small-business-year-end-tax

Will Bitcoin hit $2 million? With Greg Foss

Thu, 22 Jul 2021 18:16:00 GMT

By John Paul McDonald & Fabio Campanella

Welcome to episode 8 of Smarten Up with JP and Fab.

Today we interview the one and only Greg Foss, a 30 year veteran of the investment industry.

Greg Foss is a well known Bitcoin Bull who believes that Bitcoin is set to hit a $2,000,000 per coin valuation.

In this episode he explains his background in the investment industry, how this led to an interest in Bitcoin, and why he thinks Bitcoin is the future of money and wealth.

Greg moves fast and uses a ton of technical terminology, some of which is covered below:

Equities: This is more commonly known as "stocks" or the stock market. This represents actual ownership of companies.

Bonds/Fixed-Income: This represents the debt markets, or loans, to corporations and governments. This market is much larger than the stock market.

FIAT: This is money issued by a government. Canadian dollars, US dollars etc.

Youtube: CLICK HERE

SoundCloud: CLICK HERE

Spotify: CLICK HERE

Apple: CLICK HERE

Adaptation and entrepreneurship with Jodi Leigh

Thu, 08 Jul 2021 19:25:00 GMT

By John Paul McDonald & Fabio Campanella

Welcome to episode 6 of Smarten Up with JP and Fab. In this episode we speak with Jodi Leigh of Jodi Leigh Designs. Jodi walks us through:

CLICK HERE

Canadian Taxation of Cryptocurrency

Fri, 18 Jun 2021 02:24:00 GMT

The last decade has seen a massive advancement in the acceptance and interest in the cryptocurrency sector. Bitcoin, the original and most popular cryptocurrency currently has an estimated circulation of 18.68 million coins with a current market value of approximately $47,000 CAD per coin. From this, one can infer a total market value of circulating Bitcoin of somewhere between $800-900 Billion CAD. This is a massive number. To put that into context, the current market capitalization of the Royal Bank of Canada is approximately $181 Billion CAD, so Bitcoin is no joke.

Naturally, when a new investment becomes so popular, especially when that investment represents a new asset class and technology, the application of tax laws to transactions related to that investment can become confusing. Bitcoin and cryptocurrency are no exception. There is very little precedent upon which to base your tax reporting and planning decision. Further, there are very few written laws that directly address the assets and their related transactions.

The purpose of this article is to address this confusion, and establish the current application of Canadian tax laws and CRA interpretation to the most common cryptocurrency transactions including:

Throughout this article I will primarily address the processes and applications as they relate to Bitcoin as this is currently the most popular and widely used cryptocurrency.

Background: Business Income or Capital Gain:

Before we get into the details let’s take a look at the possible ways any investment transaction in Bitcoin can be taxed in Canada: either as business income or capital gain. When determining how your Bitcoin transactions are to be taxed you must first establish the nature of transaction and classify the transaction as either business income (loss) or capital gain (loss).

Current tax legislation dictates that business gains and losses are fully taxable at the taxpayer’s marginal rate whereas capitals gains and losses are taxable at ½ that rate. Clearly, most taxpayers wish to pay tax at ½ their marginal rate so the capital gains treatment is much more popular among investors.

As per the CRA’s current guidance ( CLICK HERE )…

The following are common signs that you may be carrying on a business:

• you carry on activity for commercial reasons and in a commercially viable way

• you undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory

• you promote a product or service

• you show that you intend to make a profit, even if you are unlikely to do so in the short term

Business activities generally require some sort of activity that is regular, repetitive, or consistent over time. This is in contrast to something more passive whereby the investor simply buys an asset and holds it over time without frequent involvement.

For example, if you were to purchase 100 shares of TD Bank in a taxable brokerage account, collect and reinvest the dividend, hold the stock for 10 years, then finally sell the stock for a gain, it would be reasonable to report that gain as a capital gain.

However, if you were to buy 100 shares of TD Bank, actively monitor the price of the stock, sell when you believe the stock is high, repurchase when it is low, and actively trade the stock on a daily basis consistently over time, it may be reasonable to report the gains as business income which would be subject to full taxation at your marginal tax rate due to the frequent nature of your trades and the amount of effort put into the transactions.

Mining New Cryptocurrency:

In this discussion we are assuming that anyone mining Bitcoin is doing so for financial gain as opposed to a “hobby”.

