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

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...

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 **

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.

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.

Startup funding: A closer look at FedDev!

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, 2014 Q: 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!

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

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.

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.

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 *

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?

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

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!

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

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

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

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. *

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

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

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)

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...

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

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!

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...

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.