Category: Canadian Tax

As the year draws to a close, it\’s time to seize opportunities to bolster your financial well-being. Our expert guide unveils seven tax-saving strategies designed to supercharge your savings and secure your financial future. From opening a First Home Savings Account to capitalizing on investment opportunities, these tips will help you navigate the year-end tax landscape with confidence. Don\’t wait—take control of your finances now and set the stage for a brighter tomorrow.

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As the year draws to a close, it\’s time to seize opportunities to bolster your financial well-being. Our expert guide unveils seven tax-saving strategies designed to supercharge your savings and secure your financial future. From opening a First Home Savings Account to capitalizing on investment opportunities, these tips will help you navigate the year-end tax landscape with confidence. Don\’t wait—take control of your finances now and set the stage for a brighter tomorrow.

Continue reading

Introduction to Family Trusts

A Family Trust is a separate entity managed by a trustee, which holds assets and generates income. While it offers tax benefits, there are also drawbacks such as filing obligations, setup costs and 21-Year rule. The complexity of the trust and the number of properties involved influence the setup fees, which can range from a few thousand to tens of thousands of Canadian dollars. Unlike corporations, which can exist indefinitely, a Family Trust must distribute assets to beneficiaries by its 21st anniversary. Failure to do so incurs tax consequences. While strategies can circumvent this rule, they can complicate matters. We emphasizes the importance of understanding these aspects before considering a Family Trust for tax optimization.

Capital Gain Tax Avoidance via Family Trust Property Transfer

Consider a scenario where a property is valued at $800,000. By transferring ownership to a Family Trust, you personally no longer own it. If you were to pass away, the property\’s appreciated value isn\’t subject to capital gain tax, as it\’s owned by the Family Trust entity. When you\’re no longer the trustee due to passing away, a successor trustee steps in according to your trust document.

Suppose the document specifies equal distribution between your daughter and son. They would each assume a purchase price of $225,000, totaling the original $450,000 invested in the property. Thus, no capital gain tax applies even though the property\’s value increased. While land transfer tax implications may arise, this approach defers income tax. Even if you initially purchased the property under the Family Trust, upon your passing, the beneficiaries (your children) inherit it at the original price. This strategy creates a tax deferral opportunity.

Utilizing Family Trusts for Estate Planning

Family Trusts hold significant value within the realm of Real Estate Investing. To revisit our previous example, let\’s consider Abby and Chilli. Abby, who owned a condo, unfortunately passed away in her 40s, leaving her assets, including co-owned properties with Chilli, in the hands of her husband. The potential tax burden for Chilli, especially with a substantial property portfolio of serval assets worth $7.5 million at age 40, escalating to $28 million by age 90, becomes evident. These properties, acquired at around $450,000 each, pose a \”rich people problem\” involving considerable capital gains taxes.

By age 90, Chilli\’s net assets amount to $22 million, with his property holdings valued at $2.7 million. The resulting $19 million capital gain triggers tax implications. Currently, only 50% of the capital gain is taxable, amounting to $9.6 million, subject to tax. Factoring in Capital Cost Allowance on the properties further contributes to a sizable taxable income of $11 million.

In this scenario, Chilli faces the challenge of managing substantial tax obligations, highlighting the potential benefits of incorporating a Family Trust into his estate planning strategy.

To delve further, let\’s analyze this using the same example explored above on deaths and taxes.

At the age of 90, tax liabilities can become substantial without proper planning. Without any tax mitigation measures, the tax liability under current rates and marginal tax brackets could reach $5.6 million—an immense concern.

An alternative approach is an estate freeze. By transferring assets to a Family Trust or a corporation owned by the Trust, the asset value is locked at the transfer date, as is the associated tax liability upon the individual\’s passing. This process involves transferring property shares directly to the Trust or a holding company, ensuring a fixed asset value and capital gain tax even in the future, regardless of the individual\’s time of passing.

Through an effective estate freeze, the property-holding company becomes owned by the Family Trust, with beneficiaries including children, grandchildren, or other family members. Additionally, arms-length individuals can be included as beneficiaries, offering flexibility.