When cryptocurrencies such as Bitcoin are created, we refer to that process as a “mining” transaction. Bitcoin mining is a process by which new Bitcoins are created and entered into circulation. It is performed by using complex mathematical problems and having a chain of computers solve these problems. Bitcoin uses blockchain technology to verify the legitimacy of Bitcoin transactions.

Individuals and organizations around the world setup sophisticated computers, which are all connected to each other. These computers are tasked with verifying existing Bitcoin transactions by solving complex mathematical computations. When computations are verified, the owners of those computers are rewarded with new Bitcoins and are also paid a fee in Bitcoin. The number of new Bitcoins that can be mined at any give time are strictly limited.

The actual process is much more complicated than this and is well beyond the scope of this article. From our standpoint what we need to concentrate on is the taxation of Bitcoin or cryptocurrency at the reward level. When a Canadian taxpayer takes part in Bitcoin mining and they receive new Bitcoin as a reward they have essentially been paid for providing a service with an asset that has a financial value.

Because the nature of Bitcoin mining is active and resembles a business activity the CRA generally classifies these sorts of transactions as business income rather than capital gain. Therefore, you must claim the Bitcoin you received as business income at the CAD equivalent when received.

Using cryptocurrency in purchase and sale transactions:

Although not common, it is entirely possible to accept Bitcoin as payment for goods and services. Such transactions are considered to be barter transactions by the CRA. A barter transaction occurs when two parties exchange goods or services without using FIAT or legal currency. When barter transactions occur between two individuals or organizations that deal at arm’s length it is a fundamental principle that these persons consider that the value of what is being received is equal to whatever is given up.

For example: Individual A sells a widget to individual B and accepts 1 Bitcoin in exchange for the widget.

In the simple transaction above, if the parties are transacting at arm’s length, it can be assumed that individual B accepts that the purchased widget is worth the value of 1 Bitcoin (presently valued at approximately $48,000 CAD) and individual A is fine with receiving that 1 Bitcoin as compensation for the widget.

Therefore, individual A should report the sale of their widget and take into income the CAD equivalent of 1 Bitcoin, or $48,000. If individual A is a GST/HST registrant and the sale of widgets is considered to be a taxable supply then GST/HST would be applicable to the transaction regardless of the form of payment. Subsequent to that transaction, individual A may convert the 1 Bitcoin received into CAD which would be considered a secondary transaction that may lead to a gain or loss on conversion. Such conversions are covered in the next section.

Buying and selling cryptocurrency from a speculative standpoint:

Personal tax liability is incurred when cryptocurrency is sold and realized as fiat currency or exchanged for another cryptocurrency. As discussed above, this tax liability is either on account of business income or capital gain. If the trading activity and volume of trades are very frequent, CRA will likely view the gains as business income as opposed to capital gains. In such a case, when Bitcoin or any other cryptocurrency is sold for fiat currency or another cryptocurrency, the profit over the cost base in which it was purchased will be reported as a business income for tax purposes. If assets are purchased for long term hold, the gains would be reported as capital gains.

The CRA has provided some guidance with respect to crypto-to-crypto exchanges and generally treats such exchanges as barter transactions (as described above). This means that exchanging one crypto for another is considered a taxable event and should be treated as a barter transaction that may result in income to the seller. But what type of income? Business or Capital Gain? The CRA provides some guidance and defers to their guidance around securities trading pursuant to IT-479R, Transactions in securities.

When transacting in securities, or in this case crypto currencies, the “intention at the time you acquired the securities” is of utmost importance. The CRA will follow the logic below to determine what your original intentions are:

a) Frequency of transactions:
• Displaying a history of extensive buying and selling of securities or of a quick turnover of properties would be more indicative of a business transaction than a capital transaction
• The CRA would look to the volume of crypto trades in a given taxation year to determine whether there were “quick flips” in positions and consistent short-term trades for profit
• The more frequent the trades the more the CRA will lean toward business income treatment

b) Period of ownership:
• How long are you holding onto your positions?
• Securities or cryptocurrency held for very short periods of time support a business income treatment more than positions held for the long-haul

c) Knowledge of the securities markets:
• The more knowledge and expertise you have in the securities or crypto sector the more the CRA will lean toward business income

d) Security transactions form a part of a taxpayer’s ordinary business:
• If securities transactions form a normal part of your primary business, or in this case crypto transactions, then the CRA is likely to lean more to business income rather than capital.

