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Trusts: New and Expanded Disclosure Requirements

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Legislation has been proposed for trusts (including estates) with years ending on December 31, 2023 and onwards that would significantly expand the reporting rules. More trusts would be required to file tax returns, and more information would be required to be disclosed in these returns. In addition, sizable penalties would be introduced for non-compliance.

More trusts and estates required to file
Under the existing rules, trusts are exempt from filing a T3 tax return if they have no taxes payable and no dispositions of capital property. However, under the proposals, tax returns will be required for all Canadian resident express trusts (this generally means trusts created deliberately) that do not meet at least one of a number of exceptions. Some of the more common exceptions include the following:

  • trusts in existence for less than three months at the end of the year;
  • trusts holding only assets within a prescribed listing (including items such as cash and publicly listed shares) with a total fair market value that does not exceed $50,000 at any time in the year;
  • trusts required by law or under rules of professional conduct to hold funds related to the activity regulated thereunder, excluding any trust that is maintained as a separate trust for a particular client (this would apply to a lawyer’s  general trust account, but not specific client accounts); and
  • registered charities and non-profit clubs, societies or associations.

Reporting will be required where a trust acts as an agent for its beneficiaries (referred to as bare trusts in the government’s explanatory notes). No details on the intended breadth of such trusts have been provided by the Department of Finance or CRA to date. 

More disclosure of parties to trusts
Where a trust is required to file a tax return, the identity, including residency, of all of the following people must be disclosed: 

  • trustees, beneficiaries and settlors; and
  • anyone that has the ability (through the terms of the trust or a related agreement) to  exert  influence over  trustee  decisions  regarding the income or capital of the trust.

The requirement to provide information in respect of the beneficiaries would be met if beneficiary information is provided for all whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. Where there are beneficiaries whose identity is not known or ascertainable with reasonable effort, the person making the return would be required to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. For example, where the beneficiaries are both the current and future grandchildren of the settlor, details in respect of the current children must be provided in addition to details of the trust terms describing the future class of beneficiaries.

The new rules would not require the disclosure of information subject to solicitor-client privilege. 

Substantial penalties 
Failure to make the required filings and disclosures on time attract penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties have been proposed, applicable to filings not made on time and inaccurate filings. These penalties are proposed to be the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime, leading to the concern that multiple persons could be subject to these substantial penalties for a single trust.

ACTION: Make a list of all arrangements that you and  your family have that may be considered a trust or bare trust.  Review them with a professional to determine whether they would  be  subject  to  the  rules.  Obtain the relevant information that will be required for the filing of the particular trust returns.

Cloud Accounting 101

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Cloud accounting software is an easy solution to small business bookkeeping. From collaboration to secure data storage, learn more about cloud accounting. QuickBooks Online is cloud accounting software that helps you take care of your finances and does the number crunching for you.

There are many benefits of cloud accounting. No longer tied to your desk, cloud accounting software allows you to access all your documents no matter where you are working from. Perfect for virtual teams, all your accountants can login and make updates in real-time.

Online accounting software like QuickBooks offers several different cloud accounting features depending on the size and type of business you own.

What Is Cloud-Based Accounting Software?

Cloud-based accounting software is based in the “cloud” rather than installed on your desktop or manually maintained in ledgers and journals. The software for cloud accounting is hosted on a remote server instead of a server on your business’ premises. Your accounting data is sent to the cloud, processed on the remote server, and then sent back for you to access.

None of the accounting processes occur on your desktop. The application functions entirely in the cloud. This frees your business from installing and maintaining software on multiple computers throughout your company. Your accounting or HR department can access the exact same version of the software as you and access real-time data within your account.

Differences between cloud accounting & traditional accounting systems

Cloud accounting and traditional accounting have some key differences. Cloud accounting is much more flexible, allowing anyone who has access to your cloud account to crunch real-time numbers from any device, anywhere, as long as there’s an internet connection.

Personnel don’t have to be at a specific computer to do their jobs. In fact, balances reflected by your entries with cloud accounting have a high level of accuracy, as far fewer errors occur in cloud accounting than in traditional, manual accounting.

