Tax-Free Money that business shareholders can take out from their corporation
In general, as shareholders of a corporation, you can compensate yourself by way of salaries, dividends, or management fees which will be taxable to you according to your personal margin tax rates. However, it is often that shareholders overlook certain items that they would be able to take out tax-free. Let’s look at a few of those items in more detail.
CDA (Capital Dividend Account)
The CDA keeps track of various tax-free surpluses accumulated by a private corporation. These surpluses may be distributed tax-free to Canadian shareholders. The most common items in the CDA are:
- Tax-free portion of capital gain;
- Life insurance proceeds; and
- Capital dividends received from other corporations.
A corporation paying a capital dividend must file an election when the dividend is paid or becomes payable. However, there is a penalty if the corporation pays a capital dividend exceeds the balance in its CDA.
The shareholder loan could be a tricky area. In general, a withdrawal from a corporation by a shareholder will not be included in the income of the borrower if the loan is repaid within one year from the end of the taxation year of the corporation in which the loan was made. However, if the loan recipient fails to repay the loan within the time period, the full amount is included the income of the shareholder under subsection 15(2) of the Income Tax Act. Even though the loan is repaid within 1 year, there is a catch from the Income Tax Act: A benefit will be deemed to have been received by the shareholder under S. 80.4(2), unless interest has been paid on the loan in an amount greater than or equal to interest calculated at the prescribed rate.
On the other hand, shareholders are more often paid expenses on behalf of their company or to inject money into the corporation for its operation. This loan from shareholders to the corporation can be taken out tax-free by the shareholders anytime.
PUC (Paid-up Capital) Reduction
The Paid-up Capital is the amount of money a company has received from shareholders in exchange for shares. When shares are bought and sold among shareholders, no additional paid-up capital is created. Where a shareholder owes shares with high PUC, the PUC can be reduced and returned to shareholders on a tax-free basis.
This article provides information of a general nature only. It is only current to date of posting. It is not updated and it may no longer be current. It does not replace professional advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific questions you should consult a professional service provide.
Human Resources Best Practices: Managing Your Company’s Assests
An organization’s workforce can often be its most valuable asset. However, this statement only holds true if the organization’s employees are properly managed and motivated. In the small business world, human resource best practices often times rank behind other functions of the business such as cash flow management, marketing and IT. While these functions are certainly important, properly managing your company’s employees should rank right beside these functions, if not ahead of them.
With this in mind, we have developed a brief webinar to provide business owners with some insight on what we’ve deemed to be the top five human resource best practices. These HR best practices include:
- First impressions last the longest
- Setting & formally documenting expectations
- Motivation – what drives your employees?
- Timely & meaningful performance feedback
- Empowering your employees
Let’s take a look into our first HR best practice!
1. FIRST IMPRESSIONS LAST THE LONGEST
Attracting the best and brightest talent is a key component for the success of a business of any size. Often times, companies will spend a substantial amount of resources to ensure their hiring process is effective and efficient, Starting off on the right foot with new employees is instrumental in both the short-term and long-term success of the organization as a whole, and will aid in the company maintaining higher staff retention rates.
2. SETTING & FORMALLY DOCUMENTATING EXPECTATIONS
Often times, companies make the mistake of assuming that newly hired employees have a good understanding of what is expected of them in their new role with the company. In actuality, this is often NOT the case, as new employees will feel more comfortable if there is a clearly defined set of roles mapped out for them.
The development of a simple but straight-forward employee handbook / manual as well as the development of formal job descriptions can go a long way in making your employees feel more comfortable and more aware of what is truly expected of them going forward.
Simple items such as attendance policies, dress code, email communication rules, clear job descriptions and clear lines of reporting should all be included in the manual.
A little time spent in development of this tool will pay dividends in a more comfortable and guided employees down the road.
3. MOTIVATION – WHAT DRIVES YOUR EMPLOYEES?
Motivation is a psychological feature that arouses an individual to act towards a desired goal. With this in mind, it is crucial to have a good understanding of what drives your employees.