e) Time spent:
• If a substantial amount of time is spent studying the market and trading in the market then the CRA will lean more to business income.

f) Financing:
• Is the investor trading with their own money or are they using a margin account or other forms of financing? Financing your crypto transactions leads more to business treatment.

g) Advertising:
• Is the taxpayer advertising or otherwise making it known that he or she is willing to purchase securities or cryptocurrencies? If that is the case the CRA leans more to business income.

h) In the case of shares, their nature:
• normally speculative in nature or of a non-dividend type.

None of the items above are a “silver bullet” that will 100% determine the nature of your crypto gains and losses, however, taken together on a case-by-case basis, they do provide taxpayers and auditors with guidance on how your crypto transactions should be reported.

Take the following examples:

Ms. X buys and sells Bitcoin on a daily basis. She studies the market and pays close attention to trade volume on a daily basis and is able to consistently generate positive returns on investment. She posts regularly on social media her thoughts on the Bitcoin market and also works as a licensed investment advisor who regularly trades Bitcoin and other securities and commodities on behalf of her clients. She trades using money borrowed on a home equity line of credit and rarely holds her positions for longer than 1 or two days. In such a case it would be reasonable to report her gains as business income .

Mr. Y bought 1 Bitcoin in 2019 at $12,000. He held onto the investment and did not pay much attention to the market, never making another trade. In 2021 he lost his job as a factory worker and ran into some financial difficulty. He noticed that Bitcoin was selling at $48,000 and decided to sell his 1 coin earning himself a $36,000 profit. Mr. Y had never invested in anything else in his life, used his own personal savings to make the original purchase, does not use social media, and spent no time at all researching his investment. In such a case it would be reasonable to report his gains as capital gains .

While the examples above are extreme, they do outline some simple case facts and how the CRA may approach a case when making their determination. It is important that individuals consult with their own tax advisors when making a reporting decision.

Conclusion:

Cryptocurrency is a relatively new asset class and as such the taxation of cryptocurrency is somewhat confusing and not exact. Individuals who do decide to mine, transact in, or trade cryptocurrencies should familiarize themselves with the basic tax concepts that can have an effect on their individual reporting requirements. Consulting with qualified professionals is highly recommended.

Fabio Campanella CPA, CA, CFP, CIM, is a founding partner of Campanella McDonald LLP . He is a tax specialist , an investment advisor, and an estate and life insurance advisor licensed in the Province of Ontario. His practice focuses on building tax-efficient retirement and estate plans for entrepreneurs, retirees, and high-income earning professionals. You can access his website by clicking HERE .

If You’re Paying Yourself a Dividend From Your Small Business Then Watch Out For These Pitfalls

Thu, 16 Apr 2020 19:48:00 GMT

When you own a small business , you have two basic methods to compensate yourself: Salary or dividends. Often, the decision is made based on an owner-manager’s personal tax situation, whether or not family members will be paid, or a multitude of other factors that may have an effect on the net tax burden of the transaction.

This article considers the non-tax planning aspects of paying oneself, or a related person, a dividend and the multitude of tax or legal traps an owner-manager of a closely held corporation can fall into without proper planning.

Directors' liability — Corporate law “solvency tests”:

Small businesses may be in a position where the liabilities on their balance sheets exceed the assets leading to a corporate deficit. When such conditions exist the corporation’s board must exercise caution when making shareholder distributions such as dividends.

Under most corporate statutes in Canada, a corporation must satisfy “solvency tests” before it can undertake certain transactions such as dividends to shareholders. If it is reasonable to believe that the corporation will have an inability to pay liabilities as they become due (the “liquidity test”) then a dividend or similar distribution may be prohibited.

Under the Canada Business Corporations Act (“CBCA”) , for example, directors who authorize dividends contrary to section 42 are jointly and severally liable to restore to the corporation the amount so distributed or paid and not otherwise recovered by the corporation.

Unpaid corporate taxes and dividends to shareholders:

What if your corporation owes income tax and you decide to pay yourself, your spouse, a minor, or anyone not dealing at arm’s length with the corporation a dividend?