Benefits of Cloud Accounting

For new businesses, starting fresh with a cloud solution is easy as signing up. Established businesses, however, will need to plan ahead for migration to ensure that critical data is kept intact, and everything continues to run smoothly.

Fortunately, major cloud accounting providers such as QuickBooks Online allow seamless transition from older, traditional desktop based solutions. Many business owners who migrated to cloud accounting technology have reported cost savings and greater efficiencies in day to day operations.

Cloud accounting has several benefits, such as:

  • Secure Storage of Financial Data

Cloud accounting technology can provide a more secure method of storing financial information than desktop-based software. Data is routinely backed up to servers in multiple locations by the SaaS provider, and there are no physical hard drives or computers containing sensitive data that can be stolen. Since financial information isn’t kept on-premise, the risks of fires and natural disasters are also mitigated.

  • Sync Data Automatically

Cloud accounting software does the heavy lifting so you can spend your time on other important business tasks. Automatically sync your bank accounts so you don’t have to manually import transactions or verify expenses. If 84% of businesses using cloud software are cutting their application costs — it’s a good indicator that with the adoption of online accounting, you can too.

  • Pay as You Grow

Small businesses often experience growing pains, which makes choosing software with future growth in mind a priority for many. Cloud accounting software allows businesses to purchase what they need and increase their spend as they grow. This includes adding more storage space, users, and more advanced features.

  • Multi-User Access

Once you reach a point where your business is looking to outsource specific tasks, using cloud accounting can help scale in a cost-effective and controlled manner. The multi-user feature of cloud accounting means you can give different people access to your financial records and bookkeeping process, which they can access remotely.

This streamlines workflow and allows you to ask your advisor or accountant questions directly, all based on the most up-to-date versions of documents. The multi-user feature makes for quick communication, team collaboration and less back and forth.

  • Immediate Transactions

Retail operations electronically enter transactions as they occur, whereas you might only enter your transactions at the end of each week or every other week, depending on the size and sales volume of your business. Small business accounting in the cloud compels you to keep your data entry current.

With cloud accounting in place, you can quickly spot a gap in cash flow or see if customers are abusing your extension of credit. Business owners who simply place all of their receipts in a drawer to deal with at a later date might not catch a potential issue until it’s too late.

You can run balance reports or expense reports and get a financial snapshot of your business at any given point. Cloud accounting software can also handle the calculations for different currencies in the event you do business with foreign companies, compensating for the fluctuations in exchange rates. It can be time- and cost-prohibitive if you or your accounting department has to crunch those always-fluctuating numbers on paper.

  • Centralizes Your Most Important Tasks

Several aspects of your day-to-day business operations, like managing inventory, invoices, payroll, and even portions of your customer relations management can all be tied into your cloud accounting software. Save your hard-earned money – no separate software is needed.

Plus, the great thing about cloud accounting software is that third-party systems integrate seamlessly with QuickBooks Online. If your company uses an ‘actual-minutes worked’ type of format, your time tracking software can integrate with your accounting software to maintain accurate payroll records.

You can basically build the accounting software suite of tools with your favourite apps that apply to your specific business.

  • Simplify Tax Compliance

You must remain compliant with the CRA or you can face stiff penalties. Cloud accounting software helps by showing you things like how much tax you owe (even down to specific invoices) or how much you’ve paid overtime on a specific tax. Cloud accounting software like QuickBooks makes it much easier to compile the information you need to file a successful remittance.

  • Analysis Tools

Have you ever wondered how much easier (and more accurate) your business tasks might be if only you had a personal financial advisor? Cloud accounting apps not only give you tools to customize your own reports, they even suggest reports for you based on the type of business you own. You can make solid financial decisions when you can see the bigger picture – just like having your own advisor.

There’s a report you can run for virtually every question you have regarding your business’ financial health. Wondering which of your clients haven’t paid you yet? Run an Accounts Receivable report.

