The importance of updating your minute book !!

Did you know that...

The Ontario and Canada Business Corporations Act (the “OBCA” or “CBCA”) require that a corporation hold an annual general meeting of shareholders to approve financial statements; to ratify and approve all acts and proceedings of the directors; to appoint officers and elect directors for the next year; and to appoint auditors or accountants in lieu thereof. The company’s minute book is subject to audit by representatives of the Canada Revenue Agency, CPP, GST and EI at any time. Any payment made by the corporation on account of dividends or bonuses must be recorded, and all capital contributions or loans to the corporation must be evidenced. However, instead of holding an actual meeting, shareholders may sign resolutions to conduct the business of the annual meeting. In addition, each Corporation must file an annual income tax return with each of Canada Revenue Agency, the Ministry of Finance and each province in which it carries on business. Please confirm with your accountant that the proper annual tax returns have been filed for these years and whether there are dividends or bonuses which should be recorded.

When you use MinuteBookUpdates.com for your corporate minute book maintenance, you will be receiving the attention of experienced corporate solicitors and law clerks with over 50 years combined experience. We provide quick, accurate production of your corporate documentation and as well as access to a corporate solicitor should you have any questions. We work closely with your accountant and your lawyer to bring your corporate minute book and business up to date and in compliance with Ontario and Canada requirements.

2009 -YEAR END TAX PLANNING

Further to my last entries, below is an excellent article written by Bessner Gallay Kreisman, Chartered Accountants :

Tax planning is most effectively carried out throughout the year, and the latter part of the year is an appropriate time to review various income tax and financial planning techniques that are available to individual and corporate taxpayers. Most tax planning transactions require analysis before being implemented so that they can be applied properly and in the right circumstances. For this reason, and since certain matters affected by the federal and various provincial budget proposals could differ from the actual law when enacted, all taxpayers should consult with their financial and tax advisors before initiating any of the strategies outlined in this issue.

PLANNING FOR OWNER-MANAGERS

Freeze or refreeze?

An estate freeze is used to ensure that future growth in the value of a company accumulates in the hands of a shareholder's heirs; it "freezes" the current fair market value of the company in preferred shares. In today's difficult economic environment, when the value of a business decreases substantially, the benefits of freezing are not fully realized, because new shareholders see the value of their shares fall. At such a time, it might be prudent to "unfreeze" the company and refreeze it. Refreezing enables taxpayers to exchange their old preferred shares, obtained at the time of the initial freeze, for new shares with a lower redemption price. Any future gains in value will then be passed on to the holders of common shares. This type of planning helps reduce tax on the death of taxpayers by lowering the redemption price of their preferred shares and transferring more value to their heirs.

The operations of unfreezing and refreezing are accepted by tax authorities and are not considered to be tax avoidance activities, provided that the redemption price of new shares issued at the time of refreezing is equal to their fair market value at that time and the lower value of the company is not the result of a dividend stripping operation.

Salary/Dividend planning

Many factors must be considered in determining the most beneficial combination of remunerating the owner/manager of a closely-held corporation. As with other planning, each case must be examined separately and no one "rule of thumb" can apply to all situations. Here are a few factors to be taken into consideration:

The tax rate of the corporation; the small business deduction (SBD) rate was increased to
$500,000 from $400,000 for active business income effective January 1, 2009

The tax rate of the individual

Exposure to Alternative Minimum Tax

The need for salary income by the individual to qualify for RRSP and CPP/QPP contributions or
to benefit from child care expenses

Wage levies applicable to salaries, such as the Ontario Employer Health Tax and Quebec's Health Services Fund and 1% Training Tax (if the payroll exceeds $1,000,000)

Quebec restrictions on the deductibility of investment expenses by individuals

Whether eligible dividends can be paid to shareholders

Full or partial loss of the dividend credit if taxable income is not high enough

Higher net income with a dividend than with a salary, dividend income is grossed up by 45% or 25% (depending on whether the dividend is eligible or not) which can have an impact on certain credits and benefits

Some planning techniques include: Remuneration that is accrued and expensed by a corporation must be paid to the employee within 179 days of the corporation's year-end. Where that year-end falls in the latter half of the calendar year (actually, after July 5), the corporation can cause the owner/manager's remuneration to fall into either the current or subsequent calendar year. The payment of dividends can be used to reduce or eliminate the owner/manager's CNIL, thus maximizing the amount of capital gains exemption that may be available to the taxpayer. To the extent that private corporations did not benefit from the small business deduction, the dividends paid from their active business income are eligible dividends that benefit from a lower tax rate. Since only Canadian residents may benefit from this type of dividend, it might be worthwhile to issue a separate category of shares for non-resident shareholders.

Income splitting

Investment income earned by an individual who invested money borrowed at low or no interest from a related person will be attributed back to the lender. Subject to a purpose test, this rule does not apply where the loan is to a related person other than a spouse or minor child. Nor will it apply where the loan is to a spouse or minor child if interest is charged at the prescribed rate in effect at the time the loan is made (the prescribed rate for the fourth quarter of 2009 is 1%). When utilizing this exception, interest must be paid no later than 30 days after the end of the year to avoid attribution of income. For instance, the high-income spouse could lend investment funds to the low-income spouse at the current 1% rate and receive (and pay tax on) the interest income each year, for as long as the loan remains outstanding. The low-income spouse would pay tax on the income generated by the funds and deduct the interest paid to the high-income spouse. Since the attribution rules are complex, caution is advised when contemplating a transfer of property or a loan to a spouse or a child (including transfers indirectly through a corporation or a trust). Some other basic planning ideas would include:

Gifting growth assets to a minor child, as the resulting capital gain is not attributed to the donor;

Gifting property to a child who is not a minor;

Segregating and re-investing "attributed" income of a spouse or minor child;

Deposit Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB) and Quebec

Child assistance payments (CAP) directly into accounts opened in the children's names;

Use the income of the spouse with the higher income to pay all the family's expenses so that the
spouse with the lower income has more capital available for investment;

Using a trust for the benefit of family members to hold shares of a closely-held corporation.

However, there are restrictions in regard to income-splitting with minor children.

Spouses can choose to share their QPP and CPP retirement pensions. Income splitting may be achieved by having your spouse be your business partner or by having a business owner pay reasonable salaries to his or her spouse or children.

Shareholder loans

Any loan granted by a corporation to an individual who is a shareholder or to a person with whom the shareholder does not deal at arm's length will be taxable in the year in which the loan is advanced, unless one of the following exceptions applies:

The loan is repaid no later than 12 months following the corporation's fiscal year in which the loan was granted. It must be ensured that a new loan is not granted immediately to the shareholder to replace the old one, because the original loan will be taxed as if it had not been repaid

If the shareholder received the loan in his or her capacity as an employee for the purpose of purchasing a home, a car or newly issued shares of the corporation. However, this type of loan must be available to all employees and bona fide arrangements for repayment must be made at the time the loan is made

The loan is made in the normal course of the company's business activities
If the loan meets one of these exceptions, the shareholder will be required to pay to the corporation interest at a rate at least equal to the prescribed rate no later than January 30 each year. If a shareholder loan exists at any time during the year, a taxable benefit must be calculated based on the prescribed interest rate, less the interest actually paid. When a loan is repaid, the shareholder may claim a deduction up to the amount that had been included in income. It might be worthwhile for a corporation to make a loan to an adult child of the shareholder at a time when the child does not have much income. The loan may be repaid in a subsequent year, when the child's marginal tax rate is higher. Since shareholder loans are not deductible from a corporation's income, it is recommended that shareholders verify whether it would be more advantageous to be paid a salary or a dividend. It is very important that any loan contract between a corporation and one of its shareholders be adequately documented.

