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by Jeff Kirshen

What are the Tax Brackets in Canada?

Canadian tax brackets are portions of Taxpayer’s income in Canada which get taxed at different rates.

The following is a breakdown of the Canadian Federal tax rates for 2019:

Canada Tax Bracket

You will notice from the Federal tax rate breakdown that the higher spectrum of a taxpayer’s income is taxed at a higher rate. This is by design as the Canadian tax system is a progressive system. In other words, the higher tax bracket is intended to make higher earned income pay more tax then the lower-earned income.

Your tax bracket is based on taxable income, which is your gross income from all sources, minus any tax deductions you may qualify for. This is your net income after you’ve claimed all your eligible deductions.

What Tax Bracket am I in?

It is important to note that higher earners only pay higher tax rates specifically on the portion of incomes within the aforementioned brackets

For instance, if a Taxpayer earns $47, 633 of income, that individual will get $47,630 of their income taxed at 15% and the remaining 3$ taxed at 20.5%. So, fear not, your whole income will not be exposed to a higher tax rate just because you are a couple of dollars over a lower tax bracket.

Canada Tax Brackets and Capital Gains

The Canadian tax system distinguishes between taxable income earned from a source and capital gains. Capital gains get a bit more preferential treatment then the latter. More specifically, only one half of the taxpayer’s capital gain from a disposition of property is taxed at the Federal tax rates.

How Can I Lower my Canada Tax Bracket?

Effective tax planning can help an individual save large amounts of money by virtue of paying less taxes. One such method is to decrease your tax bracket by using registered plans like the RRSP. RRSP contributions specifically lower your taxable income, which means you pay less taxes that you would if you did not contribute to your RRSP.

Canada Tax Brackets – Credits and Deductions

Furthermore, the Canadian Income Tax Act has many deductions and credits that can decrease a taxpayer’s tax liability. Ones that come immediately to mind are the disability tax credit, tuition credits, and motor vehicle expense deductions for businesses.

It is important to note that credits, unlike RRSP contributions and deductions, get factored in after applying the tax rate. This means that while deductions can potentially bump down your income to a lower tax bracket, credits bypass the bracket stage entirely and decrease your overall tax liability. In any event, both are very beneficial and effective tax planning can go a long way in saving a taxpayer their hard-earned money.

If you have any questions about how to classify your taxes to obtain favourable tax results, or any questions in general about filing taxes, call us today! We can help!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Revenue Canada Disputes

A Revenue Canada dispute is any disagreement that you have with the Canada Revenue Agency. These disputes can be about anything on your tax returns, such as credits, deductions, and income. Additionally, disputes can be about how to classify income and whether it should be counted as business income, or capital gains. There are many different types of Revenue Canada disputes, and here at Rosen Kirshen Tax Law, we can help with any dispute you have!

Revenue Canada Dispute – Notice of Assessment

Revenue Canada disputes usually arise upon receipt of a Notice of Assessment. Notices of Assessment notify taxpayers of the result of their tax filings and also indicate a refund or amount owing. Amounts reported in these Notices may differ from amounts reported in the taxpayer’s tax return which creates a situation where a taxpayer needs to dispute the Notice of Assessment.

Taxpayers have a right to dispute CRA assessments, and may do so by filing a notice of objection or loss determination. If you need more information before disputing a Revenue Canada assessment, there are several telephone numbers to contact depending on the nature of the inquiry. Please note that there is a deadline for a Revenue Canada dispute. Taxpayers may file a formal Notice of Objection within 90 days of receiving a Notice of Assessment. If 90 days have already passed, taxpayers may apply to the CRA for an extension of time to file their Notice of Objection. This application must outline reasons for why the Notice of Objection was not filed within the usual time limit. The time limit for this extension is one year after the 90 days has run out.

Revenue Canada Dispute – Appeals Division

After filing a Notice of Objection within the stipulated time period, the taxpayer will be contacted by the Appeals division of the Canada Revenue Agency. Typically, you will have an opportunity to present your argument to the appeals division before they respond. Once they have responded, you get one last chance to prove your point before a final decision is made. The final decision will either vacate, confirm, or further reassess the taxpayer’s Notice of Assessment. A vacation means that the CRA has entirely abandoned the Notice of Assessment in dispute and agree to go back to the taxpayer’s original position. A confirmation means that the CRA upholds the Notice of Assessment it issued, and a further reassessment means that the CRA has adjusted the Notice of Assessment in whole or in part.