Implementing a well-rounded incentive plan for your employees is instrumental to the success of your business both in the short-term and long-term. A well balanced employee incentive plan will typically involve structuring a finely tuned mix of both short-term and long-term incentives, as well as both monetary and non-monetary incentives. By implementing only short term natured bonuses and goals, you may be doing your company a disservice by sacrificing the long term success and health of the business for short term gains.
Furthermore, although monetary rewards are important, a “pat-on-the back” once and a while will certainly go a long way in motivating your staff. In the end, a motivated employee is a more productive employee and an employee that is highly motivates will naturally look for more effective and efficient ways to perform their job.
4. TIMELY AND MEANINGFUL PERFORANCE FEEDBACK
All too often, organizations ensure to provide employees with performance reviews and job feedback on an annual basis as a tool of determining salary increases and bonuses. However many companies lack in providing their employees timely and meaningful feedback periodically throughout the year. This is a recipe for disaster, as an employee cannot improve their performance if they are not aware that they need improvement!
Ensure to let your staff know how they are performing on a regular basis. Whether it be on a project-by-project, weekly, monthly, quarterly or bi-annual basis, the more frequently you can provide feedback to your staff, the better.
Be sure to let them know both what they are doing well and where there is room for improvement. Furthermore, in addition to letting them know what areas they may need to improve in, ensure to provide them with the proper tools and guidance which will give them every opportunity to improve;.
Providing timely and effective feedback will allow employees to feel that they have some control in their performance improvement and will motivate them to want to improve going forward, rather than discourage them
5. EMPOWERING YOUR EMPLOYEES
More often than not, many small business owners make the mistake of trying to do everything in the company themselves, and often times have issues with letting go of some control and micro-managing everything their employees do.
Realistically, if you are looking to grow and expand your company, there will be a point were the delegation of certain duties is necessary in order to allow you to focus on growth.
With this in mind, empowering your employees will not only free you up to focus on growing your business, but will also serve as a huge motivator for your employees and will lead to them being more productive.
In order to empower your staff, you need to allow them the freedom to do their jobs. By delegating responsibilities and authority you are also showing your staff that you have faith in them and that you are also providing them the opportunity to grow both personally and professionally in their careers.
We at I&A have provided valuable and timely consulting services over the years to many companies in all industries, specifically in assisting with the top five HR best practices.
Let’s build a future together.
Starting A Small Business
Starting a small business is an exciting endeavour – but also one that requires a lot of research and decision-making. To help make the process a little easier, here’s an overview of the most important things to consider when setting up a business, and tips to set your new venture up for success.
1. A solid business plan
- Research the current market to identify potential growth areas
- Include a budget for your start-up costs, operating funds and expected revenues
In general, there are three types of legal business structures: If you forecast that your business will doing well financially in the early going, you may want to incorporate (form a corporation) as there are tax advantages to doing so.
A strategic and professional approach to bookkeeping and organizing your records is essential. Most importantly: don’t make the (common) mistake of confusing business and personal, as it makes for a messy set of records to sort through at the end of a year.
To ensure clear business records:
- Use a business bank account for all deposits and expenses
- Set up a business credit card (or designate a personal credit card for exclusive business use)
- Keep all of your receipts, bank statements, bills, and credit card statements
- If you have cash expenses, track them (an Excel document works well) and their expense category
Use a bookkeeping system that captures all business activities and prepares sales invoices for you there is no point of doing this manually when you have the software!).
Many financial institutions offer business start-up and equipment loans which can be used to finance the first few months or year of your business. Most start-up professional loans are up to approximately $50k, with equipment loans of up to $150k are readily obtainable.
5. Location, location, location
For the majority of small businesses, selecting the right location from which to operate is crucial. Tax and business issues are important to consider when making this decision – for example, there are different regulations and tax implications for home-based businesses.
