The Hazlo Law Blog - Business Lawyers For Business Owners

How a trust can lighten the burden of raising a family

2012-01-31T16:08:00.000-08:00

Today, we would like to share a great article written by Tim Cesnick and published in the Globe & Mail. At HazloLaw, we often advise clients to consider the implementation of a Familty Trust. How a Trust can lighten the burden of raising a family My friend Allan gave me a call this week. “Tim, I just got an e-mail letting me know about my high-school reunion in the fall,” he said.“Sounds like fun, Al,” I replied.“Tim, I graduated 25 years ago, and I feel like I’ve been wasting time. The reunion is coming up fast. I only have four months to make something of myself. Got any ideas?” Then it hit me. “Al, why don’t you set up a family trust?” I suggested. “It really doesn’t matter how successful you’ve actually been – most successful people have a family trust. ”“Tim, I like it! So, when people at the reunion ask what I’m doing today, I can just tell them the truth – I play video games – but mostly I watch over my family trust. Wow, that sounds great. Uh, Tim, what am I going to do with this family trust once it’s set up?”I then shared with Allan a primer on how a trust can save a family significant tax dollars. Here are the highlights.Trust definedA trust is actually a legal relationship between the settlor (the person who transfers the assets to be held in trust), the trustee (the person(s) who holds the assets that were transferred), and the beneficiary (the person(s) for whom the assets are being held).Now, from a tax perspective think of a trust as a vehicle to hold certain assets you choose to place in the trust. The trust is treated as a separate individual for tax purposes, and any income earned by the trust will be subject to tax.The trust can pay the tax, or the trustees may choose to distribute the income to the beneficiaries, in which case the trust claims a deduction for the amount distributed and the beneficiaries face the tax on that income instead (the beneficiaries will receive a T3 slip showing the amount of income they must report). So, it’s possible to sprinkle income to various family members (beneficiaries) who might pay tax at lower rates than you might face.You should know that there are two types of trusts: An inter vivos trust, which is a trust you might establish during your lifetime, and a testamentary trust, which is established by your will after your death. I’m talking today about inter vivos trusts. These trusts are taxed at the highest possible marginal tax rate – which is not a good thing, obviously. So, you’ll generally want to distribute the income of the trust to beneficiaries to face tax in their hands at lower rates.Trust exampleConsider my friend Allan. He has children and regularly pays for many things for them. What if Allan could pay for these things using dollars that have been taxed in the kids hands rather than his own? The tax savings could be huge.To make this possible, Allan is going to lend money to a family trust that will be established. Now, there’s no hard and fast rule around how much he should advance to the trust. In my view, it should be at least $500,000 over time in order to gain sufficient benefit.If Allan lent, say, $500,000 to his family trust, the trust could invest those dollars. Let’s assume the trust earns 5 per cent annually on those funds. This would result in $25,000 of income annually. If this income were taxed in Allan’s hands, he’d pay $11,600 in taxes (in the highest tax bracket in Ontario this year).In this case, however, the trustee of the family trust – Allan in this case – can distribute the $25,000 of income to Allan’s three kids. The result? Each of his kids reports one-third of the income ($8,333 each) and pays little or no tax since these kids have little or no other income and they each have a basic personal tax credit that will shelter the first $10,527 of income from tax in 2011.Here’s the problem: Allan doesn’t really want to distribute cash to each of his kids directly. No problem. Allan can simply use the income in the trust to pay for expenses related to the kids. He could, for example, pay for their tuition, sports, travel, and other costs. The taxman will generally consider these amounts to have been distributed to the kids even when paid directly to third parties, provided the costs are clearly for the benefit of the kids.

Small business owners should beware the taxman's test

2012-01-30T16:04:00.000-08:00

written by Tim Cesnick and published in the Globe and Mail.Small business owners should beware the taxman's testI was at a local hockey arena last weekend when I ran into an old friend who I hadn’t seen in a while. “Jack, I haven’t seen you for a couple of years! I heard that you’ve started a new business. Is that right?” I asked. “That’s right,” Jack replied. “This time it’s a non-profit corporation,” he continued. “I didn’t intend it that way, but it is.”As it turns out, Jack is going to save big tax dollars because of his business losses. Many taxpayers have done the same thing in the past. Self-employment can be a great tax shelter, but you should understand the taxman’s – and the court’s – view of this. A recent court decision serves as a good reminder about the guidelines to follow.The tax shelterIf you operate a business as a proprietorship (rather than incorporating the business), any losses you report from the business can be applied to offset other income you might be reporting on your personal tax return. Quite often, the losses stem from costs you’re incurring anyway. You might, for example, use your car in your business and claim depreciation (known as “capital cost allowance” – or CCA) on your car. You’re paying for a car anyway, so why not make it deductible? It’s not uncommon to experience losses in the early years of a business.The storyBrian Sumner is a gentleman who decided to start a business several years ago. Although he had a full-time job as an economist, he owned a vacation property in Victoria Beach, Man. (primarily a summer recreational area), spent weekends and vacations there, and felt there was a demand in that area for excavation services. So, Mr. Sumner registered a business called Sumner Mechanical. He turned his garage into a maintenance shop and bought a back-hoe, tractor and skid-steer loader.Mr. Sumner reported losses on his tax returns in 2004, 2005 and 2006, and the Canada Revenue Agency disallowed losses amounting to $26,857, $29,648, and $32,710 for those years respectively. Most of the losses were created by claiming CCA on the equipment he had purchased. Mr. Sumner took CRA to court over the issue, and he lost his case. His story serves as a reminder as to what you need to do if you hope to have a small business (full- or part-time) to open the door to tax deductions.The lessonsThis type of battle with the taxman is nothing new. Yet, in the last few years, the courts have spelled out the principles that should be followed by taxpayers – and the CRA – when determining whether losses from an activity should be allowed. In particular, it was the Supreme Court of Canada in the Stewart decision (2002 SCC 46) that set out the principles to consider.The Supreme Court recognized that Canadian tax law will allow deductions where a source of business or property income exists. The question in every case, including Mr. Sumner’s case, is whether a source of income existed. Canada’s top court established that if an endeavour is clearly commercial in nature, with no personal element to it, then a source of income exists. This is not to say that the endeavour must produce a profit in any particular year.Where an endeavour is commercial in nature, then there is no room for the CRA to disallow losses on the basis that there is no reasonable expectation of profit. Where the endeavour could be classified as being personal in nature, or having a personal element to it, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income. If so, then deductions and losses may be allowed.A problem arises where the endeavour has a personal element to it and is not carried on in a sufficiently commercial manner. In this case, a source of income is not considered to exist, and losses won’t generally be tolerated by the taxman or the courts.When deciding whether an endeavour is sufficiently commercial in nature, the taxman will look at many factors, including: the profit and loss experience in past years, your training in the activity being carried on, your intended course of action, and the capability of the endeavour to show a profit.Mr. Sumner failed the commerciality test. Since he used his equipment more for his own personal property maintenance, advertised his business only seasonally, earned very little revenue, had little experience or training and lacked certain licences to operate some of his equipment on public roads, the courts ruled against him.

Business Owners: Tax savings should be top of your resolution list

2012-01-05T13:16:00.000-08:00

Happy New Year 2012 to everyone who is readying this blog. Today, I would like to share an excellent article from Tim Cesnick and published in The Globe & Mail.&&&&&&&&&&Tax savings should be top of your resolution list Once again it’s time for my annual New Year’s resolution. That’s right, a single resolution.This year, I’m getting into shape again. I’m going to start by eating slowly in 2012. It’s not about slowing my metabolism. It’s about my kids. They eat so much that if I slow down my pace of eating, there won’t be anything left by the time I’ve finished my salad. That’ll do it. What about you? If you’re still thinking about your New Year’s resolutions, consider adding tax savings to the list. If you make just one change to your affairs annually to save tax, you’ll do yourself a world of good in a short time. Consider one of these ideas:1. Create self-employment earnings. Self-employment is still one of the greatest tax shelters available. Why? Deductions. Operating a part-time business from home is all you need to do. This can open the door to deducting a portion of those things you’re paying for anyway, such as mortgage interest, rent, property taxes, home insurance, home repairs, utilities, vehicle repairs, gas, auto insurance, interest on a car loan or lease payments, computer costs and more.2. Pay family members a salary. If you have self-employment earnings you can move income into the hands of a family member who is in a lower tax bracket by paying wages or a salary for work performed. If you’re an employee, speak to your employer about requiring you to hire your own assistant for your work. Our tax law will allow an employee to deduct salary or wages paid to an assistant provided your employer required you to pay for one. Hiring your spouse or a child who is in a lower tax bracket will keep the money in the family and will save tax dollars.3. Make your interest deductible. If you’re paying interest costs that are not deductible, and have some cash or investments on hand, consider doing a “debt swap” to create a deduction for your interest. You can do this by taking some of your cash, or selling some investments to create the cash, and using the cash to fully or partially pay down your non-deductible debt. You can then re-borrow to replace those investments or that cash. As long as the new debt is used for an income-producing purpose you should be entitled to deduct your interest costs.4. Extract cash from your company tax-free. If you own a corporation, consider paying yourself capital dividends, repaying shareholder loans owing to you, and returning “paid up capital” to yourself to access the cash in your company tax-effectively. Also, consider claiming a refund of “refundable dividend tax on hand” (RDTOH) by paying yourself taxable dividends. All of this may sound like a foreign language, but a visit to a tax pro, perhaps your friendly chartered accountant, will help.5. Consider a leave of absence or sabbatical. You can defer tax by setting aside some money in a deferred salary leave plan (DSLP). You can then take a leave of absence or sabbatical in a later year and collect your deferred salary at that time. Speak to your employer about setting up a DSLP. A DSLP must be in writing and meet certain criteria, such as: No more than one-third of your salary can be set aside for the leave, your leave must be at least six consecutive months, the leave must begin no later than six years after the salary deferral begins, and following the leave you must return to work for a period at least as long as the leave. There are other details that must be looked after as well, so your employer will need to seek advice on this.6. Create pension income for the credit. If you have eligible pension income you’ll be entitled to claim the pension tax credit. If you and your spouse each claim the credit, this could fully or partially shelter the tax on $4,000 ($2,000 each) of pension income. It’s not going to make you wealthy, but it’s all part of building up tax savings year after year. You can create eligible pension income by, for example, converting part of your registered retirement savings plan to a registered retirement income fund to create $2,000 of RRIF income annually. You can also provide your spouse with eligible pension income by reporting up to half of certain pension income in his or her hands.

Business owners: Are you a candidate for a corporate reorganization and, in the process, eligible to save thousand of dollars in taxes?

2011-12-06T15:51:00.001-08:00

by Hugues Boisvert Business Lawyer, HazloLaw P.C.As a business lawyer, I work with entrepreneurs and business owners on a daily basis. For the vast majority of them, their most valuable asset is their corporation. For obvious reasons, their number one 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, unfortunately, often overlooked. Remember, as the old saying goes, “It is not what you make, but what you keep.”Business owners must realize that a proper structure can save a substantial amount of taxes, which will greatly benefit themselves, their family and their business. Further, the costs of implementing these types of structures are usually easily justified by the annual tax savings. The purpose of this article is to explain to you the benefits of a corporate reorganization and to help you determine if you are a good candidate for implementing such structure.What is a Corporate Reorganization?A Corporate Reorganization is a legal way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in annual tax savings in amounts upwards of tens of thousands of dollars.Why do I need a Corporate Reorganization?As a business lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up. But as we all know, situations change over time.It is common that the conditions which resulted in a particular corporate structure no longer reflect what is best for the corporation or its owners, resulting in a somewhat cumbersome and inefficient structure, particularly from a tax point of view.Every day, I work with companies, who are in this situation and help them to reorganize and restructure their affairs, which, in turn, allows them to save a substantial amount of money. There are many situations where a corporate reorganization is recommended, such as, corporate tax planning, creditor proofing or in order to reach other organizational goals. Sometimes this process will even involve the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Every person and corporation is different. Accordingly, when analyzing whether or not a corporate reorganization is appropriate, it is important to investigate all relevant options thoroughly. Given the complexities and technicalities of such an undertaking, it is highly recommend one obtains qualified profession help. This ensures the business owner obtains proper advice and implements the best possible plan to meet the their objectives.Based on my experience, there are many reasons companies may need to be reorganized. Some of the common reasons, which may apply to you, are as follows:(1) To implement a proper share structure;Having the right structure allows flexibility in terms of tax planning. While you are only required, by law, to have one class of shares (common), it is always best to provide for the possibility of additional classes of shares. This allows a corporation the flexibility to modify its ownership structure, should the need arise. For example, in order to save on taxes, you might want to take advantage of income splitting available to eligible family members. Or you might need to issue a new class of shares in order to attract new investors. Or you might want to make use of a family trust, discussed further below.(2) To establish and implement a Family Trust;If you have children and/or are married, serious consideration should be given to owning the shares of your business through a discretionary Family Trust. The benefits of a family trust include: (a) Income splitting: A well-structured family trust allows for the splitting of income earned by the trust among the various beneficiaries;(b) Funding of children’s education at a potential tax rate of 15.5% instead of 48% (a savings of up to $32,500 per $100,000 of profit); and,(c) Multiply uses of the one-time capital gains exemption, should you sell your company, allowing the $750,000 capital gains exemption to be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.(3) To create holding companies for tax and creditor-proofing reasons; Generally, a “holding company” is a corporation which is placed between a business, the “operating company”, and the individual shareholder. One of the foremost principles of Canadian taxation is that dividends are allowed to flow on a tax-free basis from one corporation to another. Accordingly, after-tax profits accumulated in the operating company can be distributed to the holding company as tax-free dividends.Funds transferred to the holding company in this manner are better protected from claims made by any of the operating company’s creditors. No one ever expects to face such a claim; however, the reality is that, for a variety of different reasons, creditor claims are made on a daily basis. As a result of these claims, many unprepared business owners have seen a lifetime of accumulated profits vanish, often due to a single claim. It is for this reason that use of a holding company is especially attractive to companies where the risk of lawsuits or litigation is significant.Additionally, if necessary, funds held in a holding company can be lent back to the operating company on a secured basis in order to retain protection from creditors.(4) To carry out and implement a succession plan through an estate freeze (by using Section 86 of the Income Tax Act).For business owners, tax minimization is central to any plan. One popular tool is an estate freeze. An estate freeze is part of a corporate reorganization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due under the deemed disposition rules upon their death and provides a deferral mechanism of taxes. A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization.If you think you are a candidate for a corporate reorganization or would like to know more, please feel free to contact me. I can advise on whether a corporate reorganization is required and the benefits of such reorganization, as well as manage its implementation and execution. As you can imagine, a corporate reorganization has many tax and legal implications for companies and their owners, so anyone considering it should seek professional help.

Tax Planning for Business Owners...

2011-11-30T09:00:00.001-08:00

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 that should be taken into consideration: The tax rate of the corporation The marginal tax rate of the individual Exposure to Alternative Minimum Tax The ability to benefit from child care expenses and paternity/maternity benefits and to make RRSP and CPP/QPP contributions, which are all based on salary and not dividend income 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 where expenses exceed investment income 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, since dividend income is grossed up by 41% in 2011 (38% in 2012) for eligible dividends or 25% for non-eligible dividends, which can have an impact on certain credits and benefits Some planning techniques include: If the corporation has Refundable Dividend Tax on Hand (RDTOH), the payment of a dividend will result in a refund of 33 1/3% of the dividend payment up to a maximum of the RDTOH balance Remuneration that is accrued and expensed by a corporation must be paid to the employee within 179 days of the corporation's year-end. When a year-end falls after July 5, the corporation can cause the owner-manager's remuneration to fall into either the current or subsequent calendar year 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. This is accomplished by "freezing" the current fair market value of the company in the form of preferred shares. If the value of a business subsequently decreases, the benefits of freezing may not be fully realized and it may be advantageous to consider "unfreezing" and "refreezing" a company. 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. 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 2011 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; however, certain exceptions were proposed in the 2011 federal budget 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 Have your spouse as your business partner or pay reasonable salaries to your 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 a particular exception applies. 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 and do not generate refunds of RDTOH 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. 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. Consider selling investments with losses the following year. Subject to certain conditions, an individual may defer capital gains on eligible small business investments to the extent that the proceeds are reinvested in another eligible small business. The reinvestment 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 (CCA) 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). 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. Machinery and equipment acquired after March 18, 2007 and before 2012, primarily for use in Canada for the manufacturing and processing of goods for sale or lease is currently eligible for a temporary accelerated CCA rate of 50% and subject to the half-year rule. Otherwise, a CCA rate of 30% would apply and be subject to the half-year rule. The 2011 federal budget proposed to extend this temporary incentive for two years, to eligible machinery and equipment acquired before 2014. Death Benefit A corporation can make a onetime tax free payment of up to $10,000 to the spouse or heirs of a deceased employee. This payment will not be taxable to the recipient and will be fully deductible by the corporation. * provided by BGK -Chartered Accountants - more info at www.BGK.ca

How an honest mistake beat a $6-million tax bill **

2011-11-12T14:11:00.001-08:00

Some mistakes can be costly. Consider the story of Andrew Espey from Jackson, Minn. According to KEYC-TV, Mr. Espey was fined $2,000 (U.S.) and sentenced to 90 days in jail for improperly shingling his house (he affixed the new shingles without first removing the old ones). I just hope that same building inspector doesn’t show up at my place to examine the poor job I did of hanging our new screen door. While a home improvement faux pas can be bad enough, other mistakes – particularly tax mistakes – can cost even more. How about $6-million more? Today I want to share the story of siblings who found that they owed the taxman that much. The good news? The tax bill was the result of a mistake made by these siblings, and the court was sympathetic to them. This could be good news for other taxpayers. The story Ashok and Saroj Arora are siblings who owned and operated a business by the name of Stone’s Jewellery Ltd. In 1996, Stone’s entered into an agreement to purchase a parcel of land in Springbank, Alta., for $500,000. The closing date was delayed until 2004 at which time the property was worth about $4-million. The Aroras were advised at the time of closing to register the property in their personal names rather than in the name of Stone’s in order to protect the property from potential creditors of the business. The advice they received was that this transaction would be tax-free. Then, in 2006, the Aroras transferred the property to a wholly owned corporation on the advice of their advisers. The property was worth about $6-million at the time of this transfer, and the transfer was to be treated as a tax-free transfer (by taking advantage of section 85 of our Income Tax Act which allows certain transfers to a corporation to be made tax-free). Here’s the problem: The Canada Revenue Agency argued that there were two taxable transfers here: the one in 2004 when the Aroras took possession of the property personally (CRA called this a taxable transfer by Stone’s to the Aroras), and again in 2006 when the property was transferred to the new corporation (CRA argued that section 85 was not applicable to the transfer since this was “land inventory,” or land held for resale). CRA also argued there was a taxable shareholder benefit that arose when the land was placed in the names of the Aroras. The total tax bill owing by Stone’s and the Aroras was about $6-million. This issue ended up in court (Stone’s Jewellery Ltd. v. Arora, 2009 ABQB 656) and the Court of Queen’s Bench of Alberta rendered a decision that may help other taxpayers. The decision In their application, the taxpayers argued that they were entitled to relief based on three different principles. One of these was the principle, or doctrine, of mistake. The court summarized the doctrine of common law mistake by saying that a mistake must be fundamental, going to the identity of the contract, where the contracting party obtained something other than what was intended. This should be distinguished from a situation where the contracting party did receive what was intended but it turned out to be less valuable than expected. In this latter case, the mistake is not considered to be fundamental. In a case where a mistake is fundamental, the contract can be rendered by the court to be void from the very beginning. It shouldn’t be surprising that CRA opposed the taxpayers’ application, arguing that (1) other legal remedies were available and (2) the parties should not be allowed to undertake retroactive tax planning. The court dealt with the 2006 transfer first. Although the court acknowledged that it didn’t have the power to order that the transfer take place under section 85 of the Income Tax Act, it did say that all of the parties held the mistaken belief that the transaction could be done on a tax-free basis – a fundamental mistake that went to the root of the contract. The court said the transfer was therefore void from the beginning. As for the 2004 transfer, the court said that there was a common mistaken belief by the parties, based on the advice of their advisers, that there would be no negative tax consequences to registering the property in their personal names. This too was a fundamental mistake that went to the essence of the agreement, and the transaction was rendered void from the outset. This is, of course, good news for taxpayers who may be in a similar situation where an honest and fundamental mistake results in taxes owing. * written by Tim Cesnick and published in the Globe and Mail.

The importance of preparing Annual Resolutions for your Company.

2011-10-30T14:07:00.000-07:00

The Canadian Business Corporation Act ("CBCA") states that a corporation "... must hold a shareholders' meeting on a date that is no later than 15 months after holding the last preceding annual meeting, but no later than six months after the end of its preceding financial year."Alternatively, shareholders may pass a resolution in lieu of meeting. A resolution in lieu of a meeting may be useful for small corporations that have only one or a few shareholders. A resolution in lieu of meeting is a written resolution signed by all shareholders who would have been entitled to vote at the meeting that deals with all matters required to be dealt with at a shareholders' meeting. This resolution is just as valid as it would be if passed at a meeting of shareholders. This resolution should be retained in the corporation‘s records.The shareholders' meeting (or resolution in lieu of a meeting) allows shareholders to obtain information about the corporation's business and to make appropriate decisions regarding this business. The date of the meeting, or of the resolution, must be indicated on your Annual Return.AgendaAt minimum, the agenda of an annual meeting must include the following items:- consideration of the financial statements;- appointment of an auditor (or a resolution of all shareholders not to appoint an auditor); and- election of directors.Often, the agenda includes an additional item, "any other business." This portion of the meeting allows shareholders to raise any other issues of concern to them. If directors want shareholders to consider a matter, it should be listed in the agenda prior to the meeting and not raised as "any other business."Calling a shareholders' meetingThe directors must notify voting shareholders of the time and place of a shareholders' meeting. They must do so no more than 60 days and no fewer than 21 days before the meeting date. For example, if the meeting is to be held on May 20, the notice of the meeting should be sent no earlier than March 22 and no later than April 30.Unless otherwise provided by the by-laws or the articles, this notice can be sent electronically to shareholders if they have previously consented to receiving such notices electronically and if they have designated a system for receiving them.Location of the shareholders' meetingThe annual meeting may be held in Canada at a place specified in the by-laws. Or, if the by-laws do not specify a location, directors may choose one. An annual meeting may be held outside Canada only in cases where the corporation's articles permit it or if all voting shareholders agree.Also, where the corporation's by-laws permit it, the directors of a corporation may decide that a meeting of shareholders will be held entirely by means of a telephonic, electronic or other communication means that will permit all participants to communicate adequately with each other during the meeting. In such cases, it is the responsibility of the corporation to make these facilities available.Unless otherwise provided by the by-laws, a corporation can allow shareholders to attend the meeting electronically. The communications system used must permit all participants to communicate adequately with each other during the meeting.Other requirements of the shareholders' meetingQuorumUnless a quorum of shareholders is present or represented at annual or special shareholders' meetings, no business that is binding on the corporation can be conducted. A quorum is present at a meeting when the holders of a majority of the shares entitled to vote at the meeting are present in person or represented by proxy, regardless of the number of persons actually present at the meeting. Note, however, that a corporation's by-laws can provide for a different type of quorum.Electronic votingUnless the corporation's by-laws specifically forbid it, electronic voting is allowed, as long as it is possible to verify the vote without knowing how each shareholder voted.Minutes of the meetingThe corporation must keep a written record of the meeting. This record usually includes such information as:where and when the meeting was held;who attended; andthe results of any voting.

Startup funding: A closer look at FedDev!

2011-10-20T15:37:00.000-07:00

Today, I would like to share a great article written by Mark Evans and published in The Globe and Mail. Over the past few months, a relatively unknown player has been sprinkling seed money on a growing number of startups, providing the ecosystem with a source of much-needed capital. So what is FedDev Ontario and why the flurry of investments? FedDev is a federal agency created in 2009 to support the southern Ontario economy to “mitigate and overcome economic challenges, as well as position the region to compete globally.” Translation: It is looking to jump-start economic development and create jobs. Well, that certainly sounds ambitious, doesn’t it? So why the focus on startups, which tend to be risky ventures that could support economic development but could also flame out after a short time? To get the scoop on FedDev, I asked a few questions to FedDev spokesman Kevin Miller. Q: What role does FedDev Ontario play within the investment and startup ecosystem? A: Consultations with stakeholders in southern Ontario after the launch of the agency revealed the business community faces real challenges when it comes to productivity, competition and innovation. In particular, startup companies lack access to capital and investors to help them bring promising ideas and innovations into the market. Through Investing in Business Innovation, FedDev Ontario is focusing on early-stage businesses that are recognized as having the potential for high growth and a net long-term economic benefit for southern Ontario. IBI also provides funding to help angel organizations attract new investors and encourage the growth of angel investment funds. Q: Who's eligible for the program and how does FedDev Ontario decide who gets money? A: Eligible recipients under this initiative are startup businesses, defined as companies with less than 50 employees, not-for-profit angel investor networks, and not-for-profit organizations representing angel investor networks. FedDev Ontario assesses applications based on specific criteria, as outlined in the program guidelines. Q: What's the range of investment made by FedDev Ontario in a particular company? A: Startups in southern Ontario may request up to $1-million in repayable contributions. Angel investor network applicants may request one-time, non-repayable funding of up to $50,000 to help them attract new investors. Organizations representing southern Ontario angel networks may request non-repayable funding of up to $2-million to support investment attraction and other development activities. Q: Are there any limitations on how the money can be spent or when it needs to be spent? A: Funding needs to be spent by March 31, 2014Q: Are all contributions repayable? A: Contributions to startup companies are repayable. Contributions to not-for-profit angel investor networks and organizations representing southern Ontario angel networks are non-repayable. Q: How many companies have received financing so far? A: To date, FedDev Ontario has announced investment in funding for projects with the following organizations: Powernoodle, Nulogy, Guardly, Miovision Technologies, Maintenance Assistant Inc., Chango Inc., Wave Accounting Inc., gShift Labs Inc., Ultimate Kiosk Inc. and the Niagara Angel Network. Q: How big is the program and how long will it last? A: FedDev Ontario has notionally allocated up to $190-million until March 31, 2014 for Investing in Business Innovation. However, all project activities must be completed by that date.

