:
Individuals aged 25 or over who do not meet any of the above exclusions would be subject to a reasonableness test to determine how much income, if any, would be subject to the TOSI.
In certain cases, adults aged 18 to 24 who have contributed to a family business with their own capital will be able to use the reasonableness test on the related income.
Otherwise these individuals will be allowed to earn a prescribed rate of return on capital contributed in support of the business.
These measures will apply starting with the 2018 taxation year, except that for dividends on, or gains from the disposition of, shares taxpayers will have until the end of 2018 to meet the ownership exclusion test. The measures will be legislated as part of the 2018 budget process.
December 13, 2017 update: Passive Investments
Starting December 13th, Finance will move forward with measures to limit tax deferral opportunities related to passive investments in a Canadian-controlled private corporation. Details will be included in the 2018 budget. When introduced, the passive investment measures will apply only on a go-forward basis and it is anticipated that the first $50,000 a year in passive income will be exempt. This is equivalent to a 5% return on $1 million in savings invested.
Owner Managed Businesses
Salary/dividend mix – evaluate the optimal mix of salary and dividends. Remember that earning eligible dividends, may increase your alternative minimum tax exposure.
For qualifying small business corporations, proceeding with bonus and/or dividend payments and stockpiling passive investments undermine whether the majority of the assets of a Canadian Controlled Private Corporation (CCPC) are used in an active business. In turn impacting your ability to qualify for the small business tax rate which allows you to claim $824,176 lifetime capital gains exemption upon sale of shares.
Scientific Research and Experimental Development (SR&ED) claimants be aware that if a CCPC’s taxable income exceeded $500,000 in 2017, the corporation may not be able to access the enhanced 35% Federal Investment Tax Credit (ITC) Rate and the ITC may not be refundable in 2018.
Note that the general Federal ITC rate of 20% will still be available. The Alberta ITC rate remains unchanged at 10% refundable in 2017. Consider accruing and paying salaries/bonuses within 179 days after year-end to reduce taxable income in 2017.
Corporate Income Tax Rates
Canadian Controlled Private Corporation (CCPC) combined Federal and Alberta small business rate was 12.5% in 2017, and has decreased to 12% in 2018 and 11% in 2019 on active business income up to $500,000.
The General (i.e. income in excess of $500,000) and Manufacturing & Processing combined Federal and Alberta income tax rate remains the same at 27% for 2018.
The Corporate Investment income combined Federal and Alberta tax rate remains the same as 2017 at 50.67% for 2018.
The Personal Service Business income combined Federal and Alberta tax rate remains the same as 2017 at 40% for 2018.
Personal Income Tax Rates
Combined Federal and Alberta tax rate is 48% on ordinary and interest income exceeding $303,900 for 2017 and $307,547 in 2018.
The tax rate for capital gains is 24%, for eligible dividends its 31.71% and for non-eligible dividends the tax rate has increased from 41.29% in 2017 to 41.64% in 2018.
Individuals and Investors
The Alberta Investor Tax Credit (AITC) became effective in January 2017. Individual investors can claim a 30% tax credit (up to $200,000) if they provide working capital to companies developing information technology, clean technology, health technology, interactive digital media and game products, and post-production, visual effects and digital animation. The government of Alberta is aiming the two-year $90 million program at these types of companies in hopes of diversifying the economy and creating new jobs.
Contribute to your RRSP account for 2017 – deadline is March 1, 2018. As contributions are tax deductible consider investing income subject to a lower future tax rate since withdrawals will be taxed as income. RRSP annual contribution limit increased to $26,230 in 2018.
Contribute to your Tax Free Savings Account (TFSA) with investments that produce income subject to a higher tax rate as contributions are not tax-deductible, but investment income earned in the TFSA and withdrawals will not be taxed. If you have been a Canadian resident and 18 years or older since 2009, you can contribute up to $52,000 in 2017 if you have not previously contributed to your TFSA. Contribution limit for 2018 is $5,500 and amounts can be contributed as early as January 1, 2018.
Convert your RRSP to a RRIF by age 71. If you turn 71 in 2018, consider making a one-time over contribution to your RRSP in December before conversion if you have earned income in 2017 that will generate RRSP contribution room for 2018. You may pay a penalty tax of 1% on the over-contribution (above the $2,000 permitted over-contribution limit) but new RRSP room will be available January 1, 2018 so the penalty will cease and you can deduct the over-contributed amount on your 2018 or future personal income tax returns.
Tuition costs paid to a post-secondary school will still be eligible for the tax credit in 2017 and onwards. Unused credits can be carried forward to use in 2018 and onwards.
If you are a recipient of Canada Pension Plan payments, consider splitting your CPP income with your spouse by requesting to share the payments.
If you are employed or self-employed and are age 60 to 70, you must contribute to the CPP, however if you are age 65 to 70 you can elect to stop these contributions.
Pension income recipients (e.g. RPP, RRSP, RRIF) consider allocating up to half of this income to your spouse or common law partner.
If you are 65 or older, claim the maximum pension credit by having at least $2,000 of pension income.
The Home Accessibility tax credit is a $6,500 non-refundable tax credit available if you incur eligible expenditures of up to $10,000 to make home renovations that increase the mobility or safety of a senior.
Ensure your electronic presence in a foreign jurisdiction does not inadvertently trigger a foreign tax bill.
Canadian resident individuals, corporations, trust and certain partnerships that own specified foreign property with a cost exceeding $100,000 at any time in the year, must report this information on form T1135.
Payments to non-Canadian residents may require you to withhold 15% of payments that relate to fees, commissions or other amounts in respect to services rendered in Canada.
Canadian snowbirds who spend a significant amount of time in the United States should make sure they DO NOT meet the US “substantial presence test” which may make you liable for U.S. income tax.
EFILE your SR&ED claim with your corporate tax return within 6 months of your tax year end and you could receive your refund within 2 weeks
Evaluate the project to make sure it meets SR&ED criteria and plan to make sure you maximize the claim