6. Registering your business
Every business requires a business number in order to deal with the Canadian government in regards to:
- HST (harmonized sales tax). If your business earns over $30,000 in revenue, and does not fall under the non-exempt or zero rated industries then you must register for an HST account.
You can register for your Business number online athttp://www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/bro-ide/menu-eng.html.
7. Hiring Employees
It’s important to understand your obligations if you plan on hiring employees. Some important things to factor in, and educate yourself on:
- Remitting payroll taxes (source deductions) such as EI, CPP, and EHT
- Employment standards and managing staff
- WSIB, which may be applicable to your industry
- T5018 Reporting for subcontractors, if applicable to your industry
- EHT (Employer Health Tax)
- T4/T4A Reporting annually
- Potential severance pay, notice period and ROE (Record of Employment) forms which must be completed upon termination of employment
While you should do your research on the items above and plan carefully on your own, it’s also important to consult with a professional to ensure you are on the right track with respect to reporting, taxes and structure for your particular business and sector. We’d be happy to meet with you at any time to discuss your plans.
Businesses structure pros and cons
- Inexpensive and simple to form
- Tax advantages if the business is performing poorly
- Owner solely controls the business and receives all the profit
- Unlimited Liability
- Difficult to raise capital
- Income is taxable at your personal tax rate (highest personal rate of up to 46%)
- Limited Liability (The owner and the corporation are separate legal entities)
- You can transfer ownership
- Easier to raise capital
- Tax advantages such as income splitting, tax deferral, small business deduction, and capital gains exemption on sale of business.
- Professional corporations for qualifying professionals (i.e. doctors, lawyers, dentists, etc. (see your accountant for more information)
- Annual filings are required and financial statements
- More costly to set up a corporation
- Corporations are highly regulated
- Early losses are “trapped” in the corporation (i.e. they cannot reduce personal taxes)
Credible Reporting = Better Results
It’s astonishing how many small business owners are not aware of the effect their financial statements and financial reporting choices can have on the overall success and growth of their business. The proper selection of the most appropriate financial reporting option for one’s business can have a substantial impact on an entity’s ability to remain fiscally healthy and continue to strive and grow. With this in mind, having transparent and credible financial reporting can significantly contribute to an entity’s ability to:
- Obtain financing and loans
- Obtain insurance and bonding
- Obtain customers and suppliers
- Obtain more competitive financing rates
- Obtain a higher selling price if and when selling the business
- Trigger fewer government and CRA audits
It’s unfortunate that many small business owners often do not have a true sense of the financial reporting options that are available to them. After reviewing this brief listing however, it becomes quite clear that selecting the appropriate type of financial reporting for oneâs business is a decision that should not be overlooked, and warrants any business owner’s attention no matter what the size their business is.
What are my financial reporting options?
Generally speaking, there are three general financial reporting options that a business will need to choose from when having their financial statements prepared. These options include:
1) Notice to Reader financial statements
2) Reviewed financial statements
3) Audited financial statements
Each of these options carry a different level of credibility with them, more often referred to in the accounting world as “assurance”. Thus, by definition, financial statements that have a higher level of assurance implicitly have a higher level of credibility to them.
Most business owners never ask the question “what level of assurance is the appropriate level for my business needs?” They are often pushed to that decision by external factors, banks, insurance companies or government regulation. The questions that should be posed by the business owners is surprisingly, quite simple, it typically just boils down to“WHO” the“USERS” of the financial statements are, and“WHAT” they require from you. But just as important is to anticipate what are the long term objectives of the company i.e. expansion, diversification, financial stability etc. Armed with this knowledge, it’s natural to proceed with gaining an understanding of the three basic financial reporting options and when they may be appropriate for a business.
NOTICE TO READER REPORT
This report involves an external accountant simply compiling financial information that is provided by the company’s management, and presenting this information into a basic financial statement format. Unlike “reviewed” or “audited” financial statements, this report provides no assurance (thus, no credibility) to the users of the financial statements. The report that is signed off by the external accountant and attached to the financial statements explicitly states that they are NOT providing any level of assurance to the financial statements.
