quadrantadmin, Author at Quadrant

Ottawa has turned income-splitting rules into an absolute nightmare for small businesses

When the government replaced the income splitting rules for private corporations, they could have made it simple. Instead, the new package is complex and pages are filled with the new rules, lengthy definitions and exemptions to the rules. Basically what the new rules now require is that family members prove that their contributions to the family business are meaningful enough to get the dividends they receive. If they can’t, then the dividend income will be subject to punitive tax rates. If a company earns less than 90 percent of its income from a service business, the rules will not apply to certain family members. Since most of Canadian small businesses are service providers, they do not qualify for these exemptions.

Key Takeaways:

Income splitting involves diverting dividend income (and certain other types of income) from one family member to another member in a lower tax bracket.
Under the new rules, family members over age 24, who work less than 20 hours per week may have to prove that their contributions to the business are reasonable.
Some of the factors for work to be considered reasonable are: work performed, property contributed, risks assumed and any other “relevant factors,” in addition to this being compared with contributions made by their relatives.

“In short, it means that many family members — of all ages — now have to convince the tax authorities that their contributions to the family business are meaningful enough to justify the dividends they receive. Otherwise, they risk punitive tax rates on the dividend income.”

How not to blow your Series A funding budget

Obtaining Series A funding for a business venture can be time-consuming and requires determination to navigate and secure. Furthermore, Series A funding often alters the nature of your business in certain ways, like creating obligations to these investors who might not share a personal connection with you in the way of your earliest investors probably do. After accepting some structural changes, next you’ll need to be mindful of the costs associated with hiring the right people and building the right type of team. It’s also common to underestimate or forget to include some operational costs. Founder may be well advised to not do everything themselves, take the time to consider their options and regularly review their plan.

“Because the Series A process is a very significant event in the lifetime of a startup, the euphoria that comes with that can often lead to some poor investment and strategic decisions in the early budgeting stages.”

Ten ideas to increase your after-tax investment returns

When saving for retirement you want to make sure that you get the highest returns possible. One way you can boost your returns by 1.5 to 3 percent is by carefully planning and considering your options to achieve the best after tax investment returns. For instance, if you have investments that you’ve held for a long time, you can minimize portfolio “lock-up” by periodically selling them when you have capital losses to offset the gains against, and then you can even buy back the same investment. Incorporating tax strategies into your investment portfolio while you are saving can significantly increase your returns, and if you’re unsure about what strategies to use or are unclear on tax laws, speak to a tax specialist.

“Wouldn’t it be nice to add a guaranteed additional 1.5 per cent to 3 per cent annually to your after-tax investment returns? This is possible if you take steps to minimize the tax on your portfolio.”

Coming clean to the CRA

A small-business owner, who has not kept up with their taxes, is concerned that their receipts and bookkeeping haven’t been recorded properly, and they want to know if a ballpark estimate can be made and submitted to the Canada Revenue Agency (CRA). Since the burden of proof is on the company, the best advice is for them to hire a bookkeeper or accountant to go through their business records and recreate the books. In the event of a review or audit, any company estimating could be subject to paying significantly more without proof.

Key Takeaways:

After not filing taxes for a couple years, a small business wants to know if they can file late taxes through estimation.
Business owners are required to keep accurate records each year, so hiring a good accountant to get caught up is imperative.
File late taxes as soon as possible to minimize penalties and interest.

“By not keeping records, you are inviting CRA to do the estimating for you—and they will estimate high.”

GST and HST basics – how to do right by the CRA and your business

Entrepreneurs and small business eventually grow to a level where they need to start charging a Goods and Service Tax (GST) and/or a Harmonized Sales Tax (HST). Some companies put off charging these taxes until their company reaches the threshold of $30,000 sales over the last four consecutive quarters. One reason a company may not sign up immediate is because some customers cannot claim the tax back. Taxes cannot be collected at a later date, so companies making over the minimum need to register with the CRA and start applying the tax according to the CRA’s guidelines.

Key Takeaways:

Proper collection of the GST and HST depends on such factors as the customer’s location, and the business’s annual revenue.
A business has to decide not only which tax to collect, but when to start collecting and how often to file.
Business owners who aren’t sure of their GST/HST responsibilities should call their accountant or the CRA.

“The CRA will wait for your return, but they don’t want to wait for your money.”

