Ascend Financial
It's not what you earn... It's what you keep

Do You Enjoy Paying Tax?

If you are like most of us, disposable income over the last few years has dwindled as a result of the economic downturn. If you are one of the lucky ones you have maxed out your registered plans and still have enough disposable income to invest outside your registered plan. The problem is that any distributions received on the unregistered investments is taxable. This is where consideration of your investments and their associated tax consequences must be carefully analyzed.

An investment that is noteworthy of your analysis is the CI Corporate Class funds. These funds provide you with some of the benefits that can be found  with a tax free savings account or other registered accounts. These benefits include the ability to defer tax on investments income and capital gains. This allows for increased compound growth over the long term and the ability to make investment decision, such as rebalancing your portfolio, without worrying about the tax consequences. These funds can also allow you to draw tax efficient cash flow from your investment through T-Class funds

What is CI Corporate Class Fund

CI Corporate Class is, as the name suggests, a mutual fund corporation. As opposed to the mutual fund that can be structured as a trust, the mutual fund corporation is one entity that may consist of any number of share classes, each representing a separate fund. The Income Tax Act allows investors the ability to transfer classes of capital stock of the same corporation without tax consequences. This is the basis for the CI Corporate Class and it can result in significant tax benefits for investors.

The structure effectively creates an umbrella for the funds in the corporation. Under which the investors can switch between classes, or funds, without triggering a capital gains or loss.  The actual gain or loss only occurs when you redeem from the corporation.

The Benefits of the Corporate Class Umbrella

CI Corporate Class provides the most tax efficient investments across a large selection of asset classes.

The structure allows you:
- to switch funds within the corporation without tax consequences
- receive tax efficient capital gains or Canadian dividends from traditional income funds, and
- defer paying tax on distributions, given the low dividend payout of the fund.

Please note that this Blog is just a brief overview of an investment with potential tax efficiencies. It is an investment that needs to be analyzed to determine if it fits in your investment portfolio. Decisions to invest in a Corporate Class Fund should only be done after meeting with your investment advisor. We are not investment advisors and we bring this information to you attention to educate you on potential tax efficient investments.
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A Personal Service Business in Canada


Canada Revenue Agency’s (CRA) enforcement of Personal Service Business

In the late 1960’s, Ralph Sazio, who led the Hamilton Tiger-Cats to three Grey Cups, decided it would be better for him, tax-wise, to contract his services to the club rather than be an employee so he incorporated. CRA took exception to this and denied the expenses he was claiming. He proceeded to challenge this decision in court and won his case.

This prompted CRA to change the rules preventing individuals from incorporating themselves to realize the tax benefits of a small business corporation. Thus, a Personal Services Business is denied the Federal Small Business deduction on the first $500,000 of active income resulting in increased tax rates for that corporation. On top of that, PSB’s are also denied most of the normal expenses attributable to running any other corporate organization. The only allowable costs that can be deducted are wages and employee benefits with a few minor exceptions. Effective for tax years beginning after October 31, 2011, the general rate reduction has also been disallowed for all PSB’s, again increasing the corporate tax rate.

There has been a concerted effort by CRA to “track down” some of the corporations that could, realistically, be classified as a PSB, going back, in my experience, to 2008 tax years resulting in disallowed expenses, increased tax rates and huge tax reassessments. Most PSB’s are corporations with one or two shareholders performing a service for a few (often only one) customers. These small corporations file their tax returns, pay their GST and payroll remittances etc. in the belief that they are complying in all respects with what is required.

CRA has hit the Information Technology (IT) industry the hardest with their PSB designations which is interesting considering the Government of Canada actually hired most of them through employment agencies to provide IT services directly to various Government departments. It was the hiring agencies that “required” these individuals to incorporate in order to provide these services in the first place. They were not allowed to perform services for other clients while working on Government technology. Once the upgrades were all completed, CRA audited many of them and deemed them to be PSB’s. Ironic, if not downright nasty.

Criteria used by CRA to determine whether a company is a PSB may include:

                1. Number of employees (has to have more than 5 full-time before it is NOT a PSB)

                2. How many clients or customers the company has

                3. How much control the contractor has over the work being done by the company

                4. Who owns the tools for the work done

                5. Whether there is a chance for profit or risk of loss

                6. The degree of integration between contractor and company

 

In order to be considered an independent contractor, there must be no commitment regarding number of hours worked, little or no supervision, invoices issued by contractor, no benefits received from the contracting company, and use its own office and equipment to do the work. Without the use of the intermediary corporate structure, the individual performing the service would reasonably be considered an employee of the company or person paying the corporation for the service.

 

Which brings us to another issue that is resulting in all of these PSB’s being created. In Alberta, in particular, many of the large oil and gas operating companies and related service companies have, for years, required the people performing duties for them become incorporated. This would include contract operators, tradespeople, safety consultants, etc. The individuals would normally be employed by these large companies, have regular payrolls with Canada Pension and Employment Insurance premiums deducted and paid by the company as well as applicable withholding tax. By “requiring” the individuals to incorporate, the large company does not perform any of the payroll functions and that becomes the responsibility of the incorporated individual. Also, these contractors are further “required” to possibly provide their own vehicle, fuel, cell phone, insurance, tools and pay accounting costs to file their annual tax returns. If deemed a PSB, these operating expenses will be disallowed by CRA. Only the shareholder’s wages and benefits become deductible for tax purposes. The individual either complies with the request of the contracting company and registers with CRA or looks elsewhere for work.

 

There are rules pertaining to employed versus self-employed, CRA Guide RC4110(E), that would be used in determining whether an employer-employee relationship exists. By requiring an employer-corporation relationship, the employer is navigating around its responsibility towards an individual and CRA seems to be allowing that while penalizing the individual “required” to meet the employer’s criteria.