  • Accuracy

The accuracy of your numbers is crucial. There’s always the chance of a transposed number or erroneous math in manual entry accounting, but cloud accounting software does the calculations for you. And the software also maintains other necessary information, like inventory on hand, supplies on hand and which suppliers you use for which products. Need to mail something to a client? Even your client’s addresses are maintained in QuickBooks Online for easy access when the need arises.

Is Cloud Accounting Right for Your Business?

From the smallest downtown laundromat to the largest Fortune 500 company, your business can benefit from implementing cloud accounting. Whether you have one employee or 1,000 – even if you are the only employee – cloud accounting software like QuickBooks can help you manage your payroll expenses, tax remittances and other business expenses.

How Much Does it Cost?

Costs can vary greatly among different cloud accounting service providers. QuickBooks Online offers a free, 30-day trial of its online accounting software. This cloud accounting online software offers the usual browser compatibilities, plus applications for Android and iOS mobile devices. The family of Intuit QuickBooks programs has different tiers, depending on the scale of your business and what you need the software for.

The tiers include:

  • EasyStart
  • Essentials
  • Plus

There are also versions of QuickBooks for the self-employed individual and even corporate-sized entities.

The Future of Cloud Accounting

Nothing stays the same forever and everyday new technologies are being developed that will impact the future of Canadian small businesses. From the help of AI to continued integrations, the future of cloud-based accounting systems has never looked brighter.

Machine Learning & AI

No longer a plot device in science-fiction, artificial intelligence and machine-learning algorithms are already starting to make a difference in how Canadian small businesses are handling their accounting in cloud-based software.

As Canadian firms take in ever-increasing volumes of data, a sorting mechanism must be employed to make sense of it and draw reasonable conclusions. With the right machine learning systems, it becomes possible to not only track the income and expenses for a single company, but to track those of an entire industry across decades of recorded data and derive likely projections from it. This has obvious applications for up-and-coming small businesses, as well as for Canadian firms looking to compete abroad in a post-USMCA trading environment.

A good accounting AI can already use its almost human-like language processing ability to rapidly scan through thousands of documents and come up with certain key phrases — such as “debt” and “unsustainable” — to arrive at predictions about the financial health of your company.

Another way artificial intelligence can help sort a company’s books are with long-range and specific predictions about which customers, clients, or markets are more trouble than they’re worth. An intelligent computer system can sift through the various signs of problematic customers and employees and predict which is likely to become a headache later on. A good AI system could help you see any potential problems in particular geographic locations, track the correlation between employee paid time off and the work-life balance of your employees.

Continued Integration

The vertical integration of compatible apps with software has already become a normal part of cloud-based software systems. Work towards better and more seamless integration of apps with different capabilities is an ongoing project for many app and accounting software developers. This trend can only continue, until something like a market standard for compatibility is common to every app, and a cloud-based solution is available for virtually any need that could arise.

Another approach to vertical integration is layering apps. This works a lot like the package deals vertical app markets currently offer, but with a more customized approach that allows the user to build a cloud-accounting solution specifically for their business.

For example, if a small accounting firm needed to handle financials for a start-up, payroll for an established client, and a data security audit for a one-off customer who might develop into a long-term contract, they would need three different apps to provide a solution for their varying clients. An ideal solution is to have a standard payroll app coupled with a financing app, interest rate/loan calculator, and a report generator for the audit client.

The layered approach to this situation is to choose a specific app for each task, then combine — or “layer” — them all together into the app you’re comfortable using. While this is already possible with the integration capabilities of QuickBooks Online, it is safe to say that layering will be an essential aspect of cloud-based systems of the future.

Ready to dive in? Desktop accounting applications might be on the way out, so transitioning to cloud accounting is a smart choice now. 5.6 million businesses use QuickBooks. Join them today to help your business thrive.

Buying and Selling a Home: Budget 2022 Proposals

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The 2022 Federal Budget included several proposals that would significantly change the taxation environment when buying and selling a home. Broadly, the government proposed various incentives for first-time buyers and extended family units in addition to bright-line tests/restrictions for those purchasing homes for profit (e.g. home flippers). Taxpayers should consider how the changes will affect their intended purchases and sales. In some cases, it may be beneficial to expedite a purchase or sale, while in others, it may be prudent to delay. 