Subsection 160 (1) of the Income Tax Act deals with such a situation. A dividend is considered to be a transfer of property in most cases (e.g. most “dividends” are cash dividends). In simple terms, the subsections states that a transfer of property to such an individual during a time where the corporation owes unpaid taxes, affords the Canada Revenue Agency (CRA) the ability to collect the unpaid taxes from the shareholder by making them jointly and severally liable for the balances owing.

This is important to know because many tightly held, family-owned corporations regularly use dividends as a form of “compensation” for work performed. Unfortunately, the tax legislation does not see it this way and often leaves shareholders surprised with a request from the CRA.

As we can see from the examples above, the decision to declare dividends is not as simple a process as many small business owners (or accountants for that matter) believe it to be. I have often seen examples of small business owners claiming dividends haphazardly without the appropriate legal documentation or legal advice. The decision to declare dividends, or to receive them for that matter, should be well thought out and guided by qualified legal and tax advisors.

Five Things Physicians Should Look for in an Accounting Firm

Thu, 31 Oct 2019 19:56:00 GMT

Ontario doctors need to choose their accounting firm with care.

Let’s face it - doctor’s have way better things to do than to pour over the Canadian Income tax act. Outsourcing this task literally frees up time to save lives.

Physician taxes in Ontario are as complex as any small business owner and you’re going to need a helping hand in drafting a comprehensive financial plan. Whether you’re incorporated or a sole proprietor, you’ll need assistance structuring your business, figuring out how to lower and defer taxes, and planning for retirement.

But not all accounting firms are made equal. So how should doctors go about choosing one?

We’ve compiled five things physicians should look for in an accounting firm :

1. Experience with physicians

Nothing is more important than to look for a firm that already has a host of doctors on its client roster. This is not an area for rookies. Doctors are high earners with very little time who are also running small businesses — without necessarily ever wanting to be entrepreneurs. This puts doctors in somewhat of a bind. Since doctors are relying so much on their accountants to devise and implement the best tactics, it’s essential that the firm knows what they're doing, especially when navigating new tax legislation. When you’re interviewing firms, ask them how many physician clients they have and how long they’ve been practicing in this area.

2. The right size

A medium-sized accounting firm is probably best for most physicians, especially if they’re also running a medical practice. Your financial life is likely too complex for an individual accountant, but you don’t want to get lost in the shuffle of a big firm. A medium-sized accounting firm should have a range of specialists to cater to your needs.

3. Personal attention

The relationship and attention you feel like you’re getting from your on-point accountant are essential in staying a happy client. Interview accountants until you find someone you connect with because you always want to feel comfortable enough to ask detailed questions and to share your financial goals.

4. Full-service firm

Time is incredibly valuable to physicians. Doctors are busy and don’t have the time to manage, much less micro-manage, their finances and taxes. Find a firm that can handle every aspect of your financial life, from advising you on how to invest passive corporate income, to maximizing deductions. A full-service firm may also save you money in the long-run. You may need a partner to come up with an overarching tax plan, but you don’t necessarily want to be paying their hourly rate to do bookkeeping. A full-service firm will have the manpower to delegate simpler tasks.

5. Ability to look at financial planning holistically

The last thing you want is an accountant who does your taxes and sends you on your way. Any firm can handle a tax return — what you’re looking for is a firm that can create a truly comprehensive financial plan that takes into account all aspects of your life. For example, let’s say you want to ensure the long-term financial security of your stay-at-home spouse and children — your firm will advise you on the most tax-advantageous way of structuring yourself based on your specific circumstances, like maybe buying a life insurance policy through your corporation. The bottom line is, a firm should always ask you what your goals are and then work on an action plan to help you achieve them.

Campanella McDonald LLP is a full-service accounting firm based in Oakville Ontario. The firm’s partners and staff concentrate on helping independent professionals maximize their bottom lines by providing specialized accounting, assurance, tax compliance, tax planning, and financial advisory services.

If you're a physician looking for an accounting firm to quarter-back your financial success, give us a call.

How To Pay Yourself From Your Corporation: Dividends Versus Salary

Tue, 13 Aug 2019 15:30:00 GMT

Congrats! You’ve made the move from sole proprietor to CEO of your very own corporation.

Or perhaps you started out your small business incorporated, to begin with.

