Low Interest Rate Loans

In today’s low interest rate environment, there is growing opportunity to reduce your tax burden by splitting income among family members. Our tax experts are able to identify such opportunities.

We were recently approached by a 65 year old client who had $40M worth of non-registered investments, earning him an annual return of $2M. He was paying $800k- in tax on this investment, leaving him with 1.2M.

Our client was also paying for his four grandchildren’s private school tuition, a grand total of $80K a year ($20K per child). Due to the fact he was paying these tuition expenses on behalf of his grandchildren, we recognized a more beneficial way in which these payments could be made. Rather than withdrawing from his personal after-tax funds, we were able to shift the amounts so that the taxes were borne by the grandchildren who had no other income.

RMT devised a plan in which a trust was set up for the direct benefit of his grandchildren. Our client then lent that trust $2M at an interest rate of 1% per annum*. The trust then turned around and invested the $2M, earning a 5% return that resulted in $100K of annual investment income. The trust pays $20K as interest to our client on the $2M, and pays the remaining $80K in school tuition.

As a results of the trust and loan, rather than paying $800K in tax, he paid only $770K in taxes on the remaining $38M in non-registered investments, including the $20K in interest earned on the loan. Each grandchild reports $20K in income in order to account for the trust paying their tuition. The grandchildren have no taxes to pay in this situation, as they had no other income.

As a result of our set up, our client has saved $30K in taxes on an annual basis.

(*This rate is set by Canada Revenue Agency and does not vary once you make the loan)

Incorporation for Ontario Lawyers

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Canada has a tax system whereby individuals can pay up to 53% tax but corporations in Ontario pay 26.5% and in some cases as low as 15.5%.  If structured correctly, lawyers can receive their partnership income inside a corporation thereby reducing their immediate tax by 27%.

As long as the money is left inside the corporation, there is no additional tax. Once the money is withdrawn, additional tax must be paid.

Another benefit to incorporation is having the opportunity to pay personal tax on the partnership income when you are in a lower tax bracket – possibly when you are retired. Therefore, instead of paying tax at the top rates, you will pay tax on the income at the middle rates.

Let’s say that you make $500K a year, and need $200K pre-tax to live on. Therefore you have $300K pre-tax to invest. If you don’t incorporate, you will pay 53% tax on $300K and have $141K to invest. If you do incorporate, you will pay 26.5% tax on the $300k and have $221k to invest. That’s an additional 80k to invest!

Further, you remove the $300K from the corporation when you retire and are in a lower tax bracket. Therefore, instead of paying 53% tax, you pay 46% (income up to $150K is taxed at this rate). This is a true tax savings of 7%.

2017 Federal Budget Highlights

After a stressful month of worry it turns out…..  no change to capital gains tax!

Tax Planning Using Private Corporations

The budget highlighted a number of private company structures that will be reviewed by the government over the next few months. It did not specifically address any changes to these structures. The strategies mentioned include;

  • Dividend sprinkling shares – These are shares often held by low-income family members and are used to get dividends into their hands.
  • Holding a passive investment portfolio inside a private corporation – These are investment corporations.
  • Converting a private corporation’s regular income into capital gain – as only one-half of capital gains are included in income it results in reduced taxes where this can be accomplished compared to withdrawing money by way of salary or dividends

Closing Tax Loopholes

The budget proposes to make a few changes to strengthen the integrity of the tax system;

  • Prevent the avoidance/deferral of income tax through the use of offsetting derivative positions in straddle transactions. The government will expand the types of capital losses that will be denied if an unrealized capital gains position is also held.
  • Extend to RESPs and RDSPs anti-avoidance rules similar to the ones applicable in connection with TFSAs and RRSPs
  • Clarify the intended meaning of “factual control” under the Income Tax Act for the purpose of determining who has control of a corporation in order to prevent inappropriate access to supports such as the small business tax rate and the enhanced refundable 35-per-cent Scientific Research and Experimental Development Tax Credit for small businesses. The rule will now look at operational control of the corporation.

Increased CRA Activity

With additional funding from the government, there will be increased audit activity from CRA including;

  • Increased verification activity
  • Hiring additional auditors and specialists with a focus on the underground economy
  • Developing robust business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases
  • Improving the quality of investigative work that targets criminal tax evaders

Personal Tax

  • To simplify credit claims, the Caregiver Credit, Infirm Dependant Credit and Family Caregiver Credit will be replaced with a single credit – Canada Caregiver Credit starting in 2017/
  • Tuition Tax Credits will be extended starting in 2017 to expand the range of courses eligible for this credit to include occupational skills courses that are undertaken at a post-secondary institution in Canada, and to allow the full amount of bursaries received for such courses to qualify for the scholarship exemption (where conditions are otherwise met).
  • Starting in 2017, individuals who require medical intervention in order to conceive a child are eligible to claim the same expenses that would generally be eligible for individuals on account of medical infertility.
  • The Public Transit tax credit eliminated effective June 30, 2017.

