Ways of Extracting Funds The Corporation

When you operate through your corporation, you obviously have a question as to what is the most tax efficient way of taking out the money from your corporation.

This is most relevant in case if you own your private corporation since public corporations have different criteria of withdrawing the money from corporation and the owners have many times no personal interest in the corporation.

The several ways of taking out the money from your corporation is as follows:

1)      Reimbursement of Expenses from Corporation:

When you incur corporation expenses from your personal bank account, it goes without saying that you can take out the money without inviting any tax implication.

However, the care should be taken to withdraw the exact itemised amount of expenses.

2)      Withdrawing money from Corporation by way of Salaries/Management Fees:

 When you withdraw salary from your corporation, an appropriate payroll tax needs to be paid to Canada Revenue Agency (CRA) within the prescribed time limit.

Salary/wages paid by the corporation is tax deductible for your corporation and taxable in the hands of the recipient of salary/wages.

The payroll tax calculation can be done by putting in the Gross Salary figure in Payroll Deduction Online Calculator (PDOC). Payroll tax needs to be paid on or before 15 th of the next month from the end of the month in which such salary or wages are paid out.

3)      Withdrawing money from Corporation by way of Dividend:

Dividend can be withdrawn from your corporation by withdrawing the money from your corporation without paying any payroll taxes. This is the simplest way of taking out the money from the corporation.

When you take out the dividend from your corporation, it is not tax deductible for corporation but taxable for the recipient. However, dividend is taxable on the concessional basis since it was not deducted by the corporation.

Of course, we need to file the salary and dividend slip and summary on or before February end of each year.

Whether to withdraw the money from your corporation by way of salary or by way of dividend would depend on couple of factors whether you want to create Registered Retirement Savings Plan (RRSP) and you believe investing in RRSP, whether you want to buy home and qualify as First Time Home Buyer, whether you have child care expenses that you want to deduct on your income tax return etc.

4)      Interest On Loan to Corporation:

When you lend the money to your corporation, you may want to change the interest to the corporation at the market rate. The interest paid by the corporation will be tax deductible for your corporation and will be taxable on the recipient tax return.

5)      Capital Dividend Payment:

When you sell your corporation asset. There will be capital gains tax liability on the excess of the selling price (or Market Value) over its cost.50% of the capital gains can be withdrawn absolutely tax free from your corporation.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Dividend Income of spouse from a Taxable Canadian Corporation [Section 82 (3)]

It is usual that your spouse may receive the dividend income from a taxable Canadian Corporation. You may be entitled to report such dividend income on your income tax and benefit return (not the spouse) if the following conditions are satisfied:

1)      The dividend received by your spouse is from Taxable Canadian Corporation. By Taxable Canadian Corporation we mean a corporation which is liable to tax in the Canadian jurisdiction.

2)      You can report the dividend received by your spouse on your income tax return only when it increases your spousal tax credit and not otherwise. Spousal tax credit is a non-refundable tax credit that you can avail of on your tax return if your spouse income is below a limit prescribed. For the year 2017, such limit prescribed is $11,635.

3)      When the dividend received by your spouse is reported on your income tax return, you must as a necessary condition, report all the dividends received by your spouse from the Taxable Canadian Corporations and cannot pick and choose the dividend income to report on your income tax return.

4)      When the spousal dividend is reported on your income tax return, it must be grossed up and you would be entitled to a dividend tax credit with regard to such dividend income.  

5)      There is no special form to include such dividend income on your income tax return. While finalising your income tax return, you should check with your tax expert or accountant who files income tax return on your behalf.

6)      If your spouse has incurred a deductible interest expenses for earning such dividend income, it is not transferred to your income tax return but your spouse alone should use that tax deductible interest to offset any other such income.

7)      Further information can be obtained from Canada Revenue Agency’s (CRA) guide to Line 120-Taxable Amount of dividends from taxable Canadian corporations.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based on the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek independent professional advice.

Canada Caregiver Credit-New Non-Refundable Tax Credit For Tax Year 2017

Last year Budget has introduced new Canada Caregiver Credit as a non-refundable tax credit for individual taxes. This is going to be effective from the year 2017. Before we discuss about the Canada Caregiver Credit, let us understand the nature of this credit.

Canada Caregiver Credit is a non-refundable tax credit for individuals. Non-refundable tax credit means it can reduce your tax payable to zero but can not create any tax refund.

Canada Caregiver credit is a credit for supporting your infirm spouse or common law partner or other eligible relatives.