Business owners: How to get money for your business!

2011-09-30T18:59:00.000-07:00

There are many different ways that you can finance your business. The number of options can be overwhelming sometimes, as can the criteria of lenders and investors.Financing is not always readily available, but you can increase your chances of accessing financing by preparing. Browse through this information to determine what type of financing is best for your business and study the documents on how to make a pitch to a lender or investor.Government financing Government financing Government departments and agencies provide financing such as grants and contributions, subsidies and loan guarantees. Private sector financing Private sector financing Your business may be eligible for a wide variety of different types of private sector financing, including debt and equity. Personal assets Personal assets Most new entrepreneurs will use some of their own assets to get the business off the ground. Financing for specific demographic groups Financing for specific demographic groups Find out what financing is available for specific demographic groups, including Aboriginal peoples, immigrants, persons with disabilities, women and youth. Financing from not-for-profit and community-based organizations Financing from not-for-profit and community-based organizations Look beyond traditional funding sources. There may be not-for-profit or community-based organizations that can offer you financing or direct you towards financing. Steps to Growth Capital Steps to Growth Capital Learn how to develop the plan, the materials and the confidence to go after the equity financing for your business opportunity. for more info, consult http://www.canadabusiness.ca/eng/82/150/

Business transition via Employee Share Ownership Plans

2011-09-29T21:51:00.000-07:00

Question: I would like information on Employee Share Ownership Plans (ESOPs) as a means of business succession. I am especially interested in ESOPs from a tax perspective.Answer:Generally an ESOP allows qualifying employees to purchase shares in their employer's company, with or without monetary assistance from the company. Many companies are using ESOPs as a form of succession when there is no other successor apparent. Whether an ESOP plan is created for succession or employee loyalty purposes, the plan must have a high participation rate to be effective. The type of business is also relevant. If it involves manufacturing and physical assets, valuations are easier to determine. The plan must be administered, which requires some work. That is why many ESOPs involve union structures that can help with administration. ESOPS also have many tax and legal implications for companies and their owners, so anyone considering them should seek professional help. Lawyers, accountants and some BDC consultants can help companies navigate the tricky route to establishing an ESOP.

Business Owners: Why you MUST have a business lawyer on your side.

2011-09-28T19:05:00.000-07:00

Legal issues for small business As a business owner, you may think that you don't need the additional cost of hiring a lawyer. That may be a big mistake. Read this document to understand why consulting a lawyer is essential for any small business start-up.Lawyers are trained to interpret the law and those who specialize in business law can be worth their weight in gold. It is less expensive to retain a lawyer up front and have your legal work done properly than trying to hire a lawyer later on to fix problems that may have arisen from lack of legal knowledge. Sometimes procedures and forms for businesses look simple, but legal transactions are often more complex than they seem.When do you need a lawyer? There are a number of situations where you should strongly consider consulting a lawyer.Business Structure One of the first things you will need to do is to decide on the business structure that best suits your needs. Your options can range from sole proprietorships, partnerships, limited or incorporated companies to co-operatives. A lawyer can help you choose the correct form of business structure, based on factors such as the number of people involved, the type of business, tax issues, liability concerns and financial requirements of the firm. Your lawyer can also help you draw up the necessary legal documents that set out the terms of any partnership or other shared ownership, ensure that all parties will be treated fairly and that there is a mechanism for handling any disputes or disagreements.Forms of business organization Find out which type of business structure is right for your business. Buying an existing business If you wish to buy an existing business, you may have to decide whether to buy only the assets of the business or, in the case of an incorporated company, the shares of that company. With any business purchase, you should have a buy and sell agreement, signed by both parties, that spells out the demands and obligations of each, as well as the terms of the agreement (for example, non-competition provision).Buying a business What you need to know before purchasing an existing business. Leasing Requirements Most small businesses will start by taking out a lease for their business premises. However, leases can be one of your largest expenses. Make sure that your lease will be suitable to your business needs, in case you wish to break your lease or expand your business. A lawyer can give you advice on any pitfalls or costs that may be incurred, before you sign on the dotted line.Choosing and setting up a location Trying to decide where to locate your business and how to arrange it once you get there? Review the following resources and consider your options. Contracts When you are drawing up legal contracts, you should get the advice of a lawyer. Some examples of contracts that you should get a lawyer's help with include: •Licensing agreements •Franchise agreements •Employment contracts •Subcontractor agreements •Partnership, incorporation or shareholder agreements •Lease agreements •Mortgage, purchase agreements This is not a comprehensive list. Above all, make sure you contact a lawyer before you sign any contract.Equity Financing If you plan to seek equity financing for your business, it is important to contact a lawyer to help you draw up the terms of the shareholder agreement and/or to review the legal documents provided by a potential investor. Your lawyer can also help you assess the impact of any new shareholder agreement on other obligations and existing contracts with employees, suppliers or financial institutions.Steps to Growth Capital Learn how to develop the plan, the materials and the confidence to go after the equity financing for your business opportunity. Other issues requiring legal advice There may be other issues where you need to seek the advice of a lawyer in order to determine the best course of action. This can include: •Environmental complaints or concerns •Employee problems or conflicts •Disagreements between business partners •Closing your business •Protection of intellectual property Any time you are unsure of the legality of something or the legality of your business practices are questioned, you should be sure to get the advice of a lawyer.How should you choose a lawyer? If you have used a lawyer before for a real estate transaction or other personal issue, he/she may be able to refer you to a lawyer who specializes in small business start-ups or to a business lawyer. Ask your business associates, friends and family for references of law firms they have used and received satisfactory services from in the past.Make sure you have a comfort level with your lawyer, as you will be working closely for the life cycle of your business. Don't hire the first lawyer you speak to. You will have to do some searching for the best expertise you need for your business. Make a list of potential lawyers you wish to meet. Many lawyers will meet you free of charge for the first time to establish expectations on both sides, as long as you don't try to get free legal advice while you are there.You will probably want to have a general business lawyer to handle your day-to-day affairs, but look for someone connected to specialists in specific areas of law who can refer you, as necessary, to someone with more expertise in areas like intellectual property, equity financing, and so on.Make sure you understand your lawyer's billing practices. If you think it may be a little while before revenue comes in to your business, you will have to make arrangements ahead of time with your lawyer, so you are both on the same page.

Q & A - Tips on acquiring a Franchise business.

2011-09-28T18:49:00.000-07:00

Question:We're looking to acquire a franchised business. Any tips or due diligence processes that may vary from acquiring a non-franchised business?Answer:The due diligence is the same for any other comparable business; however, the following are some franchise-specific issues. You will want to thoroughly review the franchise agreement, and you should also have it reviewed by a good commercial lawyer who specializes in franchises. Before signing a franchising contract, you should be able to answer the following questions: •Does the franchisee have an exclusive territory? •Is the franchise transferable? How long is left on the existing franchise agreement? •Is the franchise renewable? For how long? •Is it renewable at the franchisor's or the franchisee's option? •What am I getting for the franchise fee? Accounting systems? Operating systems? Lower prices on supplies?•What exactly am I buying? Am I buying the right to use the name? Is the building part of the deal, and do I own the real estate? Will I be paying rent? Confirm that the current franchisee is in good standing with the franchisor, and talk to other franchisees within the group to ensure that there are no hidden issues with the franchisor.For any specific questions, please do not hesitate to contact me.

Five tax benefits every student and parent should learn *

2011-09-15T08:07:00.000-07:00

It’s hard to believe that summer is almost over. You know summer is coming to an end when it’s time once again to prepare for that all-important educational experience: the World Scrabble Championships. Make no mistake, the competition is coming up, and the stakes are high. My neighbour, William, is hoping to take home the $20,000 (U.S.) grand prize when he makes the trek to Warsaw six weeks from now. If you’re really good at Scrabble, you can almost eke out a living – if you win every competition every year. William attributes his Scrabble acumen to his very thorough education in university, which opened his eyes, he says, to premium words such as “aureolae,” “qanat,” and “euripi” (my spell-check flagged two of these words as being unknown; that’s how good William is). Is there a young person in your life who is off to college or university in the next week or two? You may want to share with them the career possibilities that their education can afford, and “Scrabble Master” is just one. No? Well, at least share with them some of the tax benefits available to students. Here’s a list: 1. Claim moving expenses. A student can claim a deduction for the costs of moving to school (or home again) provided he earns income while in the new location. Your child should consider earning enough income during the school year, and again in the summer after moving home, to offset those moving expenses (plus enough to absorb the basic personal tax credit and his tuition, education and textbook tax credits too). Sorry, but you can’t claim those moving expenses on behalf of your child, even if you pay those costs. The usual rules for moving expenses will apply to your child. 2. Lend money from your corporation. You can help to fund your child’s education by lending her money from a corporation you own. The loan will be included in her income, but she should pay little or no tax on that amount if she has little or no other income. In fact, given the basic personal credit and tuition, education and textbook tax credits, you may be able to lend your child up to about $20,000 without tax in her hands. Once she graduates and starts working full time, she can pay back that loan, and will be entitled to a deduction for the repayment, at a time when she is earning income and could use the tax savings. 3. File a tax return. Many students don’t bother filing a tax return because they don’t earn enough to pay any tax. Bad move. By filing a tax return your child will create registered retirement savings plan (RRSP) contribution room if he has any earned income at all. When he graduates, he can then make contributions to an RRSP and save tax. Further, filing a tax return should entitle your child to a GST credit worth about $200 or more in cash once he has reached age 19. Finally, your province might offer refundable sales or other tax credits which could provide cash back to your child. 4. Claim tax credits. There are a few tax credits available to students. In particular, a tax credit is available for tuition paid in the year, an education credit based on $400 a month of full-time ($120 for part-time) enrolment, and a textbook tax credit based on $65 a month of full-time ($20 part-time) enrolment. If your child doesn’t have sufficient income to claim all these credits, these amounts can be transferred to a spouse, parent or grandparent (to a maximum of $5,000 in total). Your child can also choose to carry these amounts forward for use in a future year instead. Your child can also claim a credit for interest paid in the year on student loans made under the Canada Student Loans Act, Canada Student Financial Assistance Act, or similar provincial law. Finally, make sure your child claims the public transportation tax credit where applicable. 5. Tax-free assistance. Since 2007 it’s been possible to claim a scholarship exemption to effectively make scholarships, fellowships and bursaries tax-free. To be eligible for this exemption, the program of study has to qualify the student to claim the education amount (that tax credit I referred to above). The Canada Revenue Agency has published a reasonably good pamphlet, publication P105 – Students and Income Tax, which you can access online at cra.gc.ca for details on the scholarship exemption, among other things. *** written by Tim Cesnick and published in the Globe & Mail.

Business owners: Did you review the "buy-sell" clause in your Shareholders Agreement?

2011-09-06T06:24:00.000-07:00

It is wise for corporations and their shareholders to consider amending their shareholders' agreements periodically, as they can become out-dated over time. In particular, the structure of the buy-sell component of shareholders' agreements evolves regularly as a result of new tax legislation and interpretations of the law by the Canada Revenue Agency (CRA). This is particularly evident in connection with spousal rollovers after death. Under normal circumstances, when a spouse dies, all property of the deceased can pass to the surviving spouse as a tax-free rollover as long as the property vests in the spouse (i.e. unconditional ownership). The CRA now takes the position that a mandatory buy-sell of the shares of a company from a deceased's estate negates the ability to use the spousal rollover rules. The mandatory buy out, in the CRA's view, prevents the shares from vesting. There is thus no spousal rollover and the full capital gain will have to be reported on the deceased's final return. This result poses no problem if the shares are eligible for the capital gains exemption and the deceased had enough capital gains exemption to eliminate the gain. However, if these factors are not present, the lack of a spousal rollover eliminates the ability of the surviving spouse to use his or her capital gains exemption on a sale. To alleviate this problem, modern shareholders' agreements include what are commonly referred to as put/call provisions. Such provisions give the deceased's estate the right to require the shares to be purchased from the estate, and give the surviving shareholders the right to purchase the shares from the estate. Both parties have the option to buy and sell, but neither is obligated to do so. Buy-sell provisions should also provide enough flexibility to allow either for the company to purchase the shares from the estate, resulting in a deemed dividend, or to have the surviving shareholder(s) purchase the shares directly from the estate, resulting in a capital gain. Shareholders should inquire of their advisors regarding the tax consequences that result from these options. When structuring agreements, it is important to predetermine the buy/sell prices on an ongoing basis rather than using pre-determined valuation formulas, which can often be misleading and not representative of fair market value. Ideally, predetermined prices should be updated annually. Where shareholders are related (non-arm's length), a valuation may be required to support the value, though the CRA might question and challenge a valuation in these circumstances. Although the CRA can challenge an agreement to value between two unrelated shareholders, it is less likely to do so. In any event, no valuations are required until a shareholder dies. It is thus prudent to have a mechanism in place to determine fair market value, ideally by an independent business valuator. Notwithstanding any of the above strategies, care should be taken in implementing any changes to shareholders' agreements. Some older agreements have been maintained in their original form specifically to preserve certain tax advantages that might remain valid even though more current tax laws have changed.For any questions regarding the above and/or if you wish to discuss your situation, please do not hesitate to contact me.

The Tax-Free Savings Account (TFSA) not quite so simple for some

2011-09-02T06:10:00.000-07:00

As you may know, the The Tax-Free Savings Account allows you to contribute up to $5,000 of after-tax funds to a tax-free savings account, invest in anything you want, and the income or gains accrue tax-free for life and can be withdrawn tax-free at any time, for any reason. However, several rules need to be followed - Today, I would like to share an excellent article written by Jamie Golombek from CIBC and published in the National Post. &&&&When it was first announced, it seemed so simple.You contribute up to $5,000 of after-tax funds to a tax-free savings account, invest in anything you want, and the income or gains accrue tax-free for life and can be withdrawn tax-free at any time, for any reason.Miss a year? No problem because the $5,000 annual contribution limit automatically carries forward for life. Need to withdraw funds? Piece of cake — you can recontribute them beginning the following year.Sounds like a walk in the park, right?You would think so, but in 2009, the inaugural year of the TFSA, of 4.8 million Canadians who opened a TFSA, 72,786 (1.5%) received a letter in 2010 from the Canada Revenue Agency about possible excess contributions. This was the subject of new special report titled Knowing the Rules issued this week by the Taxpayers’ Ombudsman.The role of the ombudsman includes conducting “impartial and independent reviews of service-related complaints about the CRA,” as well as identifying and reviewing “systemic and emerging service-related issues within the CRA that have a negative impact on taxpayers.”The special report, subtitled Confusion about the rules governing the TFSA, was prompted in part by numerous media reports (several by yours truly) on the difficulties experienced by taxpayers who found themselves in a TFSA overcontribution situation, facing penalties of 1% per month of overcontribution, many through no apparent fault of their own.The issue was a lack of awareness of when a TFSA withdrawal can be recontributed. The ombudsman received complaints from taxpayers who had received letters from the CRA advising that they were being penalized for overcontributing to a TFSA and who complained that “TFSA rules regarding withdrawals and overcontributions were confusing.”The ombudsman’s office began its review in June 2010, but delayed issuing a report until now since the CRA was reacting to complaints by continually updating information on its website and training its staff on the TFSA.The conclusion was that while the CRA has already taken steps to address the issues surrounding TFSA contributions, and continues to do so, it “should have been more proactive in informing Canadians about the tax consequences of the TFSA.”It recommended that the CRA take steps to make Canadians more aware of the information it provides about the TFSA and be proactive in informing Canadians about how to find the tax rules governing the TFSA as well as to continue to work with the financial-services sector to ensure the CRA’s information about the TFSA is widely available.The CRA, in response to the report, issued a news release welcoming the report as an opportunity to improve services to Canadians and developed an action plan to address the recommendations which includes updated TFSA web pages, the issuance of relevant tax tips, community newspaper articles, and communications to financial institutions.Taxpayers who are still uncertain of how TFSAs work should also seek the advice of a reputable financial advisor well versed in the apparent intricacies of what first appeared to be a simple, new savings option for Canadians.**** Jamie Golombek is the managing director, tax & estate planning with CIBC Private Wealth Management in Toronto.

Business Owners: Income Splitting 101 and how to save taxes!

2011-08-29T06:52:00.000-07:00

if you follow my blog, you know that I enjoy reading Tim Cesnick's article published in the Globe & Mail. Once again, Tim's article is a MUST read for all of you. As usual, please do not hesitate to contact me should you wish to discuss some personal tax strategies.

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The Concept

Income splitting is one of the pillars of tax planning. It involves moving income from the hands of one family member who will pay tax at a higher rate to the hands of someone else in the family who will pay tax at a lower rate. By taking advantage of the lower tax brackets of family members, the overall tax burden for the family can be reduced.

How much tax can be saved? It varies by province, but the average across Canada is $17,000 in potential tax savings annually per family member. Your actual savings will depend on your level of income, your family member’s level of income, and your province of residence. The provinces where the greatest annual tax savings are possible are Nova Scotia ($21,000), Ontario ($19,565) and B.C. ($18,908). Alberta offers the smallest opportunity for annual savings at $13,196.

The Challenge

Here’s the problem: The attribution rules in our tax law are designed to prevent you from simply moving income to someone else’s hands. If you’re caught under these rules, the income earned by your family member will be attributed back to you to be taxed in your hands. The most common situations where these nasty rules will apply are where you give or lend money (at no or low interest) to your spouse or minor children.

The good news? There are quite a few strategies that can be implemented to split income that will sidestep the attribution rules.

The Strategies

Set yourself up for tax savings next year with one of these ideas:

1. Lend money to your spouse or child. You can simply lend money to your spouse or a child for them to invest. In the case of your spouse, all income and capital gains will be attributed back to you, and in the case of minor children, all income (but not capital gains) will face tax in your hands. But second generation income (that is, income on the income) will not be attributed back to you. It makes sense to move the income annually into a separate account so that its growth can be tracked separately from the original loan amount.

2. Lend money to family at interest. This idea is much the same as the one above, except that you can charge interest on the loan to avoid the attribution rules. By charging the prescribed rate of interest (currently just 1 per cent) your family member, not you, will face tax on any income earned. Your family member will have to pay you the interest every year by Jan. 30 for the prior year’s interest charge (if this is overlooked even once, the attribution rules will apply every year going forward). And get this: The current prescribed rate can be locked in indefinitely. So, if you set this loan up before Dec. 31 of this year, the 1-per-cent rate can apply forever. To the extent your family member earns more than 1 per cent on the funds, you’ll effectively split income.

3. Lend or give money to acquire a principal residence. If you help a family member to purchase a home, this will free up the income of that family member for other purposes – such as investing – effectively moving investable assets from your hands to theirs. In addition, if the property appreciates in value, the capital gain could be sheltered using the principal residence exemption of your family member if they are older than 18 or married.

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Business owners: Lets talk about Family Trusts

2011-08-23T08:18:00.000-07:00

In the past 3 years, I spent a considerable amount of time blogging about the use of Family Trust for business owners. Family Trusts are a great and effective way to save taxes. Today, I would like to have a closer look at the fine print on Family Trusts.

1. Establishing the trust. There will be a problem under our tax law if the settlor of the trust (the person who creates the trust by transferring assets to it) has the ability to take back the assets placed in the trust, has the right to name additional beneficiaries of the trust after its creation, or has the ability to control dispositions of the trust assets. If any of these conditions apply, the income, gains or losses of the trust will be reported on the settlor’s tax return. To avoid this outcome, it’s important to make sure that the settlor is not also the sole trustee (or a trustee with veto power over what is done with the trust assets) or sole beneficiary. The best approach is to have another family member – perhaps a parent or grandparent – be the settlor of the trust. This family member can “settle” the trust with a small asset such as a silver coin or $20 bill. The trust can then acquire other assets by, for example, borrowing money from you or others to acquire investments, shares in a private company, a vacation home, or other assets.

2. Transfers to the trust. If you transfer assets other than cash to a trust you’ll be deemed to have sold those assets at fair market value, so if they’ve appreciated in value, you could trigger a taxable capital gain. Be sure to count this cost first. You may be able to shelter from tax a capital gain on transferring assets to a trust if you have, for example, capital losses to use up, or some other tax deductions or credits available. And if you transfer a principal residence to a trust, you might be able to use your principal residence exemption on the transfer to avoid a tax hit.

3. Income of the trust. The income of the trust can be taxed in the hands of the trust, or one or more of the beneficiaries. Where the beneficiaries are minors, or your spouse, the attribution rules in our tax law could apply to cause the income to be taxed in your hands – that is, the hands of the settlor or someone who may have transferred assets to the trust. You can avoid this problem by lending money to the trust instead and charging the prescribed rate of interest (currently 1 per cent). You should also know that where a trust receives certain types of income, such as dividends from private companies, or rent or business income earned from a property or business carried on by a person related to minor beneficiaries, and an attempt is made to have that trust income taxed in the hands of minor beneficiaries, the “kiddie tax” rules can apply to cause the child to pay tax at the highest marginal tax rate. The kiddie tax won’t apply to second-generation income (that is, income on income), so it’s still possible for the trust to receive income subject to this tax, and use the cash to build up investments over time, and avoid the kiddie tax on any second-generation income.

4. Distributions from the trust. The assets, or capital of the trust, can generally be distributed from the trust on a tax-free basis to the beneficiaries of the trust who have a right to the capital. In this case, the beneficiaries inherit the adjusted cost base of the trust and may pay tax later on any income or gains on those assets they receive.

5. Twenty-one years later. Be aware that on every 21st anniversary of the trust there will be a deemed disposition of the assets of the trust, which could trigger taxable capital gains. There are various ways to plan for this tax hit (a topic for another day).

6. Asset protection benefits. Finally, assets can often be protected from potential creditors when placed in a trust where the trustee has discretion to distribute the assets to beneficiaries as the trustee sees fit. However, there are laws in place to protect the rights of creditors, so speak to a lawyer about these.

And be sure to speak to a tax lawyer before setting up a trust.

Tax Matters: In estate planning, know the hazards of joint ownership

2011-08-23T08:12:00.000-07:00

Today, I would like to share an interesting article written by Tim Cesnick published in The Globe and Mail.

Tax Matters: In estate planning, know the hazards of joint ownership

I recall a number of years ago that the New Haven (Conn.) Register newspaper reported a story about a local woman, Joanne Kamerling, who had decided to change the ownership on two acres of land that she owned in Weber County, Utah. She placed the property into the joint names of a group of people that included a physical therapist, a prominent local attorney, the former Louisiana Ku Klux Klan leader David Duke, and O.J. Simpson. She didn’t know these people personally, none of them knew each other, and they weren’t looking to become owners. Ms. Kamerling continued to pay the property taxes. Weird.

Yet when it comes to tax planning, Canadians often do something similar: They regularly place assets into joint names with right of survivorship. Okay, so there aren’t many of us adding O.J. Simpson to the title on our homes, but the end result is often about as effective. You see, while joint ownership can reduce probate fees and make for an efficient transfer of assets at the time of death, there can be drawbacks. Consider these 10:

1. A tax liability might be triggered. When you add another individual as a joint owner, you will often be creating a change in beneficial ownership. The result? When adding anyone other than your spouse as a joint owner, you may be deemed to have disposed of that ownership interest at fair market value, which could trigger a tax hit.

2. Your estate distribution might be inappropriate. If you’re hoping to leave an asset to, say, all of your children equally when you die, but have perhaps named just one as a joint owner to avoid probate fees, there is no requirement for your joint-owner child to share the asset with the others. This may not be your intention.

3. Family or legal disputes could result. Continuing with the scenario in number 2 above, those children who are effectively disinherited may dispute the unequal distribution of your estate, and there is no shortage of court cases dealing with these types of battles. Make your intentions clear, in writing, if you do choose to put assets in joint names.

4. You may not save tax. If you think you’ll save tax by placing assets into joint names, perhaps with your spouse, think again. Any income earned by your spouse on his or her half of the assets will generally be attributed back to you unless you charge interest at the prescribed rate. Further, owning assets jointly with a child will not allow you to escape tax on your share of the asset when you die.

5. Exclusive control over assets will be lost. If you add another person as a joint owner on an asset, you’ll no longer have sole control over the asset.

6. Assets could be attacked by creditors. If the individual who jointly owns an asset with you faces the attack of creditors, the full value of the asset you jointly own could be subject to the claim of those creditors.

7. Testamentary trusts will be impossible. It is possible, when you die, to leave income-producing assets to a trust established in your will for your heirs. This trust can pay the tax on the income earned annually after you’re gone. This can save your heirs tax. Any assets held jointly, with right of survivorship, will pass directly to the surviving owner or owners and there will be no opportunity for those assets to be place in a trust upon your death.

8. Portfolio risk profile may not be appropriate. If two or more people jointly own an investment account or portfolio it may be difficult to invest the capital in a manner that meets the risk profile of all owners on the account, particularly when there are large age differences between the owners.

9. A principal residence could become taxable. If you decide to place your principal residence into joint names with, say, a child, it may be necessary for both you and your child to designate that property as your respective principal residences in order to avoid tax on a disposition of the property later. This could be a problem if your child has, or will have, another property that he or she owns; it may expose your child’s other home to tax.

10. Joint tenancy may be permanent. Forget about undoing the joint ownership unless the other owner or owners agree to change things.

Be sure to ask yourself whether you should be concerned about each one of these potential drawbacks. This will help you to evaluate whether joint ownership is right for you.

Entrepreneurs: 25 conseils pour réduire vos impôts

2011-08-23T07:53:00.000-07:00

Cet article, signé Dominique Froment, est paru sur www.lesaffaires.com » le 18 mars 2011.

Pour vous aider à vous retrouver dans les dédales de l'impôt, nous avons passé au crible les recueils des grands cabinets d'experts-comptables Raymond Chabot Grant Thornton, Deloitte et RSM Richter Chamberland, en plus de consulter des fiscalistes. S'il y a peu de nouveautés pour l'année fiscale 2010, de vieux oublis peuvent encore vous coûter cher. Suivis à la lettre, ces 25 conseils pourraient vous procurer des économies de quelques milliers de dollars... et des cheveux blancs en moins !