Capital gains exemption

A capital gains exemption is available for individuals to use in relation to gains realized on qualified small business corporation shares and some other properties. The maximum lifetime capital gain exemption is $750,000. Notwithstanding the income attribution rules, it may be advantageous to transfer a certain portion of qualifying growth assets to children to enable future capital gains to be exempt from taxation by utilizing the child's capital gain exemption. Consideration should be given to crystallizing a gain that qualifies for the exemption. Because of Alternative Minimum Tax (AMT), however, a crystallization may be more beneficial if spread over more than one year. Be aware of the possible disadvantage of selling investments eligible for the $750,000 capital gains exemption and investments with losses in the same year. Capital losses realized in the year must be offset against capital gains of that year including "exempt" gains, thus leaving a smaller amount available to claim the exemption against. Investments with losses should therefore be kept until the next year.

Capital gains rollovers for small business investors

To improve access to capital for small businesses with high growth potential, there exists a tax measure that, subject to certain conditions, permits individuals to defer capital gains on eligible small business investments to the extent that the proceeds are reinvested in another eligible small business. The reinvestment in an eligible small business must be made at any time in the year of disposition or within the first 120 days of the following year.

Acquisition of assets

Accelerate the acquisition of depreciable property used in carrying on a business otherwise planned for the beginning of the next year. This will allow additional depreciation to be available to be claimed in the current year. The "available-for-use rules" should be considered (generally requiring the depreciable property to be used in operations for the depreciation deduction to be allowed). Eligible computers and software acquired after January 27, 2009 and before February 2011 are entitled to a capital cost allowance of 100% the first year in which the assets are available for use. Conversely, consider delaying until the subsequent year the acquisition of depreciable property in a class that would otherwise have a terminal loss in the current year.

Corporation tax on capital

In Ontario, the capital tax rate, which will be eliminated effective July 1, 2010, will drop from 0.225% of paid-up capital in 2009 to 0.15% for the first 6 months of 2010. Taxpayers affected are granted a $15 million deduction from paid-up capital. In Quebec the capital tax will be eliminated effective January 1, 2011. At the same time, the rate will fall from 0.24% in 2009 to 0.12% in 2010. A $1 million deduction applies to the paid-up capital of a group of associated corporations. A corporation with liquid assets at its disposal may reduce its capital tax if, before its fiscal year-end, it uses them for the repayment of certain liabilities such as shareholder loans or to purchase eligible investments. However, the corporation must have held certain of these investments for a continuous period of at least 120 days, including the date of its fiscal year-end.

Do you have a proper Share Structure??

For those who are about to incorporate and have yet to do so, it is important you give appropriate consideration to establishing a proper share structure. In doing so you will likely save time, money and administrative difficulties as your business grows. While you are only required, in law, to have one class of shares (common), it is best to provide additional classes of shares so that you will have the needed flexibility in the future to attract new investors; to afford an opportunity of income splitting between family members; and possibly to make use of a family trust. Ultimately, if truly successful, you will also be in a position to take advantage of significant tax savings if the appropriate classes of shares have been in existence and have been held by the shareholders for a sufficient period of time (2 years / capital gain exemption).

Putting in place the correct share structure provides a number of advantages:

- Income Splitting - This can be an effective tax saving device if you and your spouse hold different classes of shares. This affords you an opportunity to issue dividends and/or bonuses in a tax efficient manner.

- Key Employees - Issuing shares to key employees can promote and maintain loyalty to ensure ongoing involvement of top level employees. The shares to be offered to key employees can either be voting or non-voting common shares or voting or non-voting special shares so long as such shares are part of the share structure.

- Family Trusts - The use of family trusts and the issuing of the appropriate shares to beneficiaries of the family trust can be an effective tax and succession planning device.- Succession Planning - With the appropriate share structure in place it is possible to establish a cost effective and tax effective succession regime.

- Raising Investment Capital - While it is common that an investor will have certain requirements concerning the share structure, it is possible to envisage many, if not all such requirement in advance and this may facilitate a successful due diligence process.

- Administrative and Legal Fees - Establishing an appropriate share structure at the outset can avoid the time and expense of preparing needed Articles of Amendment in the future.

Compensation / Issuance of tax receipt from Not for Profit organization.

Q: If a consultant or supplier provides their time/services to a not-for-profit, can the organization issue a tax receipt to the provider for what the time or services would have been worth in the business world?

A: Yes. You get the benefit of the charitable donation based on FMV of work/services you perform, provided that the organization is registered as a charity and is able to give out donation receipts. Having said that, there are two sides to the transaction and you would also be required to recognize the same amount in income. You would also have to charge them GST on the value of the services. And to make things just a little more complicated, you can only deduct the donation to the extent of 75% of your net income.

Let's put some hypothetical numbers to this. Suppose you do work which you would normally charge $10,000. You would recognize $10,000 of gross revenue, and would need to remit $600 of GST. To preserve your cashflow, you would probably want to make sure you at least collect $600 of cash from the charity. You would have $10,000 or gross revenues, and a $10,000 donation expense. Provided your net income after all expenses for they year is at least $13,333, you would be able to deduct the entire charitable donation and there would be no net effect on your taxable income --- making it a wash.

Q & A written by Rolland Vaive, CA, TEP, CPA - For more information, visit Rolly at http://www.taxadvice.ca/

Business Owners: Are you aware that you can save a lot of money with an Estate Freeze!!

Taking care of business with estate freezes *

I previously wrote about an estate freeze happening during the course of a corporate reorganization.

Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:

Estate Freeze

THE CONCEPT

What in the world is an estate freeze?

It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done. Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.

Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.

Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage.

Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.Minimizing annual taxes.

Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.

THE CANDIDATES

An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.

Before undertaking an estate freeze, you should be confident in a couple of things:

(1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else;

(2) That there will be sizable growth in the assets in the future.If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.

* Published in the Globe and Mail, July 3rd, 2008

As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.

Tax Tip Management Fees and Salaries

Below is an excellent article written by Andrews & Co, Chartered Accountants, they are located in Ottawa, Canada:

Tax Tip Management Fees and Salaries

It is important to remember that management fees and salaries paid by taxpayers, usually corporations, must be reasonable to be deductible.

Companies will often “bonus down” profits to the limit of the Small Business Deduction, $500,000, to avoid paying higher rate tax on excess profits.

The Canada Revenue Agency can challenge such bonuses or management fees if in their opinion, the fees are not reasonable. It has been CRA’s assessing practice to allow bonuses or management fees where it is a corporations general practice to distribute profits in this manner AND the recipient of the income is active in the business and has special knowledge, skills etc that helped to earn the income.

In the Neilson Development Company case decision, the Court provided the criteria required to successfully bonus down and the fees to be considered reasonable. In this case, management fees of $300,000 per year were disallowed when paid to a corporation controlled by a spouse. The taxpayer successfully appealed but only because they could prove that the taxpayer met the criteria. The facts won the case, not legal arguments. The circumstances included:

- The management fees included services for budgeting, planning, marketing and being involved in the "hands on" operation
- Management was on site
- How the company operations compared to similar companies
- The effort to earn the fees
- The profitability of the company
- The presence or absence of a contract

It is important that when declaring material or substantial bonuses or management fees, that the facts be documented, there is a contract and the decision is recorded in the corporate Minutes.

What is tax avoidance?

What is tax avoidance? How does it differ from tax planning and aggressive tax planning?

Tax avoidance and tax planning both involve tax reduction arrangements that may meet the specific wording of the relevant legislation. Effective tax planning occurs when the results of these arrangements are consistent with the intent of the law. When tax planning reduces taxes in a way that is inconsistent with the overall spirit of the law, the arrangements are referred to as tax avoidance. The Canada Revenue Agency's interpretation of the term "tax avoidance" includes all unacceptable and abusive tax planning. Aggressive tax planning refers to arrangements that "push the limits" of acceptable tax planning.

