Business Owners: Why you MUST have a Holding Company (Holdco)

Today, I would like to share an excellent article written by Tim Cesnick, clearly explaining the advantages of Holding Companies.  At HazloLaw, we advise clients on a daily basis about the necessity of putting in place this type of structure and we also suggest to add a Family Trust to your current structure.  Please email us at info@hazlolaw.com is you have any questions.
HOLDING COMPANY
This summer when you're standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning.

I can tell you from experience that you'll bore them to tears with the conversation, but they'll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.

THE RULES

If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax.

How? By establishing a holding company to own the shares of your active business corporation (ABC).

You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends.

If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.

It's subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are "connected" under our tax law (which will be the case in the vast majority of situations), you'll avoid another tax called the Part Four tax.

By passing some of those earnings from your ABC to your holding company, you'll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus.

The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.

THE STRATEGIES

What strategies should you be thinking about?

Multiple shareholders: If you're one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you.

Think of each holding company as a tap to control the payment of dividends to each of you personally.

Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.

Splitting income: Your holding company can be owned by more than one person in the family.

Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared.

It's not always advisable to issue shares in the holding company directly to your children (and if they're minors, this isn't possible), and so a family trust can be utilized, which brings me to the next strategy.

Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust.

The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company.

Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you'll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are "connected."

The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.

Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.

Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or "pension" that you will need to look after yourself during retirement.

Top 10 ways to reduce your tax bill

Did you know?

There are a number of ways to reduce the amount of tax you owe and keep more money in your pocket at tax time. The Canada Revenue Agency (CRA) website can help you learn more about the various credits and deductions that you may be entitled to and that can save you money when you file your 2011 income tax and benefit return.

Important facts

For individuals:

1. Plan ahead - Go on CRA's website and Register for My Account, gather your receipts and NETFILE access code, and sign up for direct deposit before April 30. Submitting your income tax and benefit return before the tax-filing deadline means you can avoid having to pay late-filing penalties.

2. Families - Save those receipts! All the activities you have been paying for throughout the year (piano, karate, tutoring, hockey, and more) may save you money at tax time.

3. Tax-free savings account - A tax-free savings account (TFSA) is one great way to save money since you don't pay tax on any income you earn from investments in your TFSA.

4. Registered retirement savings plan - Any income that you earn in a registered retirement savings plan (RRSP) is exempt from tax, as long as the funds stay in the plan. RRSPs help you save for your retirement and give you a break at tax time too.

5. Public transit tax credit - If you or someone in your family is a regular user of public transit, then you may be able to claim a non-refundable tax credit based on the cost of eligible transit passes.

6. Pension income splitting - If you receive income from a pension, you can split up to 50% of eligible pension income with your spouse or common-law partner to reduce the taxes that you pay.

7. Students - Are you still in school? Students can claim the tuition, education, and textbook amounts. Have you graduated recently? You may be eligible to claim the interest that you paid on your student loans.

8. Child care expenses - If you have children, you may be able to claim child care expenses that you or your spouse or common-law partner paid so that either of you could work, do research, or go to school.

9. Home buyer's tax credit - If you're a first-time home buyer you may be eligible to claim $5,000 on the purchase of your new home, which can save you up to $750.

For people who are self-employed:

10. Hiring an apprentice - Did your business employ an apprentice? A salary paid to an employee registered in a prescribed trade in the first two years of his or her apprenticeship contract qualifies for a non-refundable tax credit for the employer.

Tax Tip: Lean more about potential tax savings for tradespersons

Did you know?

As a tradesperson, you may be eligible for certain deductions.

Important facts

If you were a tradesperson in 2011, you may be able to claim a deduction for the cost of eligible tools (to a maximum of $500). For more information, go to www.cra.gc.ca/trades.

You can claim certain expenses you paid to earn employment income as a deduction, but only if your employment contract required you to pay for your own expenses, and either you did not receive an allowance for them or the allowance you received is included in your income. For more information, go to www.cra.gc.ca/employmentexpenses.

If you had expenses that included GST/HST in the course of your employment duties, and you deducted these expenses from your employment income, you may be able to claim a rebate of part or all of the GST/HST you paid on these expenses.

Keep all receipts and documentation to support the claims made on your return.

