Archive for the ‘Taxes’ Category

This is more problematic since a corporation can continue after the death of the shareholder/owner – but maybe not for long.  Incorporation is usually done for two reasons:  lower tax burdens on business income and a perceived (albeit incorrect) perception that all liabilities of the corporation are that of the corporation only.

It is imperative that a succession plan and an estate plan be in place to keep the corporation a going concern and solvent. The death of a small business shareholder triggers certain events:

  • The equity in the business is now the property of the deceased shareholder’s estate.
  • If there are bank loans in place pre-death, the guarantees shift post-death. The estate of the deceased shareholder becomes the de facto guarantor of the loans of the business.
  • The appointment of an estate representative of the deceased shareholder’s affairs is very important because he/she may have to oversee the day-to-day business affairs until the business is sold or closed.
  • Any salary paid to the deceased shareholder (as President or CEO) pre-death doesn’t have to continue post-death. However, if the family income of the deceased was close to 100% of the income of the household, this becomes problematic.
  • In cases like the above, any payments post-death to a spouse (without any reasonable (legal) right to receive this payment) is a capital drain on the business and may be questioned.
  • If the deceased shareholder was an Officer of the business and had signing authority at the bank for cheques, the estate representative needs to meet the bank officials armed with both a death certificate and a copy of the will of the deceased. The will should corroborate and name the estate representative as the person who will replace the deceased as signing authority.
  • Hopefully there is a good management team in place to keep the business operational (as a going concern) until a decision on its future can be finalized.
  • The estate representative should meet (post haste) with the company management team to introduce himself/herself and get a very concise explanation of the activities of the business and pressing issues.

More to come on this important topic.

CRA appeals

Posted: October 31, 2013 in Taxes
Tags: ,

I’ve done a few in my day. The CRA disallows a key deduction and this results in your tax bill going through the roof. What to do? There is the T400A appeal. This is a formal process that starts with a clear articulation of your reasons why the refusal should be reversed.

The important point is that the appeal must be accompanied by supporting documentation. The appeal must be sent to your local CRA appeals office. Usually the appeal determination could take from 3-6 months.

I’ve done a few for tuition deductions as well as disability appeals. They take a long time and the T400A appeal must be crafted carefully.

Many small business entrepreneurs who I’ve met feel it is better to start out as a corporation rather than being a self employed proprietor. Their thinking is that they escape personal liability operating under a corporate veil. Let’s look at some factors to be considered before incorporating.

A corporation is a separate legal entity from the owner (ie the shareholder). If the corporation is a Canadian Controlled Private Corporation (CCPC) there is a very lucrative small business deduction of 17% from the 38% corporate tax rate. There are other small business deductions depending on the business sector. Provincial corporation taxing authorities offer small business deductions as well.  In an ideal world, an individual who is in the 45% marginal tax bracket, could take dividends in lieu of T4 salary income and be better off on an after-tax basis.

A corporation offers limited liability protection against trade creditors. The liability of the shareholder is limited to the extent of the amounts owed plus any damages that might be awarded in a civil litigation case. A prudent shareholder/owner would want insurance protection as well so this could be covered off in a strict downside situation.

The Canada Revenue Agency (CRA) can hold the shareholder/director personally liable for unpaid corporate remittances for: employee payroll remittances, harmonized sales tax (HST) remittances and corporation tax remittances. If a company has bank lending facilities (ie line of credit and term loans) the bank will require personal guarantees in the case of default.

The incorporation process can be costly but worth the effort if the business performs as planned.  The share structure must be carefully planned so a lawyer should be retained. Should you incorporate federally or provincially?

The year end of the corporation requires a T2 tax return and this should be prepared by a professional accountant. Depending on the type of financial statement required the exercise could cost the company between $1,000 to $5,000.

Plan before you incorporate.

 

 

 

 

The investment in a corporation is comprised of:

  • Retained earnings
  • Shareholder loans

This can be a large dollar figure. Retained earnings acrete when net profits add to the opening year retained earnings balance in the shareholder equity section of the balance sheet. Shareholder equity is reduced  when a business incurs a loss.

An increasing retained earnings will improve business capitalization and make creditors (like your commercial bank) happy. The main issue that I have with retained earnings is that they are locked in a business. They can be paid to shareholders as a dividend but the business must (a) replace the dividends paid out my future earnings and (b) have the cash flow to pay the dividend.

Canadian households have a lot of net worth tied up in the equity in their homes. Many Canadians downsize – move from their home to a condo or apartment – as they age and the kids leave the nest. They monetize the wealth they accumulated over the previous 25-40 years. A small business corporation is a key line item on a personal balance sheet. The value of business equity can be estimated but the main problem remains: How do you monetize the equity in your business?

Releasing retained earnings should be a major focus for a shareholder of a small business corporation. How can I take a combination of salary and dividends to minimize my tax liability? If the business is not in a cash position to pay dividends, what steps should you take to get the business “dividend ready?”

A financial planner has models to restructure your investment portfolio such that preservation of capital and income (from your investments) goes to the forefront after 50.

Why isn’t this done with retained earnings?

 

 

 

 

I guess it stands to reason that this would be a useful and timely post given the time of year? Here are a few tips that you might find useful. Maybe you already know about these, maybe you don’t.

  • Office in the home deduction. If you operate a home-based business and your office is in a converted room (a bedroom?) you can deduct a portion of the home costs (mortgage interest, property taxes, utilities, home insurance and home repairs) as an office in the home deduction. The proportion would be:  All of the above costs x room for business use divided by number of rooms in the house. This is already on the T2125 statement of revenue and expenses.
  • Splitting pension income with a spouse. You may have a qualifying pension (PSSA pension, private sector pension or public sector pension) plus a registered retirement income fund (RRIF) in addition to business income. You and your spouse can elect to split your pension (up to 50%) by filing a T1032 form. Regardless of your spouse’s age he/she will qualify for the $2,000 pension income deduction so there could be significant tax savings. This is a great tax planning device if the transferring spouse also has Old Age Security (OAS) benefits that might otherwise have to be clawed back on the T1 return.
  • Tax Free Savings Accounts (TFSAs). These are very useful tax savings vehicles. If you have business income and pension income and have T3 or T5 slips with interest or dividends or capital gains, this income could be taxed at your (high) marginal rate outside a TFSA. You can transfer in $5,500 per year into a TFSA for you as well as your spouse. The income earned inside the TFSA is not taxable. Be careful though, the TFSA is not fee-free. Depending on the investment vehicle chosen you could be subject to deferred sales charge fees if you sell. Ideally you want no-load funds in a TFSA so you have immediate access to your funds if you need them.