Tax avoidance occurs when a person undertakes transactions that contravene specific anti-avoidance provisions. Tax avoidance also includes situations where a person reduces or eliminates tax through a transaction or a series of transactions that comply with the letter of the law but violate the spirit and intent of the law. It was to address these latter situations that the general anti-avoidance rule was enacted in 1988.

How does tax avoidance differ from tax evasion?

Under federal tax laws, taxes may have to be paid, but the laws also provide credits, benefits, refunds, and other entitlements. While in layman's terms tax avoidance and tax evasion would seem to be synonymous, there is a definite distinction under Canadian tax law.
Tax avoidance results when actions are taken to minimize tax, while within the letter of the law, those actions contravene the object and spirit of the law.

Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by wilfully refusing to comply with legislated reporting requirements. Tax evasion, unlike tax avoidance, has criminal consequences. Tax evaders face prosecution in criminal court.

Business owners: Are you a candidate for setting up a Family Trust?

As a business lawyer, I meet with entrepreneurs on a daily basis, and for many of them their most valuable asset is their corporation. For obvious reasons, their first priority is on income-earning activities, such as generating sales. Attention to such activities is, of course, a practical necessity and a hallmark of success. However, the utilization of a proper corporate structure to reduce tax exposure is often overlooked. Business owners must realize that a proper structure can save a substantial amount of taxes and can also be greatly beneficial for them and their family. The purpose of this article is to explain to you the benefits of using a Family Trust and to help you determine if you are a good candidate for implementing such a structure.

What is a Family Trust?

In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).

How do I determine if I’m a good candidate to setup a Family Trust?

Here are some key indicators that you should consider a Family Trust:

Ø You are shareholder in a private corporation.
Ø Your business is profitable and generating profits.
Ø You have children(s) and you are paying/will pay for their education(s).
Ø You may want to sell your company in the future.

Would it be beneficial for me and for my family?

Some of the benefits of using a Family Trust structure are:

Ø Funding of your children’s education. The first and immediate benefit is the funding of your children's education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 14% through the trust as opposed to funding your child's education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, you can save as much as 34% of taxes (i.e. a potential saving of $34,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.

Ø Income splitting. A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).

Ø Capital gains exemption. Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

Ø Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.

As you can see, a Family Trust can offer business owners a great deal of flexibility and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional. For more personalized information regarding setting up a Family Trust contact Hugues Boisvert.

How can you get $750,000 TAX FREE??

The Importance of the Capital Gains Exemption for Owner-Managers *

Since 1985, the capital gains exemption has been available to Canadian business owners.The concept is simple—if you sell shares of a qualifying corporation for a profit, the first $750,000 of your gain on a lifetime basis can be received on a tax-free basis. The rules are complicated and it is quite possible that your shares may not qualify by not meeting one of the detailed conditions that apply. While shares of some corporations may never qualify for the exemption (for example, shares of many investment companies won’t qualify), other share investments that are currently offside can be put back on track with advance planning. Since the conditions are detailed, very simple steps can often make the difference between qualifying and not qualifying for the exemption when you dispose of your shares.

How do I qualify for the Capital Gains Exemption?

If you sell shares of a small business corporation (SBC), and meet the conditions for the exemption, then the gain from the sale of your business will qualify for the capital gains exemption.

To qualify for the exemption, the first condition is that your corporation must be an SBC at the time of sale. That means that it must be a Canadian-Controlled Private Corporation (or CCPC) and all or substantially all of its assets must be used in an active business carried on primarily in Canada. The Canada Revenue Agency interprets “all or substantially all” to mean that assets representing at least 90 per cent of their fair market value of all corporate assets must be used for business purposes.

If you hold shares of an SBC, there is a second set of conditions which you must meet to qualify for the exemption:

1) More than 50 per cent of the corporation’s assets (again on the basis of fair market value) must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale; and

2) The shares must not have been owned by anyone other than you or someone related to youduring the 24-month period immediately before the sale.

* this article was written by Bruce Ball, CA, CFP, TEP - Bruce is a Partner in the National Tax practice of BDO Dunwoody LLP, where he develops tax planning strategies for clients. He is also a co author of the Guide to the Family Business, Canadian Edition.

5 Benefits of using a family trust

5 Benefits of using a family trust

The following are some benefits of using a family trust structure.

1. Income splitting. Trusts can be an effective way to achieve income splitting, particularly with children (subject to the potential application of the attribution rules and the “kiddie tax”).

2. Capital gains exemption. Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of certain types of shares. Both the beneficiary and the corporation must meet all relevant tests at the time of disposition, and the trustee must allocate the capital gains to the beneficiaries. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

3. Creditor protection. Trusts offer some degree of creditor protection when the beneficial ownership of assets shifts to other beneficiaries.

4. Capital gains splitting. Trusts can be used to transfer appreciation in capital property, such as shares, to other family members, especially children. Generally stated, there is no attribution of taxable capital gains earned by minors. In this circumstance, the minor beneficiaries would be subject to tax on the capital gains at their marginal rates.

5. Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.

Corporate Reorganization - Estate Freeze

I previously wrote about an estate freeze happening during the course of a corporate reorganization. Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:

SECTION 86, Income Tax Act - Estate Freeze

THE CONCEPT

What in the world is an estate freeze?

It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.

Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done.

Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.

Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.

Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.

Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage. Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.

Minimizing annual taxes. Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.

Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.

THE CANDIDATES

An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.

Before undertaking an estate freeze, you should be confident in a couple of things: (1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else; (2) That there will be sizable growth in the assets in the future.

If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.

* Published in the Globe and Mail, July 3rd, 2008

As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.

SHAREHOLDERS AGREEMENT - What is a “Piggyback” Rights ?-

“Piggyback” Rights – designed to apply where a shareholder proposes to sell shares to a third party; if invoked by other shareholder, piggyback rights clause will prohibit the share transfer unless third party offers to purchase their shares at the same price and on the same terms as offered to the selling shareholder. Primary purpose is to protect minority shareholders.

SHAREHOLDERS AGREEMENT - What is a “Carry-Along” Rights ?

“Carry-Along” Rights – permits majority shareholder(s) to force minority shareholder to sell their shares where a bona fide offer has been received from an arm’s length party to purchase all of the shares of the corporation. Purpose is to increase majority shareholder’s flexibility to sell the business.

Uses of Family Trust to pay for kids educations

A family trust for small business pays dividends for tuition *

In previous entries, I mentionned several times the use of family trust for business owners. For almost every clients, I suggest the use of said Family trust, it is a great way of saving taxes.

Today, I would like to share with you an excellent article from Tim Cestnick from the Globe and Mail, explaining clairly the advantages of using different trusts. If you have any questions regarding the same, please do not hesitate to email me. A family trust for small business pays dividends for tuition.

Every few months my extended family gets together to visit. It's a chance to get caught up with my aunts, uncles and cousins. My cousin Erik didn't make it to our last get-together. Erik is something of a permanent student. He's got more degrees than the thermometer outside our kitchen window."Uncle Ron, how's Erik doing?" I ask."He's just fine, Tim. He's back at university this month.""Still?" I reply. "I thought he finished last year. What's Erik going to be when he graduates?""A very old man," he replies. At this point, Erik is paying for his own education. But if you're looking to help your kids with the cost of postsecondary education, and you're a business owner, consider a family trust. Let me explain.

The trust

This idea is best understood by an example. Consider Scott. Scott has three children, all in their teens. University is just around the corner for them and it won't be cheap -- about $16,000 each year, everything included.Scott runs a business that has sufficient cash flow to help pay for the education of his kids. One option for Scott is to pay himself additional salary from his company to help cover the cost of university when that time comes. Since Scott is in the highest marginal tax bracket, he'll pay tax of about 46 per cent (varies by province) on those dollars. So, a $10,000 payment from his company in this case will leave just $5,400 to help cover the costs of education.

