CRA’s Prescribe Interest Rate Rising
July 19, 2022, CRA indicated that the prescribe rate for income tax purposes for the fourth quarter of 2022 will be calculated as the average yield of three-month treasury bills. The results of this calculation indicate that the prescribe rates for Q4 will increase 1% to 3% for taxable benefits and corporate refunds, 5% for personal refunds and 7% for arrears and instalment interest.
This may be a great time for high income earners to trim taxes with income splitting using prescribed rate loans. This strategy allows high-earning taxpayers to loan funds to non-arm’s length low-income earners such that the investment income can be taxes at lower rates, as long as interested at the prescribed rate is charged and paid in a timely manner.
The prescribed rate in place at the time of the loan was made is locked in for the duration of the loan.
Private Health Services Plan (PHSP) – Sole Shareholder/Employee
A May 3, 2022 Technical Interpretation from CRA provided comments on whether Health Spending Accounts (cost-plus plans) set up for a sole employee and shareholder of a corporation could be a PHSP. A health spending account allows employees to be reimbursed for medical expenses up to a certain limit. If the plan constitutes a PHSP, payments made by the corporation are deductible, and the benefits received by the employees are not taxable.
CRA stated that a plan can only be a PHSP where it is a plan of insurance, which means that there must be a reasonable element of risk that is assumed by the employer. CRA provided the following examples that could indicate insufficient transfer of risk:
In the case of a corporation that only has one employee who is also the sole shareholder, it is likely that they will receive their full allocation annually. Further, that individual would likely have control over the plan (able to modify or terminate it at any time), thereby reducing or eliminating the corporation’s risk. CRA noted that such plans effectively allow the individual to pay their own personal medical expenses through the corporation without any risk being assumed by the corporation in its capacity as an employer. As the plan would not constitutes a plan of insurance, it would not qualify as a PHSP.
Personal Services Business (PSB) – CRA education initiatives
On July 21, 2022, CRA released a stakeholder email announcing the launch of an “education project: in respect to PSBs. The email indicated that businesses from specific sectors would be selected; however, the specific industries were not provided. Participation in the project was stated to be voluntary.
CRA officials will contact businesses and ask them to provide documentation on the nature of their payer/payee relationship. As part of the project, CRA will also inform payers and payees of the tax obligations. CRA finally noted that compliance action will result from review; however, businesses will be advised to ensure that errors are corrected and comply with the Income Tax Act. The project is expected to run until December 2022.
Additionally, CRA previously released a 15 minute video (https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/businesses-video-gallery/personal-services-business.html) that discussed some of the basics and key issues to assist in determining whether a corporation may be at risk of carrying on a PSB. The video also specifically indicated that in some industries, such as trucking, IT consulting, accounting, construction and catering, it is a more common practice for those hiring to require individuals to incorporate to provide services.
CRA Digital Services
Confirm my Representative – starting in October 2022, the Confirm my Representative process will be added to the e-file method for authorizing representatives. A signature page would be submitted using certified tax preparation software, and the taxpayer would then have to go into their CRA account to accept or deny it. CPA Canada raised several practical issues for CRA to consider, such as ensuring CRA’s records are accurate and getting the right individuals signed up for the business account – stay tuned.
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