The deadline for filing your individual income tax and benefit return is midnight on April 30, 2012. However, if you or your spouse or common-law partner carried on a business in 2011, you have until June 15, 2012, to file your return. You must pay any balance owing for 2011 on or before April 30, 2012, regardless of your filing due date. In addition to these deductions, other credits, deductions, and benefits may be available to you. For more information, go to www.cra.gc.ca/trades.

Business Owners: The cold hard logic behind freezing your assets or Estate Freeze 101

The cold hard logic behind freezing your assets - written by Tim Cesnick and published in the Globe and Mail.

Paul is a close friend of mine. We don’t see each other often enough, but we got together for lunch this week. “Tim, I’m freezing my assets,” Paul said. For a minute, I was wondering if Paul was making a commentary on the sub-zero temperatures we’ve been experiencing. But that wasn’t it. Paul was actually freezing his assets. And I’m not talking about the fact that he left his lawn furniture and lawn mower out in the backyard this year to face the elements rather than putting those things away for the winter (he says he got busy and forgot).

 

No. Paul has decided to implement a tax manoeuvre called an “estate freeze.” Although it’s possible to “freeze” most assets, this is most commonly done by those who own shares in a private company and want to accomplish a few things. Let me explain.

The concept
Completing an estate freeze involves identifying certain assets – perhaps private company shares – and freezing those assets at their current value. When this is done, the future growth in value of those assets won’t accrue to you (the person completing the freeze), but will belong to others who you have chosen to receive that future growth. There are a number of benefits to this idea, but most notably you’ll pass the tax bill on that future growth to others. That is, you will have “capped” your tax liability on the assets frozen at today’s value.

The example

Paul owns the shares of a corporation that holds rental properties that he’s been accumulating over the years. The value of these properties is about $5-million today (net of any mortgages). He expects these properties to continue to grow in value in the future. Paul doesn’t need the income from these properties to support his lifestyle.

When Paul passes away, there’s going to be a tax bill owing on the shares of his corporation. After all, the shares are worth $5-million today (since the properties owned by the corporation are worth $5-million), but his adjusted cost base of his shares is nominal, at $100. In this case, Paul will owe about $1,160,227 in taxes upon death (he lives in Ontario and is in the highest tax bracket).
As the value of the properties grows, so will Paul’s expected tax bill on death. Paul decided to cap this tax liability by completing an estate freeze. How? Paul is going to exchange his common shares that he owns in his corporation for new preferred shares that are fixed, or frozen, in value (this exchange can take place without tax at the time of the exchange). These shares won’t appreciate in value as the properties grow in the future. Paul is going to issue new common shares in the corporation to his children. The future growth of the company will accrue to these common shares.
In actual fact, Paul isn’t going to issue the new common shares to his kids directly (although he could), but has decided to issue those shares to a family trust of which the kids are beneficiaries. This will allow Paul to continue to control those shares (as trustee of the trust) for the time being. He can distribute those shares out of the trust to the kids in the future if he chooses (this distribution can generally be done on a tax-free basis). But there are real benefits to having the trust in place to hold the shares today, including the ability to split income with the beneficiaries of the trust.

The nuances

Now, there’s more than one way to accomplish an estate freeze. Exchanging shares in an existing corporation for new frozen shares, as Paul is planning, is one method. It’s also possible in most cases to take assets that are currently outside of a corporation and transfer those assets to a corporation and take back, in exchange, shares in the corporation that are frozen in value. It may also be possible to place assets directly in a trust (without use of a corporation) so that the future growth will accrue to the beneficiaries, but this method may trigger a tax bill when transferring the assets to the trust if those assets have appreciated in value (in which case a corporation is likely the better route).
Freezing your assets won’t eliminate the tax bill that has accrued to date on those assets, but will stop the bleeding by passing the future growth to others who will likely pay the tax on that growth at a much later date than you. More on this topic next week.

Tim Cestnick is president and CEO of WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.

The 21-Year Rule is Taxing on Family Trusts

Family trusts are popular estate and succession planning vehicles for good reason: they can be versatile and effective tools to help manage family wealth and taxes.

But many Canadian family trusts are now well into their second decade and need attention to avoid significant—even devastating—tax bills triggered by the Income Tax Act’s “21-year rule.” “This rule,” says Angela Ross, associate partner, tax services, PwC, “states in general that any family trust, whether it is created during someone’s lifetime or on the death of a person, has to treat itself as having disposed of its property every 21 years.”