Thus, when considering whether this financial reporting option is appropriate for your business, it is essential to determine who the users of the financial statements are, and whether or not a Notice to Reader report is sufficient for their purposes. As an example, if you anticipate that your company will require a loan or operating line of credit agreement, the bank will require that you submit audited or reviewed financial statements on an annual basis, and thus if you are currently having notice to reader financial statements prepared you would want to upgrade this in anticipation of obtaining the financing. A Notice to Reader will not be sufficient for the bank and may be a factor in the bank’s decision as to whether or not to provide your business with financing. Whereas, if the bank sees that the corporation has prepared Reviewed Financial Statements prior it shows that management has foresight, is organized and is standing behind it’s numbers.
So overall, a Notice to Reader is generally the least expensive financial reporting option for a business, and may be appropriate when the only users of the financial statements are just the business owner(s) and for filing of the tax returns. However, Notice to Reader financial statements can limit a company’s growth potential and may not be appropriate when there are multiple users of the financial statements, both currently and in the near future.
Unlike a Notice to Reader report, a Review report does in fact provide the users of the financial statements with a certain level of assurance. In this case, the external accountant will perform certain procedures over the financial statements which primarily consist of analytical procedures, enquiry and discussions with management in order to be able to form an opinion on the financial statements as a whole. Based on these procedures, the external accountant will then be able to signoff a report attached to the financial statements which will explicitly state that the financial statements were “reviewed” and thus have a level of assurance (a level of credibility). Again, as mentioned earlier, the business owner will need to determine who the users of the financial statements are and whether or not a review report is sufficient for their purposes.
The credibility in the reporting is required if and when the company is applying for a loan, bonding, selling a business or other financing arrangements. Another fundamental benefit of a review is that it becomes an external verification of the credibility of a company’s information. Without proper financial information it is very difficult to properly manage a business. This is the most important reason for the cost benefit justification for a review engagement.
The third and final basic financial reporting option available to companies is the audit report. The audit report provides the highest level of assurance that is available for a set of financial statements, and thus is generally considered to add the highest level of credibility. This credibility is achieved by the accountant conducting a full scale financial statement audit of the company, which will typically involve several auditing procedures including analysis and discussions with management, substantive testing of financial statement balances (i.e. sampling of invoices, agreements, source documents, etc) and testing of controls in place where appropriate. Based on these procedures, the accountant will then be able to provide an opinion on the financial statements as to whether the financial statements are fairly stated in all material respects, and the financial statements will be marked as “audited”.
This report will add the highest level of credibility to the company’s financial statements. All things being equal, an audited set of financial statements will allow the company to tap into financial resources such as capital markets, bonds, private banking and
large private investment. The added assurance assists in increasing the multiples for bonding and obtaining financing without personal guarantees that would be impossible with the other forms of reporting. In the end an audited financial statement opens the doors to a plethora of business opportunities that are otherwise unachievable. The “audited” financial statement in the end provides the users with highest level of confidence that is possibly attainable.
Proactive VS Reactive Financial Reporting
After considering everything we discussed, itâs clear that a business owner must really consider who the users of the financial statements are both currently and in the near future. Although a basic financial statement with no assurance may be appropriate for your business now, it may limit the companyâs ability to grow in the future. Thus, a proactive approach to financial reporting should always be considered as this will better position your company to participate in future business ventures that may be time sensitive in nature. At the end of the day,
itâs a simple formulaâ¦.credible reporting = better results!!
What is a holding company?
A holding company is a corporation that holds enough voting shares of an active company to be a majority shareholder, thus controlling its policies and management. Generally, holding companies do not produce goods or provide services; rather they serve solely as a shareholder of an active company. Holding companies also act as an intermediary between the active company and the owner.