There may be a better option. Scott could structure the ownership of his company so that some of the common shares of the company are owned by a family trust. Then, the company could pay dividends to the trust annually for each child once they're 18 and are attending university or college. The dividends could then be paid out of the trust to each child to help pay for school.

The results? Scott's company will pay tax of about 17 per cent (again, varies by province) on its active business income below $400,000.The dividends paid to the trust and then out to Scott's kids will not be taxed in the trust, and will face little or no tax in the kids' hands if they have little or no other income. In fact, each child could receive about $32,000 (varies by province) in cash dividends annually and pay little or no tax if he or she had no other income. This total tax cost of about 18 per cent is much less than the 46-per-cent tax cost of paying additional salary to Scott.

Other thoughts

Now, there are rules in Canadian tax law that will make this strategy less effective if you pay dividends directly or indirectly through a trust to a child under 18. These "kiddie tax" rules will cause tax at the highest marginal tax rate on those dividends. But the idea works well for kids 18 or older.In addition, there are some other benefits to the trust strategy. If you expect the value of your business to grow in the future, you may be able to shelter part of that growth from tax using the $750,000 capital gains exemption of each of your children who is a beneficiary of the trust. The trust will also protect the assets in the trust from any creditors or future spouses of your kids. Finally, those dividends paid out of the trust could be used for any purpose -- not just education.

* written by Tim Cestnick - Tim is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles. This article was published in the Globe and Mail on September 28, 2006 and was slighty edited to reflect accurate numbers.

Hidden Assets: Helping your clients UNLOCK THE VALUE OF THE INTELLECTUAL PROPERTY

Hidden Assets: Helping your clients UNLOCK THE VALUE OF THE INTELLECTUAL PROPERTY

The value of intellectual property in the modern marketplace can be very significant – it is estimated that Microsoft’s intellectual property including the trade-mark in its brand, copyright in its software, and its patent portfolio is responsible for 99.5% of its $263-billion value, and that Coca-Cola’s combined brands alone are worth an astounding $67-billion, more than half of its $133-billion value. IBM receives an annual revenue stream of approximately $1-billion from the 40,000 patents it owns worldwide. Intellectual property no longer merely protects the assets such as the brand or patented products, but holds tremendous value and can be leveraged to produce considerable revenues.

Intellectual property can be described as covering many of the intangible assets of a business, and includes trade-marks, patents, industrial designs and copyright. Briefly, a trade-mark gives the owner exclusive rights (which can be extended into a permanent monopoly) in a name or sign which identifies the source of a particular product or service. A patent gives an exclusive government-granted monopoly on the production and sale of an invention in exchange for disclosure of its operation to the public. Industrial designs protect the aesthetic features of a product from imitation by others. Lastly, copyright protects creative literary, dramatic, musical and artistic works from being copied for an extended period of time after their creation, and includes computer programs.

A trade-mark is an integral part of a branding strategy, and consists of a name or sign which is used by a company to uniquely identify the source of its wares or services, and distinguish them from those of other companies. Because trade-marks can come to represent not only certain goods and services, but the reputation of the producer, if properly used and protected they can become very valuable. A trade-mark’s value can be measured, at a minimum, by a company’s repeat business, and it may also be responsible for new business resulting from advertising. A trade-mark can also be licensed to allow others here or abroad to produce a company’s wares under its supervision, in exchange for additional revenues in the form of royalties. This is the equivalent of a highly cost-effective, paid-for advertising/branding initiative for the trade-mark owner.

A patent protects new inventions, and new and useful improvements of an existing invention, and allows the patent holder to stop others from exploiting its technology for 20 years. A patent can be valued, at a minimum, as the net sales of the patented item. A patent can also be licensed to others in exchange for royalties, or may be sold as an asset. Patents can be very valuable, for example, the patent for the Pfizer drug Lipitor protects $12.2-billion in annual sales.

Industrial design protects aesthetic features, such as the shape, pattern or ornament of a product that is manufactured by hand, tool or machine from being copied for ten years, and like a patent, it can be licensed or sold, and can also be very valuable. The shape of the iPod helps it to control upwards of 80% of the portable MP3 player market, and this is protected by an industrial design registration.

Copyright applies to all original literary (text and computer programs), dramatic (films, television and theatre), musical and artistic (painting, sculpture and architecture) works, and allows only the copyright owner to reproduce the work, and to prevent others from doing the same. Copyright in Canada endures for the life of the creator plus fifty years after his or her death. Copyright includes software and is a large part of the intellectual property protection of software companies. Design trade-marks and advertising can be protected by copyright in certain circumstances as well. Copyright can be assigned or licensed, and license revenues form a significant stream of income for Hollywood and music producers, like Sony music, for example. The Star Wars franchise was recently estimated to be worth $20-billion by Forbes magazine.

Trade-marks, patents, industrial designs and copyrights are recognized and legitimate property rights that can be exploited, assigned or licensed to another entity to produce a revenue stream. Intellectual property also holds tremendous value as an asset, and can be used for financing, or be sold with the company. Properly implemented, an effective intellectual property strategy can leverage the intellectual property to produce profits in the form of income, royalties and capital gains rather than merely costs, while protecting the company’s brands or patented products from imitation or theft.

Succession Planning: Taming your tax liability

Further to my previous entries on succession planning, family trust, estate freeze here is a great article written by Alexandra Lopez-Pacheco from the Financial Post.

As usual, If you have any questions, please do not hesitate to contact me.

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Taming your tax liability

To ensure the best possible conditions when a business owner is ready to pass the helm to the next generation, succession planning can maximize the company's value from the start. That's why it's never too early to begin the process, although typically many wait until three to five years before they plan to retire - and even more wait until it's too late. Developing a long-term strategy that will ensure a company's sustainability, independent of the owner, and over years enrich the skills, abilities and experience of those chosen to be the next leaders makes the company more valuable, as well as provide more retirement funds for the owner.

Part of this process is a solid tax strategy. The longer a company engages in astute tax planning to minimize its tax bill, the more money will stay in the business, as well as in the owner and his family's pockets, leaving more funds available for the next generation to buyout the owner.
According to tax specialist Paul Woolford, partner with KPMG's enterprise services, most small businesses are doing a pretty good job with accounting, but a large percentage of them are not taking advantage of all the tax-minimizing strategies available to them. And no wonder, every time there's a new federal or provincial government budget, the rules seem to change. This is where, of course, a good tax accountant comes in. They not only know the current tax rules but also keep up with new ones. "There are ways to achieve what you want in minimizing the tax bill, but you also have to be very careful to abide by the appropriate rules, and that's something that comes into play when you're looking at estate planning and succession planning," Mr. Woolford says.

When putting together a business tax plan, keep in mind it is necessary to review all possible variations and combinations available to tailor a strategy that will meet the specific needs of the company, its owners and often, his or her family. Many accountants contend business owners should put together their succession plan before the tax plan. What's more, small businesses are often about close interconnections between the owner, his family and the company. From effective use of tax exemptions and deductions, including the $750,000 capital gains allowance, to income-splitting and family trusts - there are many options available to considerably shave down the tax bill if an accountant can see all the pieces of the puzzle.

"I look at the corporation and the shareholders, and look to minimize and defer tax on both levels, and that's often one way of keeping the tax liability down or keeping more money in the company or in the individual's bank account," Mr. Woolford says.

As profit increases and the business becomes more complex, so too can the tax planning. "There are always levels of planning, from the basic planning to the complex planning to the high net-worth situation," Mr. Woolford says. "The idea is to put in a structure. It could be a family trust with beneficiaries that may include your spouse and adult children, for example. There are ways you can pay dividends to that family trust and have that trust allocate those dividends to individuals who may be in a lower tax bracket."