 
According to the Provincial Government’s 2012 report, Alberta has led Canada over the last decade with an increase of 15,288 (11.9%) in the number of new establishments with less than 50 employees. My guess is that many of these may be considered PSB’s if CRA ever chooses them for an audit.

 
Sometimes the economy is such that people really have little choice in the structure under which they earn their living. Incorporate or find a job elsewhere seems to be the prevailing attitude with many of these hiring organizations. They earn their income by contracting their contractors services.

 
If you would like further information or a more detailed history, please do not hesitate to contact me.
 

Coleen Gordon CGA

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Corporate Tax Tips


 

 
Year-End Tax Planning Checklist for Corporations

In these uncertain economic times we live in, the owner-manager will have to maintain his focus on many things throughout the day and, often times, planning to minimize their corporation’s taxes may fall to the wayside. The enclosed tax planning checklist and the help of your Ascend Financial accountant can assist you in determining which tax strategies are most suitable for you and can guide you in making informed decisions regarding the planning opportunities discussed below.
Optimal Salary – Dividend Mix Remuneration for 2012

It is important for the owner-manager to determine the optimal mix of salary and dividend. Certain personal factors should be considered in making this determination, such as, marginal tax rate, RRSP contribution room, CPP/QPP contributions and other deductions and credits, such as child care.

As a general rule of thumb, if a corporation is earning active business income below the federal small business deduction (“SBD”) limit ($500,000) it is usually more advantageous for the owner-manager to receive dividends. If the corporation is earning income in excess of the SBD limit, it is usually preferable for the owner-manager to take a bonus. In the event the owner-manager does not need the money for personal consumption, there may be a tax deferral if the income is kept in the corporation.

Consider accruing reasonable salary and bonuses before year-end. The bonus must be paid within 179 days.

Shareholder Loans

Repay any shareholder loans from your corporation no later than the end of the following taxation year after the amount was borrowed.

Consider the benefit of charging interest on any shareholder loans made to the corporation.

Income Splitting

Consider paying salaries to family members in lower tax brackets. The salary paid must be reasonable and commensurate with the services rendered. In addition to reducing the family’s overall tax, it allows the family member to have earned income for CPP/QPP, RRSP and child care expense purposes.

Consider setting up a trust to enable the corporation to pay dividends to your spouse or children who are 18 years of age and older.

Purchase Capital Assets Before Year-End

Corporations planning to acquire capital assets in the near future should consider acquiring them prior to the end of their fiscal period. If the asset is acquired and put in use before year-end, the corporation can claim half of the normal capital cost allowance (“CCA”) deduction for the year.

Consider purchasing eligible manufacturing and processing machinery and equipment to take advantage of the accelerated 50% straight-line CCA deduction. This accelerated deduction will continue to apply for purchases made before 2014.

The purchase of eligible manufacturing and processing equipment may also entitle the corporation to a 10% refundable tax credit if the equipment is used in Quebec.

Loss Selling

Investment corporations should consider selling securities with accrued capital losses prior to year-end to offset any capital gains realized in the current year or in any one of the three preceding years.

Ensure that the capital dividend account is cleared prior to any loss selling.

Charitable Donations

Consider making planned donations before year-end.

Consider donating securities of a public company with an accrued gain in lieu of a cash donation. The corporation will receive a donation receipt equal to the fair market value of the donated property. The capital gain will not be subject to tax and the full amount of the non-taxed capital gain is added to the corporation’s capital dividend account, which may be distributed on a tax-free basis to the shareholder.

Corporate Income Taxes

The federal general income tax rate in 2012 will be reduced to 15%.

Final Corporate Tax Balances

Pay final corporate income and capital tax balances by the due date, even if it entails borrowing the funds. The interest on the borrowed funds is tax deductible, whereas the interest assessed by the tax authorities is non-deductible.

Protecting Shareholder’s Investment in Business Assets

Consider transferring excess cash and other capital assets, such as real estate, to a separate holding company to secure it from potential claims against the operating company.

Consider securitizing any shareholder loans made to the corporation.

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As a Canadian ...



As a Canadian Selling US Property:
As a Canadian you are subject to U.S. income taxes if you dispose of U.S. real estate property. If any of the following pertains to your situation, we strongly advise you to meet with one of our accountants.

The Non-Resident Withholding Tax

If you are disposing of real property situated in the U.S., you are subject to a non-resident withholding tax of 10% of the gross sales price.

Your withholding tax amount may be reduced
You may make request to have the 10% non-resident tax withheld on the net capital gain on the disposition instead of the gross sales price by filing form 8288-B with the I.R.S. and obtaining a withholding certificate.

On the sale of your US property you are required to file a US tax return
In any year you dispose of a US property you are required to file a US tax return.  If you are disposing of real property that you have been renting, you must have filed your U.S. tax returns reporting the rental income and expenses up to the date of disposition, and paid all of the tax due in order to avoid penalties and interest.


Ownership in a U.S. property includes the following:

  • Direct ownership of U.S. real estate, including land improvements and leaseholds, and personal property associated with the use of the real property.
  • Ownership of shares of a U.S. corporation in which more than 50% of the fair market value of its United States real property interests equals or exceeds 50 percent of the total real property interests and any other assets used in a trade or business.
The purchaser is required to withhold the tax from the gross sales proceeds and remit it to the I.R.S. within 20 days of the closing, along with Forms 8288 and 8288A. Penalties and interest will be charged on late filed Forms 8288. There is a penalty of up to $10,000 over the tax for a willful failure to collect and pay.

No tax withholding required
If the purchase price of the property is under $300,000 and the purchaser intends to use the property as a personal residence the withholding requirement is eliminated. 


For more information contact us today at 1.403.823.1212

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