Benefits of a holding company
Although integrating a holding company into a business plan may increase the complexity of operations and financial reporting, there are various benefits that stem from the use of a holding company.
One major benefit of a holding company is the opportunity for tax savings through income splitting. Being a shareholder of the active company, the holding company is eligible to receive dividends, which are not subject to tax liabilities, allowing the active company to transfer income to the holding company tax-free. As a corporation, holding companies are considered to be a separate legal entity, giving rise to the same investment opportunities that are available to individuals. Thus, retained funds transferred into the holding company can be used for various external investments or can simply be reinvested in assets. Another possibility would be to defer or gradually distribute funds to individuals to minimize personal tax liabilities.
As stated earlier, a holding company is a separate legal entity, which means that it is not liable to the creditors of the active company. Using the transferred funds to accumulate assets and keep them within the holding company results in protection from creditors in the case of bankruptcy or liability issues within the operating company. Should the holding company need to transfer retained earnings back to the operating company, the
funds can be returned by means of a secured loan that would give the holding company claims to the assets in the case of default.
Lifetime Capital Gains Exemption
Another consideration related to a holding company would be the possibility of eligibility for the Lifetime Capital Gains Exemption (LCGE). Every individual is entitled to the LCGE when selling shares of a company, subject to certain conditions. In order to qualify for the LCGE, the company whose shares are being sold must be considered a Qualified Small Business Corporation (QSBC) according to specific tests. These tests check to see whether the company is a Canadian Controlled Private Corporation and if 90% of the assets have been used in an active, operating business.
Something You Should Know Before Purchasing A Condo
How the real estate market continues to flourish despite a weak economy – and what it means for you!
The Canadian economy is struggling through a recession and our dollar continues to slide – yet the housing market is hotter than ever. How can this be?
It actually makes sense when you consider the factors at play. First, let’s look at the overall economic situation. Much of Canada’s wealth is derived from the sale of natural resources (oil, coal, precious metals, etc.) But commodity prices are down worldwide and China – an international powerhouse that drives much of the demand for these commodities – is struggling. These two factors spell tough times ahead for the Canadian economy.
In times of recession, the Bank of Canada will often lower interest rates in an effort to improve consumer confidence and stimulate the economy. On July 15, 2015 they did just that, reducing the overnight target rate to 0.5%. Canadian banks soon followed suit, and it is now more affordable than ever to borrow money in Canada. This has fuelled the real estate market, and created enormous upward pressure on housing prices.
What does this mean for the construction industry?
The construction industry is directly affected by the real estate market – a strong dema real estate study by Build Force Canada (sanctioned by the Government of Canada), found that housing starts and household formation – key drivers of the real estate market – are projected to rise steadily from 2014 to 2024, which puts the construction industry in a very good position for years to come.
Is this a Bubble?
The notion that low interest rates are causing the Canadian housing market to overheat is shared by the Bank of Canada and the International Monetary
Fund. The extent of the bubble, however, is hotly debated.
Large household debt is a relatively new economic phenomenon, which makes its long-term effects difficult to predict. And the debt alone is not evidence of an upcoming crash. Ultimately, the existence – and magnitude – of a real estate bubble depends on the extent to which elevated home prices are due to factors such as population growth and housing starts versus the current interest rate environment.
What does this mean for me?
The Canadian housing market is the strongest it has ever been, and there is plenty of opportunity for shorter term equity appreciation in the current environment. That said, the likelihood of depressed interest rates in the foreseeable future does not necessarily insulate the housing market from a meaningful and potentially painful correction.
As such, highly leveraged speculators and developers should proceed with extreme caution, in the event that an upcoming correction is more of a crash than a “soft-landing”.
2016 Federal Budget Highlights
The highly anticipated first Federal Budget of Prime Minister Justin Trudeauâs government was delivered on March 22, 2016. While there were a few major tax changes contained in the budget, several rumoured amendments, such as changes to the small business, personal, and capital gains exemption rate were unfounded.