A good plan will cut the tax bill and, if incorporated into the succession planning process, it will also address specific needs related to ownership transfer. For example, if an owner knows he wants to sell the company to his adult child, he might prefer to keep the company's value down to lower the tax liability at the time of transfer. On the other hand, if he is planning to sell to a third party, achieving the highest possible valuation might be a better strategy.

When Bill and Bev Wostradowski were ready to turn over the company they established in in 1978 - Lake Country Building Centre, a building supply business in Lake Country, B.C. - to their son and daughter, they solicited help from their lawyer and their accountant, Bill Corbett, tax and succession planning partner at KPMG in Kelowna, B.C. "We had very good advice from Bill and our lawyer, and we put faith in them that they were going to steer us in the right direction," says Mr. Wostradowski, who is a member of the Canadian Association of Family Enterprise. He used the organization's resources and links to educate himself on the process.

The Wostradowskis chose an estate freeze - literally freezing the value of the shares the couple owned, and issuing common shares to the two adult children who had chosen to carry on with the business, Sherri Williams and Kevin Wostradowski. "That way, the growth and value accrues to the next generation," Mr. Corbett says. It also reduced the senior Wostradowskis' tax liability. Step two was to set up voting shares for the retiring couple.

"My wife and I sold our equity shares in the building supply business to our children and they were to pay us over a period of time, but we still retained voting shares. Then over five years, we gave out a few of the voting shares each year to the point that the children now own them all," Mr. Wostradowski notes. This ensured the couple had enough control should any conflict arise between their son and daughter during the transition.

They also set up holding companies for each of their successors names. By making the holding companies the shareholders, the main business can pay Sherri and Kevin through lower-taxed dividends to their holding companies rather than to them individually. And, in an example of how tax and succession planning can be integrated, this structure also allowed Sherri and Kevin to manage their own share of the profits as they wished. "One could be a saver, the other a spender, and since each had their own holding company, there would be no conflict," Mr. Corbett says.

Another component of succession planning is estate planning, which involves strategies to minimize or defer tax. Not very many people think of consulting their accountant before writing their will - but that's exactly what they should be doing. "An area that sometimes is overlooked is having two wills: a separate will that would hold the shares of your private corporation and then a normal will that contains everything other than your private shares," Mr. Woolford says. "If they only have a single will, then the shares of the private corporation could be subject to probate fees."

Another way of minimizing probate fees is to name beneficiaries wherever possible - for everything from RRSPs to life insurance - or make the intended beneficiary a joint tenant, which would simply mean that upon the death of the owner, the assets would immediately become theirs.

"It is pretty good idea to name your company as a life insurance policy beneficiary," Mr. Woolford says. That ensures there will be tax-free money available to protect a business's sustainability in the case of the owner's untimely death.

These days, the senior Wostradowskis are enjoying the fruit of their five-year-long investment in their succession planning. "The kids are all in a position that they can look out for their families and have their turn at the business, and my wife and I have enough money to travel and enjoy our life. That's all we were interested in," Mr. Wostradowski says.

Commercial Lease: Did you know?

Did you know?

Your Commercial Lease could state the Landlord can move your business or make changes to your Leased Premises whenever he chooses and without compensating you:

Excerpt from a clients Lease before I negotiate a substantial change in this clause:

"Landlord shall have the right, at its sole discretion, and without any obligation whatsoever to Tenant, to make any changes with respect to the Shopping Centre, including the right to relocate the Leased Premises or any portion thereof to another area of the Shopping Centre, and to the extent found necessary or desirable by Landlord at any such time during the term hereof, provided that the Leased Premises, as affected by such change, shall be substantially or close to the same size as defined herein. "

Concern: The Landlord has the right (whenever it pleases) to change, modify, increase, decrease or reconstruct your Premises or move you as many times as he so desires, and without compensating you.

Solution: You need to ensure that you address and negotitate this issue PRIOR to signing your OFFER TO LEASE.

As usual, please do not hesitate should you have any questions.

Canadian Taxes Deadlines - Due Dates

As a business owners, you should be aware of these important dates:

Canadian Fixed Due Dates

January 15 - December payroll remittance
February 15 - January payroll remittance
February 28 - T4 and T5 filing deadline
February 28 - NR4 filing deadline
March 15 - February payroll remittance
March 15 - Personal income tax instalment
March 31 - Family Trust filing deadline
April 15 - March payroll remittance
April 30 - Personal Income Tax Return (regular deadline and interest charges begin for self-employed)
May 15 - April payroll remittance
June 15 - May payroll remittance
June 15 - Personal Income Tax Return deadline for self-employed (penalty deadline only)
June 15 - Personal income tax instalment
August 15 - July payroll remittance
September 15 - August payroll remittance
September 15 - Personal income tax instalment
October 15 - September payroll remittance
November 15 - October payroll remittance
December 15 - November payroll remittance
December 15 - Personal income tax instalment

GST/HST - MANDATORY REGISTRATION

You have to register for GST/HST when you no longer qualify as a small supplier because your total worldwide taxable supplies of goods and services exceed the small supplier limit of $30,000 in a single calendar quarter or in four consecutive calendar quarters. However, you also have to register for GST/HST if you are a taxi or limousine operator whose fares are regulated by federal or provincial laws, even if your revenues do not exceed $30,000.

For more info click here

Holding Company: What Is It and How Does it Work?

Here is a great article written by Rolland Vaive, CA, TEP, CPA - an excellent accountant based in Ottawa (Orleans) and specializing in complicated tax matters.

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Speak to any tax accountant for more than a minute and they'll surely be talking about holding companies, or HoldCo's for short.

A holding company is not a term which is defined in the Income Tax Act. It is a term which is used to define a corporation which holds assets, most often income generating investment assets. It does not typically carry on any active business operations.

A HoldCo can arise for a variety of reasons. In the early 1990's, the personal marginal tax rate in Ontario was slightly higher than 53%, while the corporate rate of tax was considerably lower than that. High income individuals who had significant investment assets could realize a tax deferral by transferring their investment assets to a HoldCo, particularly in situations where they did not need the income which was being generated by the investments. This breakdown between the corporate rate of tax and the personal rate of tax lead to many HoldCo's being formed.

HoldCo's may also come about as an effective means of creditor proofing profitable operating companies, as a result of Canadian estate planning, or as a means of avoiding U.S. estate tax and Ontario probate fees.

Regardless of their origins, the investment income generating HoldCo is taxed in an unusual manner, which I will attempt to explain.

The underlying concept of HoldCo taxation is called "integration". In general terms, integration means that an individual should pay the same amount of tax on investment income if they earned it personally or if they earned it through a corporation and withdrew the after-tax income in the form of dividends. When we look at some real numbers, you will see that this in fact generally holds true. However, it is possible to exploit some breakdowns in integration, at which time it may become quite beneficial to earn your investment income through a HoldCo.

Let's look at the theory. We often hear about how corporations are taxed at low tax rates. In situations where a private company is earning income from active business operations carried on in Canada, that is quite true. In these situations, the rate of tax would be a flat tax rate of 18.620% if the company was resident in Ontario. The other provinces have similarly low rates of tax on "active business income". The low rate of tax does not apply to investment income, which is what the HoldCo would be generating.

For an Ontario resident private company generating investment income, the combined Federal and Provincial rate of tax would be a flat 49.7867% on all forms of investment income, other than dividends from other Canadian corporations. Bear in mind that only 1/2 of capital gains are included in income, so the effective corporate rate of tax on capital gains would be 24.8934%.

