Year-End Planning for the Family Trust

There are many benefits to be gained from the creation and administration of a family trust, both from a tax and non-tax perspective. Talk to us if you have any questions about whether the creation of a trust is right for your family. Once your trust has been established, it is very important that the trust is properly maintained, or the benefits of having a trust could be at risk.

We recommend that the trustees do the following during the year:

• Meet on a regular basis (at least annually) to review the trust investments and the needs of the beneficiaries. Record such meetings in annual trustee minutes.

• Keep appropriate records of the trust’s disbursements. Retain bank statements for the trust, along with returned cheques.

• Make sure all payment of banking, accounting, legal and management fees, etc. are paid directly from the trust account rather than any of the trustees’ or beneficiaries’ personal accounts. This includes ensuring that the trust bank account is not guaranteed by any of the trustees’ or beneficiaries’ personal funds.

• Do not deposit money in the trust account discretionally.

• Make sure that the coin or money that was used to set up the trust stays stapled to the trust document for safe keeping.

We recommend that the trustees do the following in December:

• Pay all interest on any loans from family members. The interest must be paid by January 30th of the following year to avoid adverse tax results.

• Pay out income of the trust to the beneficiaries by December 31 of each year to avoid income being taxed in the trust at top personal rate. Record payments in a trust resolution.

• If income is not paid to the beneficiaries by December 31:
i. Ensure that a decision to pay out income to the beneficiaries is recorded in a trust resolution. The resolution has to be signed by December 31 of each year.
ii. Deliver a demand promissory note to the beneficiary, or, in the case of a minor, to the guardian of the beneficiary.

• Provide trust information to us at your earliest convenience to prepare the annual trust tax return. A trust return is due 90 days after the trust’s year end.

• Beneficiaries who have taxable income will be required to file tax returns. In the case of minors, the parent or guardian of that child must file a tax return.

Tax law is complicated and every situation is unique with its own set of circumstances.

If you wish to discuss any income tax or estate planning strategies please contact us, and visit us on the web: http://www.rmtcpa.ca

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

 

Amateur Athletic Trust Tax Issues

While all Canadians are proud of the accomplishments of our Olympic athletes, the performance awards the athletes receive are not awarded in recognition of service to the public and do not qualify as a prescribed prize. Therefore, Olympic athletes must include performance awards in their personal taxable income when received. However, the government allows amateur athletes to take advantage of tax deferral arrangements by creating amateur athletic trusts.

What is an Amateur Athletic Trust (AAT)?
An AAT is a form of inter-vivos trust where earnings attributable to the Amateur Athlete can be deposited without having to pay tax until the funds are withdrawn from the Trust. An international sports federation (ISF) may require certain amounts (appearance fees, prizes, or endorsements) to be held, controlled, and administered by a registered Canadian amateur athletic association (RCAAA) to preserve the athlete’s eligibility to compete in sporting events sanctioned by an ISF. In these cases, the RCAAA is the trustee and the athlete is the beneficiary.

Who can create an AAT?
In order to qualify as an Amateur Athlete for AAT purpose, the athlete must be a member of a RCAAA and be eligible to complete as a Canadian National team member in an international event sanctioned by an ISF.

What can be contributed to an AAT?
Endorsement income, prize money, or income from public appearances or speeches may be contributed to an AAT, if it is received in connection with the athlete’s participation in international sporting events.

How is an ATT taxed?
Amounts contributed to an AAT, are excluded from the income of the amateur athlete. Furthermore, no tax is payable by the trust, including investment income earned by the trust. Property in an AAT is included in the beneficiary’s income on distribution or, as with the existing rules, eight years after the last year in which the athlete was eligible to compete as a Canadian national team member. Property remaining in the trust at the end of the eight-year period is deemed to have been distributed to the beneficiary. The trustees need to file a tax return for the trust no later than March 31 each year.

Income contributed to an AAT after 2013 qualify as earned income for purposes of determining the registered retirement savings plan (RRSP) contribution limit of the trust’s beneficiary.

If you have any questions for Amateur Athletic Trust, please contact the undersigned and visit us on the web: http://www.rmtcpa.ca

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

Incorporation

Using a corporation can mean financial benefits and wealth accumulation but also increased administrative responsibility. Things to keep in mind after you have incorporated:

1. File form RC1 with the CRA to obtain federal and provincial tax registration numbers for corporate tax, GST/HST, payroll withholdings.

2. Open and operate corporate bank account(s) with all revenues and expenses flowing through the account(s). You will need your articles of incorporation in order to open a corporate bank account. Keep in mind business cash belongs to your corporation which is a separate person from you.

