Generally speaking as a Toronto business advisor, incorporating your business offers numerous advantages. Most importantly you will be able to defer income from personal taxation. For example, in Ontario you can defer 34% in taxes if you are in the top Ontario income tax bracket by earning income through a corporation you own. Of course, the CRA is not always fond of this loophole, but the Canadian government wants small businesses to expand successfully. To this end, tax law is quite generous in which corporations are offered this 34% deferral. As I outline below, it is fairly easy to qualify.
There are a few qualifications:
(a) The corporation must not be a public company that is owned > 50% by Canadians
(b) The corporation cannot be an “incorporated employee,” i.e. a person who provides services to their employer via a corporation rather than directly (more about that in a future blog) or a corporation that derives more than 50% of their income from “passive” income dividends, such as rent, unless the corporation has more than 5 full time employees through the year
Of course, many people are not aware of the second requirement but, as a Toronto business advisor, I can assure you that CRA is. In the past few months, I have seen at least 4 form letters from CRA that, in more complex terms, state, “We think your corporation looks like a passive income corporation and we will tax your corporation at the highest tax rate possible unless you prove otherwise. You have 30 days to provide us with your proof.”
Given the relative simplicity of the law, if your corporation earns the majority of its income from rent or passive sources and the corporation does not have more than 5 full-time employees (they must be on the payroll), the company will have to pay the higher rate of tax. While a significant portion of this tax is refundable, your 34% deferral becomes about a 3% deferral.
If you are in this situation, please contact me to discuss how, as a Toronto business advisor, I can help you navigate the tax laws effectively.
William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.
Dealing with the passing of a loved one is tough enough but taking care of the financial responsibilities makes the grieving process even more difficult. Often, those closest to the one who passed are responsible for dealing with the deceased’s assets. What are the tax implications of selling the assets? I can help you find Oakville practical solutions in this difficult time.
For the most part if the deceased has a spouse, the assets would be left to him or her. This transfer is normally done on a tax-free basis. If this is not the case, then all of the assets are deemed to be disposed at fair market value upon passing, resulting in a tax bill. However, this “deemed disposition” now establishes the cost of the asset, for tax purposes, to the estate at that same fair market value.
For example, if you owned 100 shares of ABC Inc. and you purchased it for $10,000 and its fair market value on the day you died was $50,000, then there would be a capital gain of $40,000 and your estate has “purchased” it for $50,000. In the process of selling the shares to give cash to the beneficiaries, your estate would likely have a gain or a loss. If there is a gain, the estate will pay the tax at graduated rates like an individual does. But what happens if there is a loss?
In theory, the loss could be used against future capital gains. But the estate will likely be wound-up as quickly as possible (especially with the changes in the 2014 Federal Budget) and are likely not to have a capital gain in the future to use it against. Fortunately, tax law allows for the capital loss to be used against the capital gain that was triggered on death instead of remaining in the estate. The executor will have to apply for it and file some paperwork with CRA. CRA will (eventually) reduce the tax bill that was assessed on death. However, the executor must do this within one year of the person passing away or the executor will have to make a request from CRA to apply this rule.
This works for most other types of capital assets, including the deceased’s main residence, as long a family member does not live in the house while it is being sold. If a family member does live in the house after passing then there is no loss created because the loss is classified as a “personal use property” loss which is zero under tax law.
If you have any questions about how you can find Oakville practical solutions, please do not hesitate to contact me.
William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides Oakville practical solutions for taxes and accounting to individuals and their businesses in the Greater Toronto Area.