A portion of the tax that HoldCo pays each year on its' investment income goes into a notional pool called the RDTOH pool. This is an acronym for "refundable dividend tax on hand". Of the 49% rate of tax that is paid by the corporation, 26.67% will go into the RDTOH pool each year and is tracked on the corporation's Federal tax return. If HoldCo pays a taxable dividend to its' shareholders in a particular year, it gets back part of its RDTOH pool. More specifically, the company will get back $1 for every $3 of dividends that it pays. This RDTOH recovery is called a dividend refund, and would be a direct reduction of the corporation's tax liability for the year. If the corporation pays a large dividend to a shareholder, the dividend refund would also be large and may result in the company actually getting money back from the Canada Revenue Agency. In short, the HoldCo will pay a large tax liability on its investment income up front, but it can get a large portion of it back at a later date if it pays out dividends. The dividend refund is an attempt to compensate for the fact that the dividend will attract tax in the hands of the shareholder. Without this mechanism, the 48% rate of tax on investment income combined with the tax paid by the shareholder on the dividend that they receive would result in an onerous rate of tax.

It is possible that a second notional tax pool may arise in HoldCo if it is generating capital gains on its' investment assets. You will recall that only 1/2 of capital gains are included in income. The other 1/2 portion of the capital gain which is not included in income will get added to the capital dividend account, or "CDA", of HoldCo. The CDA balance is something which needs to get tracked by the company on a regular basis, since it does not appear anywhere on the company's financial statements or tax returns. The CDA is important because it is possible for HoldCo to pay a dividend to a shareholder and elect to pay it out of the CDA balance, making the dividend tax-free to the shareholder. If a company realizes a capital gain of $10,000 , only $5,000 will be included in taxable income, with the remaining $5,000 being added to the company's CDA balance. The company could then pay a $5,000 dividend to the shareholder. By electing to do so out of the CDA balance, the shareholder would not be taxed on the dividend.

Lets look at this in conjunction with the RDTOH balance. If the company pas a dividend to a shareholder out of the CDA balance, it is tax free to the shareholder, but it is not going to generate a dividend refund to HoldCo. HoldCo only gets a dividend refund if the dividend is a taxable dividend to the shareholder.

Armed with this theory, we can look at a live example of how this would work. Lets consider the example of an Ontario resident individual who is holding shares that have an adjusted cost base (i.e. tax cost) of $1,000. These shares have experienced a dramatic increase in value, and are now worth $100,000. The individual is going to sell these shares and would like to know if there is any advantage to doing so through a HoldCo. The individual is in the highest marginal tax rate (currently 31.310 % on Canadian source dividends and 46.410 % on everything else). The individual wants the after tax money, so they would withdraw everything from the HoldCo once the shares are sold. If they were to go the HoldCo route, they would elect to transfer their shares to HoldCo at their $1,000 tax cost prior to the sale (to transfer them at fair market value would defeat the purpose), and would have the capital gain realized within HoldCo. In the process of transferring the shares to HoldCo, they could arrange to have HoldCo issue a note payable to them equal to their original $1,000 tax cost.

Integration tells us that selling the shares through a HoldCo should give us the same result as selling the shares personally. If the individual wants to get the money out of the HoldCo following the sale of the shares, they would elect to take part of the proceeds from the share sale out of HoldCo as a non-taxable repayment of their $1,000 note and as a non-taxable payment our of the CDA balance. The remaining cash would be withdrawn from the company as a taxable dividend, leading to a dividend refund in HoldCo.

As this example illustrates, there is no advantage to using the HoldCo to sell the shares even without considering the professional fees associated with the HoldCo. So why do it?

Well, there may be some good reasons for doing it. Firstly, the example assumes that the individual withdraws all of the cash from HoldCo in the year of the share sale, and at a time when they are in the highest marginal tax rate. If the cash from the sale was left in the corporation and withdrawn as a dividend a year or two later when the individual was not in the highest marginal tax rate, then the results may be quite good. The HoldCo would get the dividend refund at a rate of $1 for every $3 of dividends in that later year when the dividend is paid, and the shareholder may not incur a significant tax liability on the dividend that he or she receives.

Alternatively, it may be possible to transfer the shares to HoldCo well before a sale is to happen. In this way, future growth in the value of the shares could be shifted to other family members. When the shares are sold, the growth in value since the time of the transfer could be paid as a dividend to these other family members. If these family members are in a low marginal tax rate, they would not incur much tax on the dividend, and the results could be quite good when compared to the alternative where the shares continue to be held by the individual and sold by him or her personally.

There are a host of issues to be considered before embarking on such an exercise, including the corporate attribution rules and the tax on split income to name but a few.

As always, seek professional advice before undertaking any steps.

Save tax by using a family discretionary trust

There are several advantages to setting up a family discretionary trust from tax, legal and personal perspectives. For one, owners-managers can achieve a key objective: Protecting personal assets from potential recourse by creditors.

What is a family discretionary trust?

A family discretionary trust is an inter vivos trust created by and for the members of the same family. The inter vivos trust is a legal vehicle created through a contract (the trust deed) in which a person (the settlor) transfers assets to one or more persons (the trustees) to control those assets for the benefit of other persons (the beneficiaries). Settlors may transfer a variety of assets into the trust, including investment portfolios, shares from a family company, rental properties, a principal residence, etc. Then, according to the level of discretion described in the trust deed, the trustee may allocate trust revenues or capital to one or more of the beneficiaries. Beneficiaries might include the settlor’s spouse, children or grandchildren, or, subject to certain tax rules, the settlor himself. Setting up a family discretionary trust provides many advantages. To make sure that such a strategy meets all your objectives, it’s wise to consult experienced tax and legal advisors. For any questions, please do not hesitate to contact me.

Federal budget makes small businesses even more attractive *

TIM CESTNICK from The Globe and Mail wrote this excellent article regarding the federal budget.

FEDERAL BUDGET

THE TAX RATE

When a company is a Canadian-controlled private corporation (CCPC), which includes most privately held companies in Canada, the company is eligible for an attractive 15.4-per-cent (Canada-wide average; varies by province) rate of tax on its first $500,000 of active business income, thanks to last week's federal budget. The limit was $400,000 prior to the budget. Without getting into the technical jargon, the reason for this low rate of tax is the “small-business deduction,” which reduces the company's effective tax rate.

Consider Matthew's story. Matthew's business, ABC Inc., is expected to earn $500,000 of active business income in 2009. This is the taxable income retained in the company after Matthew has paid himself a salary. The company will pay taxes of about $77,000 (15.4 per cent) on that income, leaving $423,000 in the company after taxes.

But what if Matthew pays some of the $500,000 to himself as additional salary or dividends instead of leaving it in the firm? Consider salary first. If Matthew were to pay some or all of that $500,000 out to himself as additional salary or bonuses, the company would pay less tax since it could deduct the payment. But Matthew would face tax on those dollars personally at about 45 per cent (Canada-wide average), assuming he's in the highest bracket. It doesn't take a rocket scientist to see that 45-per-cent tax in Matthew's hands is much higher than 15.4 per cent in the company.

What about dividends? If Matthew were to pay some of the $500,000 to himself as non-eligible dividends, he would face personal tax on those dollars at about 32.4 per cent (a Canada-wide average) if he's in the highest tax bracket. When you add the tax paid personally on the dividend to the tax paid in the company on the earnings, the combined rate of tax on those dollars paid out as dividends is 42.8 per cent in this complicated example. That's much greater than the 15.4-per-cent hit faced in the company when those dollars are retained in the company.
The bottom line? You'll defer tax by keeping some of your earnings in the company.

THE STRATEGIES

Visiting a tax pro is especially important if your company's taxable income is above $500,000, since you'll have to make decisions about whether to bring your company's taxable income down to the $500,000 limit by paying yourself a bonus, or paying yourself eligible dividends instead. A pro will have to crunch the numbers to determine what's best in your specific situation.