Either way, here you are — with a company of your very own. You no longer have to rely on a biweekly pay stub or suffer through torturous performance reviews to ask for raises.

Now, you can pay yourself what you want, when you want, how you want.

The trouble is, it’s hard to know the best way to pay yourself — is it better to take out a dividend or salary?

We’re going to go through each option so that you, with the help of your accountant , can weigh the pros and cons and decide on the most suitable path forward.

Dividends

Corporations can distribute their excess cash right back to shareholders in the form of dividends — and you own shares in your corporation. Unrelated to work or performance, dividends are simply a type of investment income. As such, you don’t get any of the deductions or RRSP room attached to earned income.

On the flip side, you can dish them out essentially whenever you want in whatever amount you want. You can literally just e-transfer your personal bank account cash from your corporate bank account and record the transaction

That makes them come last in the paperwork and hassle contest, for which we’re thankful for.

Salary

You just got out of being an employee and now you want to jump right back in? Joking! At least here you have some flexibility — you can decide on a fixed salary where you pay yourself, say $5,000 a month, or a one-time bonus where you decide to take $100,000 of the company.

A fixed salary is helpful if you’re not great at managing money and you want some consistency in life, but it’s nice to know you can reward yourself too (plus there are some nifty tax planning strategies that you can do with bonuses, but we won’t get into that here).

Annoyingly, salaries are much more complex than dividends.

Two major irritations are:

Depending on your lifestyle, like if you have young children and are really focused on retirement, those factors may be counterbalanced because:

Tax war tie

Suffice it to say that there are no major tax benefits to paying yourself a dividend instead of a salary. Yes, it may appear that you’re being double-taxed — first, you pay 13.5% corporate tax, and then you pay your personal income tax — but the CRA already has it (mostly) figured it out and gives you a dividend gross-up and credit to offset it.

And note, that unlike dividends from major, publicly-traded corporations, the dividends from your small business are ineligible for equally preferential tax treatment.

Similarly, you may think there’s a salary tax advantage because you can deduct it from your corporate income. But it doesn’t end up working out that way because now you have a larger amount to pay personal tax on.

Had you simply paid the 13.5% corporate tax and distributed yourself a dividend you would have less money to distribute, and thus a smaller amount to be taxed.

Basically, it's a wash.

The final word

So if there’s no major tax advantage to one or the other it comes down to your individual life circumstance.

Do you already own a house? Do you have kids in daycare? Would you rather bang your head on the wall before dealing with payroll? How good are you at budgeting? You may even switch between dividends and salaries as your situation changes.

There’s no right answer for everyone, so it’s best to sit down with a tax professional and create a comprehensive plan

If you want our advice on your specific situation, we'd be happy to have that conversation with you. Give us a call at 289-813-0097 and reach John Paul at extension 101, or email info@cmllp.com .

Understanding The HST Quick Method and How It Could Mean Automatic Tax Savings

Wed, 17 Apr 2019 19:01:00 GMT

Something we look at all the time for our clients and for those coming on with us is the HST Quick Method and the potential for automatic tax savings. In this week's Weekly Tax Planning Tip video we explain exactly how it can work for your small business...

Transcript:

Hey, there's, so one thing I wanted to share with you guys, was something that we look at annually for our clients and actually for new clients coming in with us, it's surrounding HST and the quick method. So to just jump into it, HST is a sales tax that you have to collect and remit to the government. A quick example, there's two methods actually. So there's the long method and there's the quick method. The quick method is the one that we sometimes see being overlooked and it's available for anybody under about $450,000 of taxable sales. So with the long method, normally what happens is, let's just say you have a sales of $100,000 so you're over the $30,000 limit so you have to charge HST. So let's just say long method, 13% of 100,000 you're looking at, you owe the government $13,000 sales tax collected.

Let's just pretend that there's no expenses that have been recorded where you can take ITCs on them. Compare that with the quick method. So the quick method says, look, you have $100,000 that you've, uh, that you've made sales on, plus you've collected $13,000. So the government says, well, let's make it quick and simple. We want 8.8% of the total amount collected. So 8.8% of about $113,000 is about $9,900. So you can see automatically you're looking at $13,000 remitting to the government all the way down to $9,900. On top of that, so for the quick method, you're allowed to take capital ITC. So anything that you purchased that's capital in nature, you've got the ITC still reduced against what you go with the government. So we look at quick method all the time and there is an automatic tax savings.