1) Bureau à domicile : vous pouvez déduire de nombreuses dépenses

Fatigué d'être pris dans la circulation deux heures par jour ? Songez à travailler à votre domicile. Ce choix est d'autant plus attrayant que vous pourrez déduire certaines dépenses comme l'électricité, le chauffage, l'entretien, les impôts fonciers, l'assurance et les intérêts hypothécaires. La répartition des dépenses doit être établie en fonction du nombre de pieds carrés utilisés aux fins du travail. " Si vous habitez une maison de cinq pièces comprenant trois chambres et que l'une d'elles vous sert de bureau, vous pourrez ainsi déduire 20 % des dépenses admissibles ", explique Luc Lacombe, associé fiscaliste chez Raymond Chabot Grant Thornton. Cette mesure est valable au Québec et au fédéral.

2) Déduisez vos dépenses de démarchage

Les dépenses engagées pour recruter ou conserver vos clients, comme les dépenses de nourriture et de boisson, de même que les dépenses de divertissement comme des billets pour un événement sportif, peuvent être déduites. Au fédéral et au Québec, 50 % des dépenses peuvent être déduites; cependant, le Québec ajoute une seconde limite qui se situe entre 1,25 % et 2 % de votre chiffre d'affaires.

3) Ne déclarez pas l'allocation pour votre voiture

Si votre employeur vous verse une allocation pour l'utilisation de votre voiture, celle-ci n'est pas imposable à condition qu'elle soit " raisonnable " et calculée seulement en fonction du nombre de kilomètres parcourus pour le travail. Par " raisonnable ", les autorités fiscales entendent généralement une allocation n'excédant pas 0,52 $ du kilomètre pour les premiers 5 000 kilomètres et 0,46 $ pour les autres kilomètres. Il est essentiel de tenir un registre des déplacements réels.

4) Faites-vous rembourser la TPS et la TVQ

Si, comme employé, vous déduisez des dépenses de votre revenu d'emploi, vous pouvez réclamer le remboursement de la TPS et de la TVQ que vous avez payées sur ces dépenses. On parle notamment des taxes sur les cotisations obligatoires à des ordres professionnels comme le Barreau du Québec, sur l'entretien du véhicule utilisé pour le travail, sur l'essence et l'amortissement (qui représente une partie du prix d'achat du véhicule).

5) Vente de votre entreprise : réduisez votre gain en capital

Vous avez réalisé un gain en capital à la vente d'actions d'une petite entreprise, de biens agricoles ou de biens de pêche ? Réclamez la déduction, qui peut atteindre 750 000 $ (limite à vie), soit 375 000 $ de gain en capital imposable. En fin de compte, ça fera 90 000 $ de plus dans vos poches.

6) Déduisez les dépenses de votre immeuble locatif

Un immeuble locatif peut constituer une bonne source de revenus pour vos vieux jours. D'autant plus que vous pouvez déduire toutes les dépenses raisonnables engagées pour gagner un revenu de location, comme les impôts fonciers, l'électricité, les assurances, les commissions payées pour trouver de nouveaux locataires, l'aménagement paysager, l'entretien et les services publics, les frais comptables, d'emprunt, d'intérêt et de publicité, etc.

7) Minimisez vos revenus de location aux États-Unis

Vous possédez en Floride un condo que vous louez de temps à autre ? Sachez que le revenu versé à un résident canadien pour la location d'un bien immobilier situé aux États-Unis est assujetti aux fins fiscales américaines à un impôt de 30 % retenu à la source. Vous pouvez cependant choisir d'être imposé sur votre revenu net, c'est-à-dire le revenu de location moins les dépenses de location, si cette méthode est plus avantageuse pour vous.

Par ailleurs, lorsqu'un Canadien vend un immeuble aux États-Unis, une retenue de 10 % du prix de vente est effectuée, sauf si le prix de vente est inférieur à 300 000 $ US et que l'acheteur fera du bien sa résidence principale. " Cette dernière exigence semble bizarre étant donné que la maison n'appartient plus au vendeur, mais la loi américaine est ainsi faite ", dit M. Lacombe.

8) Profitez du boum minier !

Les actions accréditives, c'est-à-dire d'une société exploitant une entreprise de ressources (pétrole, gaz, produits miniers), procurent une déduction (de 100 % au fédéral et jusqu'à 150 % au Québec) de leur coût, à condition que les montants recueillis auprès des investisseurs servent à financer des dépenses à risque comme les frais d'exploration et d'aménagement. Et avec le boum minier, certaines de ces actions se sont révélées très rentables. Mais attention, il s'agit de placements hautement spéculatifs.

9) Donnez-en un peu à votre conjoint !

Le fractionnement du revenu peut faire économiser beaucoup d'argent à certains couples. Supposons que vous receviez une rente de retraite de 20 000 $ de votre employeur et que votre conjointe ait un revenu inférieur à 10 000 $. Vous pourriez lui transférer jusqu'à 10 000 $. Votre conjointe paierait environ 3 000 $ d'impôt de plus (10 000 $ au taux d'imposition de 30 %), alors que vous en économiseriez 4 800 $ (10 000 $ au taux de 48 %), soit une économie totale de 1 800 $ pour le couple.

De plus, étant donné le très bas niveau des taux d'intérêt actuels, vous pourriez envisager d'avancer des fonds à votre époux ou conjoint de fait qui gagne moins que vous. Votre compagnon pourrait investir les sommes qui lui ont été prêtées et ajouter les revenus ou les gains en capital réalisés à ses revenus. L'emprunt doit toutefois porter intérêt au taux prescrit en vigueur à la date où il a été consenti, c'est-à-dire 1 % au premier trimestre de 2011. Ce taux reste en vigueur tant que le prêt est en cours.

10) Transférez vos revenus de dividendes

Si vous avez touché des dividendes d'actions de sociétés ouvertes (inscrites en Bourse) en 2010 et que votre revenu est faible (moins de 10 000 $), vous pouvez transférer vos revenus de dividendes à votre conjoint. Si son revenu est plus élevé que le vôtre, il pourra profiter d'un crédit d'impôt pour dividendes (qui varie selon le taux d'imposition). Ce qui, en fin de compte, réduira votre revenu et augmentera les déductions de votre conjoint. " Ce choix ne peut porter que sur les dividendes imposables de sociétés canadiennes imposables ", précise M. Lacombe.

11) Regroupez vos dons avec ceux de votre conjoint

Lorsque les dons d'un couple excèdent 200 $, il est avantageux de les combiner sur une seule déclaration de revenu. Les premiers 200 $ de dons donnent droit à un crédit de 15 % au fédéral (sujet à l'abattement de 83,5 % du Québec) et de 20 % au provincial, alors que tout excédent donne droit à un crédit de 29 % au fédéral (sujet à l'abattement de 83,5 %) et de 24 % au provincial. Sachez aussi que le don d'actions de sociétés inscrites en Bourse représente une stratégie intéressante, puisqu'elle permet d'éviter l'impôt de 50 % (multiplié par votre taux d'imposition) sur le gain en capital de ces actions.

12) Réclamez le crédit pour votre première maison

Vous avez acheté une habitation après le 27 janvier 2009 et vous ne possédiez aucun bien immobilier au cours de l'année ni au cours des quatre années civiles précédentes. Vous avez alors droit à un crédit d'impôt non remboursable de 15 % (sujet à l'abattement du Québec de 83,5 %) sur un montant de 5 000 $. Ce qui peut vous faire économiser jusqu'à 626 $.

13) Profitez d'une éventuelle baisse de revenu

Vous devez rembourser une portion de votre Régime d'accession à la propriété (RAP) à même votre contribution REER sans quoi, la portion non remboursée sera ajoutée à votre revenu imposable. Cependant, si vous prévoyez des fluctuations de revenu, il peut être intéressant de ne pas rembourser la portion minimum du RAP dans l'année où ses revenus sont plus bas ; cela vous permettra de conserver votre contribution REER afin de l'utiliser au cours d'une année où vos revenus seront plus élevés.

14) Vous pouvez retirer des sommes du REER pour financer vos études

Comme avec le RAP (Régime d'accession à la propriété), vous pouvez effectuer des retraits de votre REER sans pénalité pour défrayer le coût de vos études à plein temps ou celles de votre conjoint. Le montant retiré ne peut excéder 10 000 $ par année et 20 000 $ sur une période de quatre ans. Ces retraits sont remboursables, sans intérêt, sur une période de 10 ans.

15) Récupérez les droits au REER de votre conjoint décédé

Lorsqu'une personne décède avec des droits de cotisation au REER inutilisés, il est possible de cotiser au REER de son conjoint au nom de la personne décédée et de déduire ces cotisations additionnelles dans la déclaration finale du défunt.

16) N'oubliez pas les nombreux frais médicaux déductibles !

Au Québec, si vous payez des primes d'assurance médicament à votre travail dans le cadre d'un régime privé, elles sont considérées comme des frais médicaux au même titre que les franchises ou les dépenses qui ne sont pas couvertes par votre plan.

Au fédéral, vous pouvez réclamer l'excédent des frais médicaux payés sur le moindre de 3 % de votre revenu net ou 2 024 $. Au Québec, ces frais sont déductibles en excédent de 3 % du revenu net familial. Le crédit d'impôt équivaut au fédéral à 15 % des dépenses admissibles, multiplié par 83,5 % (pour l'abattement du Québec) et à 20 % au Québec. " Par contre, souligne M. Lacombe, au fédéral, les dépenses engagées à des fins purement esthétiques après le 4 mars 2010 ne sont plus admissibles au crédit d'impôt pour frais médicaux (elles ne l'étaient plus au Québec depuis quelques années). " Parmi les dépenses qui ne sont plus admissibles, mentionnons l'augmentation des seins et des lèvres, l'injection de botox, le lifting, les soins épilatoires, la liposuccion, etc.

17) Déduisez vos frais de garde à 7 $ au fédéral

Tous les frais de garde, y compris les garderies à 7 $, sont déductibles du revenu au fédéral. Au Québec, les frais de garderie à 7 $ ne sont pas admissibles, mais les frais en garderie privée ou à la maison sont admissibles à un crédit d'impôt remboursable variant de 75 % à 26 %, selon que le revenu familial se situe entre 31 670 $ et 141 125 $.

Au fédéral, tous les frais de garde sont des dépenses admissibles pour l'un ou l'autre des conjoints. Au fédéral comme au Québec, le maximum admissible est de 7 000 $ pour chaque enfant de 6 ans ou moins et de 4 000 $ pour chaque enfant de 7 à 16 ans.

" Depuis cette année, au fédéral, un chef de famille monoparentale peut désigner les montants reçus au titre de la prestation universelle pour la garde d'enfants (100 $ par mois) comme étant le revenu d'un enfant mineur ", nous apprend M. Lacombe. À condition de ne pas avoir d'époux ou de conjoint de fait à la fin de 2010.

18) Traitez votre enfant (fiscalement !) comme votre conjoint

Si vous avez un enfant et que vous n'êtes pas admissible au crédit de personne mariée ou vivant en union de fait, vous pouvez réclamer, à certaines conditions, un crédit d'impôt qui peut vous faire économiser jusqu'à 1 300 $ pour une personne entièrement à charge. Autrement dit, si vous vivez seul, votre enfant peut être considéré comme un conjoint et ainsi bénéficier de ce crédit. Par ailleurs, n'oubliez pas que si vos parents de plus de 65 ans, au fédéral, et de 70 ans, au Québec, vivent avec vous et ont un revenu relativement bas, vous pourriez aussi bénéficier d'un crédit pour aidant naturel.

19) Conseillez à vos enfants de produire leur déclaration fiscale

Si vous avez des enfants de moins de 18 ans travaillant à temps partiel ou à temps plein pendant les mois d'été, ils peuvent avoir droit à un remboursement d'impôt si leur revenu demeure sous le montant personnel de base (10 382 $ au fédéral et 10 505 $ au Québec). " Même si aucun impôt n'a été retenu, les parents devraient conseiller à leurs enfants de produire une déclaration fiscale pour augmenter leur limite de cotisation au REER pour les années futures ", précise M. Lacombe.

En outre, une personne de 19 ans ou plus qui gagne au moins 2 400 $ a droit à un crédit d'impôt non remboursable pouvant atteindre 1 552 $ au fédéral et 533 $ au Québec.

20) Faites bouger vos enfants !

Un crédit d'impôt fédéral non remboursable de 15 % est offert aux particuliers ayant engagé des dépenses admissibles (jusqu'à 500 $ par enfant) pour la condition physique de leurs enfants de moins de 16 ans. Au taux d'imposition maximum, cela représente 62 $ de plus dans vos poches. C'est mieux que rien !

21) Devenez parent à moindre coût

Vous avez toujours rêvé d'avoir un bambin, mais vous ou votre conjoint éprouvez des problèmes de fertilité ? Québec accorde un crédit d'impôt remboursable égal à 50 % des dépenses payées dans le but de devenir parent. Le plafond annuel des dépenses est de 20 000 $, pour un crédit maximum de 10 000 $. Parmi les dépenses admissibles, mentionnons les frais d'insémination ou de fécondation in vitro, des sommes payées à un médecin, à un centre hospitalier privé ou pour des médicaments. " Au fédéral, ces dépenses peuvent donner droit au crédit pour frais médicaux ", ajoute M. Lacombe.

22) Si vous avez 70 ans, réduisez le coût de certaines dépenses

Un contribuable de 70 ans et plus peut bénéficier d'un crédit sur ses dépenses engagées pour obtenir des services liés à son bien-être ou à son maintien à domicile, comme les services d'entretien. Le crédit peut atteindre 4 680 $ par année et 6 480 $ pour une personne non autonome. " Le domicile peut aussi être une résidence pour personnes âgées ", souligne M. Lacombe. Pour profiter au maximum de ce crédit, vos dépenses doivent atteindre au moins 15 600 $. N'oubliez pas de conserver vos factures.

23) Profitez de votre conscience environnementale

Si vous avez fait l'acquisition d'un véhicule écoénergétique admissible, Québec vous fait bénéficier d'un crédit d'impôt remboursable pouvant atteindre 8 000 $. Le taux du crédit est établi en fonction de la performance du véhicule sur le plan environnemental (au plus 5,27 litres au 100 km). Ce crédit est applicable aux véhicules neufs acquis ou loués à long terme entre le 1er janvier 2009 et le 31 décembre 2015.

24) Prenez les transports en commun et épargnez

Compte tenu de la hausse importante du carburant, il peut être encore plus avantageux d'emprunter les transports en commun pour vous rendre au bureau. N'oubliez pas que vous pouvez réclamer un crédit d'impôt fédéral non remboursable de 15 % sur le coût de laissez-passer de transport en commun mensuels ou d'au moins quatre laissez-passer hebdomadaires consécutifs. Ce crédit concerne les déplacements en métro, en autobus ou en train.

25 ) Vous pouvez déduire des frais de déménagement

Vous pouvez déduire de votre revenu des frais de déménagement si vous vous êtes rapproché d'au moins 40 km de votre nouveau lieu de travail ou d'études postsecondaires. Ces frais peuvent inclure le transport, l'entreposage, les frais liés à la vente de l'ancien domicile, les droits de mutation et les frais de notaire liés à l'achat de la nouvelle maison.

Business Owners: Why you MUST have a Shareholders Agreement. *

2011-08-21T15:59:00.000-07:00

You’re in business with other individuals. They may even be members of your family. The company is growing and all of you are working hard. You all agree with the direction in which the business is heading.

Does this sound like your company? But have you given any thought to how you and your fellow shareholders will resolve disputes should they arise? What will happen if one shareholder dies or becomes disabled?

A shareholders’ agreement is a contract between shareholders of an incorporated business that puts mechanisms in place to deal with important issues before they become problems. For business owners who are carrying on business with others in an unincorporated partnership, the issues discussed in this article are dealt with through the use of a partnership agreement. Both agreements are an invaluable tool you can use to help ensure that your business grows and prospers.

Let’s look at an example where a shareholders’ agreement could have helped to prevent a major problem. Two sisters, Jane and Mary, started an incorporated catering business in the mid-1970s. They had always been close. In fact, their families live in the same town and they vacation together. As issues arose, Jane and Mary were able to discuss them and reach a mutually satisfactory agreement. Due to this, the sisters didn’t think it was necessary to anticipate problems and therefore they didn’t consider a shareholders’ agreement.

You might also be thinking that the sisters don’t need a shareholders’ agreement. They have always been able to resolve differences, so what’s the point of spending the money to document their business relationship in writing?

It turns out that there was one issue that they never could agree to deal with—who would take over the business when they couldn’t run it anymore? Although they realized that a solution would eventually have to be found, they believed that they could deal with it later, once they were closer to retirement.

Then two events occurred which turned the lack of a shareholders’ agreement (and a succession plan) into a major issue. First, children of each sister became actively involved in the business. However, no thought was given to how those children would interact with each other once the two sisters were no longer in the picture.

Then Jane (now in her mid-sixties) suffered a heart attack. After a fairly lengthy recovery, she realized that working long hours in the business was not something she wanted anymore. So, she thought the time had come to pass on the business to the next generation. However, Mary was still in good health and didn’t share her sister’s desire to begin the succession process.

What follows in such a situation varies. In the case of the McCain family, the end result was a public conflict in which lawsuits were filed and the matter was eventually settled out of court by a New Brunswick judge who was hired as an arbitrator. For smaller businesses (as is the case for Jane and Mary), the business itself may not survive such an event.

How could a shareholders’ agreement have helped?

A shareholders’ agreement would have provided two benefits. First, an executed agreement would obviously set rules that would be followed to resolve business disputes and events such as Jane’s illness. But more importantly, the process of working through an agreement would help the sisters identify possible business risks and let them discuss in advance how they would resolve each issue if it arose and perhaps even set aside resources in advance (such as life, disability or critical illness insurance).

This could have been accomplished when they were getting along, in good health and in a good position to be objective over who should take over the business. In particular, the agreement could have provided for a couple of options—a mandated succession plan where each sister would pass on their interests to the next generation or a buy-sell agreement which would allow one sister to buy the other’s shares at a time when she became unable to carry on in the business due to poor health. Although the sisters could try to negotiate such an arrangement now, the point really is that their interests have already diverged and the issue is causing disharmony in their relationship. An added problem is that Jane is potentially at a disadvantage in any negotiations as she is unable to continue in the business.

In addition to buy-sell rules on disability or death and rules for succession, a shareholders’ agreement will usually include mechanisms to help shareholders deal with important issues such as:

Major business decisions such as a merger;
Rules for employing family members;
Rules for disposing of major assets or a business line;
Remuneration of shareholders and setting work expectations;
Corporate financing decisions;
Rules for determining a price of a shareholder’s interest and the conditions under which the interest can be transferred (in addition to illness or death);
Liquidation of a shareholder’s interest in the event of disagreement, disability or death (this would include buy-sell agreements for shares); and
Rules for resolving deadlocks (such as arbitration, mediation or appointing additional directors).

This list is not exhaustive—any issue of mutual concern to the shareholders of a company can and should be covered in the agreement.

The moral

You should put mechanisms in place now to help you deal with major issues at a time when you and your fellow shareholders are enjoying a good relationship, good health and can be objective. This is usually accomplished through the use of a shareholders’ agreement for an incorporated business or a partnership agreement for unincorporated partners.

* article published in BDO tax series -

Business owners: What You Need to Know When Your CRA Tax Bill Is Wrong

2011-08-21T15:46:00.000-07:00

The Canada Revenue Agency (CRA) doesn't always get it right. If you're a small business owner who has received a Notice of Reassessment stating that you owe a significant amount of tax, interest and penalties, that's the first thing to remember, says Peter V. Aprile.

Writing in The Globe and Mail, he offers eight pieces of advice for small business owners caught in this situation. Two that I found most interesting;

1) The CRA is not interested in making deals.
"...the CRA will not agree to settle a dispute unless persuaded that the taxpayer's position is correct in fact and/or law," writes Mr. Aprile. So trying to get a "knockdown" on the amount owed by whatever bargaining techniques have worked for you in business deals is a waste of time.

2) Save the begging for last and then only if you have to.
Mr. Aprile says that taxpayers with tax bills on their assessments often just ask the CRA to waive or cancel interest and penalties under the taxpayer relief provisions rather than challenging the merits of the assessment. This, he says, "is the tax equivalent to approaching the Minister of National Revenue on bended knee... In most cases, if a taxpayer has an arguable case the better route is to dispute the reassessment".

My main takeaway from this article, though is that dealing with the Canada Revenue Agency about a tax dispute is not a suitable do-it-yourself project. Sometimes you need to spend money to protect money. Connecting with a tax lawyer with tax dispute resolution experience would be the best first step.

For any questions, please contact me.

Business Owners: Don't forget the Tax-Free Car Allowance

2011-08-21T15:33:00.000-07:00

As a business owner, you may receive a tax-free car allowance if you use your own car when performing your business duties. The Canada Revenue Agency (CRA) will consider the allowance non-taxable if it is based on a per kilometre rate that they consider reasonable. The CRA normally considers the allowance reasonable, if it does not exceed the rate set annually by the government. For 2011, the rate is 52 cents/km for the first 5,000 km of business travel and 46 cents/km for business travel over 5,000 km. For the Yukon, the Northwest Territories and Nunavut, the rate is 56 cents/km for the first 5,000 km of business travel and 50 cents for each additional kilometre. The allowance is beneficial because you only have to track the distance travelled on business, not all of the related car expenses.

If the allowance exceeds these amounts, or could otherwise be viewed as being unreasonably high, it may be wise to track actual expenses and kilometres driven, in order to substantiate this higher amount, should the CRA ever challenge it.

Also, note that any allowance not calculated wholly on a reasonable "per kilometre" basis, is in most cases automatically considered taxable by the CRA. This would be the case, for instance, if you received a flat dollar amount per month.

Change of career and back to school? Consider the Lifelong Learning Plan (LLP)

2011-08-21T15:27:00.000-07:00

Lifelong Learning Plan (LLP)

The Lifelong Learning Plan allows you to withdraw up to $10,000 in a calendar year from your registered retirement savings plans (RRSPs) to finance full-time training or education for you, your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children. As long as you meet the LLP conditions every year, you can withdraw amounts from your RRSPs until January of the fourth year after the year you make yourfirst LLP withdrawal. You cannot withdraw more than $20,000 in total.

Eligibility Information

Participants must meet the following criteria:

•complete and send an income tax return every year until they have repaid all of their LLP withdrawals or included them in their income

•enrol in a qualifying educational program at a designated educational institution

OR

•be a person with a disability enrolled in part-time training or education

Other criteria may apply.

Dates and Deadlines

•Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first.

•Amounts withdrawn must be repaid within 10 years.

Business Owners: Don't forget to file your Trust tax return on time...

2011-08-17T14:19:00.000-07:00

To avoid paying penalties, trustees must ensure that they file a trust's tax return by the filing deadline. If you fail to file on time, a penalty of 5% of the unpaid tax is due. A further penalty of 1% of the unpaid tax times the number of months the return is not filed (to a maximum of 12 months) will also be due if the return remains unfiled. Even if the trust does not have a balance owing, the trust return is also an information return. That means that if the trust return is not filed on time or any of the information slips are not distributed on time, a penalty for each failure to comply with this requirement can be charged.

The filing deadline for trust returns with a December 31, 2011 year-end (which includes all inter-vivos trusts) will be March 31, 2012.

Tax Tip Management Fees and Salaries for Business Owners

2011-08-17T06:21:00.000-07:00

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.

Careful estate planning can stave off legal battles!

2011-08-09T09:43:00.000-07:00

below is a good article written by Thane Stenner and published in the Globe and Mail.

Last week I had a working lunch with “Bill,” a client who had sold a significant portion of his family-held business about two years ago.

Over the course of our discussion, Bill told me a close friend from his university days had called him last month. The friend's father passed away back in March, leaving a sizable estate. Unfortunately, that estate was now in the process of an extensive legal battle, as four siblings (from two different marriages), a widow, and an ex-spouse bickered and fought over their share of the pie.

•Why you need an estate plan
•It's time to have 'the talk' with mom and dad
•Planning for your estate

“What a mess,” Bill said, shaking his head as he waited for his grilled salmon. “When I go, I want things to be well-organized – easy to deal with.” Bill paused for a moment before looking at me and adding: “And I want everybody to know exactly what I want done with my money.”

Bill's concern is well founded. In my experience, there's a direct relationship between the size of one's estate and the potential for conflict. The higher the stakes, the higher the chances for litigation.

Unfortunately, as I told Bill, there is no such thing as a litigation-free estate. Even the most well-organized, well-constructed estate may be challenged by disgruntled heirs or creditors. That said, there are things high-net-worth individuals can do to discourage litigation, and diffuse inter-family conflict before it leads to courtroom drama.

Start the process early

Estate planning can be detailed, complicated work. By starting early, high-net-worth individuals have the time to seek professional counsel and consider options carefully. This in turn clarifies intentions, and makes ambiguities and disagreements less likely, which should help deter claims against the estate.

For business owners like Bill, an early start is even more critical. Succession plans need put in place well in advance of the owner's retirement date, particularly if the intention is to groom a particular family member to take over the business.

Avoid ‘surprises’

Most estate litigation is born from what I call the “awful surprise”: an heir discovers they've been left much less than they thought they would, or have not been recognized as an owner of certain assets (the family business, for example). The news generates shock, alienation and anger. The desire to see justice done leads the heir to challenge the will, regardless of the ultimate chance of success.

Most high-net-worth individuals work hard to avoid this kind of dynamic. They communicate their estate intentions to heirs, and, if appropriate, to business partners and associates. If they know their family situation is explosive, they set up a family meeting or formal conference – using a professional mediator, if necessary –to let heirs know what their estate intentions actually are.

Use trusts

Trusts are an extremely flexible, extremely effective tool for organizing high-net-worth estates. Properly written, trusts can accomplish a number of important estate planning goals: They can reduce taxes, increase privacy, protect assets from creditors, protect family assets from future divorces, and structure an ongoing charitable contribution.

