Taxation of Investment Holding Companies

Our goal in this presentation is to focus on the following questions:

Why are holding companies so common among higher net worth individuals?

How is investment income taxed in a corporation and how does this compare to taxation of individuals? Is it better or worse to hold investments corporately rather than personally?

How do we help with estate planning for individuals who have corporations that will cause significant capital gains tax at death?

To click on the full presentation, please click on the link below:

Taxation of Investment Holding Companies presentation

For more information, visit us on the web: http://www.rmtca.ca

Rosenswig McRae Thorpe LLP
Toronto, Ontario
416-977-6600

2016 Federal Budget Highlights

The much anticipated 2016 Federal budget was presented today by Finance Minister Bill Morneau. For most of our clients, the tax changes were insignificant, with the major change being the new personal high tax bracket introduced in January. Below are some tax highlights.

Corporate Tax

  •  Restricting Small Business Rate Multiplication – The budget introduces measures that eliminate the small business deduction for corporations that provide services to a partnership during the year, where at any time, the corporation or shareholder of the corporation is a member of the partnership. This impacts professional service firms with complex structures, however it does not impact the structures used by most of our clients.
  • Increased Personal Service Business Rate – Effective for 2016 and later years, the federal tax rate on such corporations is increased 5% from 28% to 33% making the rates on such a business much worse off than earning the income as a self employed individual. This increases the downside for individuals who might be considered employees rather than independent contractors.
  • Life Insurance Transfers – Effective March 22, 2016, measures were passed to ensure that life insurance
    policies transferred into a corporation do not result in amounts that can be extracted by the shareholder tax
    free. This change was expected for several years.
  • Eligible Capital Property replaced – A new amortization (CCA) class with 5% amortization rate is being introduced eliminating eligible capital pools with the transition effective January 1, 2017. Current balances will transfer to the new CCA class. Future sales of goodwill and other former eligible capital property will result in recapture and capital gains. This effects clients who are selling their business and may make a share sale more attractive than an asset sale.

Personal Tax

  • Canada Child Benefit – Effective July 2016, this replaces the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). The benefit is as much as $6,400 for children under the age of 6 and $5,400 per child aged 6 through 17. The benefit is tax free however the amount received is income tested.
  • Child related credits removed – The arts and fitness tax credits are being halved in 2016 and completely eliminated in 2017.
  • Income Splitting – The budget introduced measures to remove income splitting through the family tax cut which previously saved families up to $2,000 per year. This is eliminated effective for 2016 and future years.
  • Eliminating the Education and Textbook tax credits – Effective January 1, 2017, there will be no credits for education and textbooks, however a credit will remain for the tuition itself.
  • OAS – The changes which were put in place to move the Old Age Security application age to 67 are eliminated, accordingly OAS application remains at age 65.

Other Matters

  • Increased audit and collection activity – The budget earmarks money and concerted effort in the area of increasing CRA audit activity and CRA collections.
  • Making Post-Secondary Education More Affordable – Through increases to Canada Student Grants (effective for the 2016-2017 year), increasing repayment income thresholds and other similar measures.
  • Labour Sponsored Venture Capital Corporation (LSVCC) Tax Credit – The budget restores to 15% such credits effective for the 2016 tax year for provincially registered LSVCCs.

Expensing Meals and Entertainment in Your Corporation

Meals and entertainment expenses incurred for business purposes can be written off in your company. So whether you are entertaining existing clients, potential clients, vendors or employees, these may be considered valid business expenses. Some of these are only 50% deductible for tax purposes while others could be 100%. It is important to distinguish between the two.

What meals and entertainment expenses are limited to a 50% deduction?

• Meals at restaurants where all employees are not invited;
• Tickets for a theatre, concert, athletic event or other performance;
• Private boxes at sports facilities;
• Fee paid for attendance to a conference, convention, seminar or similar event where meals are included, other than incidental items such as coffee and muffins, $50 per day is deemed to be paid for meals and entertainment and is subject to the 50% limitation.

What meals and entertainment expenses are 100% deductible?

• Meal and entertainment expenses of providing a holiday party or similar event where all the employees from a particular location are invited. Up to 6 such events are allowed in the year. Corporate clients can be included although expenses related to the clients are subject to the 50% limitation.
• Food/meals if it is part of the cost of goods sold for the business for example a restaurant, airline or hotel
• Meal pertaining to work by employees at remote work sites
• Meal and entertainment expenses incurred for a fund-raising event that was mainly for the benefit of the registered charity.