In Canada, when someone dies, they are seen as having disposed of their property (except property left to their spouse) at fair market value and their estate pays taxes on any gains realized on that property. Any property then acquired by their child will again be deemed disposed on the death of that child. Were it not for the “21-year rule,” a family trust could hold property for multiple generations without ever incurring tax on the death of a generation.

So every 21 years in a family trust’s “life,” the CRA looks at the property in a trust as if it were the property of someone who had just died. “When the 21 years are up, if the trust holds property on that date, it is deemed to have disposed of the property at its current market value and has to pay taxes on it. Say the trust owns property that had an original cost of $10 but its value on the 21-year anniversary is $100. That trust will be deemed to have realized a $90 capital gain.” As we enter 2011, many Canadian family trusts are approaching the 21st anniversary of their creation and families need to be aware that in most cases, with proper, advanced planning, steps can be taken to defer the tax.

“A trust can generally transfer its assets to Canadian resident beneficiaries on a tax-deferred basis prior to the 21-year anniversary, meaning it can transfer its assets to beneficiaries without triggering the tax on the gain,” says Ross. “So if the trust owns property with a cost of $10, and at 20 years, its fair market value is $100, the trust can transfer the entire asset to its Canadian resident beneficiaries at its $10 price. The trust disposition would reflect $10 of proceeds and not the $90 gain. The taxes on the $90 capital gain can be deferred until that beneficiary sells or dies.” Ross advises family trusts to begin planning for the transfer at least a year in advance of the 21-year anniversary—although in more complex cases two or more years will be needed.

Some important points to keep in mind include: With the exception of Canadian real estate held in a trust, the general rule is you can’t transfer the trust’s assets at cost to beneficiaries who are not Canadian residents. But even if you have non-Canadian resident beneficiaries, depending on the terms of the trust and situation, it may be possible to do some planning to get the assets out for the benefit of that non-resident. It can be very complicated, so start early.

If timed properly and you have the right tax scenario, you can transfer the trust’s assets to grandchildren rather than your children and thus defer the taxes for another generation. In the case of a family trust owning a business that is transferring shares to children or grandchildren, it’s prudent to have a shareholders’ agreement in place before the children or grandchildren receive the shares.

Even if your family trust is nowhere near 21 years old, having it reviewed carefully by an expert now can be a smart move. “There are a few provisions in the Tax Act that could prevent you from doing the rollout before 21 years,” says Ross.

“Most important is 75(2)—the revocable trust provision. It applies if the trust received property from any person who is a capital beneficiary of the trust or is a person who decides when the trust property is disposed of or to whom it eventually goes. It’s a brutal provision that may prevent the rollout of any assets to beneficiaries before 21 years and it’s one people need to be aware of.” Although there’s nothing that can be done to change it, with enough time, it’s possible to develop strategies to fund the eventual tax liability. “The sooner you know you have this issue, the better,” says Ross. “Alternative planning may be possible.

You could implement a reorganization at say 10 years to stop the growth in a bad trust and potentially start the growth in a good trust and minimize the tax hit that’s going to happen at 21 years.”

written and published by Ms. Angela M. Ross from PriceWaterHouseCooper(PWC)

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

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

Do you have a proper Share Structure??

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

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

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

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

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

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

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

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

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

What is a Family Trust?

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

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

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

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

Would it be beneficial for me and for my family?

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

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

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

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

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

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

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

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

Tax reasons include the desire:

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

Non-tax reasons include the following:

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

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

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

what is a Corporate Reorganization??

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

why do I need a Corporate Reoganization?>

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

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

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

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

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

There are many reasons companies may need to be reorganized:

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

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

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

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

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

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

The gift that takes.


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

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

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

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

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

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

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

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

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

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

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

FAMILIES

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

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

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

EDUCATION

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

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

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

INVESTORS

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

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

Business owners: Keep your business income all in the family

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

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

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

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

The story

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

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

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


The solution

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

Other stories

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

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

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

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

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

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

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

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

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

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

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

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

A shareholders’ agreement is an important and very helpful document when setting up a business, or when acquiring partial interest in a business. It sets out the privileges and responsibilities of the shareholders, and provides a means for setting out the principles upon which the shareholders intend to run the business and deal with unforeseen circumstance and contingencies. The biggest advantages of a shareholders’ agreement is that it helps to avoid disputes, thereby avoiding unnecessary costs, time and damage to a business. While it is best to create a shareholders’ agreement when the company is being set up, when all parties are more likely to be in a position to agree its contents, they can be agreed at any time – even if the company has been in business a number of years. If you don't have a shareholders agreement signed, it will easily cost you $50,000-100,000 in legal fees to litigate and resolve a shareholders dispute. In my opinion, it is worth to spend $2,500 to have a proper shareholders agreement in place.