Trusts can also be an excellent way to avoid estate litigation. By putting a portion of your assets/estate into a trust, you can ensure an inheritance passes to specific people (adult children from a first marriage, for example). Another possibility is to put a family asset (the family cottage) into a trust instead of bequeathing it to a specific individual. That way all family members can enjoy it without bickering about who owns it. Ultimate ownership should still be completed though.

Assign a professional trustee

As the “manager” of an estate, the trustee wields a tremendous amount of financial power. While appointing a family member has its advantages, it’s unlikely the average person has the time, the knowledge, or even the inclination to properly administer a multi-million dollar estate at the same time they’re grieving for a loved one.

One way to get the best of both worlds is to appoint two estate trustees: (a) a family member, and (b) a financially competent professional (typically a CA, lawyer, or a trustee from a respected financial institution) who knows the family well. By appointing a trustee from outside the family who is legally bound to act in the interests of all beneficiaries, you can eliminate claims of bias or conflict of interest before they happen.

Update your will

Changes in business or family relationships can create friction among heirs. By regularly updating their wills, high-net-worth individuals can avoid making that friction boil over into legal challenges and/or inter-family disputes.

Reviewing a will every two years is usually a good rule of thumb. Such a review needn’t take more than an hour – the idea is to check to see whether everything is still in order. If a significant life or financial change takes place earlier than that (a marriage, a divorce, a liquidity event, etc.), a more frequent update may be warranted

Business owners: In trusts you can trust to find tax savings...

2011-08-09T09:39:00.000-07:00

Trusts are wonderful tools for the wealthy, but business owners should use them, too. They can be worthwhile for amounts of money or assets of $150,000 – even less in some circumstances. The cost of setting up a simple testamentary trust – a trust set out in a will that takes effect when you die – can be an initial $2,000 to $3,000, mainly for legal fees.

The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you’re still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.

“If you have enough, you might be okay with giving it up today,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you’ll take the prudent approach and pass on whatever is left in a will, she says.

Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.

An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child’s living expenses or even to buy a car.

Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.

Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client’s children from the first marriage.

In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.

But trusts have other advantages.

For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.

You can spread your largesse around, using “sprinkler” trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.

Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, “you have to look at whose money is generating the income.” It must belong to the children.

Keep it private

If privacy or probate is an issue, consider a trust.

When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.

“Anyone” might include family members with an axe to grind or even charities hoping to approach your beneficiaries.

“Certain charities look at the affluent,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. “They want to follow up with the beneficiaries looking for donations.”

Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.

Entrepreneurs: How do you handle leadership transfer?

2011-08-08T08:06:00.001-07:00

How do you transfer leadership of an organization to the next generation?

Leadership succession requires workers and managers to struggle with uncertainty and the other emotions that come with change. Sometimes that change is managed so badly that the organization or business fails.

Therefore, many organizations take a "whole business" approach to leadership transfer in which they view the change's impact on the entire business, not just on the current leader and the successor. Usually this is a sustained process that exists over many years and involves all stakeholders, including workers, customers, suppliers, governors (or boards of directors) and other interested parties.

The first step in this process is persuading the leader to prepare for an exit. For many organizations, this is an automatic process instituted by governing boards as part of proper management. However, for many family firms, the founders do not want to consider the possibility. Perhaps they fear the business may not continue without them, or they cannot identify a proper successor, or they do not want to face the future or they are simply too busy.

But succession planning is more important today than ever. Generally it involves a seven-step process:

1.The leader identifies and understands his or her personal dream and vision
2.Those involved in the organization must identify their own visions
3.There must be a strategic plan for leadership transfer
4.Designated successors must be identified, prepared and trained
5.There should be a gradual transition to new leadership
6.Leadership or ownership must be transferred
7.The leader or owner must have a well-thought-out estate plan

Business Owners: requirements to export to the U.S.

2011-08-08T08:00:00.000-07:00

What permits or other licenses are required before shipping products to the U.S.?

The answer to this question depends on what product is being shipped. Some products can be exported to the United States as easily as they can be shipped within Canada, while the export process for other products may involve all sorts of red tape. Generally, products that might damage health (such as pharmaceuticals and foods) or security (such as explosives and radioactive isotopes) are more likely to require permits and other licenses than more innocuous products. Similarly, products that are the subject of trade disputes (softwood lumber), protectionist measures by the United States (Buy American requirements) or quota systems (cheese) are more likely to be subject to regulatory constraints.

The Canada Border Service Agency offers Exporting Goods from Canada - A Handy Customs Guide for Exporters, which provides helpful information for exporters and would-be exporters, and which includes links to other sources of export information. A good general overview of exporting is Canada Business's online resource for exporting. Western Economic Diversification Canada has links to information on exporting for small businesses, and BDC's site has many useful articles as well as information on BDC programs such as financing and consulting.

Acquiring a franchise business...

2011-08-01T19:17:00.000-07:00

We're looking to acquire a franchised business. Any tips or due diligence processes that may vary from acquiring a non-franchised business?

The due diligence is the same for any other comparable business; however, the following are some franchise-specific issues.

You will want to thoroughly review the franchise agreement, and you should also have it reviewed by a good commercial lawyer who specializes in franchises.

Before signing a franchising contract, you should be able to answer the following questions:

•Does the franchisee have an exclusive territory?
•Is the franchise transferable? How long is left on the existing franchise agreement?
•Is the franchise renewable? For how long?
•Is it renewable at the franchisor's or the franchisee's option?
•What am I getting for the franchise fee? Accounting systems? Operating systems? Lower prices on supplies?
•What exactly am I buying? Am I buying the right to use the name? Is the building part of the deal, and do I own the real estate? Will I be paying rent?

Confirm that the current franchisee is in good standing with the franchisor, and talk to other franchisees within the group to ensure that there are no hidden issues with the franchisor. For any other question, please do not hesitate to contact me.

Business owners: What’s your business worth?

2011-08-01T19:12:00.000-07:00

Whether you're passing on the company to a family member or selling to outside interests, you will require a business valuation that establishes a realistic and fair price. This value will be an important focal point of your transition plan.

Valuating a business is not a simple task. The number you have in mind may differ from that of your family successors, potential buyers or tax assessors. It's probably best to call in a specialist who can look at your assets, liabilities and goodwill with clear-eyed detachment.

Different methods can be used to arrive at your business valuation, and they can be used alone or in combination.

Asset-based approach

This method totals up all investments made in the business to date. It does not account for the depreciation in the value of machinery that may be several years old, or other assets that have declined in value.

Business comparison
This approach determines a company’s market value by comparing it to similar companies in the field and transactions that have occurred in the recent past. For a highly specialized business, it may be difficult to research comparable transactions.

Company's past earnings

This method calculates a company’s value by its past earnings and profits. Those earnings and profits, however, are not a guarantee of future growth.

Doing it yourself

If you are intent on determining the market value of your company yourself, here are some pointers. First, determine just what it is that will be sold — or passed on — to your successor(s) or buyer(s).
•Do you have significant physical assets, or are you selling goodwill and client lists? How valuable is that client list, and does it include quality clients? Can you charge a premium for your client list, business name or logo?
•If you have equipment, how much equity do you have in it? If it's not leased, consider asking a machinery dealer for an appraisal.
•How about receivables? What state are they in? What percent are at 60, 90 or more days?

Once the assets have been added up, look at your liabilities. These include all outstanding company debts, of course, as well as variables such as unresolved lawsuits.

Some industry groups publish business valuation data based on sales and net cash flow. This data can be used to estimate the value of your business. Research firms that are similar to your own to see how much they sold for. Your company, however, may be a model of efficiency and profitability that outstrips all the rest, so those numbers are not necessarily the best basis of valuation.

Getting professional help

Business valuation requires some legwork and a lot of research. Do you have the time, the proper tools and the inclination to do it? If not, you might consider using a business valuator, who may be an accountant or a lawyer and should be experienced enough to determine the best method or combination of methods for the task at hand.

Your present lawyer or accountant may be able to recommend someone. Be sure to ask for references of similar business valuations that he or she has done.

Improving that number

Whether you’ve done the valuation yourself or had it done by a professional, once you've arrived at a realistic number, it's only reasonable to wonder how that number can be improved. BDC Consulting has the resources to provide you with succession planning and customized management solutions to make your company more valuable.
•One way of enhancing value is to increase sales — the "top line" — and reduce expenses such as owner perks to improve the "bottom line."
•Do you have variable liabilities such as outstanding lawsuits? If so, these should be settled before you begin the transition process.
•If you are the business — that is, if you are closely identified with the company — consider giving more responsibility to employees. They can make the transition to ownership and thereby render your company more valuable.
•Finally, your business may be more valuable in pieces than as a whole. A buyer may find your real estate holdings more attractive as an asset than as part of a potentially risky business.

There are many ways to estimate and enhance the value of your company prior to your business succession, and it pays to do your research and find a qualified business valuator. A professionally derived valuation will contribute to a smooth transition and continued harmony among family members.

Family successions: managing the emotions.....

2011-08-01T18:59:00.000-07:00

You’re about to retire, and the ambitious daughter you hoped would be an ideal successor announces she wants out of the business. Your brother jumps at the opportunity to run the company, but you don’t feel he’s got what it takes. Resentment boils over, and family turmoil threatens to sink your firm.

This is a typical scenario at many family-owned companies, according to Theodore Homa, Senior Partner, BDC International Consulting Services.

“Emotional issues can create a volatile dynamic in family businesses,” Homa says. “These entrepreneurs often have made personal sacrifices to keep their companies afloat, so it’s hard for them to separate business and personal relationships,” he says. “In the end, those emotions can get in the way of making decisions that are good for the business.”

Unresolved family issues, such as sibling rivalry, put a strain on business successions. According to the Canadian Federation of Independent Business, 33% of family businesses survive in the first generation and only 15% survive the second.

Homa provides these pointers to help business owners proactively manage emotional issues in family successions:

•Give yourself a lot of lead time to plan and execute – realistically at least 2 years. Family business transitions take much longer than one realizes.
•Formalize your family succession plan to avoid disagreements down the road. Maintain an open dialogue with family members about your plans and get them involved. Keeping them out of the loop can simply sow family discord.
•Create trust in your decisions, especially when it comes to the transfer of leadership. When you choose who will take over the helm, communicate a clear action plan to family members and employees. Reassure them that you have the mentoring and training in place to develop your successor in all aspects of the business.
•Define roles and responsibilities and even put them in writing. For instance, a family member might be a stakeholder in the business, but that doesn’t mean that he or she automatically has the right to be involved in daily operations. By clarifying these roles, especially in areas such as what is the purview of management in running the business on a daily basis versus what is required for governance of the business, you can avoid unnecessary misunderstandings.
•To address potential conflicts in the hiring of relatives, be sure you have clearly defined job profiles that outline exactly what you need in terms of experience, skills and education. After all, you don’t want to feel obliged to hire family members to do a job if you believe they are ill-equipped. At the same time, you don’t want to pressure family members to accept jobs that they aren’t suited to or interested in.

Seek external advice to resolve issues objectively. Experienced consultants can give you a third-party perspective that is invaluable. You can also turn to an advisory board, or even a formal board of directors, to provide a neutral point of view and help you through the various steps of the transition.

When buying a business, is the new owner liable for any outstanding liabilities??

2011-08-01T18:56:00.000-07:00

QUESTION:

When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?

ANSWER:

Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.

Asset Purchase

Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.

The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.

Stock Purchases
If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.

A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.

For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.

A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.

In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option

Factors to consider when requesting financing for a start-up

2011-08-01T18:53:00.000-07:00

QUESTION:

What are the most important factors to consider when asking a financial institution for financing to start a business?

ANSWER:

Most bankers look at four factors:

Your professional profile

Bankers try to evaluate your ability to manage the project. You must show that you have the experience, skills, determination and self-confidence necessary to successfully carry out your project.

Your project's viability

You should have a business plan that is clear, structured and short, but also covers all the elements of your business idea. You need to present at least two years of financial projections as well as an analysis of market size, market potential and positioning.

Your financial strength

You will have to reveal your personal and business net worth (assets minus liabilities) so a banker can judge your ability to meet your financial obligations. A banker will also look at your past credit history to gauge the future.

Your collateral

Bankers often also look for assets to secure a loan. They invariably ask for some investment on your part as proof of commitment. This investment might have been raised by you privately.

Of all these factors, perhaps the most important is that you have planned out your idea beyond the idea stage. Before approaching a bank for financing, you should be able to predict, and answer in detail, all possible questions about your business, such as how you are going to do it and what its potential is.

You should also have a clear concept of where you want to be in five years, and have a list of steps required to get you there. If you can convince a banker of this, many of the other factors can be negotiated.

Entrepreneurs: The different business structures available in Canada....

2011-08-01T18:50:00.000-07:00

Now that you have decided on starting your own business, you will have to determine what business structure or form of organization suits your needs.

The structure of your business will depend on whether you want to run your business yourself or with a partner or associates. There are four types of business structures: sole proprietorship, partnerships, corporations and cooperatives.

Sole proprietorship

With this type of business organization, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.

Advantages:

•Easy and inexpensive to form a sole proprietorship (you will only need to register your business name provincially, except in Newfoundland and Labrador)
•Relatively low cost to start your business
•Lowest amount of regulatory burden
•Direct control of decision making
•Minimal working capital required to start-up
•Tax advantages if your business is not doing well, for example, deducting your losses from your personal income, lower tax bracket when profits are low, and so on
•All profits will go to you directly

Disadvantages:

•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Income would be taxable at your personal rate and, if your business is profitable, this may put you in a higher tax bracket
•Lack of continuity for your business, if you need to be absent
•Difficulty raising capital on your own

Partnerships

A partnership would be a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, you would combine your financial resources with your partner into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As a partner, you would share in the profits of your business according to the terms of your agreement.

You may also be interested in a limited liability partnership in the business. This means that you would not take part in the control or management of the business, but would be liable for debts to a specified extent only.

When establishing a partnership, you should have a partnership agreement drawn up with the assistance of a lawyer, to ensure that:

•You are protecting your interests
•That you have clearly established the terms of the partnership with regards to issues like profit sharing, dissolving the partnership, and more
•That you meet the legal requirements for a limited partnership (if applicable)

Advantages:

•Easy to start-up a partnership
•Start-up costs would be shared equally with you and your partner
•Equal share in the management, profits and assets
•Tax advantage, if income from the partnership is low or loses money (you and your partner include your share of the partnership in your individual tax return)

Disadvantages:

•Similar to sole proprietorship, as there is no legal difference between you and your business
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Hard to find a suitable partner
•Possible development of conflict between you and your partner
•You are held financially responsible for business decisions made by your partner (for example, contracts that are broken)

Corporations

Another business structure is to incorporate your business. This can be done at the federal or provincial level. When you incorporate your business, it is considered to be a legal entity that is separate from the owners and shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation.

Advantages:

•Limited liability
•Ownership is transferable
•Continuous existence
•Separate legal entity
•Easier to raise capital
•Possible tax advantage as taxes may be lower for an incorporated business

Disadvantages:

•A corporation is closely regulated
•More expensive to incorporate than a partnership or sole proprietorship
•Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government
•Possible conflict between shareholders and directors
•Possible problem with residency of directors, if they are in another province or the majority are not Canadian

Entrepreneurs: taking care of your business transition via Employee Share Ownership Plans (ESOPs)

2011-08-01T18:44:00.000-07:00

QUESTION:

I would like information on Employee Share Ownership Plans (ESOPs) as a means of business succession. I am especially interested in ESOPs from a tax perspective.

ANSWER:

Generally an ESOP allows qualifying employees to purchase shares in their employer's company, with or without monetary assistance from the company. Many companies are using ESOPs as a form of succession when there is no other successor apparent.

Whether an ESOP plan is created for succession or employee loyalty purposes, the plan must have a high participation rate to be effective. The type of business is also relevant. If it involves manufacturing and physical assets, valuations are easier to determine. The plan must be administered, which requires some work. That is why many ESOPs involve union structures that can help with administration.

ESOPS also have many tax and legal implications for companies and their owners, so anyone considering them should seek professional help. Lawyers, accountants and some BDC consultants can help companies navigate the tricky route to establishing an ESOP.

Q & A: Minimizing taxes due to share transfers

2011-08-01T18:41:00.000-07:00

QUESTION:

I want to gradually transfer my shares to my 18-year-old son. How can I transfer these shares to minimize personal and corporate income tax?

ANSWER:

You should ask a tax expert such as an accountant, but I can provide a general overview of the tax system. In this case, your corporation will likely be unaffected from a tax point of view by any transfer of shares if you hold all the shares. The transfer becomes largely a personal tax issue for you and your son.

Transferring shares to your son can be done in two ways – as gifts or as sales. In both cases the shares must be assigned a value, which can be determined by an accountant or lawyer who specializes in this field. This value will be affected by the earnings of your company and whether the shares have been paying you dividends, among other issues.

If you give the shares to your son, there may be tax implications for you. If the shares are deemed as having been "sold" at the time, you may be taxed on your capital gains. However, for any income incurred by these shares, your son will be taxed.

If you sell the shares to your son, the effects would be roughly the same, but the numbers may change for each of you. Your personal capital gains tax may be lower, and your son's capital cost base will be higher, so this may be a way of deferring his tax owed to the future.

You plan to transfer shares gradually, but there will be a point where your son has a sizeable financial interest in the company. If you hope that he will one day take over management of the company, ensure you've taken the standard steps involved in succession planning. Is he competent or willing to take over, and do you have a proper training program to ensure the company will not be damaged by the succession?

Also, there may be a need for an interim manager to run the company until your son is ready. If that is the case, this manager may also want some financial stake in the company, such as a percentage of shares.

General aspects to consider before acquiring a business

2011-08-01T18:39:00.000-07:00

What are some of the most important aspects to look for in buying a business?

The guiding principles of acquisition are called synergies, value and equilibrium. Synergies must occur between the 2 companies that are merging or between the buyer and the company being acquired. Ideally the companies that are merging should have similar or complementary product or service lines, and their marketing and sales methods should be in harmony.

There are 3 areas where synergies should occur:

•Marketing and sales (new products and services, new clients or new markets should create more revenues)
•Operations (there should be volume discounts or better ways and means to create and deliver products and services, or both)
•Finance and administration (the merger or acquisition should improve cash flow and fuel additional business projects)
If there are no synergies, there should be no acquisition. Value, meanwhile, is the capacity to generate profits and cash flow. Profits and cash flow create value and support growth: profits generate equity that increases value, and cash flow builds working capital and strengthens the day-to-day operations.

A business that cannot create value should not be acquired.

Equilibrium is striking the right balance. With regard to synergies, the acquisition should be feasible operationally and financially. In other words, a very small company should not acquire a very large company, and a company that manufactures widgets should probably not acquire a company that manufactures clothing. Another kind of equilibrium is in the potential to create value: the investor should be able to add value to the company being acquired and vice versa.

An acquisition that is not in equilibrium with positive synergies and value should not be made.

Management buyout demystified ...

2011-08-01T18:36:00.000-07:00

As a business lawyer, I structure complex transactions on a weekly basis, today I would like to take the time to explain you what is a MBO :)

As a generation of baby boomers approach retirement, buyouts can be expected to grow in popularity as a way for senior managers to acquire the firms where they work.

In their simplest form, management buyouts, or MBOs, see a management team pool resources to acquire all or part of the business they manage. Leveraged management buyouts, or LMBOs, are similar, except the buyers use company assets as collateral to secure financing.

Transactions of this sort typically see management teams take full ownership of a firm, using their expertise to grow the business afterward. Funding usually comes from a mix of personal resources, external financiers and the seller. Internal processes and transfers of responsibilities remain confidential and are often handled quickly.

Risk is reduced by the fact that continuity of the company's business is better assured when the people who have managed it are its buyers. Since the purchasers are an experienced management team who understand the business and its needs, existing clients and business partners often feel reassured, improving the prospects for a solid return on investment.

Such buyouts are not to be confused with MBIs, or management buy-ins, in which a team of outside managers buys a business, often with financing from private equity investors. Another variation on this theme is the so-called Buy-In-Management-Buyout, or BIMBO, a combined MBO and MBI, in which an external group of managers buys into the business and joins forces with an internal management team.

A number of issues need to be considered when contemplating a management buyout.

Be transparent
Approach the company owner with your proposal, and ask for permission before disclosing confidential information to financiers.

Check the feasibility of the initiative
Be sure the venture is profitable. Keep in mind that management buyouts, whether leveraged or not, require substantial financing that can typically reduce a company's cash flow. Cost cutting, improved productivity or increased revenues may be needed to cover these financing costs.

Any thorough financial analysis will uncover figures on cash flow, sales volume, debt capacity and growth potential. These in turn will provide valuable information on the fair market value of the business you are eyeing.

Choose your management team well

You will need to put in place people with the right combination of skills to take the company through a transition period and run the business profitably.

Establish a fair way to share equity
There should be reasonable incentives for everyone involved in the process.

Remain low-key

Keep a low profile until the paperwork is signed. You don't want to reveal your interests to too many potential competitors and instigate an auction that causes the price to rise.

Retain good relationships
If your buyout bid fails, you may end up working with the same colleagues in the future.

When power transfers within a company from seller to buyer, both must first agree on a sale price, which is confirmed by a valuation. Managers then assess how many shares they are in a position to purchase immediately, and draft a shareholder agreement. Financial institutions are approached, a transition plan is developed that incorporates tax and succession planning, and managers buy out the owner's stake in the business with assistance from the lender. The full transfer of decision-making and ownership powers to the successors can take place gradually, over a period of months or even years. Managers then pay back the financial institution at a time and pace that will not unduly slow the growth of the business.

How to finance an MBO/LMBO
It's critical to develop a strong business plan before making an acquisition of this type. Forecasts should be credible so you and your partners know what you're getting into. Personal and business referrals can help you secure the confidence of bankers. A single institution is usually involved in smaller buyouts, while in larger transactions, several institutions may handle the financing.

In leveraged buyouts, business assets must be evaluated to determine how much equity is available for financing. The lender will then use the assets as collateral, adjusting the interest rate charged based on the risks associated with the transaction.

In some occasions, the financer will ask the sellers to finance a portion of the sale as a way of demonstrating their commitment to the venture and confidence in the management team. It's always worth shopping around for the best terms.

The following are the most common types of financing used, often in combination, in such ventures:

Personal funds

Can help secure the confidence of a financial institution, add equity to a transaction and share risk. Managers often have no choice but to invest a substantial amount of their own wealth in such ventures, even refinancing their personal assets, as a way of demonstrating their commitment.

Loan or credit notes

When they come from banks, they are often used to purchase shares from an owner. This appeal of this type of financing is in its simplicity: assets are used as collateral, and interest rates are lower as a result.

Seller financing

Can set a schedule for payment over period of years and involve credit notes, loans or preferred shares. This reduces demands on cash flow when the transaction occurs. Likewise, an instalment purchase of stock allows sellers to maintain some control over the business until they have been completely paid off.

Stock sales to employees

Can help reduce the cost of financing a management buyout while giving employees new productivity incentives as full control over the business shifts to the management team.

Subordinate financing can complement a management team's investment by bringing together features of both debt and equity financing without diluting ownership. If a profitable business maximizes financing for its assets but managers' personal funds are still insufficient for a transaction, subordinate financing can fill the gap. Repayment terms are established at time of transaction.

Venture capital can provide long-term, unsecured equity financing. This inevitably involves a partnership in which the venture capital group purchases shares in a business in exchange for ownership rights. There is no fixed repayment schedule since capital gains, or increases in the firm's share value, determine when the financing can be paid down. Venture capital investments can provide the new owners with great insight and expertise, but buy-back costs are undetermined at the outset.

Canadian business owners: 4 ways of custom financing an acquisition

2011-08-01T18:32:00.000-07:00

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.

Lenders interested in fixed assets

Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.

The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.

Lenders interested in the whole package

BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.

Companies that have a competitive advantage in a fast-growing industry should consider Subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.

Equity investors

Depending on your situation and the amount you need to raise, you can seek out Venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.

Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favourably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.

Strategic investors

These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.

How to evaluate a proposed business acquisition...

2011-08-01T18:30:00.000-07:00

below is a great article prepared by the BDC.

There's nothing simple about estimating the value of a business you want to acquire. Valuating a business is not a simple exercise, nor is it an exact science. It simply provides a theoretical value that will give you an idea of the fair price to pay for a business.

You mustn't rely only on the judgement of your accountant or of the seller. It is recommended that you have an expert, who specializes in business valuations, produce an independent report. While this is an unregulated field, the Canadian Institute of Chartered Business Valuators (CICBV) does provide guidelines and a code of ethics.

In general, you will rarely be able to compare your potential acquisition with a similar transaction. There is little information available on such transactions and they may not even apply to your specific conditions. Also, the terms may be too closely related to a particular sector to be useful.

3 degrees of assurance
According to the CICBV, there are three types of reports, they vary from the most general to the most detailed:
•Calculation report: provides an approximate valuation for initial planning
•Estimate report: ideal for preliminary negotiations, succession planning, and situations involving important issues that are subject to budgetary constraints
•Comprehensive report: appropriate in situations that involve high risks, important issues, or when there are legal proceedings
•To prepare their reports, evaluators look at the facts and financial data, formulate a conclusion, and the possible impacts on the estimated value. They will also add a disclaimer regarding the scope of the mandate, which varies with the quality of the report provided.

Work required
To produce a calculation report, the valuator reviews and analyzes the financial information and may meet with management.

The estimate report takes the same approach but is more exhaustive.

In the comprehensive report, the valuator provides an opinion. It is a more in depth analysis of the business and it reviews:
•Patents, bylaws, and shareholder agreements
•Business' economic situation and sector
•Market conditions and the competition
•Clientele and any contracts, backlog of orders
•Suppliers contracts and commitments
•Visit to the business
•Financial and forecast data
•Rationale for the choice of discount and capitalization rates using accepted financial models

Basic valuation principles
The first step in the process of establishing a price consists of determining the fair market value of the business. The three main valuation principles are:
•Value is dependent on expectations
•Value is dependent on future cash flows
•Value is dependent on tangible capital assets

Valuation methods and techniques
There are two basic ways of determining the value of a business:

Asset-based
•Book value: company's net worth, which is equal to assets minus liabilities. What is shown in the financial statements
•Liquidation value: assumes that the business sells all its assets, pays off all its debts, including taxes, and distributes the surplus to its shareholders

Earnings and Cash flow
•Discounted cash flow: value is based on the future cash flows of a business
•Going concern value: assumes that the business will continue operating and compares the current cash flows with future inflows to make projections
Some of the most common techniques used to calculate a business value include:

Capitalization of typical net earnings
A value can be attributed to future earnings resulting from the acquisition. To obtain the going concern value, a capitalization multiple is applied to these earnings and non-operating assets are added.