New possibilities and enhanced programs include the following: 

  • Home accessibility tax credit – The annual expense limit would be doubled to $20,000 such that the maximum non-refundable tax credit would be $3,000, proposed to be effective for 2022 and subsequent taxation years. This credit applies to enduring and integral home renovations in respect of a taxpayer, or a relative who is (or will be) living with the taxpayer, that is either a senior or eligible for the disability tax credit. The renovation must enable the individual to gain access to the home, be more mobile or functional in the home, or reduce the risk of harm within, or in gaining access to, the home. 
  • Home buyers’ tax credit – The amount would be doubled such that eligible first-time home buyers could access tax relief of $1,500, proposed to be effective for acquisitions of a qualifying home on or after January 1, 2022.  
  • Tax-free first home savings account – A new registered account would allow for tax-deductible contributions of up to $8,000 annually and up to $40,000 in total; withdrawals from the plan (including income earned in the plan) to purchase a first home would not be taxable. This initiative is expected to become available in 2023. 
  • Multigenerational home renovation tax credit – A new tax credit would provide relief on up to $50,000 of eligible expenses to construct a secondary suite for a senior or person with a disability to live with a relative. This initiative is expected to become available in 2023. 

New cautions and restrictions include the following: 

  • Residential property flipping rule – A new rule would be introduced to deem all gains arising from the disposition of a residential property (including rental property)that was owned for less than 12 months to be business income, other than any disposition for which an exception would apply (such as where a death or addition to the family necessitates a move). Sales on homes owned for 12 months or more would follow the traditional rules. This means that such sales could still be classified as fully taxable business income and not be eligible for the principal residence exemption. This measure would apply to residential properties sold on or after January 1, 2023.
  • Foreign buyer property banForeign commercial enterprises and people who are not Canadian citizens or permanent residents would be prohibited from acquiring non-recreational residential property in Canada for two years. This would not apply to refugees and people authorized to come to Canada while fleeing international crises, certain international students on the path to permanent residency or individuals on work permits residing in Canada. 
  • GST/HST on assignment sales by individuals – All assignment sales in respect of newly constructed or substantially renovated residential housing would be taxable for GST/HST purposes. 

In addition to the above tax measures, Budget 2022 proposed to develop and implement a Home Buyers’ Bill of Rights and national plan to end blind bidding. This Bill of Rights could also include items such as ensuring a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches. 

ACTION: Consider the expected timing of implementation for reach of these measures and the impacts on purchases or sales.

Recent tax updates

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  • The interest rate on overdue taxes for the fourth quarter of 2022 (October 1 – December 31, 2022) has increased by 1% to 7%. Make sure to get those payments in to CRA on time!
  • The luxury tax affecting new vehicles and aircraft retailing for more than $100,000 and new boats over $250,000 has been rescheduled to commence on September 1, 2022.
  • On June 19, 2022, individuals suffering from Type 1 diabetes became automatically entitled to the disability tax credit. This change is retroactive to 2021.
  • On June 23, 2022, legislation was passed which would allow the full and immediate expensing of many capital assets purchased on or after April 19, 2021.
  • The program that has offered purchase incentives of up to $5,000 for zero-emission vehicles since 2019 is proposed to be extended until March 2025, and eligibility would be broadened to include other vehicle models, including more vans, trucks and SUVs.
  • The federal climate action incentive (Alberta, Manitoba, Ontario and Saskatchewan) converted from a tax credit claimed on personal tax returns to quarterly payments in 2022. The first payment was made in July 2022 and it was a double payment for the first two quarters of 2022. Subsequent payments will be made each January, April, July and October.
  • CRA is currently reviewing how and when crypto asset holdings need to be disclosed on form T1135.
  • The annual TFSA limit for 2022 remains at $6,000. As such, if an individual has never contributed and has built room since the program’s inception in 2009, up to $81,500 can be contributed.

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