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

Top 10 reasons why your company needs a Shareholders’ Agreement

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

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

Reason #2: Voting entitlements

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

Reason #3: The possibility of imposing share-transfers

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

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

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

Reason #5: Transferring of power

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

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

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

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

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

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

Reason #9: Potential inconvenience

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

Reason #10: Impact of other agreements

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

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

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

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

This week I received a really important question:

What is a creditor-proofing plan?

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

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

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

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

Let's take John, a consultant, incorporated under the name John Doe Inc. The company is making 200k of net profit per year - the Corporation will then pay roughly about 16% of corporate tax (CCPC - Ontario, fiscal year 2010). John is the sole shareholder of is corporation, he will either take a salary, declare a dividend to himself, a mix of both or he will let a portion of the profit in is company as retained earnings.

Let’s make it a little bit more complicated, John got married last year with Julie and they are planning to have a baby next year. Further, Julie will stop working for 3-4 year to raise the kid. Did you know that while staying home, Julie could receive up to $35,000 TAX FREE…

How is that possible? Well, trough a series of legal and accountant transactions (namely an estate freeze - S.86 Income Tax Act) Julie would then acquire shares in John’s company and would then be able to issue a dividend to her… the Company would pay 16% of Corporate tax and Julie would be receive a dividend from the Corporation. The first $35,000 would be non-taxable for Julie if she has not other revenue(email me to know more about these conditions...)

The important part to know if that If an individual does not have any other source of revenues, this shareholder can receive up to $35,000 Tax Free. As usual, I strongly suggest you consult your own professional advisor before proceeding with an estate freeze.

Too good to be true ?? Contact me and I will explain how we can change your corporate structure to ensure that you save taxes!!

2010 Year End Tax Planning for Business Owners

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

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2010 YEAR END TAX PLANNING

Salary/Dividend Planning

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

Here are a few factors that should be taken into consideration:

• The tax rate of the corporation
• The marginal tax rate of the individual
• Exposure to Alternative Minimum Tax
• The ability to benefit from child care expenses, paternity/maternity benefits and to make RRSP and CPP/QPP contributions is based on salary and not dividend income
• Wage levies applicable to salaries, such as the Ontario Employer Health Tax and Quebec's Health Services Fund and 1% Training Tax (if the payroll exceeds $1,000,000)
• Quebec restrictions on the deductibility of investment expenses by individuals where expenses exceed investment income
• Whether eligible dividends can be paid to shareholders
• Full or partial loss of the dividend credit if taxable income is not high enough
• Higher net income with a dividend than with a salary, as dividend income is grossed up by 44% or 25% (depending on whether the dividend is eligible or not) which can have an impact on certain credits and benefits
Some planning techniques include:
• If the corporation has Refundable Dividend Tax on Hand (RDTOH), the payment of a dividend will result in a refund of 33 1/3% of the dividend payment up to a maximum of the RDTOH balance
• Remuneration that is accrued and expensed by a corporation must be paid to the employee within 179 days of the corporation's year-end. When a year-end falls after July 5, the corporation can cause the owner/manager's remuneration to fall into either the current or subsequent calendar year

Freeze or Refreeze?

An estate freeze is used to ensure that future growth in the value of a company accumulates in the hands of a shareholder's heirs. This is accomplished by "freezing" the current fair market value of the company in the form of preferred shares. If the value of a business subsequently decreases, the benefits of freezing may not be fully realized and it may be advantageous to consider "unfreezing" and "refreezing" a company.

Refreezing enables taxpayers to exchange their old preferred shares, obtained at the time of the initial freeze, for new shares with a lower redemption price. Any future gains in value will then be passed on to the holders of common shares. This type of planning helps reduce tax on the death of taxpayers by lowering the redemption price of their preferred shares and transferring more value to their heirs.