Capitalization of typical cash flows
The same as above with the exception that cash flows, rather than earnings, are capitalized.

Discounting of expected future cash flows
Consists of determining the most likely future cash flows and discounting them at the valuation date.

Determination of adjusted net assets
Liabilities are subtracted from the determined fair-market value of the assets. It is used for businesses, such as those in the real estate sector, whose value is asset-related rather than operations-related

For more information, consult the Steps to Capital Growth guide included on Canada Business website.

Other rules
In some sectors of the service industry the value of a business is based on a multiple of revenues. For example, an insurance brokerage firm can be worth 1 to 1.5 times the commissions received over a period determined by negotiation.

In the final analysis, purchase conditions and the final price paid will be determined in your negotiations with the vendor.

for more information about this article, please visit www.bdc.ca

Holding Company 101: What is it and Why do you need one?

2011-07-22T13:49:00.001-07:00

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.

Business Owners: 5 Myths that you should know about Family Trust!!

2011-07-22T13:45:00.000-07:00

Over the past 3 years, I've been blogging extensively about the various advantages of using a Family Trust for business owners and owners/managers -

On a daily basis, I spent a considerable amount of time educating people on the benefits of using such structure. Today, I would like to share an excellent article written by Chaya Cooperberg published in the Globe & Mail.

The Truth about Family Trusts.

The perception of family trusts as vehicles for only the extremely wealthy is one of the misperceptions about trusts that Ms. Blades wants to put to rest. Here are her top five myths and realities about the structure.

Myth #1: They are inflexible.

Reality: Trusts can be quite versatile and are often the best option to provide for disabled beneficiaries or for children of blended marriages. The terms of the trust can vary. There can be a fixed-interest trust, where an amount is invested and the beneficiary gets the money. Or a trustee can be appointed to pay it out. You can also stagger the payments so that funds are paid out when the beneficiary reaches certain age milestones.

Myth #2: They are mainly used to avoid estate taxes and probate costs.

Reality: Trusts can offer significant tax benefits and avoid probate costs, but they also have other benefits like asset protection, investment management, and protection for disabled family members or the client if they become incapacitated.

“It’s always a cost benefit analysis with a trust,” says Ms. Blades. “You would never just look at the financial benefits such as how much tax is saved; you would also look at the beneficiary benefits. You need to do the analysis to see when and where it is worthwhile.”

Myth #3: They are only for the very wealthy.

Reality: Trusts can be set up for anyone with specific needs and are useful vehicles for passing funds to children or grandchildren. There are multimillion-dollar trusts and there are much smaller trusts.

Myth #4: You lose control.

Reality: Trusts are customized vehicles designed in line with your wishes and ensure that cash is ultimately transferred to beneficiaries as desired. While you no longer own the money, you can say when and how you want it used. Your control comes in under the terms and conditions you’re drafting.

Myth #5: Trusts are complicated and onerous to manage.

Reality: The provisions of a trust can be as simple or as complex as you want or need. To set up a trust, you would first need to meet with a will and estate planner or a lawyer to draft the agreement. It is also important to get separate tax advice from an accountant to ensure the trust is a worthwhile vehicle for you. If you make the trust a part of a will – this type of trust is called a testamentary trust – the cost will be built into the cost of the will. If you create a trust that takes effect while you are alive – known as a living trust or inter vivos trust.

What is the role of a Business Lawyer?

2011-07-20T12:49:00.000-07:00

A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when I use the term "business lawyer" I think of all of the above.

What types of clients do I represent?

On a daily basis, I represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and I advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters. Further, my primay focus is on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs.

Do I need a business lawyer?

If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.

A business lawyer can advise you of the applicable laws and help you comply with them.
A business lawyer can help steer you away from future disputes and lawsuits.
A business lawyer can help protect your tangible and intangible assets.
A business lawyer can help you negotiate more favourable business transactions.

Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.

Over the years, I have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, I am extremely sensitive to that concern and actively work with you to control legal costs. I believe it is in both our interests to discuss the scope of work and the costs involved before I provide any legal services.

You should seek a business lawyer if you or your company are . . .

- Starting a new business; (partnership, sole proprietorship or corporation)
- Issuing shares, stocks, options, warrants or convertible notes;
- Hiring your first employees (i.e. employment agreement);
- Negotiating a new lease;
- Acquiring another business;
- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)
- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)
- Selling your company;
- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)
- Planning to create and develop new ideas, products and services;
- Seeking to resolve internal disputes. (i.e. shareholders agreement);
- Any other business/legal issues

For any questions on the above, please do not hesitate to send me an email at hugues.boisvert@andrewsrobichaud.com or at +1.613.237.1512 x 255

Professionals: The Tax Advantages of Incorporating a Professional Corporation

2011-07-20T10:22:00.000-07:00

The Tax Advantages of Incorporating for Professionals *

As a professional, there are tax planning opportunities that become available when you incorporate. Before you decide to incorporate to take advantage of these opportunities, however, there are a number of important considerations to make. Unlike business people in general, you must consider the specific rules that govern your profession when determining whether incorporation makes sense for you. In particular, you need to determine the ownership rules that apply, as certain provinces restrict who can own shares of a professional corporation (PC). You also need to determine what activities your profession will allow your PC to engage in. Both can impact on the tax planning available.

In this article, we will outline the main tax planning opportunities available along with the key considerations to make when deciding whether or not to incorporate.

Income Splitting

The ability to split income with a spouse or an adult child is one of the main benefits of incorporation for businesses. However, it is necessary for professionals to consider the ownership rules of their profession as this will determine whether income splitting benefits are available. In particular, you will need to consider who is allowed to hold shares of the PC. Certain provinces will allow shareholders of the PC to include the professional along with their family members, while other professions will allow only members of the profession to hold shares of the PC. Where family ownership is allowed, some provinces also restrict the use of trusts.

Where the rules allow, you can benefit from income splitting where your spouse and adult children are allowed to subscribe for shares of the corporation and receive dividends from the profits of the PC. The advantage here is the ability to have the dividends taxed in the hands of more than one person, which generally means that the overall tax on the dividends is lower. Note that due to the income-splitting tax (often referred to as the kiddie tax), the benefit of splitting dividend income with minor children is not available.

In the case of your spouse, you’ll also need to ensure you don’t run afoul of the corporate attribution rules. These rules may apply if you transfer property or make a low-interest loan to your PC where your spouse is or will become a shareholder. Where these rules apply, an imputed interest penalty will be included in your income and income splitting will not be achieved. Note, however, that the corporate attribution rules will not apply for any period that the corporation qualifies as a small business corporation (SBC). A corporation qualifies as an SBC if:

It’s a Canadian-controlled private corporation (CCPC); and

All or substantially all of its assets are used in an active business carried on primarily in Canada. The CRA interprets this to mean that assets representing at least 90% of the fair market value of all assets are used for business purposes.

The corporate attribution rules will be an issue for professionals who want to introduce a spouse as a shareholder to their PC and passive investments have already been built up in the PC. Also, keep in mind that even where a PC is currently an SBC, if passive assets accumulate in the PC, the corporate attribution rules can still become a problem.

The Small Business Deduction

The second main benefit of incorporation is the ability to access the small business deduction. A PC owned by a professional resident in Canada will be a CCPC, so that corporation may be able to obtain the benefit of the small business deduction. With this deduction, a CCPC’s federal and provincial tax on active business income is reduced, up to certain limits. Currently, a maximum of $500,000 of active business income qualifies for the federal small business deduction. The limit varies by province.

A benefit can be achieved where business income is instead retained in the corporation, and the additional personal tax that will be payable when dividends are paid is deferred. The lower corporate tax rate leaves greater after-tax dollars in the corporation to pay expenses and reinvest in assets. A smaller tax deferral will also be available for general rate business income (i.e. income not eligible for the small business deduction). In provinces that do not allow non-professionals to hold shares of a PC, the tax deferral will be the largest tax benefit.

When determining whether your PC can benefit from the small business deduction, you need to consider the following rules:

Partnerships – If you carry on business as a member of a partnership, the small business deduction rules will apply differently. The rules that will apply are known as the specified partnership income rules. Under these rules only one small business deduction will be available to reduce corporate tax on income from the partnership. In the case of a partnership of PCs, all of the PCs must share one small business deduction. For example, if your PC earns 1/4 of the income from a professional partnership, only $125,000 of the income (1/4 of $500,000) will be eligible for the federal small business deduction. Note that these rules effectively mean that partners of large partnerships do not get any significant small business deduction on their partnership income. Certain structures can be used to effectively allow PCs of partners in professional partnerships access to a full small business deduction limit, but they require careful planning to implement and generally require that non-competition clauses in partnership agreements be eliminated.

Personal Services Business – Generally, if you provide services through your corporation and if not for the corporation you could be considered an employee of the entity to which you provide the services, the corporation may be considered a personal services business (PSB) where certain exceptions do not apply. In other words, you would be considered an “incorporated employee”. Where the PSB rules apply, income from the PSB will not be eligible for the small business deduction. As well, deductions claimed by the PSB will be restricted. Consequently, to fully benefit from incorporation, you must ensure that you avoid the PSB rules. In most cases, this means that you have to be an independent contractor and not an incorporated employee. The PSB rules are not a concern for partners of a professional partnership who are generally not considered to be employees of the partnership.

Capital Gains Exemption for Qualifying Small Business Shares

The third significant tax advantage of incorporation that may be available is the capital gains exemption for qualifying small business corporation shares. Due to the nature of a PC as well as the restrictive ownership rules, selling shares and realizing a gain eligible for the exemption may be difficult. Purchasers may prefer to buy goodwill or client lists, rather than shares, and they may also have concerns about inheriting the professional liability of the vendor. An incorporated partner of a professional partnership will likely not be able to sell shares of his PC. However, if you or family members are able to sell shares of the PC, up to $750,000 of gross gains can be exempted (for each individual).

To qualify for the exemption, the following general conditions must be met:
At the time of the disposition, at least 90% of the corporation’s assets (on the basis of fair market value) must be business assets;
More than 50% of the corporation’s assets (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
The shares must not have been owned by anyone other than the vendor or someone related to the vendor during the 24-month period immediately before the sale.

In addition to claiming the capital gains exemption on an actual sale of your shares, it may be possible to trigger a capital gain, claim the exemption and step-up the tax cost of your shares in anticipation of a future sale. This planning will be especially useful if you believe your corporation will lose its status as an SBC in the future.

Other Considerations

There are other benefits, as well as potential minor disadvantages, that you should consider if you want to incorporate.

Individual Pension Plan – Instead of contributing to an RRSP, another retirement savings option is available to you as a professional if you incorporate. Under the rules for defined benefit pension plans, an individual pension plan (IPP) can be set up for business owners who are employed and earning employment income. The benefits under an IPP are set by reference to your salary from your PC, and contributions are made to build sufficient funds to fund this defined pension benefit. For many individuals (generally, in their 50s or older), the use of an IPP can allow for greater contributions when compared to an RRSP. Additional benefits of an IPP include the ability to make up for poor investment performance and the possibility of making lump-sum contributions for past service.

Employment Benefits – If you incorporate, you may also be able to take advantage of employee benefits that have preferential tax treatment such as private health service plan benefits and benefits from the use of a leased company car. As a shareholder of your PC, it will be important to ensure that the benefit is received as an employment benefit and not as a shareholder benefit — otherwise preferential tax treatment will be lost.

Additional Compliance – One minor disadvantage of incorporation is that it does mean that you have additional paperwork. This will include preparing a corporate tax return and completing the appropriate tax filings for salaries or dividends paid by the corporation.

Payroll Taxes – Another potential disadvantage is that certain jurisdictions levy a payroll tax on remuneration paid to employees. Therefore, a payroll tax may apply to remuneration paid to employees of a PC.

There are many factors to consider when deciding whether or not incorporation makes sense for you as a professional. The provincial rules for your profession need to be balanced with the tax rules to ensure you benefit from the tax planning opportunities available from incorporation, given the additional costs you may incur. All factors considered, the decision can seem overwhelming, but your legal advisor can help you make the decision that is right for you.

*** this article published by the accounting firm BDO - www.BDO.ca ***

Why Family Trust are NOT only for Millionaire....

2011-07-19T14:46:00.000-07:00

If you’re like most business owners, you probably think of trusts as powerful financial tools used by the ultra-rich. Well, you’d be wrong. They are powerful financial tools, but they’re not just for the rich. They’re used by all kinds of financially savvy business people who know about the benefits they offer and save a lot of money using them to their advantage.

You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $35,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars.

In addition, did you know that if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate fee (taxes payable at death)and save you thousand of dollars. I highly recommend that you contact me if you wish to learn more.

The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.

If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com

Business owner: Did you know that by having a proper Share Structure; you can save a lot of money??

2011-07-17T14:54:00.000-07:00

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.

Business owner: Are you a candidate for a Family Trust and save thousand of $$ in taxes?

2011-07-17T14:53:00.001-07:00

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 please contact me via email.

Corporation's Annual General Meeting (AGM)

2011-07-17T14:53:00.000-07:00

The Canadian Business Corporation Act ("CBCA") states that a corporation "... must hold a shareholders' meeting on a date that is no later than 15 months after holding the last preceding annual meeting, but no later than six months after the end of its preceding financial year."

Alternatively, shareholders may pass a resolution in lieu of meeting. A resolution in lieu of a meeting may be useful for small corporations that have only one or a few shareholders. A resolution in lieu of meeting is a written resolution signed by all shareholders who would have been entitled to vote at the meeting that deals with all matters required to be dealt with at a shareholders' meeting. This resolution is just as valid as it would be if passed at a meeting of shareholders. This resolution should be retained in the corporation‘s records.

The shareholders' meeting (or resolution in lieu of a meeting) allows shareholders to obtain information about the corporation's business and to make appropriate decisions regarding this business. The date of the meeting, or of the resolution, must be indicated on your Annual Return.

Agenda

At minimum, the agenda of an annual meeting must include the following items:

- consideration of the financial statements;

- appointment of an auditor (or a resolution of all shareholders not to appoint an auditor); and

- election of directors.

Often, the agenda includes an additional item, "any other business." This portion of the meeting allows shareholders to raise any other issues of concern to them. If directors want shareholders to consider a matter, it should be listed in the agenda prior to the meeting and not raised as "any other business."

Calling a shareholders' meeting

The directors must notify voting shareholders of the time and place of a shareholders' meeting. They must do so no more than 60 days and no fewer than 21 days before the meeting date. For example, if the meeting is to be held on May 20, the notice of the meeting should be sent no earlier than March 22 and no later than April 30.

Unless otherwise provided by the by-laws or the articles, this notice can be sent electronically to shareholders if they have previously consented to receiving such notices electronically and if they have designated a system for receiving them.

Location of the shareholders' meeting

The annual meeting may be held in Canada at a place specified in the by-laws. Or, if the by-laws do not specify a location, directors may choose one. An annual meeting may be held outside Canada only in cases where the corporation's articles permit it or if all voting shareholders agree.
Also, where the corporation's by-laws permit it, the directors of a corporation may decide that a meeting of shareholders will be held entirely by means of a telephonic, electronic or other communication means that will permit all participants to communicate adequately with each other during the meeting. In such cases, it is the responsibility of the corporation to make these facilities available.

Unless otherwise provided by the by-laws, a corporation can allow shareholders to attend the meeting electronically. The communications system used must permit all participants to communicate adequately with each other during the meeting.

Other requirements of the shareholders' meeting

Quorum

Unless a quorum of shareholders is present or represented at annual or special shareholders' meetings, no business that is binding on the corporation can be conducted. A quorum is present at a meeting when the holders of a majority of the shares entitled to vote at the meeting are present in person or represented by proxy, regardless of the number of persons actually present at the meeting. Note, however, that a corporation's by-laws can provide for a different type of quorum.

Electronic voting

Unless the corporation's by-laws specifically forbid it, electronic voting is allowed, as long as it is possible to verify the vote without knowing how each shareholder voted.

Minutes of the meeting

The corporation must keep a written record of the meeting. This record usually includes such information as:

where and when the meeting was held;

who attended; and

the results of any voting.

The Entrepreneurship Centre’s Top 10 Tips for Entrepreneurs

2011-06-06T07:27:00.000-07:00

As you may know, I am a business partner with OCRI Entrepreneurship Centre located in Ottawa, Canada. They are an incredible team and provide guidance and support to entrepreneurs in the National Capital region. The Manager, Micheal Burnatowski, gave us 10 tips for Entrepreneurs. For more information, please visit www.entrepreneurship.com

The Entrepreneurship Centre’s Top 10 Tips for Entrepreneurs

10. Have support and build a network — then go out and network. Don’t do it alone. Find and use advisors, a team, make sure there is family support.

9. Look on how to bootstrap — don’t relay on government to help you finance.

8. Know your costs inside and out.

7. Research. Ask people, not only your friends or family. They are normally the last to say anything negative.

6. Have persistence — don’t give up — have alternate avenues. Never take no as the final answer! Accept some stress, use it to your benefit.

5. Know who you are competing against. Competitors can often be your best friend!

4. Learn from your mistakes — there will be plenty.

3. Ask yourself about your product/service the question: “Who cares?” Have an answer to this question.

2. Be unique. Creativity and innovation make you stand out from the crowd.

1. Be passionate! Have drive. Be ‘jazzed’ about your business. It will drive your sales, your network and make you a leader.

Transfer assets to a Trust for a number of tax and non-tax reasons...

2011-05-16T12:36:00.000-07:00

An entrepreneur or a business owner may wish to transfer assets to a trust for a number of tax and non-tax reasons.

Tax reasons include the desire:

(a) to transfer the tax burden from a high bracket taxpayer to a taxpayer in a lower tax bracket;
(b) to utilise the enhanced 750k capital gains exemption of various members of the family;
(c) to access the lower tax rates of a different province (such as Alberta at this time); and
(d) in the case of testamentary trusts, to multiply the ability to access the lower tax rates by using multiple testamentary trusts.

Non-tax reasons include the following:

(a) to set a mechanism in place to manage one’s property in the event of disability or incapacity;
(b) to protect property from the claims of creditors;
(c) to provide for disabled beneficiaries without jeopardising their government benefits;
(d) to provide for a person who is not able to look after his or her property by reason of minority, mental incapacity or lack of business experience;
(e) to give a beneficiary the benefits of property ownership without giving up control over the property;
(f) to provide for successive interests; and
(g) to avoid the application of provincial probate
taxes.

please do not hesitate to contact me via email at hugues.boisvert@andrewsrobichaud.com should you have any questions.

Business owners: Are you a candidate for a Corporate Reorganization and save tens of thousands of dollars of potential tax savings every year!!

2011-04-20T11:20:00.000-07:00

what is a Corporate Reorganization??

A Corporate Reorganization is a way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.

why do I need a Corporate Reoganization?>

As a Business Lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up, but as we all know, situations change over time.

It is therefore sometimes the case that the favourable conditions existing at the time your corporate structure was put in place are no longer there, and you might end up with a somewhat cumbersome of inefficient structure in today's business climate, particularly from a tax point of view.

On a daily basis, I work with companies in this situation to help them reorganize and restructure so that they can reap the rewards of the existing tax regulations - often resulting in tens of thousands of dollars of potential tax savings every year into the future.

In many situations, for example, I may recommend a corporate reorganization, whether for corporate tax planning, creditor proofing or other organization purposes. I can also assist you in the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Alternatively, I could recommend amalgamating two corporations or winding up one into the other for tax planning purposes or to rationalize a corporate structure.

Often, I will investigate the options thoroughly and advise you of the best plan to meet with your objectives.

There are many reasons companies may need to be reorganized:

•to establish and implement a family trust in the course of corporate reorganization;
•to create holding companies for creditor-proofing reasons;
•to divide the assets of a corporation among the shareholders;
•to incorporate a business, so that it may be carried on in corporate form;
•to carry out an estate freeze in the most effective manner;
•to transfer a business from a corporation to a partnership to deduct losses, take in a partner, or eliminate capital tax

If you think you are a candidate and would like to know more, I can advise on whether a corporate reorganization is required, the benefits of such a reorganization, and the disadvantages, if any.

Finally, I can also develop a plan to implement the corporate reorganization, and work with your advisors (accountants, financial planners, insurance) to execute the plan.

Please contact me should you wish more information on the above.

Business owners: 7 Reasons to Incorporate Your Business! *

2011-04-20T10:53:00.000-07:00

Business owners: You should incorporate If Any of These Apply to You.

One of the first questions new business owners need to answer is how to legally structure their business, a question often phrased as, "Should I incorporate my business or not?" Below are seven reasons to incorporate your business. Whether you're starting a new business or running an established enterprise, you'll probably want to incorporate if any of these situations apply.

1. You need to incorporate if you’re trying to get financing.

"Certainly, you will need to probably incorporate if you want to look for financing, because that demonstrates to a lender that you are committed to going for the long haul," says Ted Mallett, vice-president of research and chief economist at the Canadian Federation of Independent Business (Ann Perry, Banking on a home-based business, TheStar.com).

Whether or not it's true, lenders generally have the perception that businesses that bother to incorporate are more serious and stable than those that don't.

2. You need to incorporate to be eligible for particular federal programs.

For instance, if you don't incorporate, your business is not eligible for the Small Business Internship Program, a program where the Government of Canada will reimburse 75 percent of the eligible wages and related expenses such as statutory employee benefits, up to a total of $10,000 when you employ a post-secondary student to work on an information and communication technologies (ICT) project.

The Ontario Book Publishing Tax Credit (OBPTC), which provides a maximum tax credit of $10,000 per title, is another example of a program only open to Canadian-controlled private corporations.

3. You need to incorporate if your business involves potential liability that could seriously damage your personal finances.

Roger Haineault suggests considering what the worst that could happen is when trying to answer the question, "Should I incorporate my business?"(Pros and cons to incorporating, New Brunswick Business Journal).Suppose you're a painter, he says. The worst that can happen if a customer is dissatisfied with the job you do is that you might have to repaint some rooms.

But the worst can be much worse if the painter has hired a worker who falls off a roof. As a sole proprietor, the painter could be wiped out financially, whereas the most a corporation can lose is the value of its assets.

What's the worst that could happen in your business? Your projected liability could make the cost to incorporate your business a bargain.

4. You need to incorporate if you're trying to work for other businesses.

Some businesses, especially larger corporations, will only hire contractors that are incorporated. So if you don't incorporate, you have no chance of working for them.

5. You need to incorporate if you want to take advantage of the Lifetime Capital Gains Exemption when you sell your business.

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.

What's the catch? Well first of all, a business owner qualifies for the exemption only if the company is a Canadian-controlled private corporation with generally 90 per cent of its assets involved in active business. Second, the shares must have been owned by the owner for at least 24 months before the sale of the business and more than 50 per cent of the corporation's assets must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale.

Bruce Ball, a recognized authority on capital gains, succession and retirement planning explains how to take steps now to make sure your company can benefit from the Lifetime Capital Gains Tax Exemption in the future, such as crystallizing your exemption (The Importance of the Capital Gains Exemption for Owner–Managers (Canadian Federation of Independent Business).

6. You need to incorporate to take advantage of the Small Business Deduction.

For Canadian-controlled private corporations claiming the small business deduction, the net tax rate as of January 1, 2008 is 11%, while the net tax rate for other types of corporations as of January 1, 2008 is 19.5%. (Note that, once again, this tax advantage is only available to Canadian-Controlled Private Corporations. See Types of Corporations in Canada.)

7. You need to incorporate if you're making enough money that you need to manage your income.

For instance, in a discussion about whether or not to incorporate in the About Small Business Canada forum, one user wrote:

"The beauty of having that separate legal entity means you can also throttle how much you pay yourself in any given year. You can hold it in the company or not depending on other things going on in your life. Think of it as a giant surrogate RRSP. As a sole proprietor, if you have a banner year, you're going to pay serious tax right away that year."
If you incorporate your business, you can control how much revenue you take and therefore, how much personal income tax you pay.

Other Reasons to Incorporate Your Business

I've given you seven reasons to incorporate your business here but there are more. One that springs to mind is public perception. Generally I think the public views incorporated businesses more favourably. There's a certain amount of prestige attached to an "Inc." or a "Ltd." After a company's name.

But should you incorporate your business? My best advice is to consider the reasons to incorporate I've presented above, and if you're still unsure about whether or not you should incorporate your own business, talk to your accountant or lawyer about it.

*** This excellent article was written by Suzan Ward and published on the website www.about.com ***

Tax tip: A free iPod or gift certificate received by your employees is a lot less attractive if they have to pay tax on it?

2011-04-20T10:11:00.000-07:00

Today I would like to share a great article written by Jamie Golombek. Mr. Golombek is managing director, tax & estate planning at CIBC Private Wealth Management.

The gift that takes.

Do your employees sometimes receive gifts from customers? If so, are they allowed to accept them and, perhaps more importantly, can they keep them for personal use or do the gifts have to be shared, where feasible, with the entire team? And what about the tax implications of such a gift?

Under the Tax Act, an employee's income from employment includes salary and wages, as well as "other remuneration received by the taxpayer in the year." Other remuneration includes cash and near-cash gifts (i. e., gift cards) received "by virtue of employment."

A technical interpretation released by the Canada Revenue Agency (CRA) earlier this year shed further light on the tax treatment of gifts, particularly gifts and awards received via an employee draw. In this case, the CRA was asked what the tax implications would be if employees who receive gifts from a customer -- be they cash, gift cards or physical items, such as an iPod -- choose to donate these gifts to the employer's Social Committee. The Social Committee, which is not funded in any way by the employer, other than it hosting an annual holiday party, then gives the gifts away in a random draw that includes all employees.