The outcome is that future property appreciation—such as an increase from $800,000 to $1 million—can be transferred to the Family Trust and then distributed among beneficiaries, detached from the parents\’ ownership. The parents maintain ownership of the shares\’ value at the time of the transfer, i.e., the initial $450,000 investment. In this scenario, the $350,000 capital gain would become an asset held by the parents\’ shares. This arrangement provides clarity on future tax obligations, regardless of when they pass away—whether today, tomorrow, in a decade, or two.

By executing an estate freeze and having the Family Trust own corporate shares linked to underlying properties, the parents secure control over their assets and trust. This empowers them to distribute dividends among Family Trust beneficiaries as desired, offering considerable flexibility.

However, it\’s essential to consider individual circumstances. If the parents intend to liquidate all properties during their lifetime, or if their children have no interest in inheriting the real estate portfolio, setting up a Family Trust may not be beneficial. The decision should align with the taxpayer\’s unique situation.

Navigating Family Trusts isn\’t straightforward. To make informed choices and manage tax liability effectively, seeking advice from professionals who understand your circumstances is crucial.

If this article interests you and you would like someone to assess your personal situation please do not hesitate to contact us.

Introduction

In Canada, there is a growing concern among incorporated truck drivers who file taxes as small businesses. The Canadian Revenue Agency (CRA) has taken a stance that may classify these drivers as Personal Services Businesses (PSBs). This article explores the implications of such classification and provides insights into the criteria used by the CRA to determine whether incorporated truck drivers can be considered small businesses.

Understanding Personal Services Businesses (PSBs)

A personal services corporation is essentially a one-person business that operates more like an employee rather than an independent contractor. When an incorporated business has only one client, the CRA has the authority to designate it as a personal services corporation.

Recently, the CRA has identified incorporated company truck drivers as Personal Services Businesses (PSBs). As a result, trucking companies that employ self-employed contractors are now required to issue T4As to these drivers. It\’s important to note that PSBs do not qualify for the Small Business Deduction and are subjected to the higher corporate tax rate. Some other professions that may be considered as PSBs include IT consultants, accountants, caterers, and construction workers.

Determining Factors for PSB Classification

The Income Tax Act outlines the rules for identifying PSBs. Generally, the following conditions need to be met:

1. Business income in the corporation comes from services provided by an individual on behalf of the corporation, often referred to as an \”incorporated employee.\”
2. The incorporated employee, or a related person, is a specified shareholder. This means that the individual, together with non-arm\’s length persons, owns 10% or more of the issued shares of any class of the corporation or any related corporation.
3. Without the existence of the corporation, the incorporated employee would typically be considered an officer or employee of the payor.
4. The corporation does not employ more than five full-time employees throughout the year.
5. The services provided by the corporation are not being supplied to an associated corporation.

Limited Deductions for PSBs

PSBs face limitations when it comes to deducting expenses. The Income Tax Act allows the following deductions for PSBs:

1. Wages, salary, and other compensation paid during the year to an incorporated employee of the corporation.
2. The cost of benefits or allowances provided to the incorporated employee.
3. The cost of selling property or negotiating contracts by the corporation, provided it would have been deductible if spent by the incorporated employee during their employment.
4. Legal costs incurred by the corporation in collecting amounts due for services rendered.

It\’s important to note that these deductions are only applicable to PSBs if they are also deductible for any other business.

Determining Factors for Personal Service Business Classification

The criteria for determining whether a corporation qualifies as a personal service business can vary. Some key factors that are often considered include:

1. Ownership of tools: Whether the corporation or the individual holds ownership of the tools necessary to perform the job.
2. Control over hours of work: The level of control the corporation has over determining the hours of work for the incorporated employee.
3. Risk-bearing: Which party assumes the risk associated with the work performed.
4. Subcontracting ability: Whether the incorporated employee has the ability to subcontract work to others.
5. Scope of work: The extent to which the incorporated employee is engaged in work for other clients.

Conclusion

For contract truck drivers predominantly serving a single company, it is crucial to familiarize themselves with the distinctions made by the Canada Revenue Agency between employees and independent contractors. By understanding the criteria used to classify entities as personal service businesses, drivers can take appropriate steps to safeguard their corporate status and explore opportunities to expand their business horizons.

Does this apply to you? Please contact us today to safeguard your corporate status.

https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/businesses-video-gallery/personal-services-business.html

If you\’re a parent in Canada, you\’re probably familiar with the RESP (Registered Education Savings Plan). It\’s a popular investment vehicle that allows you to save for your child\’s post-secondary education while taking advantage of tax-deferred growth and government grants. However, there\’s a potential RESP tax trap that parents should be aware of when it comes time to withdraw funds from the plan. In this article, we\’ll discuss the RESP tax trap and share some strategies for minimizing your child\’s tax liability.