Specifically, the claim is allowed for following categories:

1)      Infirm spouse or common-law partner (when anyone lives with his/her partner for a continuous period of 12 months unless child is involved)

2)      Infirm dependants to whom you can claim as an eligible dependant. An eligible dependant claim can be made when you are either single, separated, widowed or divorced at any time during the year and supported one eligible dependant during the time that you had one of the above marital status. The eligible dependant could be either child under the age of 18 years of age, parent or grand parents, uncle, aunt, niece or nephew, brother or sister.

3)      Other infirm dependants who can not be claimed as an eligible dependant by anyone on his or her tax return.

Of course, this claim is subject to the income of the above-mentioned dependants. Dependant’s income reduces the amount of this claim.

There will only one claim of maximum $6,883 can be allowed for any taxpayer.

 Line 304 of Individual Income Tax and Benefit Return:

Canada Caregiver Amount for Spouse/Common Law Partner or Eligible Dependant of age 18 years and older:

Total claim of $6,883 is allowed (subject to the income of the dependant) for infirm spouse or common law partner or eligible dependant. This claim is reduced by the amount of claim already made for the above category of person on line 303 (spousal amount claim) or Line 305 (Eligible Dependant claim as explained in 2) above)

Line 307 of Individual Income Tax and Benefit Return:

Canada Caregiver Amount for other infirm dependants of age 18 years and older:

Total claim of $6,883 is allowed (subject to the income of the dependant) for claiming parents,       grand parents, uncle, aunt, niece, nephew, brother, sister who are infirm. This claim starts        reducing after net income of dependant from $16,164 or more and is completely phased out at income of $23,046.

The same rules of calculations apply for calculation of claim on Line 367 which deals with the claim of credit for infirm dependent child under the age of 18 years of age.

Few other points to keep in mind are as follows:

1)      Healthy seniors over 65 years of age can no longer be claimed under the new rules for Canada Caregiver credit.

2)      The requirement for you to live with the dependant is no longer a precondition to claim this credit.

3)      While filing your individual tax return it is not required to attach any proof of infirmity of spouse or common law partner or other eligible relatives claimed until at a later date when Canada Revenue Agency (CRA) asks you to show the proof of the same.

4)      Infirmity is different from disability. Instances of infirmity could be Parkinson, Alzheimer, Multiple Sclerosis etc. It simply requires the letter from doctor to prove it. The disability is far more strict and is allowed only when the disability is substantial and prolonged ( more than 12 months)

5)      If any of the above mentioned dependants are disabled (where CRA has approved the disability in writing), separate disability amount of $8,113 can be claimed in addition to claiming Canada Caregiver amount.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

  

  

Claiming of Moving Expenses

If you move, you may be able to deduct the moving expenses.

You can deduct the moving expenses provided you move for the following purposes:

1)      To take up a new job or new place of employment.

2)      To start a new business.

3)      To study on a full time basis at a post-secondary institution.

Moving expenses are deductible only if you move more than 40 kms.

Some of the expenses that qualify for moving expenses deductions are as follows:

1)      Reasonable travelling costs including the cost of the meal and lodging for you and your family members. You can claim the meal cost at flat rate of $17 per meal, three times a day times the number of days involved in moving or at actuals whichever benefit you.

2)      The cost of moving your household effects, including storage charges.

3)      The cost of the meals and lodging near either the old or the new home up to 15 days.

4)      Lease cancellation costs.

5)      The cost of revising the legal documents to reflect the new address, replacing the driver’s licenses and automobile permits.

6)      Charges for utilities connects and disconnects.

7)      Selling costs of your old home including real estate commission.

8)      If you sell your old home, legal fees and land transfer tax payable when you buy a new home.

9)      Mortgage interest, property taxes, insurance premium, insurance premium and utility costs related to your old home up to a maximum of $5,000.

10)  In case of travel by automobile for moving, the cost of moving is at actual or at a predetermined rate of Canada Revenue Agency ( CRA) ranging from 43.5 Cents to 59 Cents per km. depending on the Province or Territory in which you begin travelling.

In case if the moving expenses are reimbursed by your employer, you may be taxed on the reimbursement provided by your employer. However, your employer can reimburse you for the following purposes without creating a taxable benefit.

1)      The cost of the house hunting trips to the new location.

2)      Travelling costs for you and your family members while you and your family members are moving from old home to the new one.

3)      The cost of the transporting or storing your household effects and the other personal property while moving from old home to the new one.

4)      The cost of revising the legal documents to reflect the new address, replacing the driver licenses, automobile permits, utility connects and disconnects.

5)      Mortgage interest, property taxes, insurance premium and utility costs related to your old home up to a maximum of $5,000.

6)      If your employer pays you non-accountable moving expenses allowance, it is not taxable up to $650.

7)      Reimbursement of loss on sale (proceeds minus the cost of the home) of your old home up to first $15,000 and thereafter at the rate of 50% on the excess amount of loss reimbursed by your employer.