In response, the CRA reiterated that if an item is given to one employee by an employer via a prize draw and the draw is only open to employees of the company, then any item won is a taxable benefit of employment since it was gained by virtue of his or her employment. If, on the other hand, an item is paid for by a social committee and given via a draw, as long as the social committee is neither funded nor controlled by the employer, it's the CRA's position that such a prize is considered to be a tax-free windfall.

But in this particular situation the gift was received by an employee from a customer, and the CRA concluded it must be included in the recipient employee's income, regardless of whether the employee donates the gift to the social committee. When the committee subsequently awards it to another employee via a draw in which all employees can participate, the employee who ultimately receives that gift is not considered to have received a taxable benefit.

While it may be kind of the CRA to not insist on taxing the same gift twice, the taxman's harsh position on the initial gift seems a bit cruel -- and may certainly discourage employees from donating a taxable gift to their company for any reason.

Business owners: 8 tax changes you should know about...

2011-04-04T14:32:00.000-07:00

I would like to share an article published in the Globe and Mail and written by Tim Cesnick.

Business owners: 8 tax changes you should know about...

In the weeks leading up to the 2011 federal budget there was very little talk about the type of tax measures that were likely to be proposed. The silence was deafening. Now, the score is in: Taxpayers: 9, the Government: 12 – give or take. That is, there were more measures proposed in the 2011 Federal Budget to benefit the government by closing loopholes than measures designed to put more money into the pockets of Canadian taxpayers.

While I won’t dwell on every change proposed in this budget, let me share some key highlights that are sure to impact many Canadian families and individuals.

FAMILIES

1. Children’s Arts Tax Credit. This credit should have been called the “Development” credit rather than the “Arts” credit because it will apply to much more than just artistic activities. Regardless, it’s good news for families. This tax credit can be claimed on up to $500 of eligible expenses per child each year. It will put $75 of federal tax back in your pocket if you spend $500 for a child (the actual federal credit is 15 per cent of the eligible expenses). Eligible expenses include fees paid for children under 16 in an eligible program of artistic, cultural, recreational, or developmental activities. Eligible activities include things like music lessons, instruction in languages, dance, literary arts, visual arts, and even academic tutoring.

2. Family Caregiver Tax Credit. A new tax credit will be available beginning in 2012 for those caring for a dependent with a mental or physical infirmity. It applies to your total tax credits if you’re already eligible to claim the spousal or common-law partner credit, child tax credit, eligible dependent credit, caregiver tax credit, or infirm dependent credit. If you qualify for one of these credits, you can claim an additional 15 per cent of $2,000 federally ($300 in added tax savings).

3. Medical Expense Tax Credit. Up until this budget, you had the ability to claim a tax credit for medical expenses incurred for yourself, your spouse or common-law partner, your children who are under 18, or certain other dependent relatives. When it comes to these “other dependent relatives” there has been a cap of $10,000 on the amount that could be claimed. This budget has removed the $10,000 limit for dependent relatives, and applies for 2011 and later tax years.

EDUCATION

4. Exam fees. This budget proposes to amend the tuition tax credit to recognize fees paid to an educational institution, professional association, provincial ministry, or similar institution to take an exam that leads to a professional status recognized by a statute, or to be licensed or certified to practice a profession or trade in Canada. The total fees must be $100 or more to be eligible to claim a credit, and applies to exams taken in 2011 or later years. Be sure to keep your receipts for these exams.

5. Studying abroad. It used to be that a student could qualify to claim a tuition tax credit for studying outside of Canada only where the course lasted at least 13 consecutive weeks. Because many programs are shorter than this, the 2011 budget reduces the minimum course duration to three consecutive weeks. The 13-week requirement to be eligible to withdraw educational assistance payments from a registered education savings plan (RESP) has also been reduced to three weeks for many courses.

6. RESPs. The budget introduces changes that will allow assets inside RESPs to be transferred from one sibling’s plan to another without tax penalties or triggering a repayment of the Canada Education Savings Grants (CESGs), provided that the beneficiary of the plan receiving the assets has not turned 21 by the time the plan was opened.

INVESTORS

7. RRSPs. A new set of rules has been introduced in this budget to prevent taxpayers from entering tax schemes designed to enable investors to access the funds inside their Registered Retirement Savings plans without paying tax on withdrawals. These “RRSP-strip” schemes have evolved over time and the new rules are broad enough to stop virtually all of them. Further, it used to be the case that you could potentially hold a sizeable investment in private company shares in an RRSP. The rules have been tightened to limit that investment to less than 10 per cent of a private company (this is a complex area of the tax law – so speak to a tax pro for more).

8. Donation of flow-through shares. It was great while it lasted, but a “loophole” has just been closed. It has been the case that you could purchase flow-through shares, gain a tax deduction for virtually the entire amount invested, donate the shares to charity and receive a donation tax credit for the full value of the shares. To boot, you wouldn’t have to pay tax on the resulting capital gain when the shares were “disposed of” by transferring them to the charity. The rules are now tightened so that the capital gain on the transfer of the shares to the charity will be taxable, unless the gain represents the value of the shares over and above what you paid for the shares. There’s still tax relief in this strategy, but it’s not as generous as before.

Business owners: Keep your business income all in the family

2011-03-21T08:30:00.000-07:00

Today, I would like to share an excellent article written by Tim Cesnick published in the Globe and Mail.

Business owners: Keep your business income all in the family!

There are a lot of things I want to pass along to my kids. My love for hockey is one of those things. I’ll admit it: I’m a fanatical hockey dad. How fanatical you ask? Well, consider that each of my kids learned to shoot with a hockey stick before they could eat with a fork.

Next to a passion for hockey, there are other things I’d like to pass on to my children. The cottage, for example. Shares of my holding company, for another. The trick is to avoid tax traps while making these transfers. Today, let me share one of those common traps, and how to avoid it.

The story

Consider Mary. Mary owns a cottage with a value of $700,000, and for which she paid $200,000 many years before. While she still uses the cottage in the summers, her son Mitch uses it much more. She has felt for some time now that she’d like to transfer ownership of the cottage to Mitch. Last year, she did just that.

Specifically, Mary sold the cottage to Mitch at a very favourable price – just $100,000. It was an amount Mitch could afford. The problem is that Section 69 of our tax law deems Mary to have sold the cottage to Mitch for the true fair market value of $700,000. The result? Mary paid tax as though she had sold the property for $700,000, which triggered a tax liability of $116,025 (at the highest marginal tax rate on capital gains in Ontario in 2010; Mary is preserving her principal residence exemption for her city home).

What about Mitch? His adjusted cost base for tax purposes remains at $100,000 – the amount he paid. So, if he were to sell the property for its fair market value of $700,000, he’d pay tax on a $600,000 capital gain. This is a double tax problem, because Mary has already paid tax on the $500,000 gain in value from $200,000 to $700,000. Yikes. This is not good planning.

The solution

What could Mary have done differently? Mary could have instead gifted the cottage to Mitch. This would have still triggered a capital gain for her, but Mitch’s adjusted cost base would be the current fair market value of $700,000. Alternatively, Mary could have sold the cottage to Mitch for the full fair market value of $700,000, and taken cash for $100,000 (which is all he could afford) and taken back a promissory note, or a mortgage, from Mitch for the balance. She could then forgive the promissory note or mortgage at the time of her death with no negative tax consequences. I like this latter alternative because Mary could also have deferred tax on much of the capital gain by taking advantage of the “capital gains reserve” provision in our tax law. This provision allows a taxpayer to pay tax on a capital gain over a period as long as five years when the sale proceeds are not fully collected in the first year.

Other stories

There are other examples where this tax trap can catch you. Suppose, for example, you own shares in an operating company with a value of $1-million, and your adjusted cost base is nominal – assume zero. Suppose you want to transfer ownership to a child and do this by selling your shares to your child’s holding company for, say, $750,000. Perhaps your plan is to claim the capital gains exemption to shelter the $750,000 capital gain from tax.

Your problem? You guessed it. Section 69 deems your selling price to be $1-million, but your child has an adjusted cost base in the shares of just $750,000, which creates a double tax problem if your child ever sells the shares for more than $750,000. In this case, there’s a second problem: The transfer to your child will not be taxed as a capital gain (and therefore can’t be sheltered using the capital gains exemption) but rather will be deemed to be a dividend because of Section 84.1 of the Income Tax Act.

In this case, an estate freeze could have worked to transfer ownership to your child (I’ve talked about estate freezes before)

The moral of the story? Any time you want to transfer assets to others – particularly those related to you – get professional tax help.

Business owners: Why Family Trusts are not just for millionaires...

2011-02-18T08:30:00.001-08:00

If you’re like most business owners, you probably think of trusts as powerful financial tools used by the ultra-rich. Well, you’d be wrong. They are powerful financial tools, but they’re not just for the rich. They’re used by all kinds of financially savvy business people who know about the benefits they offer and save a lot of money using them to their advantage.

You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $32,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars plus annual trustee and administration fees.

In addition, if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate and save you thousand of dollars.

The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.

If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com

Two wrong reasons for not having an estate plan...

2011-02-18T08:25:00.000-08:00

You may be wondering, if estate planning is so important, why doesn’t everyone have an estate plan? The answer is part human nature and part misconception.

Human nature prevents us from talking, even thinking about our own mortality. We don’t like to say to ourselves: “Someday I will die or become incapacitated.” For the sake of our loved ones however, we have to deal with this. And because it can happen anytime, we should deal with it now, regardless of age.

People also wrongly believe that estate planning is only for the super-rich. The word “estate” somehow implies great wealth. But the fact is, an estate can be a house and several thousand dollars or a mansion and several million.

It’s simple. Whatever your age, whatever the size of your estate, a proper estate plan will ensure that it is passed along as you desire, with minimum taxes and with no complications or delays for your heirs.

Business Owners: Why should you spend money on a shareholders agreement?

2011-02-14T20:11:00.000-08:00

Business Owners: Why should you spend money on a shareholders agreement?

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. The biggest advantages of a shareholders’ agreement is that it helps to avoid disputes, thereby avoiding unnecessary costs, time and damage to a business. While it is best to create a shareholders’ agreement when the company is being set up, when all parties are more likely to be in a position to agree its contents, they can be agreed at any time – even if the company has been in business a number of years. If you don't have a shareholders agreement signed, it will easily cost you $50,000-100,000 in legal fees to litigate and resolve a shareholders dispute. In my opinion, it is worth to spend $2,500 to have a proper shareholders agreement in place.

Therefore, companies and shareholders MUST have a shareholders’ agreement for 10 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.

Please do not hesitate to contact me should you have any questions on the above.

Weekly Q & A / Legal Questions for Entrepreneurs: What is a creditor-proofing plan?

2011-02-14T10:35:00.000-08:00

This week I received a really important question:

What is a creditor-proofing plan?

It is a legal plan allowing you to protect your personal and business assets and benefits from various tax exemptions. You can achieve protection through the way you’re structuring your business, by changing who owns what. By consulting a business lawyer, you may be able to save Thousands of Dollars in taxes.

Every entrepreneur that I know is working extremely hard and are fully dedicated to their businesses. For most of them, they are so much busy running their businesses and keeping cash flow positive that they are sometimes loosing sight of extremely important issues. I mean protecting what they earned by working hard and taking risk. We all know that it is impossible to predict the future; in any event, what we can do is being diligent and proactive with our actions. The objective of creditor proofing plan is to highlight some easy ways to structure your businesses in order to protect yourself and your businesses against creditors and, in the process used at your advantage various tax exemptions.

Business owners: Ask your FREE legal question(s) related to business/tax law.

2011-02-01T07:01:00.000-08:00

I am glad to announce that as of today, I would like to interact more frequently with business owners through my blog. In order to achieve this objective, I will once a week, choose and respond to 1 legal question received by the public. Your question(s) should be related to business/tax law. Please don’t be shy and send your legal question(s) at hugues.boisvert@andrewsrobichaud.com - Once a week, I will post on my blog the question and the answer. I am looking forward to receiving a lot of questions.

Entrepreneurs: How to take 35k out of your business TAX FREE!

2011-01-27T12:41:00.000-08:00

Several clients asked me to blog about the different ways of extracting money from your 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% of corporate tax (CCPC - Ontario, fiscal year 2010). John is the sole shareholder of is corporation, 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 is 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. Further, Julie will stop working for 3-4 year to raise the kid. Did you know that while staying home, Julie could receive up to $35,000 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 would then be able to issue a dividend to her… the Company would pay 16% of Corporate tax and Julie would be receive a dividend from the Corporation. The first $35,000 would be non-taxable for Julie if she has not other revenue(email me to know more about these conditions...)

The important part to know if that If an individual does not have any other source of revenues, this shareholder can receive up to $35,000 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!!

Business owners: 5 resolutions for the New Year!

2010-12-19T18:40:00.001-08:00

You are a successful business owner...but are you satisfied with your results?

I didn’t think so. Let me help you make your business even more successful in 2011. Here is how I can help:

1. Setting up a proper share structure

Save on taxes! I’ll say it again, save taxes! Having the right structure allows flexibility in terms of tax planning. While you are only required, in law, to have one class of shares (common), it is always best to provide additional classes of shares so that you will have the needed flexibility. You might want an opportunity to income split between family members and save substantial taxes; to attract new investors and possibly to make use of a family trust. The right share structure will help you save on your tax bill in 2011.

2. Enter a shareholders’ agreement

Because happy endings only happen in Hollywood! Every entrepreneur should understand the importance of a written contract to resolve conflicts. 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.

3. Set up a holding company

To protect the assets you need to operate your business. You need operating cash flow, a place of business and equipment to make a profit right? So why would you subject them to attacks from creditors? The best way to protect the assets of an incorporated business is through the use of a holding company (Holdco). And you can also save on taxes because when the operating company has excess cash in the operating company each year, it can pay the excess capital to the Holdco as a tax-free dividend.

4. Use discretionary family trusts to maximize income-splitting

Save taxes (again) thanks to your spouse and children. If you have children and/or are married, you should consider owning their shares through a discretionary Family trust because you can further reduce your income tax bill. The benefits of a family trust include: (a) Income splitting: A well-structured family trust allows for the splitting of income earned by the trust among the various beneficiaries (b) Funding of children’s education at a potential and very low tax rate of 16% instead (c) Multiply the allowable tax free gains (capital gains exemption) should you sell your company: 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.

5. Prepare primary and secondary wills

Did you know that you’ll be taxed even when you pass on? Yes, thanks to probate fees! You can save significant probate fees if you have a secondary will? Probate fees are the fees charged by provincial governments to probate your Will when settling your estate. As a result, Ontario’s probate fees for a modest estate of $500,000 now amount to $7,000. In order to avoid probate fees on their corporate holdings (i.e. shares in private companies) and by using the “double will” technique, every shareholder should have a primary and secondary will drafted and executed.

2010 Year End Tax Planning for Business Owners

2010-11-29T11:37:00.000-08:00

As we all know, Dec. 31st is coming real fast and I advise all my clients to ensure that they doing some year end tax planning. Below is a great summary prepared by the accounting firm, Bessner Gallay Kreisman LLP. As usual, please do not hesitate to contact me directly should you have any questions.

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2010 YEAR END TAX PLANNING

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 that should be taken into consideration:

• The tax rate of the corporation
• The marginal tax rate of the individual
• Exposure to Alternative Minimum Tax
• The ability to benefit from child care expenses, paternity/maternity benefits and to make RRSP and CPP/QPP contributions is based on salary and not dividend income
• 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 where expenses exceed investment income
• 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, as dividend income is grossed up by 44% 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:
• If the corporation has Refundable Dividend Tax on Hand (RDTOH), the payment of a dividend will result in a refund of 33 1/3% of the dividend payment up to a maximum of the RDTOH balance
• Remuneration that is accrued and expensed by a corporation must be paid to the employee within 179 days of the corporation's year-end. When a year-end falls after July 5, the corporation can cause the owner/manager's remuneration to fall into either the current or subsequent calendar year

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. This is accomplished by "freezing" the current fair market value of the company in the form of preferred shares. If the value of a business subsequently decreases, the benefits of freezing may not be fully realized and it may be advantageous to consider "unfreezing" and "refreezing" a company.

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.

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 2010 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
• Have your spouse as your business partner or pay reasonable salaries to your 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 a particular exception applies.

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 and do not generate refunds of RDTOH 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. 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. Consider selling investments with losses the following year. Subject to certain conditions an individual may defer capital gains on eligible small business investments to the extent that the proceeds are reinvested in another eligible small business. The reinvestment 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 (CCA) 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).

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.

Eligible new computers and software acquired before February 2011 are entitled to a capital cost allowance of 100% the first year in which the assets are available for use. Computers purchased after January 2011 will revert to a CCA rate of 55% and be subject to the half-year rule.

Death Benefit

A corporation can make a onetime tax free payment of up to $10,000 to the spouse or heirs of a deceased employee. This payment will not be taxable to the recipient and will be fully deductible by the corporation.

Doctors: What are the Tax Advantages of a Physician Professional Corporation?

2010-11-22T07:22:00.000-08:00

Why Have a Professional Corporation (“PC”)

Physicians who carry on their medical practice in Ontario personally pay income tax at a rate in excess of 46%. Such physicians are not permitted to split income with family members, except to pay “reasonable salaries” to family members who provide actual services to the practice. Such salaries are frequently attacked by Canada Revenue Agency (“CRA”). By incorporating a PC to carry on the medical practice, a physician can achieve significant tax advantages by way of paying tax at a much lower corporate tax rate (18.6% rather than 46.4%) and income splitting with family members by paying dividends (which themselves are taxed at a lower rate).

What are the Legal Requirements for a PC?

A PC is incorporated under the Ontario Business Corporation Act (the “OBCA”) as a regular corporation. However, a PC is subject to a number of special rules and restrictions pursuant to the OBCA and the Regulated Health Professions Act. Some of the key restrictions and requirements are as follows:

A physician must be the sole director, officer and own all of the shares with general voting rights;

The name of the corporation must include the physician’s surname plus “Medicine Professional Corporation”; Other family members (spouse, children, parents and trust for minor children) can own non-voting shares(recent change to legislation);

A Certificate of Authorization for the PC from the College of Physicians and Surgeons of Ontario is required;

The physician remains personally liable for all professional matters relating to the practice; and

The activities of the PC must be limited to carrying on a professional medical practice (and related matters and investments).

Are There Any Non-Tax Advantages

The main advantages and reasons for establishing a PC are income tax related. However, although the physician remains personally liable for professional matters, the PC does offer some advantages of limited liability for non-professional matters, such as if the PC borrows money and enters into agreements, such as an office lease and equipment leases.

How does the Lower Corporate Tax Rate Result in Tax Savings

A corporation (including a PC) can earn up to $500,000 per year of active business income at the 17.6% tax rate. This provides a tax savings of approximately 28.8%, compared to the personal tax rate in Ontario that applies if the physician earns the practice income personally (46.4%). This lower tax rate applies only to income left behind in the PC.

What Can You do with Money Left over in a PC

There are a number of efficient uses for the extra after-tax dollars left in the PC. If, for example, a physician is able to leave $50,000 of profit per year in the PC, there will be significant tax savings. The after-tax amount left to invest inside the PC would be approximately $40,700, rather than $26,800, if the $50,000 was earned personally by the physician. This represents a tax savings of $13,900 per year. This after-tax amount can be invested in the PC the same way it would be invested personally by the physician and provides an excellent, tax-efficient method to build up investments more quickly and save for retirement.

Also, the additional after-tax income left in the PC allows the PC to pay off debts more quickly than if the income was earned personally by the physician and provides a tax-efficient method to pay certain non-deductible expenses (life insurance premiums and some entertainment expenses).

How Can You Income Split with a PC

Physicians are allowed to split income with other family members, such as a spouse, parents, children and trusts for minor children. The income splitting is achieved by having the family members own non-voting shares of the PC that can receive dividends as determined by the physician. Dividends are taxed more favourably than other types of income. An individual with no other income can receive up to approximately $32,000 of dividends tax-free. Dividends can be paid most tax-efficiently to family members who do not have significant other income.

What Factors do you need to Consider when setting up the Share Structure:

It is extremely important that the share structure of the PC be set up with advance planning at the outset, in consideration of the following:

Flexibility for changing circumstances of family members;

Flexibility to pay dividends to whatever family members are selected each year by the physician;

Ensuring that the physician retains complete control of the PC;

Allowing the physician to cancel the shares of family members if the circumstances warrant (i.e. marital problems);

Establishment at the time of incorporation of multiple classes of shares, so there is a separate class for each family member (allowing complete flexibility as to dividends payable to each family member); and

Establishing special classes of shares to be issued to the physician on the transfer of goodwill and other assets relating to the practice, such as equipment.

Are There Any Other Tax Advantages

The most significant tax advantages available to a PC are generally the corporate tax rate advantage and the income splitting advantage. However, there are additional possible tax advantages, such as creating an individual pension plan, tax deferral (to next year) by bonus accruals, use of non-calendar year end, no GST payable on dividends and no requirement for dividend recipients to perform reasonable (i.e. any) services.

How Can You Transfer Assets and Agreements to the PC

Since the medical practice will be carried on by the PC, it is necessary to consider what assets and agreements need to be transferred from the physician to the PC. In order to avoid possible tax problems, it is necessary that goodwill relating to the medical practice be transferred from the physician to the PC. Also, it is necessary to consider if there are other assets, such as equipment to be transferred to the PC. Finally, one must consider what agreements there are relating to the practice, such as office lease and equipment leases, which should be transferred to the PC.
Summary

A PC can offer significant income tax savings to a physician. However, it is important that there be proper tax planning in advance by the physician, accountant and lawyer. On the legal front, the lawyer must implement the corporate share structure properly, in order to achieve the maximum tax savings, provide the most flexibility for changing circumstances and to avoid the various tax traps that can apply.

If you would like to consider the suitability of a PC for your situation, please contact me.

Taxman cracks down on IT consultants

2010-11-18T11:55:00.000-08:00

Today I would like to share an interesting article written by Peter Kovessy from the Ottawa Business Journal. If you are in this situtation, I encourage you to contact me to review your situation before you get audited by CRA. Its important to have the proper agreement in place, the right set of facts, etc.

Government ignoring committee’s call to recognize realities of ‘modern labour market’
Thousands of local IT consultants are facing hefty tax reassessments as the Canada Revenue Agency reexamines their relationship with staffing agencies that help connect them to the federal government, experts say.

In recent months, the CRA has started “aggressively” auditing these incorporated businesses and ruling their role is more like an employee of a staffing firm than an independent contractor.

The financial stakes for these consultants are said to be high, with some facing reassessed tax bills of up to $50,000, say those involved in the fight with CRA.

If these businesses are deemed to be what the tax agency terms “personal services businesses,” they can no longer claim business expenses – such as office space, supplies and training – as deductions on their taxes. It also means they’re no longer eligible for the favourable small-business tax rate, adding a further financial strain.

“It can have such a significant impact in this town,” says Doug McLarty, managing director of accounting and financial services firm McLarty & Co.

While the frustrations of IT consultants may currently be directed at the CRA, a 1960s-era CFL coach may actually be at the root of the problem.

Ralph Sazio, who led the Hamilton Tiger-Cats to three Grey Cup championships, felt he would be better off tax-wise if he incorporated himself and contracted his services to the football club, says Gowlings partner and tax lawyer Mark Siegel, who represents a “fair number” of IT consultants fighting their reassessments.

He says the tax agency took the case to court and lost, prompting new rules that prevented individuals who incorporate themselves – but perform the functions of an employee – from realizing the tax benefits of a small business.

Government downsizing in the 1990s resulted in many federal bureaucrats becoming consultants to their former employer, especially in the IT sector. Rather than dealing with thousands of individual contracts, the government moved to a relatively small number of standing offers with staffing firms, which in turn subcontracted the consultants.

But Mr. Siegel says the CRA decided in the early 2000s that the consultants were more like employees than independent contractors of the staffing firms, which were then on the hook to make CPP and EI contributions.

To avoid these costs, many staffing firms then required consultants to be incorporated companies if they wanted work, according to Mr. Siegel.

But in 2009, the CRA started taking a different view of many of these independent corporations, observers say.

“They are reassessing these (individuals) – mainly IT consultants – who have created corporations (and) are providing their services, generally, through a staffing agency to federal government departments,” says Mr. Siegel.

“They’re between a rock and a hard place. If the assessment were to come along, a normal person would say, ‘I won’t be incorporated anymore.’ But then the staffing agencies won’t hire them.”

Jennifer Smith, an executive director in the Ottawa tax practice with Ernst & Young LLP, says incorporated individuals deemed to be personal services businesses face a double financial hit.

First, they can no longer deduct normal business expenses incurred while earning revenues.

They’re also ineligible for the favourable 15.5-per-cent tax rate on the first $500,000 of active business income, which is substantially lower than what an individual is taxed.

The CRA weighs several factors in determining whether an incorporated individual is an employee or an independent contractor, such as the degree of financial risk taken, level of control, and the opportunity for profit.

Mr. McLarty adds contractors who do the bulk of their work at a single department are at a higher risk than those with multiple clients.

Federal politicians are aware of the problems caused by the CRA’s new interpretation.

In June, the House of Commons finance committee released a report calling on the government to change the Income Tax Act to reflect “the realities of the modern labour market, particularly in terms of small information technology companies, in order to ensure tax fairness for those small business owners who are deemed to be ‘incorporated employees.’” The recommendation has so far been ignored.

Those representing the affected IT firms say they’re simply seeking clarity for their clients.

“These people are are facing tax bills they can’t pay ... (the CRA is) destroying entrepreneurship in the IT sector,” says Serge Buy, a lobbyist for CABiNET, which represents IT professional service providers in the National Capital Region.

“There should be clear rules that allow you to establish your business practices in a stable way.”

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Common-law tests of whether an individual is an employee or an independent contractor:

-The level of control the employer or hirer has over the worker's activities;

-Whether the worker provides his or her own equipment;

-Whether the worker hires his or her own helpers;

-The degree of financial risk taken by the worker;

-The degree of responsibility for investment and management undertaken by the worker;

-The worker's opportunity for profit (or risk of loss) in the performance of his or her tasks; and

-The intention of the parties, as expressed in the relevant documentation and by their actions.