What is the RESP Tax Trap?

The RESP tax trap arises from the way withdrawals from the plan are taxed. When your child attends post-secondary school and withdrawals are made from the RESP to pay for their education, the money is taxed as income in the student\’s hands. This means that your child will need to pay taxes on the amount withdrawn at their marginal tax rate, which could be significantly higher than your tax rate.

Why the RESP Tax Trap Matters?

The problem arises when parents have contributed a significant amount to the RESP, and their child receives a large sum of money upon graduation. If your child is in a high tax bracket, they may end up paying a considerable amount of taxes on the withdrawals, which could result in a substantial reduction in the amount of money they actually receive.

Strategies to Minimize Your Child\’s Tax Liability

To avoid the RESP tax trap, here are some strategies that you can use:

1. Spread out the withdrawals

One option is to spread out the withdrawals over several years to minimize the tax hit in any given year. This can help to ensure that your child\’s tax liability remains low and manageable.

1. Transfer some of the RESP funds to an RRSP

Another option is to transfer some of the RESP funds to an RRSP (Registered Retirement Savings Plan) in your name. This can be done as long as you have available contribution room, and the transfer is done before your child turns 21.

1. Keep your child\’s income low

You can keep your child\’s income low during their post-secondary studies by having them take out student loans and using the RESP funds to pay them off after graduation. This will allow your child to take advantage of the basic personal exemption and other tax credits, which will reduce their tax liability.

How can the First Home Savings Account (FHSA) assist you in funding your home purchase? The FHSA offers a unique combination of benefits from both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) to help you save for a down payment on your home.

To begin with, contributions made to the FHSA are tax-deductible at the time of filing your taxes. This is similar to how contributions to an RRSP can be used to lower your net income.

Moreover, any qualifying withdrawals made from the FHSA, including investment returns, are tax-free, just like a TFSA. It\’s essential to note that the withdrawal must be considered qualifying, which means it must adhere to the rules laid out by the government, such as being used for a first home purchase.

Contributions:

The FHSA has an annual contribution limit of $8,000, with a lifetime contribution limit of $40,000. In case you have a spouse or common-law partner, both of you can use your respective FHSA accounts when ready to purchase your first home.

Additionally, any unused contribution can be carried forward to the following year, up to a maximum of $8,000 per year, on top of the annual contribution limit of $8,000. Please note that the carry-forward amounts begin accumulating only after you have opened your FHSA. This option could be useful if you are planning to purchase a home in the future but not looking to contribute to the account immediately.

Claiming deduction:

Similar to an RRSP contribution, you can carry forward any unused deductions indefinitely (throughout the account\’s lifespan of 15 years) and use them in subsequent years. For instance, if you make a $8,000 contribution to your FHSA in 2023, you can claim some or all of the deduction to your taxes next year (2024) or in later years.

Important things to know

We are ready to help you, please contact us toady.

To prevent foreign buyers from purchasing Canadian residential properties and holding them vacant, the Canadian Federal government announced in the 2018 budget that they would implement the new Underused Housing Tax Act (UHT). And this new act is finally effective starting January 1, 2022. CRA *FINALLY* released the filing requirements and the forms two weeks ago , leaving most accountants very little time to prepare. You might think, “my properties aren’t underused and I’m not a foreigner, this Act does not apply to me.”  Well, unfortunately, the Act is written in a way that it affects many Canadians owners, including Canadian controlled private corporations that own residential properties, Canadian partnerships and Canadians acting as a trustee owning properties on behalf of a joint venture relationship or a corporation that they are shareholders. Before I dive deeper into how UHT works…let’s clear up some confusion…

UHT is NOT:

• It’s NOT Vacant Home Tax in Toronto
• It’s NOT Vacant Unit Tax in Ottawa
• It’s NOT Empty Home Tax in Vancouver
• It’s NOT Speculation and Vacancy Tax in BC
• Just because your houses are NOT underused, it does not mean that you don’t have filing obligation!