Other exceptions:

– Keep in mind there are specific rules pertaining to long haul truckers which are not covered in the above
– Also, self employed couriers and rickshaw drivers have allowable flat rate deductible amounts which may be taken

E-mails That Are Too Good To Be True

Beware of e-mails you receive that seem to come from Canada Revenue Agency (CRA) wanting to give you an increased refund through INTERAC or other means. These e-mails are NOT from CRA and are schemes to get personal information from individuals for nefarious use (identity theft, withdrawing funds from accounts, etc).

E-mails from CRA will be in both languages and will never be in only English or French. CRA is very clear that they do not send e-mails containing links (typical in e-mails requesting an INTERAC acceptance) and will not request personal information of any kind through e-mails.

If you would like more guidance, CRA has provided more information here, including examples of fraudulent e-mails, texts, letters and other materials that are circulating so you can better spot if something is fraudulent or not. If you are ever in doubt, contact CRA by phone directly so that they can confirm if a communication is legitimate.

If it seems too good to be true – unfortunately – it probably is.

For more information, visit us on the web: http://www.rmtca.ca

Rosenswig McRae Thorpe LLP
Toronto, Ontario
416-977-6600

SR&ED For Medical Professionals

Many companies, especially those in the manufacturing and technological space, take advantage of the Scientific Research & Experimental Development (“SR&ED”) tax credit program offered by the federal government in order to benefit from the funding on eligible research projects. Medical professional corporations (MPCs) may also perform work in the space of research which may qualify. Many practitioners with their own MPC work closely with hospitals, universities, or other such organizations to perform this work.

The SR&ED program allows materials and a portion of the salary for the individuals related to eligible research activities to be claimed for the credit. Where refundable, the credit can result in a current year reduction of taxes of about 60% of the actual SR&ED expenses – for example $1,000 of eligible salary expense creating a reduction/refund of up to about $600 of tax in the current year.

SR&ED claims can be filed up to 18 months after an MPCs year end. Therefore there may be an opportunity to make a claim for the last two taxation years. It is also an important factor in current and future remuneration planning.

If you would like to discuss how this opportunity may be applicable to yourself and your practice, please contact our office.

For more information, visit us on the web: http://www.rmtca.ca

Rosenswig McRae Thorpe LLP
Toronto, Ontario
416-977-6600

Spousal Income Splitting – How to pocket more by making the same

Personal tax rates in Canada are incremental which means that as you earn more income you pay more taxes. One may be able to take advantage of the incremental tax rates by moving income from the higher income spouse to the lower income spouse. This would mean income that would have been taxed at a higher incremental rate is now being taxed at a lower tax rate.

For example, in 2014, a couple with only one income earner making $100,000 gross and with no children would have paid $6,000 more in tax than a similar couple where each person made $50,000 gross.

The federal government has taken steps to provide income splitting measures in two areas, pension income splitting and new in 2014, the Family Tax Cut. Pension splitting has been around for a few years and allows people receiving pension income to transfer up to half the eligible pension amount to their spouse. The Family Tax Cut is generally available for couples that have a child under 18 at the end of the year and allows the couple to notionally shift (unlike the pension split which actually moves the income, the family tax cut is only a calculation and doesn’t actually move the income) up to $50,000 of income to allow a reduction in tax of up to $2,000.

The are also other great options one can implement for income splitting between spouses including:

Low Interest Loans – Have the higher income spouse lend money to the lower income spouse at prescribed interest rates (currently at 1%) to invest. This will allow the income earned from the investments to be taxed in the hands of the lower income spouse. Even though the higher income spouse has to report the 1% interest earned on the loan, the income earned from the investment would ideally be greater than this 1%.

Self-Employed – If one spouse is self employed and the other assists with the business, it may be possible to pay a reasonable salary or fee to the spouse. This would reduce the self employment income of the higher income spouse and move some of the income into the other spouse’ hands.

Whether income splitting with your spouse is possible and of benefit will depend on your specific situation and should be discussed with a tax professional.

For more information, visit us on the web: http://www.rmtca.ca

Rosenswig McRae Thorpe LLP
Toronto, Ontario
416-977-6600

Self Funding Your Health Care Cost

A business can sometimes find the cost of health insurance premiums overwhelming. Yet not providing some form of health insurance to your employees is not an option. For some businesses, self funding employees’ health care may be an option. Canada Revenue Agency recognizes this fact and has set up rules around a private health service plan (PHSP).

To read more about Private Health Service Plans, please click on the link below:

Health Spending Accounts

For more information, visit us on the web: http://www.rmtca.ca

Rosenswig McRae Thorpe LLP
Toronto, Ontario
416-977-6600