In addition to above, the moving expense deduction is limited to the income from the new employment or business or the amount of grants or bursaries received for full time study. If the income is insufficient, the balance amount of moving expenses will be carried forward to the following year and can be deducted against the income from the same job or business.

When you immigrate to Canada, you cannot deduct the moving expenses on your first Canadian income tax return because at the time of move you are not a resident of Canada for tax purposes.

However, if you move out of Canada, you may be able to deduct the moving cost to other country as you will be still a Canadian tax resident at the time of moving to other country.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

  

Fraudsters Calling In The Name Of CRA

Many a time taxpayers get a frightening call from someone representing Canada Revenue Agency (CRA) asking him to pay an astronomical sum of money in the name of tax payment due. In a week, on an average three to four clients report to me about receiving such a call.

Usually, these calls are made by fraudsters in the name of CRA and contain the common features like:

1)      You owe a large sum of money by way of tax payment which is remaining outstanding for long.

2)      CRA has proceeded against you and issued an arrest warrant.

3)      A compromise settlement can be reached by paying a certain sum of money that you need to pay immediately.

Therefore, the immediate reaction of the person receiving such calls is fearfulness and not knowing what to do immediately.

After sometimes, if you receive such call, you can immediately call your accountant (if you have one) to verify your amount of owing.

Upon receiving such calls, you should not get worried and keep in mind the following things:

1)      If you have tax owing, you can immediately verify the same by going online and checking your account with CRA under CRA module called “My Account”. “My Account” can be checked online if you are registered with CRA and have the username and the password. You can check at CRA website www.cra.gc.ca

2)      If you owe the taxes to CRA, CRA never threatens you over phone to pay up immediately but communicates in writing and reminds you several times about your outstanding debt/s.

3)      If you are not sure of the amount of tax money that you owe to CRA, you can call CRA on their general phone lines for Individual tax payers 1-800-959-8281 and 1-800-959-5525 for businesses and verify if you have any outstanding payable to them.

4)      Call your accountant (if you have one), and discuss about your outstanding tax owing, if any.

5)      Report to the Crime Stoppers on the number displayed on CRA website to stop them harassing to others.

6)      Never pay or agree to pay to the fraudsters any sum of money in compromise of any tax dues.

7)      CRA normally does not file a law suit against you for collection of any outstanding taxes but hands over the matter after a considerable time to collection department and such department asks for payment in a civilised tone and would also suggest you to make an agreement to the tax dues in installments.

Hope the above information would help you if you receive such a call.

Since the year end and the tax season is round the corner, such fraud calls will only be on the increase.

Disclaimer:

Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Filing of Form T-1135 –Foreign Income Verification Statement

What is form T1135 and who needs to file?

When you file your income tax return each year, one of the questions that you need to answer is whether you hold (own) asset/s outside Canada in excess of $100,000 at any time during the year. Canada Revenue Agency (CRA) wants to keep a track on those taxpayers who are holding assets outside Canada and generating income out of such assets.  

This requirement applies to all the types of entities namely individual, partnership, corporation and trust.

What is the deadline for filing this form?

This form needs to be filed along with the individual tax return (T1) and the latest date to file is April 30 each year.

What is the penalty for not filing or late filing?

The failure to file this form is per day penalty of $25 up to a maximum of 100 days (maximum $2,500)

What does this form contain?

Mainly following assets require disclosure:

1)      Funds held outside of Canada

2)      Shares of non-resident corporations

3)      Indebtedness owed by non-resident

4)      Interest in non-resident Trusts

5)      Real property outside of Canada

6)      Other property held outside Canada

This form also contains the disclosure of information such as cost at the end of the year, maximum      amount outstanding at the year end and income generated out those assets. Please take a look at the below mentioned link

https://www.canada.ca/content/dam/cra-arc/migration/cra-arc/E/pbg/tf/t1135/t1135-16e.pdf

How do you determine the cost of assets for this form?

When you enter Canada and own the assets outside of Canada, the fair market value of asset as on the date of entry needs to be regarded as cost for the purpose this form. In case if you are already a permanent resident and subsequently become the owner of the asset outside of Canada by purchasing asset, the cost to acquire such asset is considered for reporting for this form. In case if you become the owner of an asset by any other means such as inheritance from the parents, grandparents etc. The fair market value of such asset as on the date of inheritance should be regarded.

Methods of Reporting:

Please note that the requirement to file this form applies when you own assets outside of Canada, the total of which exceeds $100,000 and not when each asset is exceeding $100,000. Figures are to be expressed in Canadian Dollars in this form.

There are two methods of reporting 1) Simplified reporting method 2) Detailed reporting method.