Here’s the high level decision logic that I’ve come up:

1. Do you own a residential property? If yes, proceed to Q2.
2. Are you one of the excluded owners?  If no, you have filing obligation and proceed to Q3.
3. Do you meet any of the exemption?  If yes, you have filing obligation but no tax to pay.  If no, you have filing obligation and you have tax to pay.

Residential properties definition:

UHT is applicable ONLY to residential properties owners as at Dec 31, 2022 and residential properties are defined as:

• Residential Condos
• Single family homes
• Semi-detached houses
• Duplex
• Triplex
• Commercial properties with more than 50% residential use, and residential use has 3 units and under

Example of Excluded properties include:

• Hotel
• Boarding House
• High rise apartment buildings
• Park model trailers
• Travel trailers
• Commercial condo units (such as industrial and commercial condos)
• And a few others …

Excluded Owners Definition:

If you are an excluded owner, you don’t have to file and you don’t have any tax to pay.  But the way the legislation is written, there’re many real estate investors that would be caught… As per CRA’s website, excluded owners include:

• Canadian citizen or permanent resident, unless you are an affected owner defined below… (this is huge because many Canadian citizen and residents are affected owners)
• Publicly traded companies
• Registered charities
• Coop housing corp
• Indigenous governing body

Affected owners (have filing obligation) include:

• Non-Canadian citizen or permanent resident
• An individual who owns a residential property as a trustee of a trust
• An individual who is a partner of a partnership that owns a residential property
• A foreign corporation
• Canadian private corporation

In another words, if you own residential properties (as defined above) in a Canadian corporation, you have to file UHT return. If you own residential properties in trust for a Canadian corporation, you have to file a UHT return. If you own residential properties in trust for a joint venture, you have to file a UHT return. If you are the sole legal own of the property, but both you and your spouse are reporting income and expenses of the property, you have to file a UHT return. If you own residential properties as part of a partnership, you have to file a UHT return. If you are on title with your elderly parents on their homes, and you’re owning the property in trust for them, you have to file a UHT return. And the list goes on… Confusing enough?!  We hear ya. The truth is, the way the legislation is written require many of Canadians to file a UHT return, even though they won’t have any underused housing tax to pay.

Exemptions definition:

Now you might have concluded that you are an affected owner and have filing obligation, but chances are, you are exempted from paying taxes. You can be exempted based on:

• Type of owner you are
• Availability of the residential property
• Location and use of the residential property
• Occupant of the residential property

If you are a specified Canadian corporation (shareholders are primarily Canadian resident/citizens), you are exempted from the tax, but you still need to file the form. If you are on legal owner owning property for the joint venture, you can be exempted from the tax if your JV partners are all Canadians, but you still need to file. If you are a partner of a partnership that owns a residential property, you can also be exempted from the tax if all partners are Canadian citizens or residents, but you still have to file. If the property is a newly constructed home, you can be exempted, but you still need to submit the form. If you have a qualified occupant, you can be exempted from the tax but you still need to file. Yes, as long as you identify yourself as an affected owner, you have to file, even though you might have no tax to pay.

Penalty for non-filing:

If you are an affected owner and you don’t file, penalty is $5K for individuals and $10K for corporation. The exemption mentioned above could be taken away as well.

How much is UHT if you are subject to tax:

1% of the value of the residential property multiply by ownership percentage.

Filing deadline:  April 30, 2023

We are ready to help you with all the deadline. Please contact us toady.

Meal and beverage expenses of long-haul truck drivers are deductible at a higher rate than the 50% permitted for other transportation employees. During eligible travel periods in 2022, meal and beverage expenses are deductible at 80%.

You are a long-haul truck driver if you are an employee whose main duty of employment is transporting goods by way of driving a long-haul truck, whether or not your employer\’s main business is transporting goods, passengers, or both.

A long-haul truck is a truck or tractor that is designed for hauling freight, and has a gross vehicle weight rating of more than 11,788 kg.

An eligible travel period is a period during which you are away from your municipality or metropolitan area (if there is one) for at least 24 hours for the purpose of driving a long-haul truck that transports goods at least 160 kilometres from the employer\’s establishment to which you regularly report to work.

For information on how to deduct your meals and lodging expenses, see CRA link  Meals and lodging (including showers).

If you travel to the United States for your work as a transport employee, see CRA link Trips to the United States.

Not impressed? have more questions? Please contact us today for details.

Please contact us today for details.