3. Prepare annual financial statements. This means selecting the way you will record your business activity either through a manual spreadsheet or using accounting software.

4. File annual Canadian corporate tax returns with the federal government and specified provinces as applicable which are due six months after year end.

5. No tax installments are required for the corporation’s first fiscal year. If there are taxes payable for your end, this may be due as soon as two months after year end.

6. Withhold and remit to Canada Revenue Agency payroll deductions, the frequency of which will depend on how salary is paid; monthly, quarterly, etc.

7. Hold annual shareholder and director meetings and document such in minutes and director’s resolutions

8. If the gross Ontario remuneration for the year is to exceed $450,000, apply for an Employer Health Tax (EHT) Account to file an annual EHT return and to pay the required EHT. Also apply if your first year salaries for all associated companies will exceed $5M.

9. Issue and file annual T4/T4A forms to evidence salary paid and T5 forms to evidence dividends and interest paid during a calendar. This is due at the end of February of the following year.

10. Have proper professional liability and general insurance.

11. Have new stationary such as business cards, letterhead, etc.

12. Use a proper signage showing the name of the corporation.

13. Change all lease agreements or contracts pertaining to you before to the name of your corporation.

If you have questions regarding incorporation, please contact us and visit us on the web: http://www.rmtcpa.ca

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

Capital Gain Exemption

Each Canadian is entitled to a Lifetime Capital Gains Exemption (“LCGE”) of up to $824,177 for 2016, (this amount is indexed annually) on the disposition of Qualified Small Business Corporation (“QSBC”) shares. The exemption is $1,000,000 on qualified farm and fishing properties. The exemption also applies to capital gains that are flowed to individuals through partnerships and trust.

How to qualify for the exemption:

To qualify for the exemption, shares of a corporation must be QSBC shares. To be a QSBC share, a few tests must be met:

1. At the time of share disposition, the corporation must be a Small Business Corporation (SBC). A SBC is a Canadian Controlled Private Corporation (CCPC) where all or substantially all (i.e., 90% or more) of the assets, on a fair market value basis, are used principally in an active business, that is carried on primarily (i.e. 50% or more) in Canada by the corporation or a related corporation.

Note: The assets meeting the 90% or more test may include shares or debt in another SBC which is controlled by the CCPC or of which the CCPC owns at least 10% of the voting shares and value.

2. The second test is a holding period test. No one other than the shareholder (or a person or partnership related to the shareholder) must have owned the shares during the 24 months immediately preceding the disposition. During this period, at least 50% of the fair market value of the corporation’s assets must have been used in an active business.
Planning regarding availability and timing of LCGE:

1. If a corporation holds non-active assets such as stocks, rental buildings,                                etc., consider transferring those assets to another holding company to purify the                    corporation.

2. Have family members as shareholders to allow access to multiple LCGE as each                  Canadian resident is entitled to a LCGE.

3. Consider crystalizing a gain by selling shares of the QSBC to a spouse or adult                      child. A reason to do this is to lock in the capital gain exemption while the                                corporation shares still qualify, for example, before the corporation accumulates                    investment assets.

Access to capital gain exemption can be reduced or denied depending on the shareholder’s previous tax claims. If you have any questions regarding LCGE and QSBC planning, please contact our office.

If you have questions regarding provincial residency, please contact us and visit us on the web: http://www.rmtcpa.ca

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

Canadians Moving to the US – Tax Concerns

Canadians looking to move to the United States must consider a number of tax issues as some significant differences, noted below, must be properly planned for to avoid paying significantly higher cumulative taxes.

Income Tax Residency: U.S. persons, which includes citizens and resident aliens, are subject to tax in the United States on their worldwide income. A resident alien is a person who (1) is lawfully admitted for permanent residence; (2) meets the substantial presence test; or (3) satisfies the requirements and makes an election to be treated as a resident. Many Canadians moving to the U.S. are likely to be taxed on their worldwide income.

RRSP: Periodic withdrawals will be subject to 15% Canadian withholding tax but the cost amount of the RRSP investments as calculated on the day Canadians take up residence in the U.S. can be withdrawn tax free.

TFSA: Emigrants can continue to hold a TFSA and pay no Canadian tax on TFSA income. There is tax in the U.S. on any income earned each year in the TFSA as the tax treaty does not protect a TFSA as it does an RRSP.