Measures effecting Lawyers and Accountants

WIP elections for professionals are being eliminated so that income is taxed on an accrual basis.

5 Simple Internal Controls To Put In Place Around Financial Information

Internal controls are important to help safeguard businesses against errors, theft, and fraud.  There are many simple controls that a lot of business owners already have in place (locking up petty cash and blank cheques, background and criminal checks on employees and frequently changing passwords on programs).  However, when it comes to accounting, some owners think they are too small to be able to implement any simple yet smart and effective internal controls.

5 simple internal controls a business owner can put in place around financial information:

1.       Owner signs all cheques and only with appropriate supporting documentation attached.  Proper supporting documentation would include authorized purchase order, receiving report, supplier invoice.  Once paid, the invoice should be stamped or initialed to avoid duplicate payments.

2.       Mail should be collected by the owner or someone who has no accounting functions.  Mail should be opened by the owner but if time is a scarce resource then at a minimum the owner should open the monthly bank statements.  This way bank statements cannot be tampered with and cheques and payments are received directly by the owner.  If deposits at the bank are done by a person other than the owner, the owner should also complete the deposit slip before passing it off.

3.       Prepare budgets as this will help owners develop expectations.  Variances between actual to budget should be investigated thoroughly

4.       Review T4s for proper payroll deductions.  It’s a good time to also check that the T4s match to real people who have been employed and source deductions make sense.

5.       Review bank reconciliations as well as accounts receivable and payable sub-ledgers on a regular basis.  This will help identify errors and unusual transactions. Reviewing the sub-ledger will allow for timely investigation of old receivable and payables which may improve cashflow.   

New Residential Rental Property Rebate

The new residential rental property rebate (NRRPR) related to a property in Ontario can be worth as much as $24,000 to the builder.

To be eligible for a rebate there must be an:

Eligible Rental Property

• Detached or semidetached single unit house
• Duplex
• Condominium unit
• Townhouse
• A unit in a coop housing corporation
• A mobile home
• A floating home

Eligible Transaction

• purchased newly constructed or substantially renovated housing from a builder;
• constructed, or hired someone else to build, housing or an addition to housing;
• substantially renovated, or hired someone else to substantially renovate, housing;
• converted a non-residential property into housing; or
• made an exempt lease or sublease of land to another person.

When you buy a new rental property in Ontario:

When purchasing a property for rental purposes, you cannot assign the rebate to the builder and must file the rebate for directly with CRA. This does mean the additional upfront cash outlay of HST and waiting for rebate from CRA. Consideration should be given to such cash flow implications.

Filing deadline and time to process:

Depending on the specific type of rebate being applied for, the timing for filing can vary, but is generally a two year period starting from the date of the sale closing. The form to be submitted is GST524 and the associated forms noted therein. Generally, it takes CRA approximately two months to provide the rebate however this period can be longer if additional questions arise from CRA.

New Housing Rebate

The new housing rebate related to a property in Ontario can be worth as much as $30,000 to the purchaser.

To be eligible for a rebate there must be an:

Eligible House

• Detached or semidetached single unit house
• Duplex
• Condominium unit
• Townhouse
• A unit in a coop housing corporation
A mobile home
• A floating home

Eligible Transaction

• Purchased a newly constructed home
• Purchased a new condo
• Built a house
• Contracted someone to build a house
• Substantially renovated a house or condominium
• Contracted someone to extensively renovate a home or condo
• Added a major addition to a home
• Rebuilt a home that was destroyed by fire
• Bought shares in a newly constructed cooperative housing project
• Converted a non-residential property into a home

The property must meet the Primary Residency Requirement:

To be eligible for the rebate, a new house or condo unit must be used as the primary place of residence by the purchaser or their immediate family (meaning people related by blood, marriage, common-law partnership, or adoption). Please note that here are a number of factors considered by the CRA when determining whether or not a house is a person’s primary residence which include , but are not limited to; whether it is a mailing address for the individual, used on ID such as a driver’s licence, and how long the home has been inhabited.

When you buy a new home in Ontario for you to live in:

Typically when purchasing a new home, the related HST rebate is assigned to the builder and no rebate application is made by the purchaser. If this is not the case, you will have to separately apply for the rebate.

Filing deadline and time to process:

The rebate form GST190 (and the related, applicable provincial form) must be filed within two years of a new home or condo closing or construction completion. When a property has been built, please ensure to keep all invoices as submission of information related to these costs are required with such a rebate. Though processing times can vary, rebates are typically received from the Canada Revenue Agency (CRA) within two months.

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

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

IFRS Leases (2016)

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

  • Overview
  • Accounting Details
  • Transition
  • Example
  • Impact of changes
  • Takeaways for Company’s business

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

IFRS (Leases)

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

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