Now, that tax savings, when you divide the difference between $13,000 and the $9,900 minus $300, you're looking about $9,600. You're looking at the math on that. You're saving roughly $3,400. Divide that by 13% and that lets you know that in order to make the long method work, you have to have ITCs of about $3,400. Equated to expenses is about $25,000. In most cases, we see a lot of people, the biggest expense for small companies is salaries and wages which has no HST in it. So you're automatically looking at a savings for most small companies where they have expenses without HST in them of $25,000. So look for this when you guys are calculating or speaking to your accountants in a way to save you guys money. So until next time, we'll see you.

2 Triggers to Stay Clear of That Could Prompt a CRA Tax Audit

Thu, 11 Apr 2019 14:51:00 GMT

Audit. This is probably one of the most feared words in a small business owner’s vocabulary. A Canada Revenue Agency (CRA) audit can be one of the most stressful, frustrating, and costly things a small business can ever deal with.

But what triggers an audit? The truth is, we don’t know. The CRA doesn’t publish its audit selection criteria, however, there are ways we can infer the trigger points from our experience with thousands of clients and tax filings:

Below are two common triggers we see with our clients:

Trigger 1: High Professional Fees

If you operate in an industry that doesn’t normally incur high professional fees (lawyers, consultants, accountants, etc.) then reporting very high professional fees on your corporate tax return may trigger a “Corporation Post Assessing Review.” This type of review is extremely common and begins with the CRA sending your corporation a letter requesting the details on professional fees deducted in a given taxation year. You’ll have to provide your assigned CRA agent with a listing of the professionals or firms that billed you, explanations as to why your corporation was billed, and provide evidence of payment and an official invoice for the services provided.

The CRA will review the data and decide whether the professional fees were deductible against your corporation’s revenue. Some common areas of disagreement are as follows:

How do you avoid this?

First, start by only deducting professional fees that are directly related to your business. Don’t try to hide personal professional services in the mix (i.e. legal fees related to purchasing your home, personal tax fees, etc.).

Second, ensure the professionals you engage address the proper corporation on their invoices. If they are working for your business, ensure they invoice your business and not you.

Third, ensure that your expenses are properly allocated. Professional fees, per the “General Index of Financial Information” (GIFI – the standard classifications for Canadian tax accounting) would be limited to services that are professional in nature such as legal fees, accounting fees, engineering fees, and other such fees. They would not include fees for other services such as advertising, computer-related fees, etc.

Trigger 2: Massive HST refunds

Harmonized Sales Tax or HST for short is a consumption tax that your business may or may not charge to customers and clients. HST is a value-added tax, meaning that it is a tax on the amount by which the value of an article has been increased at each stage of its production or distribution. What this means is that, from time to time, your business may be in a refund rather than payable position.

If you are in a refund position because you’ve made large amounts of instalments throughout the year then you should be fine. But, if you’re in a refund position because you’ve incurred more HST than you’ve collected you may find yourself subject to a CRA review.

These HST reviews are very common and, in most cases, the CRA is looking for the following:

The CRA is looking to ensure that you are charging your clients and customers the correct rate of HST:

In addition to the correct application of HST to your customers, the CRA is looking to ensure you are only claiming ITCs for which your business is entitled. Some common taxpayer errors:

It’s important to ensure you are accurate in recording HST collected and expensed and ALWAYS KEEP YOUR RECEIPTS.

Deducting Life Insurance Premiums in a Corporation

Sat, 04 Aug 2018 09:14:00 GMT

For various reasons a small business owner or incorporated professional may wish to enter into a life insurance contract via their corporation. But, are the premiums deductible for tax purposes? This depends, there are generally two scenarios in which premiums may be deductible:

Employer paid premiums for employee:
If an employer pays life insurance premiums for an employee and the benefit of the insurance is for the employee or his/her family (e.g. the beneficiaries being the employee’s children, spouse, or estate) then the premiums can usually be deducted by the employer. However, the premiums form a taxable benefit to the employee.

Life insurance as collateral for a loan:
Small business corporations and professional corporations often need leverage but do not have sufficient hard assets that potential lenders can use as collateral. In cases such as these financial institutions will normally require an owner-manger to enter into a life insurance contract and assign the policy to them as a form of collateral.