Why you need a plan when withdrawing from an RESP to pay for school

Often, a Registered Education Savings Plan (RESP), is created by parents long before a child has any notion of what a post-secondary education even is. When the time comes to withdraw from the account, advisors recommend proper planning to ensure there is sufficient time to convert those investments into cash. In addition, the type of withdrawal is important. There are two types of withdraws: the refund of contributions, and the educational assistance payments (EAP) portions. Generally, it’s wise to withdraw the investment gains and EAP monies first. The reason is that if a child stops going to a post-secondary institution and there is money still in the EAP portion, then the federal grant money must be repaid to the government. Keep in mind that the refund of contributions are not taxed, but the EAP amount is taxed as the student’s income.

“You want to use up your educational assistance payments first because if there’s any left in the pool and your child is no longer going to school and won’t be going to school those are going to need to be repaid back to the government,”

If you want to keep wealth in the family, be careful how you bequeath it

In Canada, care must be taken in how you pass on an inheritance to your children. Some provinces, like Ontario’s Family Law Act, clearly protects inherited wealth by ensuring that it remains the property of the inheritor, and not be split equally in case of a divorce, after it is bequeathed. However, how the inherited or gifted funds are used can nullify this exclusion. For instance, if the inheritance is used in the matrimonial home, then the courts will decide whether or not the money qualifies for exclusion. This example illustrates why it is important to be aware of how you designate any wealth you will be passing to your children.

“Beneficiaries of an inter-generational transfer of wealth should take notice of the need to properly plan if the intent is to ensure the funds are not shared in the unfortunate event of a divorce.”

Retiring baby boomers will trigger a huge wave of business transfers over next 5 to 10 years: CFIB

According to the Canadian Federation of Independent Business, Canada is facing an impending glut of ownership transfers from its small businesses as baby boomers retire and pass away. As many as 72 percent of small businesses will experience such transfers in the next ten years. The concern is that only eight percent of such businesses have a formal transition plan. This can cause havoc if the owners are incapacitated suddenly and there is no clear succession in place.

“While it is encouraging that a good proportion of business owners intend to pass their business on to a new generation, the lack of formal planning gives rise to significant risks for Canada’s competitiveness and prosperity.”

Borrowing to invest? Court ruling provides tax guidance

Breaking tax rules, even if you did so unintentionally, can be costly as a Canadian taxpayer recently found out after a Tax Court of Canada (TCC) decision. This case deals with interest deductions. The rules allow borrowers to deduct interest on their borrowed funds, but these funds must meet specific criteria. The money borrowed needs to be used for taxable purposes, such as mutual funds, or for earning other sorts of non-exempt income, such as the acquisition of rents. The borrower got it almost right. He did borrow to invest in mutual funds. But, then he got some of the capital back. Had he continued to put the money back into his investments, then this would have been all right. Unfortunately, the investor used the funds for personal expenditures, removing his ability to deduct interest. And, even though the percentage used for personal use was small, it was no longer possible to show a clear trail from borrowing to purpose. Understanding the fine print of tax law in this case would have saved this borrower a court trial and defeat.

Key Takeaways:

Knowing the rules of tax planning can save you a lot of money and help you avoid costly mistakes.
The rules around interest deductions can be complicated, but there are some general principles that apply here, namely the “purpose test” and “direct use” test.
If borrowing money, you cannot deduct interest charges if you are taking personal interest from the funds received from the borrow money.

“Earning income from business or property is important to deducting your interest costs. Be aware that capital gains don’t count as income from property.”

Tax traps when converting a home to an income property

The Principal Residence Exemption is a Canadian statute meant to protect Canadian tax-payers and families from accruing tax on the capital gains of a sold property, provided it is deemed the primary residence. Basically, a legal family unit can designate one residence as the primary family residence per year. However, the designated property must be used for living in and not for any commercial purpose. There is leeway for homeowners that live in their primary residence, yet rent out a portion. Assuming that the ratio of income-generating space to personal homeowner usage still favors the homeowner and no structural changes were made on the property, nor were Capital Costs Allowance assessed, then the PRE umbrella can still shelter the property. Even homeowners that use there entire property for rental purposes can claim PRE by a special election which more or less nullifies the event and allows the family of residence or the individual homeowner to go on treating the property as a primary residence, provided that the owner(s) sells it in five years and never declares any other residence as a primary residence during that time period.

“When a property changes use from principal residence to income-producing, the PRE should shelter the entire capital gain provided the property is designated the taxpayer’s principal residence for each tax year owned. The concern is that when the converted income property is sold in future, a higher taxable capital gain may result.”