quadrantadmin, Author at Quadrant

Personal Investor: 2019 small business tax break has strings attached

This year, small businesses in Canada will get a reduced tax rate on the first $500,000 earned from 10 percent to 9 percent. However, if businesses hold over $50,000 in passive income, the tax rate will change based on the excess amount. It’s estimated small businesses with an annual income of $107,000 will save about $1600; giving small business an advantage – provided they do not have passive income. Larger small businesses that have high passive income likely won’t be able to benefit from the reduced rate.

“If the business holds more than $50,000 in what is termed “passive income” that corporate tax rate moves up depending on the excess amount.”

Time to do some active planning to beat the passive income tax changes

Small businesses who earned over $50,000 in passive income in the past year may no longer qualify for the small business deduction (SBD). Some business owners will be affected, but all should take note of the changes. One way to prevent the loss of this deduction if your “adjusted aggregate investment income” (AAII) is close to or exceeding the threshold, is to withdraw funds that would have been invested or invest in growth potential rather than interest earnings. Life insurance and pension plans can also be utilized to limit the amount. Whatever you choose to do, start planning now.

Key Takeaways:

The loss of the small business deduction will go into effect in 2019 for corporations with more than $50,000 in passive investment income from 2018.
Currently, the small business deduction allows for a low rate of corporate tax on the first $500,000, which is known as the SBD limit, for active business income per year.
Under the new rule, the SBD limit will be reduced by $5 for each $1 of AAII that exceeds $50,000 and will reach zero once $150,000 of AAII is earned in a year.

“If you are going to take the after-tax business income out of the company in the year it’s earned, then you’re not enjoying any tax deferral and the loss of the SBD is likely immaterial.”

Personal Investor: Boost your RRSP contribution with your refund

If you are looking for ways to increase your retirement savings, consider investing your tax refund early. If you add your refund before the March 1st cut-off, you will generate further tax savings provided the principal is paid back within a few months. This can be done by borrowing the money for a couple of months through a home-equity line of credit, and provided the money is paid back quickly then the small amount of interest will outweigh the additional tax savings on your return. There are plenty of online calculators available to help you with the calculations or speak to an accountant to determine the best way to do this for your situation.

“If you’re scrambling to put together a registered retirement savings plan (RRSP) contribution before the March 1 deadline, there’s a way to boost it by nearly 40 per cent by contributing the refund.”

New refundable dividend tax on hand (RDTOH) rules for CCPCs

For taxation years beginning after December 31, 2018, all Canadian controlled private corporations (CCPCs) earning investment income must consider a new set of complex rules relating to their refundable dividend tax on hand (RDTOH) balances. These rules could increase the tax costs to individuals when distributing corporate funds from their private corporations. Taxpayers will need to review their companies’ RDTOH balances to determine whether planning is required. The 2018 federal budget announced new measures that restrict the ability to recover RDTOH through the payment of eligible dividentds, with limited exceptions. As a result, the cost of extracting profits from a CCPC may go up for owner-manager. Consider speaking to your accountant about these rule changes will affect you, and how you can plan for these taxation changes.

The new RDTOH rules will impact taxation years starting in 2019. To prepare for the change, you should discuss it with your accountant and start planning now.

Your personal business better be real if you are using it to claim expenses

Canadian taxpayers who claim business expenses need to take care to ensure they’re valid. As a recent case involving an Ontario resident demonstrates, if the business is sketchy (aka not a valid commercial business), the Canadian Revenue Agency will pursue legal action against such activities, and win. In this case, a man ran an unincorporated business for years, claiming a level of business expenses that far exceeded his company’s revenue. He also kept poor records, which didn’t help his case. In court, the judge ruled against him, finding that the business wasn’t designed to make a profit, and his write-offs were thus in violation of tax law.

Key Takeaways:

Do not try to claim losses on your personal business unless it is really a legitimate business.
Make sure you keep all receipts in order, so that expenses claimed on your tax form match individual receipts.
Be forewarned that your case may go to court to be decided upon if you are claiming a loss on your personal business.

“Notwithstanding the reasonableness of his expenses, the real issue before the Tax Court was whether he could deduct any expenses as the CRA argued that the taxpayer did not actually have a commercial business.”

Americans living in Canada: Be aware that the IRS is watching you

America requires its citizens to pay taxes even when those citizens being taxed are not living inside the borders of the United States of America. This can sometimes come as a surprise to some who move abroad or out of the country to Canada, but the Internal Revenue Service (IRS) is still keeping track of income and payments issued to its citizens, and expects every citizen to file a tax return and remit any taxes due. Even if you’ve not been back to America for years, you’re still required to file and pay.

“The IRS enforces many different tax rules on U.S. citizens living abroad. Here are five additional cross-border tax issues for Americans living in Canada.”

As small business appetite to borrow grows, banks step up with speedy loan approval platforms

Small businesses in Canada looking for business loans are finding it easier to secure financing these days. Lenders have made the process so easy that businesses looking to borrow can be approved the same day as they apply. Use of technologies that determine what’s important to secure loans have made the application process more streamlined. As more Canadians are looking to start or finance existing businesses, the banks are ready and able to provide financing they are looking for.

“According to the bank, the small business-specific lending ‘platform’ allows it to cut down on the amount of time it takes to approve loans from weeks to minutes.”

Four tax tools to boost investment returns

Taxes are usually the bane of investors, because they nibble away at investment earnings. However, there are several tax tools that could safeguard or even plump up your investment dollars. For example, using a tax-free savings account, or a registered retirement savings plan, allows investors to grow their dollars in a tax-free way, using any of a wide array of available securities. Other ways that investors can potentially avoid losing some of their investment earnings include using a capital gains exemption or a dividend tax credit.

Key Takeaways:

One main difference between a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA) is that in the latter, you cannot deduct contributions from taxable income.
Contributions and gains inside an RRSP are not taxed until they are withdrawn – ideally in retirement when the plan holder is in a lower tax bracket.
An investor should also consider the capital gains exemption (only half of equity gains are taxed), using equity losses to offset gains, or the dividend tax credit (for eligible dividend stocks) to boost returns over the long-term.

“Taxes are normally seen as a drain on investments but there are four tax tools available to the average investor that could actually boost returns over the long term.”

Payback Time: As contribution room grows, the TFSA is the gift that keeps on giving

Investors who enjoy the benefits of a TFSA, especially income created from tax free dividends, can soon get more out of their accounts. The amount that can be contributed will go up by $6,000 in the next year. Those planning for retirement should consider also maintaining a RRSP account with a fully contributed TFSA. Taking small withdraws that are come with lower tax penalties from your RRSP and using a TFSA for the rest of your income can prevent large taxes on what could be considered high retirement incomes.

“In comparison, half of capital gains on equities in non-registered accounts are taxed and income is fully taxed. Dividends are also subject to full taxation with the exception of a tax credit on eligible payouts.”

Better data and approaches help the Canada Revenue Agency identify Canadians trying to hide …

Thanks to new approaches, new tools, and better data, Canada can better identify and take action against Canadians who evade taxes and use aggressive tax avoidance. With the introduction of the Common Reporting standards in 2017, the CRA now has access to greater information on Canadian’s overseas financial accounts. There are more than 100 jurisdictions and 80 partners, who share information on each other’s citizens, to help taxpayers to comply with their obligations. The CRA has also been a leader in creating a joint international tax force consisting of several countries cooperating to find and pursue tax evaders.

“Canada continues to be a leader in international collaboration as a member of the expanded Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC).”