In situations such as these, where the loan is used to earn income from a business or property, provisions in the Income Tax Act exist to allow the deduction of the life insurance premiums from taxable income.

One must be careful though as only the “net cost of insurance in respect of the year” under the policy is deductible. This “net cost” is determined by using actuarial principles as set out in the Income Tax Regulations but will approximate the cost of the pure life insurance (think a term-life policy rather than a whole-life or universal-life policy).

Further, the deduction may be limited to the amount that “can reasonably be considered to relate to the amount owing from time to time during the year” under the loan. E.g. if you have a $100,000 life insurance policy but you only owe $50,000 to the financial institution then you would be able to deduct 50% of the lesser of the premiums payable and the net cost of pure insurance under the policy for the year.

Is there a requirement for the insurance policy to be taken out at the same time as the borrowing? No, the CRA states that the assignment of an existing policy can qualify as well.

Life insurance can be an effective tool in a small business owner’s financial plan but can add an element of complexity to their tax plan. The partners at Campanella McDonald LLP have been helping small business owners and incorporated professionals plan their tax and financial situations since 2002 and have assisted entrepreneurs in structuring their insurance policies for estate planning, risk management, and tax planning purposes for years.

Campanella McDonald LLP is a full-service accounting firm based in Oakville Ontario . The firm’s partners and staff concentrate on helping small businesses, independent professionals, and real estate investors maximize their bottom lines by providing specialized accounting, assurance, tax compliance, tax planning and financial advisory services.

The CRA’s annual Office Audit Letter Campaign

Thu, 11 Feb 2016 18:26:00 GMT

The Canada Revenue Agency (CRA) will soon be conducting its seventh annual Office Audit Letter Campaign.

This campaign targets a specific group of taxpayers that have demonstrated specific tax behaviour. This year, CRA is targeting about 30,000 taxpayers who claim consecutive business or rental losses or who are employees claiming employment expenses on line 229 of their tax return. Each taxpayer will receive an “intent-to-audit” letter with information and guidance on their general tax obligations.

The goal is to encourage targeted taxpayers to review their taxes by accessing their account on-line through My Account. This way if they find errors, corrections can be made by submitting any required changes using Form T1-ADJ - T1 Adjustment Request (which is a paper form), or through the Voluntary Disclosures Program.

The CRA hopes to help individuals and small businesses better understand their tax obligations, which increases future voluntary compliance, protects the government’s tax base, and uses resources within the CRA more effectively.

If you or your clients have questions about the CRA’s Office Audit Letter Campaign or need help making changes to previously filed returns, give us a call at 905-580-2199. We'll walk you through any necessary steps to make sure you're in good standing with the CRA.

Holding Companies

Tue, 29 Sep 2015 18:09:00 GMT

Using a Holding Company:

Dividends paid between connected Canadian corporations do not usually attract tax.

This is just one beautiful advantage of a holding company. When your assets build up, your business gets riskier, and you need legal methods to ease the tax burden, a holding company could be the answer.

First, your small business needs to be incorporated. A holding company only works if you’re transferring assets from one corporation to another. If you haven’t incorporated yet, that’s the first move to consider.

Once you’ve incorporated and your assets are starting to become a burden (yes, it happens), then you can talk to a lawyer and an accountant about forming a holding company (also referred to has a “holdco.”)

Your operating company (or “opco”) is your actual business, the one you serve people from. The holdco has no dealing with the public (unless it’s investing) and it produces no goods or services. It exists solely for the purpose of holding shares in your operating company and managing your assets.

A holdco acts as a bank. You put money into the holdco for safe keeping and certain tax advantages. When you need the cash, the holdco can lend money back to the opco.

When the holdco is formed, it buys a controlling share of your opco. It becomes the “owner.” You put money into the holdco by paying out dividends to it each year. Inter-corporate dividends are usually tax free if the two companies are “connected” for tax purposes.

Generally holdcos can’t be successfully sued because they have no direct interaction with the public. So if your opco is sued, all of the assets that are under the holdco are protected.

But that’s just the tip of the iceberg. Holding companies have many other functions.

Limit Vulnerability

A holding company is the buffer between your active business and the assets it’s amassing. It’s not a perfect protector, though. The holdco is liable to the extent that it’s invested in your operating company.