Some of the proposed changes that will be of more relevance to our clients have been highlighted below.
Personal Tax Changes
Personal tax rates will remain relatively similar, with the exception of the reduction in rate from22% to20.5% for individuals in the income bracket in between$45,283 to $90,563. The new budget does, however propose significant changes to some of the tax credits available to Canadian taxpayers in the past.
Significantly, the new budget introduces a new Canada Child Benefit to replace the existing Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). The new benefit provides a maximum annual benefit ofup to $6,400 per child under the age of six, and up to $5,400 per child for those aged six through 17. Families with less than $30,000 in net income will receive the maximum benefit, with the credit phasing out beyond this threshold. The CCTB and UCCB will be eliminated for months after June 2016.
The budget has also proposed toremove the income splitting tax credit for couples with children under the age of 18 for the 2016 tax year and beyond. It should be noted that pension splitting will not be affected by this change. Furthermore, the budget proposes tophase out the Fitness and Arts Tax Credits by 2017. In the past, a 15% refundable tax credit on up to $1,000 of eligible fitness expenses for children under 16 years old was in place; this credit will be reduced to a maximum of $500 in eligible amounts in 2016, and will be eliminated in 2017.
Also eliminated in the proposed budget is the Education and Textbook Tax Credit. The Tuition Tax Credit remains intact. The new budget, however, does provide for expanded support for students in the form of loans, grants, and standard tuition payments. Students with household income under $25,000 are not required to pay back loans.
The budget further proposesa 15% Teacher and Early Childhood Educator School Supply Tax Credit, that is effective in the 2016 tax year. The credit is refundable and applies on up to $1,000 of eligible supplies incurred by the teachers.
Additionally, the Guaranteed Income Supplement top-up benefit for the most vulnerable single seniors has been proposed to be increased to $947 starting in July 2016.
Small Business Tax Changes
Although the small business deduction rate was expect to decrease annually until hitting its target of 9% in 2019,the rate remains unchanged at 10.5%. The gross-up rate on non-eligible dividends will be maintained at 17% and the dividend tax credit rate will be 21/29 of the gross-up amount.
The budget does, however, propose changes that prevent certain business owners from multiplying access to the $500,000 small business deduction using complex partnerships and corporations. The rules pertaining to association are complex and beyond the scope of this newsletter; the proposed changes are technical and look to clear up any potential loopholes in the verbiage of the rules.
Though the 2015 budget announced a review of the circumstances in which income is deemed active or investment business, no modifications have been proposed to the rules in the 2016 budget.
With respect to intangible assets owned by a corporation, the budget proposesto repeal the eligible capital property (ECP) regime and create a new capital cost allowance (CCA) class. Goodwill acquired will fall into this new CCA class, 14.1. As a consequence of these changes, the disposition of assets in this class will give rise to recapture and capital gains, resulting in a significant increase in income taxes paid by many CCPCs in many circumstances. Eligible capital expenditure (ECE), such as the cost of goodwill, customer lists, licenses, etc. will be included in Class 14.1 at a 100% inclusion rate, compared to the previous 75% inclusion rate. The annual depreciation rate of this class will be 5% compared to the prior 7% rate on ECE.
The budget also addresses life insurance proceeds and the transfer of life insurance policies to corporations. Life insurance proceeds are generally not subject to income tax, however, in the past, corporations were able to add the amount of the policy benefit to its capital dividend account and pay tax-free dividends to shareholders.The proposed amendment is in place to ensure that the âinsurance benefit limitâ is properly adhered to.
The 2016 budget proposes to introduce rules so that any accrued foreign exchange gains on a foreign currency dbet will be realized the debt becomes a parked obligation. This is to combat the complex âdebt-parkingâ transactions used to avoid foreign exchange gains on the repayment of foreign currency debts. This debt-parking will no longer be possible under the proposed changes.
We hope you have found this information useful, and please do not hesitate to contact us with any questions or concerns about how you will be affected.