But if your corporate taxable income is $500,000 or less, you'll defer tax by leaving some of those earnings in the company. So, what should you do with those dollars inside your company?
Buy computers. Consider taking advantage of last week's federal budget change that will allow you to deduct 100 per cent of the cost of eligible computers if you acquire them before February, 2011.

Pay salaries to family. If you pay salaries or wages to a family member who has little or no income, the payment will face little or no tax. The pay must be reasonable for the services provided.

Pay tax-free dividends. If an adult shareholder has no other income, it's possible to receive up to about $40,000 (varies by province) in dividends from a Canadian company tax-free thanks to the dividend tax credit.

Repay shareholder loans. If you've lent money to your company in the past, you can take a repayment of any loans at any time on a tax-free basis.

Pay yourself rent. If your company leases space from you in your home, you'll have to report rental income, but can offset much of that income with deductions such as mortgage interest.

Pay capital dividends. To the extent your company has a capital dividend account (CDA) balance, you can receive tax-free dividends from the company. A CDA balance is commonly created when the company realizes capital gains or receives life insurance proceeds.

Dividend to holding company. If your corporation carries on an active business, it can make sense to pay a tax-free intercorporate dividend to a holding company. This can protect that cash from creditors of the business, and provide flexibility in the timing of income to you.

The importance of written notice in a commercial lease

I previously discussed the importance of having written documents & agreements. Today, I would like to share the importance of a written notice in a commercial lease. As you may imagine, the Tenant may be noted in default pursuant to the terms of the lease. In the event of a default by the Tenant, the Landlord may exercise certain rights in order to remedy the default. If you are the Tenant, you need to ensure that the Lanldlord give you a written notice that you are in default. By receiving the written notice, you will be able to cure the default and the Landlord will not be able to note you in default.

For ease of reference, I included the 2 clauses:

ACTS OF DEFAULT AND LANDLORD'S REMEDIES

(1) An Act of Default has occurred when:
(a) the Tenant has failed to pay Rent for a period of five (5) consecutive days, regardless of whether demand for payment has been made or not;

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In the event of a default made by Tenant in the payment of rent when due to Landlord, Tenant shall have five (5) days after receipt of written notice thereof to cure such default.

Did you notice the difference??

Why is it so important?

well, in the event that you sign a 5 year lease and 1 option for another 5 year - pursuant to the terms of the lease, in order to renew and exercise your option, you need to have to respected the terms of your lease.

here is an example of clause:

Provided the Tenant has observed and performed its obligations under this Lease, and is not in default hereunder, the Tenant shall have one option to renew this Lease for a further period of five (5) years on the same terms and conditions

100% Tax Deduction on Computers

2009 Federal Budget: Temporary 100% Capital Cost Allowance Rate for Computers and Software

David Brighten from Andrews & Co advised us that the Budget provides a temporary 100% CCA rate for eligible computers and software acquired after January 27, 2009, and before February 2011. Further, the “half-year rule” will not apply, allowing the taxpayer to fully deduct the cost of an eligible computer in the first year that the CCA deductions are available. In general, this special treatment is restricted to computers acquired for business uses. Various other restrictions also apply.

Top 10 reasons why your company needs a Shareholders’ Agreement

As mentioned before, a shareholders’ agreement is an important and very helpful document when setting up a business, or when acquiring partial interest in a business. It sets out the privileges and responsibilities of the shareholders, and provides a means for setting out the principles upon which the shareholders intend to run the business and deal with unforeseen circumstance and contingencies. In other words, a shareholders’ agreement defines the way in which the company should be governed and managed so as to avoid messy and expensive disputes in the future. Therefore, companies should have a shareholders’ agreement for ten main reasons.

Top 10 reasons why your company needs a Shareholders’ Agreement

Reason #1: Provides a customized relationship between shareholders and directors

Corporations often want to customize their relationship to create an arrangement which differs from the applicable corporate legislation, including shareholder voting entitlements, imposing share-transfer requirements, and providing for a dispute-settlement mechanism.

Reason #2: Voting entitlements

Shareholders in a corporation may want to exercise their power to vote on a basis different from the votes they have according to their share ownership. For example, it may be essential to provide for how the shareholders are to nominate and elect the directors.

Reason #3: The possibility of imposing share-transfers

The general rule is that no shares may be transferred without prior approval of the directors. This rule protects the shareholders from ending up in a business relationship with parties who are different from those initially agreed upon. Consequently, if not supplemented by other provisions, a shareholder that wishes to exit needs to obtain prior approval from the other shareholders and there is no assurance that such approval will be imminent. It is therefore vital to provide a predetermined method for transferring shares.

Reason #4: Preventing conflict between the shareholders by providing conflict-resolution methods.

Different forms of dispute-settlement methods, such as mediation or arbitration, are often included in shareholders’ agreements to avoid going to court to resolve such disputes.

Reason #5: Transferring of power

Shareholders’ agreements permit altering the distribution of power between directors and shareholders. Basically, it can restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs for the corporation, and provide a greater degree of power to the shareholders.
Reason #6: Future shareholders

It is common in shareholders’ agreements to stipulate that all transfers and share issuances are conditional upon any new shareholder signing the agreement. Please note: this is not required if there is a unanimous shareholders agreement.

Reason #7: Addressing the quorum and other minimum requirements for director and shareholder meetings

It is important to address the minimum number of members necessary to carry out the business of the corporation.

Reason #8: Issues relating to the finances of the company

Shareholders may wish to regulate the distribution of the corporation’s profits in some manner. It may also be imperative to set out the relevant terms of debt financing in the shareholders’ agreement.

Reason #9: Potential inconvenience

A corporation can anticipate future situations and therefore a shareholders’ agreement can lay out possible solutions for potential problems such as deadlocks.

Reason #10: Impact of other agreements

Some shareholders are party to other agreements with respect to the corporation. The shareholders’ agreement may provide information on what to do if a shareholder breaches that other agreement.

The lawyer’s role in preparing this agreement requires him/her to learn as much as possible about the client’s objectives, needs, and fears. This information mentioned above is incorporated into the agreement in order to ensure that each agreement is designed to fit the unique needs and circumstances of each client.

Dissolving a Corporation...

What is dissolution?

Definition

It is the legal termination of a corporation. In other words, dissolution is the act of ending the existence of a corporation. To dissolve a corporation, the applicant must respect the CBCA formalities that will lead to the issuance of a certificate of dissolution. The corporation is dissolved as of the effective date of the certificate of dissolution.

Bankrupt or Insolvent Corporation

The fact that a corporation is bankrupt or insolvent does not end its existence. A corporation that is insolvent or bankrupt under the Bankruptcy and Insolvency Act cannot voluntary dissolve.

A corporation is insolvent under the Bankruptcy and Insolvency Act if:

i) it is unable to meet its obligations as they generally become due;

ii) it has ceased paying current obligations in the ordinary course of business as they generally become due; or

iii) the aggregate of the corporation's property is not, at a fair valuation, sufficient; or if disposed of at a fairly conducted sale under legal process, it would not be sufficient to enable payment of all obligations, due and accruing due.

If you file Articles of Dissolution with Corporations Canada for a corporation that is bankrupt or insolvent, the application will be rejected.

For any questions regarding a bankrupt or insolvent corporation, please contact the Office of the Superintendent of Bankrupty Canada.

2009 Automobile Deductions

Andrews & Co. Chartered Accountants wrote an excellent article concerning the automobile deductions:

2009 Automobile Deductions

On December 30, 2008, the Department of Finance announced that the automobile expense deduction limits and prescribed rates for the automobile operating expense benefit for 2009 will remain at the 2008 amounts. As set out in the press release:

A) The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes will remain at $30,000 (plus applicable federal and provincial sales taxes) for purchases after 2008.

B) This ceiling restricts the cost of a vehicle on which CCA may be claimed for business purposes.