When you own assets the total of which is between $100,000 and $250,000, simplified reporting method can be adopted. Under simplified method of reporting, you need to report only the different kind of assets held, income and gains or losses generated out of such assets. You do not need to report the total cost of such assets held.

Detailed Method of Reporting:

Under this method, each individual asset held needs to be reported along with its cost at the end of the year, maximum outstanding during the year, country where such asset is held and the income or gain (or loss) from such asset.

Staring the year 2015, this form can be e-filed to CRA.

Exclusions from the reporting:

There are some exclusions from the above reporting the most prominent ones being, one personal vacation property and any asset held outside Canada in carrying out active business. 

Filing of this form is very important when the global standards of information sharing are changing each day due to the information sharing treaty taking place between Canada and rest of the world.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

   

Proposed Tax Changes for Private Corporations

On July 18, 2017 Department of Finance, Canada announced its intention to introduce changes affecting private corporation taxes whereby it sought to plug the tax loopholes with a view that everyone pays a fair share of taxes. Attached is the link below:

https://www.fin.gc.ca/n17/17-066-eng.asp

As soon as above proposed tax changes were tabled by the Finance Minister Mr. Bill Morneau, lots of opposition were raised expressing their resistance to new rules imposing very high tax burden on such private corporation.

Let us look at them as to what are those proposed changes. These changes were in three major areas as follows:

1. Income sprinkling in the private corporation.
2. Holding of passive investment in such private corporation.
3. Converting Private Corporation’s regular income into Capital Gains ( since Capital Gains are taxed at a lower rate)

Income Sprinkling In the Private Corporation: (Salary and Dividends Paid) Rules for Minor and Major Family Members:

Salary:

Currently, if the private corporation pays reasonable salary to the family members, the same is allowed:

• If the salary paid is reasonable.

Proposed Rule:

Salary paid to children over 25 years of age will be taxed at the maximum marginal tax rates, unless:

• The salary paid is reasonable and
•  It is equivalent to the Fair Market Value of services rendered.

Salary paid to children of 18-24 years of age will be taxed at the maximum marginal tax rates unless:

• The salary paid is reasonable and
• Is equivalent to the Fair Market Value of services rendered
• Children must be engaged on a regular, continuous and substantial basis in the activities of the corporation.

Dividend Payment:

Currently, if the private corporation pays Dividend to the family members as shareholders, the same is allowed.

Proposed Rule:

Dividend paid to children over 25 years of age will be allowed:

• If the same is paid at the Market Rate of Return

 Dividend paid to children of 18-24 years of age will be allowed at the prescribed interest rate which is 1% p.a.

Example Scenario:

• Steven (24) receives the Dividend of $100,000 from his father’s corporation because he is the preferred shareholder of the corporation.
• Steven also receives the salary of $30,000 when the market value of his services is $50,000,the calculation will be done as under:

Total Dividend Paid	$100,000
Less: Child being 24, Dividend allowed is at 1% pa on $100,000	< 1,000>
Less: Fair market of services rendered $50K-Salary paid of $30K	< 20,000>
Tax at Maximum Marginal rate on unreasonable dividend	$80,000

Action Required:

Consider making the dividend payments to the adult shareholders who do not contribute to your corporation.

Life Time Capital Gains Exemption on Sale of Small Business Corporation Shares:

Currently if the children are the shareholders, then each child is entitled to Life Time Capital Gains Exemption on the disposition of such shares. The maximum deduction allowed is $835,716 ($1 Million for Qualified Farm Property or Qualified Fishing Property)

However, going forward, no life time capital gains exemption will be allowed if the shareholder child is under the age of 18 years and if such shares are included for taxing the split income as shown above.

Also, it is proposed that there will be no life time capital gains exemption for non-arm’s length dispositions of a small business corporation shares.

Latest News:

Somewhere around October 20, 2017, Finance Minister Bill Morneau and the agricultural minister Lawrence Mac-Aulay made the announcement that the current government would not go ahead for implementing this part of their proposal since it would create difficulty for Family Farm to pass on the same to the next generation.

Passive Income Generated in the Private Corporation:

It was proposed in the new rules as regards the income generated by private corporation that it be taxed at a much higher rate by eliminating the tax that can be refunded in case if such private corporation pays dividend to its shareholder.

Latest News:

The Finance Minister has announced somewhere at the end of the third week of October that Government will not levy additional tax as indicated above up to a limit of $50,000 income from passive investments considering 5% per annum return on an investment of $1 million in a private corporation.   

At around same time it was also announced that the small business corporation’s Federal Rate of tax would be reduced from 10.5 % as at present to 9% giving out some more tax relief to private corporations which are the back bone of The Canadian economy.

It would be interesting to see how the above private corporation tax changes are finally crystalized and implemented. It is expected that these changes will be passed at the end of this November.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.