Source: Ernst & Young

Business Owners: Income Splitting 101 & How can you reduce your tax burden with some Income Splitting" strategies?

2010-11-11T14:30:00.000-08:00

Example of how you can save $26,000 or more in taxes if you use a Family Trust

2010-11-09T09:10:00.001-08:00

Example of the Operation of A Family Trust

Scenario 1: Income Splitting

Mr. X establishes a trust for the benefit of himself, his spouse, Mrs. X, and their three children, A, B and C. A and B are over 18 years of age and attending university. C is a minor living at home.

The participating shares of Opco, Mr. X’s active business corporation, are owned 100% by the trust.

After salaries are paid to Mr. X, Opco is earning $100,000 before tax and $82,000 after tax.

Based on current tax rates, if Mr. X wishes to pay out the net after corporate tax income of $82,000 to himself to enable him to use it personally, he would pay additional taxes of over $26,000 if he were the sole shareholder of the company.

Using the family trust arrangement and paying the income earned by the trust equally to the adult beneficiaries (except Mr. X.), the trust’s dividend could be split evenly between Mrs. X, A, and B. The tax liability on the dividend would thus be taxed as follows:

Mr. X = O in dividend (he is paid via salary)

Mrs. X, A and B all take a Dividend of $27,334 each for a total of $82,000. Hence, if Mrs. X, A, and B have no other sources of income, they would pay no taxes at all on this amount.

Note, that dividends allocated to the minor child would be subject to tax at top marginal rates with no personal tax credits applicable, pursuant to the “Kiddie Tax” provisions.

By using a family trust arrangement, Mr. X has just saved the family unit about $26,000 in tax.

Scenario 2: Capital Gains Splitting

Mr. X has received an offer to sell the shares of Opco (which are "qualified small business corporation shares") for $2,000,000. The shares were acquired for a nominal amount ($100). If Mr. X were to receive the sale proceeds as sole shareholder of the business, his tax liability might be computed as follows:

Proceeds $ 2,000,000
Cost (100)
Capital Gain 1,999,900
Capital Gains Exemption (750,000)
Capital Gains Subject to Tax $ 1,240,900
Taxable Capital Gain $ 620,450
Tax $ 310,225

Under the family trust arrangement, the trust would receive the total $2,000,000 proceeds. The trust's capital gain could be paid out to trust's beneficiaries (if desired by the trustee) and the beneficiaries could shelter the gain with their own $750,000 capital gains exemptions. In this case up to the entire $310,225 in tax calculated above could potentially be saved (subject to alternative minimum tax
considerations).

Note that this benefit can be achieved even if the beneficiary is a minor child, since the "Kiddie Tax" does not apply to capital gains.

Any trust income not actually paid or payable to a specific beneficiary in a given year would be taxable in the trust at the highest marginal tax bracket (thus eliminating the benefits of using the trust).

Amounts will be paid or payable to a beneficiary in the year under the following scenarios:

1. An expense report detailing the year’s expenses incurred by the parent on behalf of a beneficiary is submitted by the parent to the trustee. The trustee initials the report to evidence the exercise of his discretion pursuant to the terms of the trust agreement, and a trust cheque is issued to the parent before the end of the year.

2. The parent requests the trustee in writing to make certain payments to a third party for the benefit of the beneficiary. The trustee initials the written request to evidence the exercise of his discretion and makes the payments to the third party before the end of the year.

3. The trustee declares an income distribution using a trustee’s minute and either issues a trust cheque payable to the beneficiary before the end of the year, or issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.

4. Where the amount of trust income earned is not known in the year (e.g., where a trust owns units in a mutual fund trust) the trustee resolves to make an income distribution to a beneficiary equal to a certain percentage of the undistributed income earned by the trust in the year using a trustee’s minute, and issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.
Under the most recent guidelines released by Canada Revenue Agency, the trust can pay for, or reimburse a wide variety of expenses for a child as long as the payment of the expense clearly benefits the child. Such expenses may include (but are not necessarily limited to):

• Education and tuition expenses
• Recreation expenses and equipment
• The child’s share of restaurant meals and family grocery bills
• Clothing
• Medical and dental expenses
• Spending allowances
• Toys
• Car expenses, including per kilometre reimbursements for driving to and from the child’s activities
• A proportionate share of vacation costs

Asset purchases (e.g., cars, boats, vacation properties) and mortgage payments which cannot or will not be legally registered in a child’s name are problematic and we generally suggest that they not be reimbursed by the trust.

In all cases, receipts should be retained that document the fact that trust funds were spent on the beneficiary’s behalf.

Business owners: What is a business lawyer ?

2010-11-08T11:19:00.000-08:00

What is a business lawyer?

A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when I use the term "business lawyer" I think of all three of the above.

What types of clients do I represent?

On a daily basis, I represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and I advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters. Further, my primay focus is on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs.

Do I need a business lawyer?

If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.

A business lawyer can advise you of the applicable laws and help you comply with them.
A business lawyer can help steer you away from future disputes and lawsuits.
A business lawyer can help protect your tangible and intangible assets.
A business lawyer can help you negotiate more favourable business transactions.

Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.

Over the years, I have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, I am extremely sensitive to that concern and actively work with you to control legal costs. I believe it is in both our interests to discuss the scope of work and the costs involved before I provide any legal services.

You should seek a business lawyer if you or your company are . . .

- Starting a new business; (partnership, sole proprietorship or corporation)
- Issuing shares, stocks, options, warrants or convertible notes;
- Hiring your first employees (i.e. employment agreement);
- Negotiating a new lease;
- Acquiring another business;
- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)
- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)
- Selling your company;
- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)
- Planning to create and develop new ideas, products and services;
- Seeking to resolve internal disputes. (i.e. shareholders agreement);
- Any other business/legal issues

For any questions on the above, please do not hesitate to send me an email at hugues.boisvert@andrewsrobichaud.com or at +1.613.237.1512 x 255

Business owners: What are the benefits of an Estate Freeze?

2010-10-19T13:43:00.001-07:00

As you may know, I practice corporate & tax law with a focus on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs. One technique that I like to use is called Estate Freeze. Hence, Today, I would like to share an article written by Bessner Gallay Kreisman, Chartered Accountants.

What are the benefits of an Estate Freeze?

For an owner-managed business, tax minimization is central to the overall financial plan. One popular tool is an estate freeze. An estate freeze is a corporate re-organization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due to deemed disposition rules at death and provides a deferral of tax.

A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization. The use of a trust facilitates income-splitting strategies between family members, and if properly planned, can also result in each beneficiary being able to utilize their $750,000 capital gain deduction concurrently. In a company that is expected to experience continued growth, the ability to benefit from multiple capital gain deductions can result in substantial tax savings.

For many companies that have already undertaken such a freeze, the current economic climate has unfortunately eroded valuations. However, from an estate planning perspective the decrease in values may have created a unique opportunity to re-freeze shares. Re-freezing at a lower value can help further reduce the tax liability upon death and defer the same to the next generation.

An important factor to consider with any estate freeze is the valuation of the shares being frozen. Given the nature of a freeze, and the potential benefits to non-arms length parties, the need to ensure a fair and impartial valuation is critical. While many may believe an ad-hoc valuation is sufficient, determining the value that may be attained in an open and unrestricted market, between informed and prudent parties, is a complex process that poses several challenges. A formal report ensures that adequate research is conducted and the valuation can be defended in the event the transaction comes under review by the taxation authorities.

Given the unique characteristics of each situation, effectively implementing such a strategy requires careful consideration of both technical and non-technical components. An estate freeze is only one component that can be utilized as part of a global tax and estate plan.

A New Chapter in Taxation of Trusts: The Residency of a Trust

2010-10-11T16:23:00.000-07:00

Below is an excellent article published by Collins Barrow, Chartered Accountants.

A New Chapter in Taxation of Trusts

The recent decision of the Tax Court of Canada in Garron Family Trust v. R (2009 DTC 1568) has cast doubt on some common international and inter-provincial tax planning structures that involve the use of trusts. Generally, these trust structures reallocated income to jurisdictions that had either lower tax or no tax at all on certain types of income. This was accomplished by implementing a tax strategy that involved a trust and relying on the residency of that trust to determine the jurisdiction in which the trust's income would be taxed.

For over thirty years, tax professionals have relied on the principles set out in the well-known Thibodeau Family Trust case (78 DTC 6376) to determine the residency of a trust. Now, as a result of the decision in the Garron Family Trust case, we appear to have a new set of rules for determining the residency of a trust. These new rules can have a serious impact on any trust tax planning strategy that relies on the old residency rules of the trust to minimize or eliminate taxation.

Pursuant to the Thibodeau case, the residency of a trust was based on the residency of the managing trustees. The Thibodeau trust had three trustees, one resident in Canada and two in Bermuda. The trust was administered in Bermuda and the books and records of the trust were in Bermuda. The Court concluded that the trust resided in Bermuda because the trust document required that a majority of trustees agree on all matters of trustee discretion, and the majority of trustees resided in Bermuda. The Court rejected the notion that the residence of a trust should be similar to that of a corporation, and therefore disregarded the "management and control" test used for corporations. The Court then concluded that the residence of a trust should be determined based on residency of the trustees.

Just over thirty years later, we now have a different opinion from the Tax Court regarding this issue. With the Garron Family Trust decision, the Court has now embraced the notion that the residence of a trust should be similar to that of a corporation. The Court will look to the management and control of the trust to determine residency of the trust. The Court concluded that adopting a similar test of residence for trusts and corporations promotes the important principles of consistency, predictability and fairness in the application of tax law.

With an update in the jurisprudence related to the residency of trusts, the Canada Revenue Agency (CRA) is now aggressively reviewing tax planning structures involving trusts to reduce tax avoidance through international and inter-provincial tax planning.

The CRA recently hired additional auditors to review the residency of Alberta trusts. During the past several years, it has been attractive and popular for individuals located in provinces other than Alberta to set up an Alberta resident trust to access Alberta's low provincial tax rates. With this review of Alberta Trusts, the CRA is seeking to determine the "management and control" over the trust assets. As a result, it has distributed questionnaires to Alberta trustees, requesting the following information:

•a list of the duties and responsibilities as the trustee;
•the signing and/or contracting authority of the trustees; and
•the responsibility of the trustees for the management of any business or property owned by the trust, the banking and financing arrangements for the trust, and the preparation of the trust's accounts and reporting to the beneficiaries.
If the CRA determines that the management and control over the trust assets rests with any person(s) other than the Alberta trustees, it may determine the residence of the trust to be other than Alberta and reassess the provincial taxes accordingly.

Based on the 2010 Federal Budget, and the Department of Finance's desire to close various loopholes in the Income Tax Act, and to try to find ways to generate revenue to assist in reducing the deficit, we can anticipate the CRA will also apply the same aggressive nature toward international tax planning strategies involving trusts.

This may be a new chapter in the taxation of trusts, but the story is not over yet. The Garron Family Trust has requested leave to appeal to the Federal Court of Appeal. We will have to wait for the outcome of that appeal to see whether a new chapter is written once again, or if the book is closed for the foreseeable future.

Business owners: Should you take a Salary or a Dividend??

2010-10-03T18:01:00.000-07:00

Today I would like to share an excellent article written by Tim Cesnick published in The Globe and Mail.

Business owners: Should you take a Salary or a Dividend??

Business owners face all types of challenges. Human resources issues may be the greatest – but tax issues are also near the top of the list. How should you compensate yourself? Should you pay yourself more salary? How about dividends? Are there other alternatives? Let’s talk about your compensation.

The Theory

If you own an incorporated business, there are two primary ways to pay yourself: salary, and/or dividends. If you pay yourself salary, the amount is a deductible expense to your company and is taxable in your hands. Another alternative is to have the income taxed in your corporation and then pay the after-tax earnings to yourself as dividends. Your company doesn’t claim a deduction for dividends paid. You’ll face tax on the dividends paid to you, but at a lower tax rate than salary. Why? Because the corporation has already paid tax on the income. When you receive dividends, the amount is “grossed up” (to approximate the pretax income of the company) and then you’re entitled to a dividend tax credit (to provide a tax credit for the approximate tax that was paid by the company).

Our tax system is based on the theory of integration. The theory is that there should be no difference between earning income personally, or earning it in a corporation and then paying that income out to yourself as dividends. If integration is perfect, the amount of income in your hands would be exactly the same, either way.

In the past, integration only worked, albeit not perfectly, in the case of small, Canadian-controlled private corporations (CCPCs) that have been eligible for a lower rate of tax (on the first $500,000 of taxable income today; this results from the “small business deduction” available only to CCPCs). The government changed this in 2006 when it introduced “eligible dividends.” To make a long story short, eligible dividends are those paid after 2005 out of business income that was taxed at a higher rate – rates applicable, for example, to income earned by publicly traded companies or smaller-company income that is not sheltered by the small business deduction. Eligible dividends have been subject to a different gross-up and tax credit rate. This effectively reduced the level of personal tax paid on those dividends, to make integration work better where the company has paid higher rates of tax.

Today, you’ll face a different tax rate on eligible dividends (paid out of corporate income taxed at higher rates) and ineligible dividends (paid out of corporate income subject to lower rates, thanks to the small business deduction).

The Reality

The fact is, integration doesn’t work perfectly. And so there may be advantages to paying dividends over salary, or vice versa. To complicate things, general corporate tax rates are falling over the next couple of years, which may shift your approach. You see, as corporate tax rates fall, the level of tax you’ll pay personally on eligible dividends is due to increase. Why? To keep integration as close to perfect as possible.

The general federal corporate tax rate is currently 18 per cent in 2010, will be 16.5 per cent in 2011, and 15 per cent in 2012. The top federal marginal tax rate on eligible dividends is 15.88 per cent in 2010, will be 17.72 per cent in 2011, and 19.29 per cent in 2012. Regardless of your province of residence, it’s still true that the tax rate on eligible dividends is going up.

So, what does all this mean for you? First, if you do plan to pay yourself eligible dividends, your best bet may be to accelerate those dividends to pay them out in an earlier year rather than later, to take advantage of the current lower tax rates. There was some confusion from my article last week where I had mentioned that it could be beneficial to wait until 2011 to pay out eligible dividends. That read incorrectly. I had intended to suggest that paying dividends sooner, say in 2010, would be better.

Business owners: Unconventional ways of saving for your child's education

2010-09-21T04:53:00.000-07:00

Below is a great article written by Tim Cesnick and published in The Globe and Mail.

Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education

Now that my kids have decided they want to be brain surgeons, I’ve been thinking about how to pay for their post-secondary education. Two methods of saving for a child’s education are often overlooked. The first is a family trust, and the second is life insurance.

FAMILY TRUST

A trust is simply a legal relationship between three parties: The settlor (the person creating the trust), the trustee (the person who holds and controls the property of trust) and the beneficiary (the person for whom the property of the trust is being held). The nice thing about a trust is that it’s possible to have the income of the trust taxed in the hands of the beneficiaries, who may pay little or no tax if they are minors and have little or no other income.

Setting up a trust does come with a cost, so it’s not generally going to make sense unless you’re willing and able to commit a sustantial sum to the trust over a short period of time. You can make this a loan to the trust if you want, so that you can take back your capital again later, as a repayment of the loan.

Once the money is in the trust, any interest and dividend income earned in the trust will be attributed back to you to be taxed in your hands while the beneficiaries of the trust are minors (unless you charge the taxman’s prescribed rate of interest on a loan to the trust), but capital gains can be taxed in the hands of the beneficiaries. Also, any second generation income (that is, income on the income, even if it’s interest or dividends) can be taxed in the hands of your children.

You can pay for all or part of your child’s education costs out of the income or capital of the trust. The taxman will consider payments to third parties, including reimbursements to you, as being paid to the beneficiary as long as those payments were clearly for the benefit of your child. To the extent that little or no tax has been paid on the income of the trust over the years (by having income taxed in your child’s hands), you’ll effectively be using pre-tax dollars to pay for the child’s education.

The benefits of the trust include: protection of the assets of the trust from creditors, splitting income with your children, maintaining control over the assets, and flexibility to use the trust funds for things other than education. There’s a lot to consider when setting up a trust. Visit a tax pro for help.

LIFE INSURANCE

Life insurance is an interesting tool because you can accumulate investments inside a policy on a tax-sheltered basis. Further, if it is the life of your child that is insured, you’re able to transfer ownership of the policy, including the accumulated investments inside the policy, to your child free of tax once he or she reaches age 18. Your child can then make withdrawals of those investments from the policy to pay for education. While those withdrawals are generally going to be taxable to your child, he’ll likely pay little or no tax if he has little or no other income.

One of the benefits of choosing a whole life insurance policy is that the returns have been incredibly stable over the years, even throughout 2008. The reason for this is that the insurance companies are allowed to smooth, or average, the returns you receive over a period of years.

Consider some numbers. If you pay $2,750 annually into a whole life policy each year until your child is 18, there could be $70,000 to $75,000 in the accumulating fund to be accessed (varies by insurance company), assuming a 5 per cent annual return inside the policy. If you set aside the same $2,750 in a tax-free savings account (TFSA) you could end up with approximately $84,000 earning that same 5 per cent, but this would assume a portfolio that is largely in equities that is subject to the volatility of the markets. If you earned, say, 6 per cent in the TFSA, you’d have close to $92,000 in this case, with the volatility.

Life insurance also offers asset protection, flexibility to use the assets for any purpose, and a death benefit ($265,000 in my example) over and above the investment component of the policy if your child passes away prematurely. Insurance is just another tool to consider.

As usual, please do not hesitate to contact me should you have any questions. hugues.boisvert@andrewsrobichaud.com or +1.613.237.1512 x 255

Family Trust Audits Highlight Need for Proper Trust Records

2010-09-14T21:11:00.000-07:00

Today, I would like to share an excellent article written by BDO Canada - As usual, please let me know if you have any questions.

Family Trust Audits Highlight Need for Proper Trust Records

A family trust can provide significant benefits as the
legalities and benefits of ownership can be separated. A
discretionary trust allows the benefits of ownership to flow
to beneficiaries while the trustee maintains control and ownership
of trust property and can ultimately decide on who will receive the
property at a later date. Due to this, family trusts are a powerful tool
in terms of income splitting and capital gains splitting, including
multiplying access to the capital gains exemption.

As is often the case, beneficial tax planning vehicles often carry a
greater recordkeeping and compliance burden, and family trusts are
no different. In particular, one of the key benefits of a discretionary
family trust is the ability to allocate income in different shares to
different beneficiaries, or to retain the income in the trust. For a
discretionary family trust, it is important to note that the default
position is that all of the income belongs to the trust and will be
taxed there if no further action is taken. If it is beneficial to have
income taxed in the hands of a beneficiary, that income can be
allocated in one of two ways:

• It can be paid to them during the year, or the trustee(s) can
declare that the income is payable to the beneficiary at the end
of the year. In other words, the income belongs to the beneficiary.

• It can be allocated by way of a special tax rule called the
preferred beneficiary election (under this election, it is possible to
allocate income to a beneficiary of the trust that is mentally or
physically infirm or disabled without giving them a right to that
income).

Most likely due to the popularity of family trusts and the tax
benefits they provide, the Canada Revenue Agency (CRA)
implemented an audit project on these trusts. The CRA’s audit work
on trusts is focused on the following:

• Has the trust been properly formed? If your trust was set up in writing by a lawyer, this should not be a significant issue.

• Where trust income has been allocated, was the income actually
paid or is there a bona fide obligation to pay that income to a
particular beneficiary? The CRA will be looking for documentation
such as trustee resolutions that allocate the trust’s income, proof
of payment for income paid during the year and promissory notes
or other proof that the trust has made the income payable to the
individual beneficiaries.

• Where the trustees make payments to third parties, was the
payment made for the benefit of the beneficiary? It is also
possible to “pay income” to a beneficiary by making payments
to third parties for the benefit of that beneficiary. In this case,
the trustee will need to document the payments made and
also provide evidence that the payment benefited a particular
beneficiary. For example, if a parent is reimbursed for expenses
incurred on behalf of a child who is a beneficiary, receipts for the
expenses should be retained to prove the child benefited from the
payment and not the parent.

In addition to these particular issues that arise for family trusts, the
CRA will also be reviewing the records of the trust in the same way
it does for other taxable entities to determine whether income has
been calculated and reported properly. So, you should ensure that
bank and investment accounts are set up as needed and proper
records are maintained. Also, your trust agreement and the property
used to settle the trust should be kept in a safe place.

Business owners: why you MUST use separate corporations.

2010-09-07T20:05:00.000-07:00

USE OF SEPARATE CORPORATIONS

The use of separate corporations to carry on different businesses is a basic creditor proofing technique that should always be considered when starting a new business. Separate corporations generally have limited liability, which will help insulate the assets associated with one business from any risks associated with another business. The use of separate corporations is also recommended where a business has used accumulated earnings to acquire significant liquid and/or investment assets or perhaps real estate. For example, it is desirable for real estate and/or equipment which is used in the business to be owned by a separate company(Holding Company), rather than be owned by the operating company. In this manner, the real estate can be protected from direct creditors of the operating business.

If the operating company already owns real estate, it may be possible to separate the real estate by means of a tax deferred corporate reorganization. Where the real estate is owned separate from the operating company, the company owning the real estate would generally charge the operating company a fair market value
rent.

This type of arrangement may also provide ancillary tax benefits with regard to the potential for a more rapid deduction of the leasehold improvements incurred by the operating company.

In addition to real estate assets, other liquid assets(such as cash) accumulating in an operating company should be separated from the company to the extent there are accumulated earnings. For example, term deposits owned by an operating company could be separated and transferred to a holding company by having the operating company pay a tax-deferred dividend to the holding company. In the future, if the
operating company requires the funds, the holding company could then loan the funds back by way of a registered debenture, so that, in the event of a business failure, the holding company’s right to realize on the loan would precede the rights of any general unsecured creditors of the operating company.

If a holding company does not currently exist, a relatively simple re-organization6 could take place to establish a holding company and protect the investment assets of the operating company.

As usual, you should seek professional advice before implementing your new structure - call me or email me if you have any questions.

Business owners: 5 myths that you MUST know about Family Trusts...

2010-08-30T09:35:00.000-07:00

Over the past 2 years, I've been blogging extensively about the various advantages of using a Family Trust for business owners and owners/managers - On a daily basis, I spent a considerable amount of time educating people on the benefits of using such structure. Today, I would like to share an excellent article written by Chaya Cooperberg published in the Globe & Mail.

The Truth about Family Trusts.

The perception of family trusts as vehicles for only the extremely wealthy is one of the misperceptions about trusts that Ms. Blades wants to put to rest. Here are her top five myths and realities about the structure.

Myth #1: They are inflexible.

Reality: Trusts can be quite versatile and are often the best option to provide for disabled beneficiaries or for children of blended marriages. The terms of the trust can vary. There can be a fixed-interest trust, where an amount is invested and the beneficiary gets the money. Or a trustee can be appointed to pay it out. You can also stagger the payments so that funds are paid out when the beneficiary reaches certain age milestones.

Myth #2: They are mainly used to avoid estate taxes and probate costs.

Reality: Trusts can offer significant tax benefits and avoid probate costs, but they also have other benefits like asset protection, investment management, and protection for disabled family members or the client if they become incapacitated.

“It’s always a cost benefit analysis with a trust,” says Ms. Blades. “You would never just look at the financial benefits such as how much tax is saved; you would also look at the beneficiary benefits. You need to do the analysis to see when and where it is worthwhile.”

Myth #3: They are only for the very wealthy.

Reality: Trusts can be set up for anyone with specific needs and are useful vehicles for passing funds to children or grandchildren. There are multimillion-dollar trusts and there are much smaller trusts.

Myth #4: You lose control.

Reality: Trusts are customized vehicles designed in line with your wishes and ensure that cash is ultimately transferred to beneficiaries as desired. While you no longer own the money, you can say when and how you want it used. Your control comes in under the terms and conditions you’re drafting.

Myth #5: Trusts are complicated and onerous to manage.

Reality: The provisions of a trust can be as simple or as complex as you want or need. To set up a trust, you would first need to meet with a will and estate planner or a lawyer to draft the agreement. It is also important to get separate tax advice from an accountant to ensure the trust is a worthwhile vehicle for you. If you make the trust a part of a will – this type of trust is called a testamentary trust – the cost will be built into the cost of the will. If you create a trust that takes effect while you are alive – known as a living trust or inter vivos trust – it will cost at least $1,000 to set up and establish. For a large trust, you will need to appoint a trustee to oversee it and manage investments held within the trust. This comes with a typical annual fee of 1 per cent.

Family Trust: Discretionary vs. Non-Discretionary

2010-08-30T09:21:00.000-07:00

A family trust can be either discretionary or non-discretionary. A discretionary trust gives the trustee full discretion to allocate income and capital among beneficiaries.

In a non-discretionary trust, the trust deed sets out the parameters within which income and capital are allocated. For example, if a trust has three beneficiaries, each beneficiary could be entitled to one-third of the income on an annual basis, and
one-third of the trust capital when capital allocations are made.

Most trusts are irrevocable, as the tax rules deem any income or capital gains earned by a revocable trust to be those of the contributor and taxed in his or her hands, and not income or capital gains of the trust.

As previouly explained, Trusts can be an effective part of your tax and estate planning. This posting is a brief summary of some features of trusts and is not a thorough examination. Always contact your lawyer and/or accountant for more information.

Shifting taxable income to someone else? You still might foot the bill

2010-08-26T10:37:00.000-07:00

Today I would share an excellent article written by Tim cesnick published in the Globe and Mail.

Shifting taxable income to someone else? You still might foot the bill.

Some things just seem a little backward. Take my cousin Julia’s situation for example. Julia is an environmentalist – a self-proclaimed “tree-hugger,” to use her words. Her husband is a competitive swimmer. She doesn’t shave her legs, but he shaves his. It just seems backward to me.