C) The limit on deductible leasing costs will remain at $800 per month (plus applicable federal and provincial sales taxes) for leases entered into after 2008. This limit is one of two restrictions on the deduction of automobile lease payments. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling.

D) The maximum allowable interest deduction for amounts borrowed to purchase an automobile will remain at $300 per month for loans related to vehicles acquired after 2008.

E) The limit on the deduction of tax-exempt allowances paid by employers to employees using their personal vehicle for business purposes for 2009 will remain at 52 cents per kilometre for the first 5,000 kilometres driven and 46 cents for each additional kilometre. For the Yukon Territory, Northwest Territories and Nunavut, the tax-exempt allowance will remain at 56 cents for the first 5,000 kilometres driven and 50 cents for each additional kilometre.
The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers for 2009 will remain at 24 cents per kilometre. For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will remain at 21 cents per kilometre. The additional benefit of having an employer-provided vehicle available for personal use (i.e., the automobile standby charge) is calculated separately and is also included in the employee's income.

Standard Outline for a Partnership or Shareholder Agreement

The ideal time to reach unanimous agreement regarding how a company is organized, operated, changed or liquidated is before the investment transaction takes place. In order to have a productive meeting, you need an agenda and you need to make decisions; decisions that stand the test of being committed to writing in order to deal fairly with future events and consequences that may or may not occur.

Here are some examples of required clauses in your agreement:

Describe the partners or shareholders and their investments.
Describe the firm's trade name and style of identity.
Describe the nature and scope of business activity.
Identify the official business office address, and phone number.
Establish a date to review the agreement.
Detail each equity contribution and include the terms of each shareholder loan.
Establish all banking resolutions and signing authorities.
Establish the limits for personal guarantee bonds and postponements before negotiating any bank financing.
Establish a dividend policy.
Establish compensation for per diems, bonuses, salaries or drawings for the term of the agreement.
Establish a policy for the inspection of business records and right of audit.
Establish insurance coverage(s) and the indemnification of directors for contingent liabilities of the firm.
Establish provisions for partners or shareholders:
wishing to retire;
withdrawing equity;
settling an estate;
in arbitration of disputes;
expelling a partner;
selling to an outsider.
Establish provisions to evaluate the share of a retiring or deceased partner's interest.
Establish rights and options for surviving or remaining partners or shareholders to purchase the interest.
Establish the terms for restrictive covenants, conflict of interest, and non-competition agreements for partners leaving the firm.

Many simple companies are forged as 50/50 or equal partnerships in order to avoid the less exciting details of a formal agreement and get on with the business. The buy/sell agreement in these situations is usually just a simple "SHOTGUN" clause (possibly named after a wild west version of the Mexican Standoff). In these situations, one party makes an offer and the recipients of the offer can either sell by accepting the amount, terms and conditions, or turn around and buy on exactly the same basis; thereby forcing the offer back to the issuer. This is quick end befitting a quick beginning!

Business Owners - How can you extract up to $32,000 TAX FREE from your Corporation

Business Owners - How can you extract up to $32,000 TAX FREE from your Corporation

Several clients asked me to blog about the different ways of extracting money from their company - Today I will only explain you one technique to take out cash from your company:

Let's take John, a consultant, incorporated under the name John Doe Inc. The company is making 200k of net profit per year - the Corporation will then pay roughly about 16.5% of corporate tax (CCPC - Ontario, fiscal year 2009). John is the sole shareholder of is corporation, John will then have 3 options - he will either take a salary, declare a dividend to himself, a mix of both or he will let a portion of the profit in it's company as retained earnings....

Let’s make it a little bit more complicated, John got married last year with Julie and they are planning to have a baby next year. Then Julie will stop working for 3-4 year to raise the kid.

Did you know that while staying home, Julie could receive up to $32,000 TAX FREE…How is that possible? Well, trough a series of legal and accountant transactions (namely an estate freeze - S.86 Income Tax Act) Julie would then acquire shares in John’s company and John would be able to issue her a dividend … The first $32,000 would be non-taxable for Julie if she qualify under the different conditions of the Act - (email me to know more about these conditions...)

The important part to know is that If an individual does not have any other source of revenues, a shareholder can receive up to $32,000 Tax Free.

As usual, I strongly suggest you consult your own professional advisor before proceeding with an estate freeze.Too good to be true ?? Contact me and I will explain how we can change your corporate structure to ensure that you save taxes!!

Why Should I Incorporate?

Benefits of Incorporating

(A) Separate Legal Entity

The act of incorporating creates a legal entity called a corporation, commonly referred to as a "company." When a business is incorporated, its separate legal status, property, rights and liabilities continue to exist until the corporation is dissolved, even if one or more shareholders or directors sell their shares, die or leave the corporation. A corporation has the same rights and obligations under Canadian law as a natural person. Among other things, this means it can acquire assets, go into debt, enter into contracts, sue or be sued. A corporation's money and other assets belong to the corporation and not to its shareholders.

(B) Limited Liability

The act of incorporation limits the liability of a corporation's shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If the corporation goes bankrupt, a shareholder will not lose more than his or her investment (unless the shareholder has provided personal guarantees for the corporation's debts). Creditors also cannot sue shareholders for liabilities (debts) incurred by the corporation, even though shareholders are owners of the corporation. Note, however, that if a shareholder has another relationship with the corporation — for example, as a director — then he or she may, in certain circumstances, be liable for the debts of the corporation.

(C) Lower Corporate Tax Rates

Because corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate, incorporation may offer you some fiscal advantages. Canadian controlled private corporations (CCPC) enjoy a lower corporate tax rate. If the corporation is CCPC and qualifies for the small business deduction, the tax rate on the first $400,000 of eligible income (2008 amounts) is only 16.5% (11 % federal tax and 5.5% Ontario tax).

(D) Greater Access to Capital

It is often easier for corporations to raise money than it is for other forms of business. For example, while corporations have the option of issuing bonds or share certificates to investors, other types of businesses must rely solely on their own money and loans for capital. This can limit the ability of a business to expand. Corporations are also often able to borrow money at lower rates than those paid by other types of businesses, simply because financial institutions and other sources of financing tend to see loans to corporations as less risky than those given to other forms of enterprise.

(E) Continuous Existence

While a partnership or sole proprietorship ceases to exist upon the death of its owner(s), a corporation continues to live on even if every shareholder and director were to die. This is because, in the case of a corporation, ownership of the business would simply transfer to the shareholders' heirs. This assurance of continuous existence gives a corporation greater stability. This, in turn, allows the corporation to plan over a longer term, thereby helping it obtain more favourable financing.

SOLE PROPRIETORSHIP - PROVINCE OF ONTARIO

OVERVIEW:

· Sole proprietorships are the most common and simple form of business structure. Under this type of business structure, one person owns the assets of the business and is also personally responsible for its liabilities. The owner can employ others to help in operating the business, but the owner usually manages the business himself or herself. There are few formal legal requirements to establish sole proprietorships, and they are much cheaper to create than corporations. An Ontario sole proprietorship must have its registered business address located within the Province of Ontario.

LEGAL REQUIREMENTS:

· The only legal requirement in establishing a sole proprietorship is to obtain certain licenses which are required for specific types of businesses. These licenses can range from a Vendor's Permit for collection of the Retail Sales Tax to a municipal permit for the operation of a home based business. Licensing requirements vary depending on the specific region in which the business will operate.

· If the sole proprietorship will operate under a business name other than the owner's, the business name must also be registered under the Business Names Act. This registration is relatively simple to complete and must be renewed every five years. Although there is no formal legal requirement to conduct a search of a proposed business name, it is a good idea to do so to be sure that the name which you want to use is not identical or confusingly similar to another business name already registered. This will avoid potential law suits down the road.