Tax Articles
The Jungle of Tax Compliance for Businesses
Mississuaga Business Times
Kais Aziz
Your company’s tax compliance burden will become lighter now that the federal and Ontario governments are singing in tune when it comes to corporate income and capital taxes.
Under an agreement reached in 2006, the federal government will administer and collect Ontario’s corporate income and capital taxes for taxation years ending after 2008. Ontario companies will now be able to make combined Ontario/federal income tax payments and file a single corporate tax return. This change will reduce the tax compliance burden on Ontario corporations.
Under the federal/Ontario agreement, corporations will use federal tax attributes as the common tax base. Both federal and Ontario tax will now apply on the same taxable income amount.
“Tax attributes” are amounts your company can deduct for tax purposes such as losses carried forward from previous years and undepreciated capital costs. If these attributes are different for federal and Ontario corporate tax purposes as of the first day of the taxation year in which your corporation files a harmonized corporate tax return, the Ontario attributes will be adjusted to the federal attributes.
If this adjustment results in a net increase to your Ontario attributes, your company will have to pay for this increase in equal instalments over five taxation years. If the adjustment results in a net decrease to your Ontario attributes, your company will be eligible to claim a tax credit that must be used within a five-year period. This credit is not refundable; it can only be applied against taxes payable.
The attributes that may result in a transitional debit or credit include the following:
• undepreciated capital cost
• donations carried forward
• cumulative eligible capital
• Scientific Research and Experimental Development pools
• non-capital losses carried forward
• net capital losses carried forward
• adjusted cost base of partnership interests
• reserves deducted
• discretionary deductions
Your corporation will no longer have to file a separate Form CT23 for taxation years ending after 2008. Therefore, if your company has a December 31year-end, the first year you will be impacted is the year ending December 31, 2009. However, corporations with non-calendar year-ends will be impacted sooner – for example, if your corporation has a January 31year-end, you will file your first combined corporate tax return for the taxation year ending on January 31, 2009.
Since February 2008 is the first month of the 2009 taxation year, you would make a combined corporate tax instalment to the Canada Revenue Agency (CRA).
Combined instalment payments include all Ontario taxes that the CRA will administer on behalf of the province. These include corporate income tax, corporate minimum tax, capital tax and the special additional tax on life insurers.
If your company participates in the Scientific Research and Experimental Development program (SR&ED), you can also benefit from a couple of transitional provisions. Many companies, for example, have differences in their Ontario and federal R&D tax pools available for deduction. To alleviate the hardship of a transitional debit, you have the option of electing for a seven-year deferral.
As well, there is a new non-refundable 4.5 per cent R&D tax credit in Ontario effective for taxation years ending after 2008 to compensate Ontario R&D companies for the fact that federal R&D investment tax credits are now subject to Ontario corporate income tax.
There are numerous other effects of the harmonized corporate tax system for Ontario companies. Be sure to discuss the implications for your company with your accountant – after all, you’ll benefit from singing the right tune.
Kais Aziz is a senior tax manager of BDO Dunwoody LLP (www.bdo.ca). One of Canada's leading accounting firms, If you have questions about this article or you would like to receive BDO's Tax Factor newsletter, contact Kais in the Mississauga office at (905) 270-7700 or kaziz@bdo.ca
This article was originally published in Mississauga Business Times, Sep 2008