RESP: Although emigrants can continue to be the subscribers on the plan after they move to the U.S, the annual income earned in the RESP plus any grant or bond money received annually would be taxable in their hands in the U.S. since the RESP is considered to be a foreign trust for U.S. tax purposes.

Capital Dividends: Under U.S. law, dividends follow a certain order of distributions so Canadian capital dividend may become taxable in the U.S.

Canadian Estate Freezes: A typical Canadian estate freeze is exchanging common stock for fixed value preferred stock to freeze the current value of the company for the founder, and pass future growth to the subscriber of new common shares. This technique may not work in the U.S. because preferred stocks are not considered stock in these transactions. The exchange will be taxable in the U.S.

Capital Gain Exemption: The U.S. does not recognize the capital gain exemption.

Allowable Business Investment Losses (ABIL): An ABIL remains a capital loss for U.S. tax purposes.

Principal Residence Exemption: Property must have been used as the principal residence for at least 2 years in the 5 year period ending on the date of sale. The exemption is only up to $250,000.

Stock Options: Benefits from an employee stock-option are taxed at different time in Canada and U.S. Double taxation may occur due to a potential mismatch of foreign taxes for foreign tax-credit purposes.

Flow-through shares: In Canada, flow-through shares allow for the “flow-through” of exploration expenses from resource companies to individual investors. The U.S does not recognize the flow through characteristic of these shares and will disallow the deduction of resource expense.

Pension Income Splitting: Canadian residents can elect to split eligible pension between spouses to reduce total taxes but the U.S. does not recognize the deduction for pension split.

Lottery winning and gambling: Lottery and gambling winnings are taxable in the U.S. Losses, however, may be deductible subject to certain limits.

The taxation of residents moving between Canada and the United States is a complex area, and is likely to remain so. Negative tax consequences can be alleviated (at least to some degree) with proper planning. If you have any questions, please contact our office.

If you have questions regarding provincial residency, please contact us and visit us on the web: http://www.rmtcpa.ca

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

Provincial Residency

Provincial Taxation of Individuals

There is a difference in tax rates between Ontario and Alberta. The salary difference is 6% (Alberta at 48% while Ontario 54%) while the difference on dividends received from public company’s is 7% (Alberta 32% while Ontario 39%) and the difference on dividend received from a private corporation is generally 5% (Alberta 40% while Ontario 45%). Becoming a resident of Alberta is appealing to high-income Ontario residents particularly when they are about to receive large amount of dividends, or compensation payments.

Generally speaking, where a person lives on December 31st determines what province he pays tax in for the entire year. Where an individual has residential ties to more than one province at the end of year, he will be deemed to be resident only in that province which may reasonably be regarded as his principal place of residence. The determination of a principal place of residence will be dependent on the strength of ties to each province, including where the individual has a permanent residence, where the individual’s family lives, attends school, where the individual works, and where the day-to day activities occur.

We recommend the following actions concerning provincial residency change from the perspective of an individual who is moving from Ontario to Alberta:

  • Sell Ontario residential properties, or list it for sale; a long-term lease with an arm’s length third party if a sale is not desirable;
  • Ship all of your belongings to Alberta residential address;
  • Purchase/lease residential property suitable for you and your family in Alberta;
  • Ensure that family members relocate to Alberta;
  • Notify the CRA and any other persons who send correspondence to you of your new address in Alberta;
  • Discontinue, or place on a non-resident status, your memberships or associations in Ontario, including social, community, religious and professional organizations;
  • Any subscription of newspapers, periodicals and magazines currently sent to you at an Ontario address should be cancelled or redirected to your Alberta residential address;
  • Discontinue rental of any Ontario safe deposit box or post office box;
  • Terminate Ontario government health insurance and apply for coverage under Alberta government health insurance;
  • Do not maintain a personal mailing address or telephone listing in Ontario, and have your cell phone number updated;
  • Discontinue use of stationery, including business cards, showing and Ontario address;
  • Bank account currently maintained through Ontario bank branches should be moved to Alberta bank branches;
  • Cancel any Ontario driver’s licence and obtain an Alberta driver licence;
  • Ensure your vehicles are register in Alberta;
  • All federal and provincial income tax returns and other filings should be prepared on the basis that you are resident in Alberta as at December 1, 201X and thereafter, assuming that appropriate steps have been taken in 201X;
  • Limit the time you spend in Ontario as much as possible.

The foregoing facts are in no particular order of importance. Specific personal situations could affect the actions needed.

If you have questions regarding provincial residency, please contact us and visit us on the web: http://www.rmtcpa.ca

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

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.rmtcpa.ca

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