But the other investments that the holding company makes, as well as dividends earned over the years, are safe when your opco is in a legal battle.

If people know that you are solvent (you have money spend, not tied up in debts), you become a target for litigation. Some will do whatever they can to get a piece of your accrued wealth.

Beyond legal protection, a holding company can be a stabilizing force when business gets tight.

Your market may slow down, costs increase, or competitors eat up your market share. As you build strategies to overcome any business setback, you may need financial help to keep cash flowing. If you have assets in a holdco, it can loan money to your opco as secured debt.

“Secured” debt means that the lender has priority when creditors come looking for their money. Your holdco would have first claim on assets if your business couldn’t recover (and files for bankruptcy).

Setting up a holding company cannot be a response to litigation though. You have to already have your assets in the holdco when legal action is taken against you. Start thinking about it now, before you run into any obstacles, legal or financial.

Ensure Your Family’s Future

Holdcos can be a component of an estate plan. For example, you can “freeze” your estate by rolling your assets into a holding company, taking back fixed value shares for the current market value of your assets then transfer the future value to the chosen beneficiaries of your estate by issuing them common shares of the holdco.

Estate planning using holding companies (and sometimes trusts) require an in-depth knowledge of tax and law so this will be the topic of other articles.

Taxes Take a Smaller Chunk

The first tax break you get is on the dividends paid from the opco to the holdco. Most of the time, dividends paid between connected corporations are tax free. If you are paying yourself in dividends from the opco, you’ll be taxed. This is a way to keep the assets in your control and defer taxes.

Income splitting is another way to keep the tax burden light, as long as your family members’ personal tax rates are lower than yours. You can issue special shares to your family from the holdco. When they are paid, they are taxed at their personal rates.

These strategies are only the beginning and require a lot of planning. Make sure to consult a lawyer and an accountant when you hope to find legal ways to ease the tax burden.

But Beware...

There are a few things you need to know before deciding to set up a holdco:

Conclusion

Opening a holding company is an excellent idea when your business is walking into risky areas or you’ve been met with such success that your assets need additional protection.

But there are many consideration and there is a lot of planning involved, just like setting up any corporation. You absolutely need to consult a lawyer. Opening a holdco is a legal process. But you also need the professional attention of an accountant.

A holdco is another business structure to plan with taxes and payment strategies that need careful attention. We’ve helped many business open holding companies and keep their taxes down.

If you’re thinking of opening a holding company, call us. We’ll walk you through the process and we have some very good lawyers that we can work with you keep you protected and stable.

Tax Tips: Income splitting using a spousal investment loan

Tue, 16 Sep 2014 12:50:00 GMT

If you and your spouse have vastly different annual incomes then you'll want to pay close attention to this time sensitive tax tip!

Transcription: Today we're going to cover the topic of income splitting, but not all of income splitting because that is going to take hours. We're going to specifically cover a topic called: spousal investment loans.

Income splitting is an extremely useful tool when spouses’ have different levels of income. For instance, in Ontario someone at the highest tax bracket is paying taxes at somewhere around the 50 percent mark whereas someone with no income is paying no tax.

Perfect income splitting between Spouses can lead up to $17,000 per year in tax savings. That's a huge potential savings. Intuitively a spouse with a high income level is going to want to transfer money over to the spouse with a low income level so that particular spouse can make an investment and pay tax on the investment returns at their low level. Now if this is done incorrectly the attribution rules of the income tax act are going to kick in and deem that investment returns were earned at the higher income earning spouses' level and tax it in their hands.

So how do we get around this? We get around this by doing something called an investment loan. The high income earning spouse takes their money, loans it to the lower income earning spouse and charges interest at what is called the prescribed rate. The higher income earning spouse claims this interest as income and pays tax on it at their marginal rate then the lower income earning spouse will be able to claim the actual investment returns on their income tax return paying tax presumably at a lower rate.

This is a really good strategy especially at the moment because we're at a period where the prescribe rate is at a historically low level of 1% so even modest returns are going to provide the family with a tax benefit overall. Obviously it's not as simple as this, you are going to have to contact a tax lawyer or a tax accountant who's familiar with this strategy because there's a lot of potential pitfalls. You don't want to try to do this yourself it's not something that you can do yourself, trust me. Thanks for listening we'll see you next week