Below are some noteworthy news items and updates that may impact your tax and financial planning:
Loans and Mortgages from Related Corporations
The Department of Finance recently clarified their definition of what constitutes a loan being “in the ordinary course of the creditor’s business or a loan made in the ordinary course of the lender’s ordinary business of lending money.” This impacts current and future loans made by private corporations to related shareholders.
Subsection 15(2) of the Income Tax Act provides that where a corporation makes a loan to a shareholder, a member of a partnership that is a shareholder, or a person connected to a shareholder, the full amount of the loan must be included in the borrower’s income.
A few exceptions to this rule include, but are not limited to:
- if the loan is repaid within one year of the corporate lender’s year-end, or
- the loan is “in the ordinary course of the creditor’s business” and a bona fide arrangement is in place for the loan to be repaid over a reasonable term with a reasonable rate of interest.
Until recently, you could take the position that your corporation was “in the ordinary business of lending money” and give yourself or a family member a mortgage. As long as you established reasonable repayment terms, you could use this exception to avoid the loan being included as income.
But the Department of Finance has now significantly narrowed this exception by specifying that at least 90% of all outstanding loans must be made to arm’s length borrowers in order for a loan to be considered “in the ordinary course of the creditor’s business.” The revision will make it harder for your corporation to make a mortgage to you or someone related to you.
If you have an outstanding loan from a related corporation that met the old exception but does not meet the new narrowed exception, please note that the loan is required to be repaid within one year of the corporation’s 2023 year-end. If not, Subsection 15(2) of the Act will apply and the outstanding loan amount will need to be included in your income.
Upcoming changes to the Canada Pension Plan
There are some upcoming changes and enhancements to the Canada Pension Plan (CPP) that may impact your financial planning. Beginning in January 2024, a second CPP contribution rate and earnings ceiling will be introduced for higher-income earners. This additional contribution will be known as “second additional CPP contribution” or CPP2. It applies to income between the first earnings ceiling (“annual maximum pensionable earnings”) and the second earnings ceiling, referred to as the “additional maximum annual pensionable earnings”, which is estimated to be $72,400 in 2024. The new limit will not replace the first earnings ceiling. Rather, it will subject earnings to two limits.
This change will result in higher contributions towards CPP benefits for those with higher earnings. Individuals whose salaries remain under the original maximum earnings ceiling will not be subject to the additional contributions.
Employees and employers will each contribute 4% on the portion of income that falls between the annual maximum pensionable earnings and the newly established additional maximum annual pensionable earnings. The maximum annual employee and employer contribution for CPP2 is estimated to be $188 (each) for 2024, and the maximum CPP2 contribution for self-employed individuals is estimated to be $376 for 2024.
The CRA website provides additional guidance as well as a comprehensive webinar on the subject.
Updated Repayment Terms for Canada Emergency Business Account (CEBA) Loans
The repayment deadline for CEBA loans to qualify for partial loan forgiveness has been extended from December 31, 2023, to January 18, 2024. For CEBA loan holders who make a refinancing application with the financial institution that provided their CEBA loan by January 18, 2024, the repayment deadline to qualify for partial loan forgiveness now includes a refinancing extension until March 28, 2024.
As of January 19, 2024, outstanding loans, including those that are captured by the refinancing extension, will convert to three-year term loans, subject to interest of 5% per annum, with the term loan repayment date extended by an additional year from December 31, 2025 to December 31, 2026.
Repayment on or before the new deadline of January 18, 2024 (or March 28, 2024 with refinancing application) will result in loan forgiveness of $10,000 for a $40,000 loan and $20,000 for a $60,000 loan.
Additional details can be found on the Government of Canada website.
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