The folks at the Canada Revenue Agency (CRA) often take offence to things when they’re backward. No, I’m not talking about personal grooming habits – CRA doesn’t care much about whether or not you shave your legs. But CRA does care when someone else pays a tax bill and it should be you paying the tax instead.

The rules

Let me tell you about subsection 56(2) of our tax law, which can cause real problems in certain situations. Specifically, this subsection will cause certain amounts to be taxed in your hands even when the amounts were received by someone else. Subsection 56(2) applies when the following conditions are met:

1. There is a payment or a transfer of property to a person other than you.

2. This payment is made at your direction, or with your concurrence.

3. There is a benefit to you, or a benefit you wish to confer on the other person.

4. You would have been taxable on the amount had you received the payment or transfer of property.

In situations where these conditions are met, subsection 56(2) will cause the amount to be taxed in your hands rather than the hands of the other person who received the amount. If subsection 56(2) applies, the amount in question will need to be added to your income; CRA will however reduce the income of the person who initially received the amount, in order to prevent double taxation.

The examples

Clear as mud so far? Let me share a few examples where 56(2) might apply.

* Sale of an asset. If you sell an asset but direct the sale proceeds to be paid to your spouse or a family member with the hope that they’ll pay the tax instead, 56(2) could apply to cause you to pay the tax anyway.

* Business income. Perhaps you own a business, provide goods and/or services to a customer, and then direct the customer to make payment to your spouse or family member and not you. Beware of 56(2).

* Rental income. If you own a rental property, or part thereof, and you instruct a tenant to make payment to your spouse, child, a charity, or some other party, subsection 56(2) could apply.

* Employment income. As an employee you could be subject to 56(2) if your employer makes a payment to one of your family members for services provided by you.

* Gifts by a corporation. Perhaps you’re a shareholder and the corporation makes a gift of cash or property to one of your family members. Subsection 56(2) could apply to tax you on the value of the gift because the gift would likely have been taxable to you as a shareholder benefit had it been made to you.

* Property sold to family. If you’re a shareholder and your corporation sells an asset to a family member at an amount below fair market value subsection, 56(2) could apply.

* Dividends paid to shareholders. Consider a situation where dividends are paid to a shareholder who is not entitled to receive dividends and/or you had a pre-existing right to dividends. Or where you might waive your dividend entitlement for the purpose of transferring income to other shareholders. Subsection 56(2) could apply to tax you on those amounts.

Now you get the drift. Subsection 56(2) is not to be confused with the other attribution rules in our tax law that can cause investment income to be taxed in your hands when you give or lend investment assets to a family member. This provision is broader. It can even apply to tax you on payments made to unrelated third parties.

The solutions

You should note that there’s often a way to accomplish the same tax savings without triggering 56(2).

This might mean receiving a payment yourself and then paying a deductible amount to a family member, properly transferring an asset to your spouse or child to allow them to pay tax on a sale later, restructuring your employment contract to allow payments to an assistant who might be a family member, or revising the terms of your company’s share classes to allow a more flexible sprinkling of dividends, among other ideas.

It’s also worth noting that there’s an exception for the splitting of CPP benefits, which is specifically allowed under our tax law.

Business Owners: Did you ever use some income splitting techniques?

2010-08-15T16:23:00.000-07:00

below is a great article written by BDO Canada, Chartered Accountants.

Family income splitting

The following opportunities exist to split income with other members of your family:

Make an interest-free loan to your spouse or children for investment purposes.

Under the attribution rules, income earned by your spouse or child on the funds will be taxed in your hands, just as it would have been had you not made the loan. However, that income becomes their property and can be reinvested without further attribution. Over time, family members can build up a large pool of funds which earn income taxed in their hands. Be sure to deposit the income in a separate bank account so that it can be properly tracked and separated from the funds advanced as a loan. Also, you may want to consider setting up a trust to manage the funds if minor children are involved.

The attribution rules do not apply to loans that bear interest at the prescribed rate—an interest rate set quarterly by the Canada Revenue Agency (CRA) that approximates short-term Treasury Bill rates. If you loan funds to your spouse or child and the funds are invested so that the rate of return is higher than the prescribed rate, the excess income will be taxed in their hands. Note that interest on the loan must be paid no later than 30 days after the end of the year. Where the interest is not paid on time once, the loan will be subject to the attribution rules until repaid. The interest rate on the loan does not have to be adjusted each time the prescribed rate changes.

Loan funds to family members other than your spouse to invest in assets that produce capital gains.

Consider loaning funds interest-free to low-income family members other than your spouse. They can use the funds to purchase investments with low returns, but with the potential to produce capital gains. Capital gains arising on these investments will not be subject to attribution.

Many mutual funds invest in growth stocks with low dividend rates. Such investments are well-suited for this plan, as any distribution from these funds are often a distribution of capital gains.

If a child’s in-trust account or a trust for the child has investments with accrued gains, consider triggering these gains each year to the extent the child’s personal exemptions are not otherwise utilized. This will help ensure that the child won’t have a large gain that will be taxed at some point in the future.

Make gifts to adult family members.

If you support adult family members, such as children at university or elderly parents, consider giving them assets which they can invest to earn their own income. The income will be taxed in their hands, not yours, and they’ll have more after-tax funds than if you had earned the income and paid their expenses.

This situation can arise where an adult child needs money for his or her education, or where your parents are dependent on you for support. Bear in mind that a gift means you give up control of the asset. If making gifts to low-income parents, you may want to ensure that the assets will be left to you in their wills. Also, if you give property other than cash to any relative, you’re deemed to dispose of it at fair market value, which could result in a taxable capital gain.

Ensure the high-income spouse pays all family expenses, while the low-income spouse saves.

Often, both spouses contribute equally to household expenses, where each have a source of income. This may seem fair and reasonable, but it’s poor tax planning. To the maximum extent possible, the low-income spouse’s salary and other earnings should be saved for investment purposes, while the higher income spouse pays for expenses such as food, clothing, mortgage payments etc. You can even pay your spouse’s taxes. This ensures that the family’s total investment income is taxed at the lowest possible rate.

Loan or give funds to family members to purchase a principal residence.

If you support a child in residence at university or pay rent for elderly parents, consider loaning or giving them funds to purchase a separate residence. This will reduce your investment income subject to tax and, since the funds aren’t earning income, there’s no attribution. Also, if the property increases in value, the family member may be able to use the principal residence exemption.

Invest the Child Tax Benefit and the Universal Child Care Benefit in the name of your children.

The Child Tax Benefit is based on family income. Consequently, higher income families do not qualify for the benefit. The Universal Child Care Benefit is available to all parents for children under the age of six and is paid in instalments of $100 per month per child. To the extent that you receive these benefits, you should invest the funds in a separate account in trust for your children. Investment income on these funds will not be attributed to you.

Invest inheritances for the benefit of your children.

If your child inherits money, make sure that you segregate these funds and invest them in the name of the child. If you or your spouse will inherit funds from a relative you can split income from that inheritance as well, if your relative names your child as a beneficiary. Keep in mind that if a child’s inheritance from a relative, that is not their parent, includes shares of a private company, the dividends will likely be subject to the kiddie tax (which we discuss later in the section entitled “Income splitting through corporations”).

Treat educational support to your spouse as a loan.

If you’re supporting your spouse while he or she is in attendance at a school, college or university and the spouse is expected to eventually be the high-income earner, treat the amounts spent on his or her education as a loan. Later, when the individual earns income, the amount can be repaid to you for investment purposes. You should document the amounts spent and have a written loan agreement.

Shift assets between spouses.

The attribution rules don’t apply if you transfer assets to your spouse in return for assets of equal value. If your spouse has non-income-producing property (i.e. such as a cottage), consider purchasing these assets for cash (or other income-producing assets) at their fair market value. You and your spouse can continue to enjoy the assets, as your spouse earns income from the funds.

Usually, assets can be exchanged between spouses with no tax consequences. However, to avoid attribution, you and your spouse must elect to have the sale occur at fair market value. If the assets transferred have accrued gains, a capital gain will result. If the election is made, any future income or capital gains on the income-producing property would not be attributed back to the transferring spouse.

Contribute to a Registered Education Savings Plan (RESP).

An RESP is a vehicle through which you can defer taxes, split income with your children and save towards their post-secondary education all at the same time. Unlike a Registered Retirement Savings Plan (RRSP), contributions to the plan are not deductible. However, income earned in the plan is not taxed until distributed as educational assistance payments to someone named by you as a beneficiary under the plan. At such time, the income is taxable in the hands of the recipient, presumably at a lower rate, and the original contributions are returned tax-free.

Before the 2007 Federal budget, you were allowed to contribute up to $4,000 annually to an RESP – with a cumulative lifetime contribution limit of $42,000. Changes announced in the 2007 Federal budget eliminated the $4,000 annual RESP contribution limit and the lifetime RESP contribution limit was increased to $50,000. What this means is that you can contribute $50,000 immediately to an RESP. Note that if more than one plan has been set up for a particular beneficiary, you and the other contributors must share the contribution limit. The plan itself must be wound up after 25 years.

There are two types of plans—individual plans and group plans. In addition, there are two kinds of individual plans – non-family plans and family plans. A non-family plan is a plan you set up for just one beneficiary, and there are no restrictions on who can be a beneficiary of such plan. A family plan can have more than one beneficiary; however, each beneficiary must be connected by blood or adoption to each living subscriber under the plan or have been connected to a deceased original subscriber.

A group plan (also referred to as a pooled plan or a scholarship plan), is a set of individual non-family plans that are administered based on a specific age group. Individual plans are more flexible, as they give the contributor more control over the investments made and the timing and amount of educational assistance payments made to beneficiaries. It is important to review all plans carefully to fully understand the provisions of the plan in the event that beneficiaries do not attend college or university within the required time period.

An added benefit of using an RESP is the Canada Education Savings Grant (CESG). The CESG is a federal grant that is added to your eligible contributions. Changes in the 2007 Federal budget increased the maximum annual RESP contribution qualifying for the 20% CESG to $2,500 from $2,000, which increases the maximum annual CESG per beneficiary for 2007 and subsequent years to $500 from $400. Similarly, the maximum CESG for a year has been increased to $1,000 from $800 if there is unused grant room because of contributions of less than the maximum amount in previous years. It is worth noting that the $7,200 lifetime CESG limit is unaffected by these changes.

Despite these beneficial changes, it may still make sense to use both an RESP and an “in-trust” account when saving for a child’s education. For more information, see Are You Getting a Passing Grade on Education Savings? in the 2008-01 issue of The Tax Factor.

Pay your spouse’s interest-bearing debts.

If your spouse has incurred interest-bearing debts such as a car loan, consider paying off these debts on behalf of your spouse. The reduction in interest expense is not subject to attribution. Your spouse will then have more funds to invest in the future.

Note that this plan does not work if the debts were incurred to acquire income-producing properties. If you pay off these debts, any income from the properties will attribute to you.

Provide for a testamentary trust in your will.

Rather than leaving your estate directly to your spouse, children or other dependants, consider leaving some funds in a testamentary trust for the benefit of these individuals. A testamentary trust pays tax as though it were an individual. Income from the funds will be taxed in the trust and will thereby benefit from an additional set of lower marginal tax rates. It is even possible to set up multiple testamentary trusts under your will, one for each beneficiary, which can multiply the availability of lower marginal tax rates on the income earned by the assets in your estate. The capital and after-tax income can be distributed over time to your beneficiaries free of tax. Your BDO advisor can help you select the method which best suits your needs and can assist you in other areas of estate planning.

Business income splitting

If you carry on a business, other income splitting opportunities are available to you:

Make your spouse a partner of your unincorporated business.

If you operate an unincorporated business in which your spouse is active, you may be able to establish that he or she is your partner, eligible to share in the profits or losses of the business. To be considered a bona fide partner, your spouse must either devote a significant amount of his or her time, specified skills, or training to the business or must have invested his or her own property in the business. You must ensure that your spouse’s share of income is reasonable compared with the amount of work or capital put into the business. A partnership agreement is recommended.

Pay your spouse and children a salary.

If your spouse or children work in your business, consider paying them a salary. The salary must be reasonable given the services performed. A good rule of thumb is to pay them what you would have paid a third party for the same services. A record should be kept of the time actually spent and the services actually performed.

When you pay salaries to your spouse or children, you usually must make withholdings for income tax, Canada/Quebec Pension Plan (for individuals over 18 years of age) and any applicable provincial payroll taxes. There will generally be no liability for employment insurance on remuneration paid to members of your family.

Pay your spouse a director’s fee.

If your spouse is a director of your corporation, consider paying your spouse a director’s fee for services performed. A director’s services usually include attending directors’ meetings, directing the management and affairs of the business, approving financial statements, declaring dividends, approving changes to share capital and electing officers of the company. Note that your spouse will also be jointly liable with the other directors for the fulfillment of certain regulatory requirements, such as salary withholdings and GST collections.

Pay a guarantee fee to your spouse.

If your spouse is required to pledge assets or to otherwise guarantee a business loan, he or she can be paid a fee by the business.

Again, the amount paid must be reasonable in the circumstances. In determining reasonableness, one would look at the amount of the loan, subsequent ability of the business to repay the loan and the amount that would have otherwise been paid to an arm’s-length party to guarantee the loan. The fee will also help in establishing deductibility of the loan for your spouse, should the debt become bad and the guarantee ever be called.

Loan funds to your spouse to start-up a business.

Only income from property is subject to attribution. Income from a business is not. If your spouse has a promising business venture, you can provide interest-free financing without any attribution. If the venture is risky, you should consider that an interest-free loan would not qualify for capital loss treatment should the venture fail. If this is the case, you might want to make a capital contribution to the business as a partner and share in the start-up loss. When the business becomes profitable, you can make interest-free loans to the business for further expansion. A gift could also be used to finance a new venture. Your spouse’s share of profits from the venture can be invested by your spouse and would not be subject to income attribution.

Income splitting through corporations

In the past, income splitting was possible with all members of your family through your corporation by issuing shares to your spouse and children, as long as you were careful to overcome certain obstacles. Dividends paid by the corporation to the shareholders would be taxed in their hands, provided you did not give or loan them the funds interest-free to acquire the shares. However, with the introduction of the kiddie tax, the government created yet another obstacle when it comes to income splitting with minor children. In order to implement a corporate income splitting plan that is successful, you must be aware of all of the obstacles that prevent income splitting.

The first obstacle is a set of rules commonly referred to as the corporate attribution rules. Without these rules, you could avoid attribution by simply making interest-free loans to a corporation where your spouse and children are shareholders, instead of directly to them. The corporate attribution rules provide that, if you make a low-interest or interest-free loan or transfer any property to a corporation with the main purpose of reducing your income and benefiting your spouse or minor children, you are deemed to receive interest on the loan or the value of the property transferred at the CRA’s prescribed rate. This income inclusion to you is reduced by any interest, by 5/4ths of any ineligible dividends and 145% of any eligible dividends you actually receive from the corporation. This deemed interest arises even if no income is earned by the corporation and no dividends are paid to your spouse or children. Consequently, it is a penalty provision that should be avoided.

The rules do not apply during any period that the corporation is a small business corporation (SBC). An SBC is a Canadian-controlled private corporation (CCPC) in which at least 90% of the assets (on a fair market value basis) are used in operating an active business in Canada. Therefore, as long as your corporation carries on business and does not accumulate significant investment assets, your spouse and children, particularly those 18 years of age and older, can be a shareholder and receive dividends.

The second obstacle is the kiddie tax, which prevents the transfer of income from high-income individuals to their children under the age of 18. Rather than redirecting income and taxing it in the hands of the high-income family member, the rules provide for a tax on minors who receive income under an income splitting arrangement.

Beginning in the year 2000, minor children are taxed at the top federal personal tax rate on dividends or business income received from a family business.

Specifically, this tax will apply on the following sources of income:

Taxable dividends received directly by a minor, or indirectly through a trust or partnership. Dividends from publicly traded corporations are excluded.
Income inclusions required under the Income Tax Act, in respect of the ownership by any person of shares of the capital stock of a corporation. Shares of a class listed on a prescribed stock exchange are excluded.
Business income from a partnership or trust, where the income is from property (prior to 2003, this reference was to goods) or services provided to, or in support of, a business carried on by:
a person related to the minor, including a relative who is a partner of the partnership earning business income, a corporation where a relative of the minor owns 10% or more of the corporation’s shares, or a professional corporation where a relative of the minor is a shareholder.

The reference to business income earned in support of another business carried on by a relative appears to be designed to prevent you from having your management company or partnership bill third parties directly, rather than your own business, for services rendered. Generally effective for 2003 and subsequent years, the government has proposed to extend the income splitting tax to catch rental or interest income earned by a trust or partnership from a family business and received by minor children.

Personal tax credits cannot be claimed to reduce this tax. However, the minor will be allowed to claim the dividend tax credits and foreign tax credits, where applicable, to reduce the tax.

Although limited, there are some exceptions to the kiddie tax:

the tax will not apply where both of the minor’s parents are non-residents of Canada, the tax will not apply on income from property inherited from a parent, and
if the child is going to college or university, or is disabled, income from property inherited from others won’t be subject to the tax. With the tax on minor children, it is difficult to achieve business income splitting through a corporation with minor children. However, income splitting with your spouse and children who are 18 years of age and older is alive and well. In a typical corporate income splitting arrangement, shares with nominal value are issued to the spouse and children. Dividends are later paid on these shares as income is earned by the corporation. The dividends paid often exceed the amount paid for the shares. Since different classes of shares are usually issued to different family members, it’s possible to determine the dividend amount to each person to minimize tax. (Note that the dividends paid to minor children will now be subject to the income splitting tax.)

This process, called “dividend sprinkling”, was the subject of a 1990 Supreme Court case (The Queen v. McClurg). The following guidelines were drawn from the outcome of that case:

1.If you’re setting up multiple classes of shares, you should ensure each class is different in some respect from the others—for example, one class of shares can be voting while the others are not, some shares can share in growth while other shares are redeemable at a set price. By varying the attributes of the shares, it is possible to have several unique classes of shares.
2.Fair market value consideration must be paid by your family members in exchange for the shares issued. This may be difficult if the shares have high value and the family members have no independent source of funds. Income splitting arrangements are often accompanied by a “freeze” in the value of the company. This is accomplished by having the owner-manager exchange their common shares for preferred shares having a redemption amount equal to the value of the company. Provided the preferred shares have attributes that support this fair market value, any new common shares issued should then have only a nominal value.
3.Each shareholder should pay for the shares using his or her own funds and not funds provided by the owner-manager.
If you have an existing income splitting plan that involves minor children, the kiddie tax will generally now make the payment of dividends to these children unattractive. The best way to optimize your current income splitting plan is to reinvest as much money as possible, that was accumulated in the past under your plan, for the benefit of your child. Your BDO advisor also has other more sophisticated income splitting strategies that might make sense for you.

Corporate income splitting is still very much an option with your spouse and children who are 18 years of age and older. Remember to consider the corporate attribution rules where a spouse will be a shareholder. Great care is required when developing a corporate income splitting plan and your BDO tax advisor should be consulted prior to undertaking any arrangement.

Holding companies have their benefits - Tax-free dividends, creditor protection among them

2010-08-10T08:03:00.000-07:00

Today I would like to share an excellent article written by Tim Cesnick published in the Globe and Mail.

When you understand the rules of the game, you can make them work to your advantage.

I think of Roger Neilson, former National Hockey League coach, who also coached the Peterborough Petes when my brother-in-law played for the team years ago. Mr. Neilson knew the rules of the game better than anyone. On one occasion, when the opposition was awarded a penalty shot, he pulled his goalie and put a defenceman in net. When the opposing player picked up the puck at centre ice, the defenceman came rushing out of the net and hit the confused shooter. No goal. Hey, there was nothing in the rules to stop this type of tactic. Well, not at that time. The rulebook has since been changed. Mr. Neilson was probably responsible for more changes to the rulebook than any single coach.

Things are no different in tax planning. If you know the rules, you can use them to your advantage. For those who are business owners, taking advantage of tax law will mean setting up a holding company in most cases. Today, I want to talk about the benefits of a holding company.

The story

Gord is a business owner who established a holding company (Holdco) several years ago. Holdco, in turn, owns all the shares of Gord's operating company (Opco), which carries on an active business - he distributes light fixtures.

Gord pays part of the earnings of Opco to Holdco as a dividend each year. This is generally a tax-free, intercorporate dividend. Gord then uses that money to invest in other things, such as real estate, marketable securities, and other private businesses. If Opco needs more cash for any reason, Gord can arrange for Holdco to lend the money to Opco.

Gord also pays income out of Holdco to himself, and other family members, each year.

The benefits

Gord enjoys a number of benefits:

Tax-free dividends. Dividends paid by an operating subsidiary (Opco) to the parent holding company (Holdco) in Canada are generally tax-free dividends to Holdco. Tax free is always good.

Creditor protection. Because Gord has excess earnings in Opco each year, he pays the excess to Holdco as a tax-free dividend, which protects those earnings from creditors of Opco. If necessary, he can lend that money back to Opco on a secured basis to retain that protection from creditors.

Efficient reinvestment. Gord has been reinvesting some of Opco's excess earnings in other assets to diversify his holdings. He does this by paying tax-free dividends from Opco to Holdco and then having Holdco make those other investments. If he paid the excess earnings from Opco to himself, personally, to make those investments, he would pay tax first, leaving less to reinvest. As it stands, Holdco filters out that layer of tax, making reinvestment tax efficient.

Income splitting. Gord is able to pay income to his wife and children each year so that some of the earnings are taxed in their hands, not his. The income can be in the form of salary (if the relative is doing work of some kind), or dividends, among other things. Because Gord's children have very little other income, they'll pay no tax at all on the income he pays to them. You do have to be aware that dividends paid to minors (perhaps through a trust) will be taxed at the highest marginal tax rate. But once the kids reach age 18, they can receive up to about $40,000 (it varies by province) each year in Canadian dividends virtually tax free.

Timing income. Think of Holdco as a private pension in many ways. Gord can draw money out of Holdco when he wants it. He chooses to pay himself dividends every second year rather than every year, which allows him to avoid personal tax instalments each quarter, because it's possible to base instalments on either the previous year's tax owing, or the current year's expected liability. If Gord has little or no tax liability every second year, he can base his instalments annually on the year he expects to have little income.

Avoid U.S. estate tax. Canadian residents could be subject to U.S. estate tax if they own "U.S. situs property," which includes shares in U.S. corporations, among other things. If you're otherwise subject to U.S. estate tax on those securities, you can hold those investments in a Canadian holding company to avoid the estate tax.

The addition of a holding company required professional help; hence, contact me to talk about all the pros and cons.

Business owners: Documenting the use of a vehicle to comply with CRA's requirement

2010-07-12T20:33:00.000-07:00

This posting explains the ways in which a person who uses a vehicle in a business can keep track of business travel.

When a vehicle is used partially for business purposes and partially for other purposes, the expenses relating to its use must be apportioned. Only those expenses relating to the business travel or commercial activity are considered eligible for a business deduction and for input tax credits on GST/HST. The proration in such cases is done based on the distances driven. To support a deduction or claim, the person must know and be able to demonstrate the distance travelled for business purposes and commercial activities.

The Income Tax Act and the Excise Tax Act do not set out specific documentary requirements for recording the usage of a vehicle. The general rule is that the person must retain records that would enable an objective determination of the person's tax payable.

Full logbook
The best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered.

Alternative records
The fact that a viable business exists is usually a strong indicator that a person incurred vehicle expenses, because it is extremely difficult to carry on a business without doing at least some driving. Claims for a very low amount of business use do not require extensive records to demonstrate business travel. As the percentage of business use and the related expense claims increase, more documentation, as discussed below, is expected to be available.

For many persons, the books and records they already retain as part of their normal business operations may be indicative of the presence of and the extent of business driving. An appointment diary indicating what addresses were visited and why, or a log of service calls might be sufficient. Purchase or sales invoices may indicate that items were picked up or delivered by the taxpayer. Examples of other evidence that may be taken into consideration may include:

•whether the person has another vehicle for personal travel,
•the type of vehicle,
•the nature of the business and the business travel likely required,
•who else drives the vehicle (e.g., family),
•how the vehicle is insured, and
•indications of other personal travel.

CRA auditors will generally consider the usage of a vehicle in the context of the entire operation of that particular business. A proposal to disallow a portion of a claim for vehicle expenses would only occur where the claimed travel seems out of proportion in that overall context and is not supported by sufficient evidence as described here. However, it should be noted that individuals will be responsible for providing sufficient evidence to demonstrate the accuracy of their claims for business distances driven throughout the year.

Logbook for a sample period
The CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year's usage of a vehicle if it meets the following criteria.

•The taxpayer has previously filled out and retained a logbook covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.
•A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).
•The distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).
•The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.
The business use of the vehicle in the subsequent year will be calculated by multiplying the business use as determined in the base year by the ratio of the sample period and base year period. The formula for this calculation is as follows:

(Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual business use

Where the calculated annual business use in a later year goes up or down by more than 10%, the base year is not an appropriate indicator of annual usage in that later year. In such a case, the sample period logbook would only be reliable for the three-month period it had been maintained. For the remainder of the year, the business use of the vehicle would need to be determined based on an actual record of travel or alternative records, as discussed above. In these circumstances, the taxpayer should consider establishing a new base year by maintaining a logbook for a new 12-month period.

Example:

An individual has completed a logbook for a full 12-month period, which showed a business use percentage in each quarter of 52/46/39/67 and an annual business use of the vehicle as 49%. In a subsequent year, a logbook was maintained for a three-month sample period during April, May and June, which showed the business use as 51%. In the base year, the percentage of business use of the vehicle for the months April, May and June was 46%. The business use of the vehicle would be calculated as follows:

(51% ÷ 46%) × 49% = 54%

In this case, the CRA would accept, in the absence of contradictory evidence, the calculated annual business use of the vehicle for the subsequent year as 54%. (I.e., the calculated annual business use is within 10% of the annual business use in the base year – it is not lower than 39% or higher than 59%.)

Even though records and supporting documents are only required to be kept for a period of six years from the end of the tax year to which they relate, the logbook for the full 12-month period must be kept for a period of six years from the end of the tax year for which it is last used to establish business use.