Budget 1995 Fact Sheets - 13
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Archived - Eliminating Deferral of Tax on Business Income

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Among a number of measures proposed in the budget to improve the fairness of the tax system is an important change affecting individuals who report business income (including professional income). To eliminate the deferral of taxes, these taxpayers will be required to report their business income on a calendar year basis, effective for taxation years starting after 1994.

The measure affects all sole proprietorships, professional corporations and partnerships (where at least one member of the partnership is an individual, professional corporation, or another affected partnership).

How Taxes Are Currently Deferred

Currently, business income is reported by an individual on the basis of a business' fiscal period. That fiscal period may or may not coincide with the end of the calendar year (December 31), which is the end of the annual reporting period for employment and other types of income.

In calculating income for a calendar year, an individual must include income from any business with a fiscal period ending in that year. Therefore, if the business' fiscal period ends prior to December 31, the reporting of business income earned between the end of that fiscal period and December 31 can be delayed. As a result of the delay in reporting the business income, the payment of taxes on that income can be deferred.

Transitional Relief

Given that most affected taxpayers would otherwise be required to report more than 12 months of business income in their 1995 tax returns, the measure includes provisions to bring the additional amounts into income over a 10-year transitional period, subject to some restrictions. The measure allows for 5 per cent of the additional income to be included in 1995, 10 per cent to be included in each of the subsequent eight years and 15 per cent to be included in the last year.

Extended Reporting Period

Since some individuals will now have less time to prepare their financial statements and income tax returns, individuals (other than trusts) with business income (other than only from limited partnerships) will be given until June 15 of each year to complete and file their income tax returns. However, any tax owing will continue to be payable on April 30 and interest on unpaid taxes will be charged from that date.

Changed Year-End for GST

Persons required to have a December 31 fiscal year-end and who are GST registrants will have the same year-end for GST purposes. For individuals who file annually for GST purposes, the GST filing period will also be extended to June 15 but, as with income taxes, any GST owing will continue to be due on April 30. Revenue Canada will provide further details regarding changes to reporting periods for GST purposes.

Illustration of Transitional Provision

Consider an individual with the following characteristics:

Income of $110,000, earned between February 1, 1995 and December 31, 1995 is currently deferred for tax purposes.

Calculation of Business Income for Tax Purposes


 

1995

1996


Business income

   

- fiscal period ended Jan. 31/95

$120,000

 

- fiscal period ended Dec. 31/96

 

$120,000

 

Inclusion of income that otherwise would have been deferred for tax purposes:

   

- income earned

   

       Feb. 1/95 - Dec. 31/95 - $110,000 (A)

   

- annual inclusion percentage (B)

5%

10%

- additional income to be taxed (A x B)

$5,500

$11,000

 
 

Income from business to be reported

$125,500

$131,000


Further details on this measure can be found in Annex 6 of the Budget Plan.

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