Income Splitting

Investment income earned by an individual who invested money borrowed at low or no interest from a related person will be attributed back to the lender. Subject to a purpose test, this rule does not apply where the loan is to a related person other than a spouse or minor child. Nor will it apply where the loan is to a spouse or minor child if interest is charged at the prescribed rate in effect at the time the loan is made (the prescribed rate for the fourth quarter of 2010 is 1%). When utilizing this exception, interest must be paid no later than 30 days after the end of the year to avoid attribution of income.

For instance, the high-income spouse could lend investment funds to the low-income spouse at the current 1% rate and receive (and pay tax on) the interest income each year, for as long as the loan remains outstanding. The low-income spouse would pay tax on the income generated by the funds and deduct the interest paid to the high-income spouse.

Since the attribution rules are complex, caution is advised when contemplating a transfer of property or a loan to a spouse or a child (including transfers indirectly through a corporation or a trust).

Some other basic planning ideas would include:

• Gifting growth assets to a minor child, as the resulting capital gain is not attributed to the donor
• Gifting property to a child who is not a minor
• Segregating and re-investing "attributed" income of a spouse or minor child
• Deposit Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB) and Quebec Child assistance payments (CAP) directly into accounts opened in the children's names
• Use the income of the spouse with the higher income to pay all the family's expenses so that the spouse with the lower income has more capital available for investment
• Using a trust for the benefit of family members to hold shares of a closely-held corporation. However, there are restrictions in regard to income-splitting with minor children
• Spouses can choose to share their QPP and CPP retirement pensions
• Have your spouse as your business partner or pay reasonable salaries to your spouse or children

Shareholder Loans

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

If the loan meets one of these exceptions, the shareholder will be required to pay to the corporation interest at a rate at least equal to the prescribed rate no later than January 30 each year. If a shareholder loan exists at any time during the year, a taxable benefit must be calculated based on the prescribed interest rate, less the interest actually paid.

When a loan is repaid, the shareholder may claim a deduction up to the amount that had been included in income. It might be worthwhile for a corporation to make a loan to an adult child of the shareholder at a time when the child does not have much income. The loan may be repaid in a subsequent year, when the child's marginal tax rate is higher.

Since shareholder loans are not deductible from a corporation's income and do not generate refunds of RDTOH it is recommended that shareholders verify whether it would be more advantageous to be paid a salary or a dividend. It is very important that any loan contract between a corporation and one of its shareholders be adequately documented.

Capital Gains Exemption

A capital gains exemption is available for individuals to use in relation to gains realized on qualified small business corporation shares and some other properties. The maximum lifetime capital gain exemption is $750,000. Be aware of the possible disadvantage of selling investments eligible for the $750,000 capital gains exemption and investments with losses in the same year. Capital losses realized in the year must be offset against capital gains of that year including "exempt" gains. Consider selling investments with losses the following year. Subject to certain conditions an individual may defer capital gains on eligible small business investments to the extent that the proceeds are reinvested in another eligible small business. The reinvestment must be made at any time in the year of disposition or within the first 120 days of the following year.

Acquisition of Assets

Accelerate the acquisition of depreciable property used in carrying on a business otherwise planned for the beginning of the next year. This will allow additional depreciation (CCA) to be claimed in the current year. The "available-for-use rules" should be considered (generally requiring the depreciable property to be used in operations for the depreciation deduction to be allowed).

Conversely, consider delaying until the subsequent year the acquisition of depreciable property in a class that would otherwise have a terminal loss in the current year.

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

Death Benefit

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

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

Why Have a Professional Corporation (“PC”)

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

What are the Legal Requirements for a PC?

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

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

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

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

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

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

Are There Any Non-Tax Advantages

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

How does the Lower Corporate Tax Rate Result in Tax Savings

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

What Can You do with Money Left over in a PC

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

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

How Can You Income Split with a PC

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

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

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

Flexibility for changing circumstances of family members;

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

Ensuring that the physician retains complete control of the PC;

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

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

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

Are There Any Other Tax Advantages

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

How Can You Transfer Assets and Agreements to the PC

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

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

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

Taxman cracks down on IT consultants

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

-Whether the worker provides his or her own equipment;

-Whether the worker hires his or her own helpers;

-The degree of financial risk taken by the worker;

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

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

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

Source: Ernst & Young