Revenue Canada Dispute – Tax Court

If you still disagree with Revenue Canada after the Notice of Objection, Taxpayers may file a Notice of Appeal to Tax Court if they wish to further their Revenue Canada dispute. Appeals are heard at the Tax Court of Canada, which is an independent court of law that regularly conducts hearings in major centres across Canada.

The taxpayer may choose to have the appeal heard under either an informal procedure or general procedure. Smaller amounts are typically in dispute under the informal procedure, and there may not be strict adherence to all technical rules of evidence. Without choosing to hear the appeal under informal procedure, the appeal will be heard under general procedure. Under the general procedure, individuals may be self-represented and corporations must be represented by a lawyer.

Revenue Canada Dispute – Federal Court of Appeal and the Supreme Court of Canada

After the Tax Court renders its judgment, taxpayers may further appeal to the Federal Court of Appeal. These appeals are looked at based on whether there were errors in the original Tax Court hearing, which led to an incorrect result. If the taxpayer’s dispute involves issues of national significance, the taxpayer may apply for, and be granted, leave to further appeal to the Supreme Court of Canada. All judgments rendered by the Supreme Court of Canada are final.

If you are involved in a Revenue Canada dispute, or you disagree with the results of a Notice of Assessment you have received, call us today! We handle Revenue Canada disputes from audit all the way through the Federal Court of appeal. Make sure your Revenue Canada dispute is handled by a professional, we’re here to help!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

TFSA Contribution Limit

A Tax-free savings account (TFSA) is a registered investment account that allows Canadian residents to earn tax-free money on certain types of investments.

TFSAs are a great way for Canadians to save towards their financial goals, as they provide a great opportunity to save money both short and long term. For the most part, contributing to a TFSA will not change the way a taxpayer files their taxes. For the taxpayer’s convenience, the Canada Revenue Agency (the “CRA”) includes the taxpayer’s contribution limit on their Notice of Assessment after the filing of a tax return.

When did TFSAs Start?

As of January 2009, taxpayers above the age of 18 were able to start contributing to their TFSA. The TFSA can hold any combination of eligible investment vehicles, such as stocks, bonds, cash, GICs and mutual funds, the growth of which will be sheltered from any taxation.

A TFSA cannot be opened or contributed to until the taxpayer turns 18. In certain provinces and territories, the legal age a taxpayer can enter into a contract is 19. Thus, in those jurisdictions, an 18-year-old who would be otherwise eligible would accumulate the annual contribution amount for that year and carry it over to the next year.

Benefits of a TFSA

TFSAs are not just beneficial to young Canadians; they offer adults and seniors a flexible avenue to save their income. Income earned in the TFSA does not affect the means-tested benefits like the guaranteed income supplement and old age security. Unlike a Registered Retirement Savings Plan (“RRSP”), a TFSA does not have a maximum age limit and taxpayers can contribute beyond 71-years-old.

What is a TFSA?

In a basic sense, TFSAs allow you to set aside money in eligible investments and watch those savings grow tax-free throughout your lifetime. Dividends, interest and capital gains earned in a TFSA are tax-free for the entirety of the taxpayer’s life. A bonus of a TFSA is that funds can be withdrawn at any time, for any reason the taxpayer so chooses. In addition, all withdrawals from a TFSA are tax-free.

TFSA Contribution Room

Unused contribution room from one year is carried forward and added to the TFSA’s contribution limit for the following year. If the taxpayer makes a withdrawal during a taxation year, this will automatically create additional contribution room for the following year.

The annual TFSA contribution limit for a taxpayer was set at $5,500 for 2018. In 2019, the TFSA contribution limit is $6,000. In addition, the total room available in 2019 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009 is $63,500.

TFSA Over-Contributions

If a taxpayer over-contributes to their TFSA, the CRA will impose a tax of 1% per month for each month (or partial month) that the excess contribution stays in the account. Accordingly, the 1% tax will continue to apply until either the entire excess amount is withdrawn, or for eligible individuals, the entire excess amount is absorbed by additions to their unused TFSA contribution room in the following years.

If you have over-contributed to your TFSA, and the CRA has not contacted you, you may be eligible for a voluntary disclosure. This could save you the penalties and interest!

If you have questions about TFSA Contributions, want to discuss what an eligible investment is, or if you’ve over-contributed to your TFSA, call us today! We can help!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Uber Drivers and Canadian Income Tax

Uber drivers are considered self-employed in Canada, otherwise known as an independent contractor. As such, Uber drivers must keep records of the money they receive from Uber, and all of their expenses so that they may prepare and file proper income tax returns each year. Because Uber drivers are independent contractors, they will not be issued a T4 slip.

When preparing and filing their tax returns, Uber drivers must complete a T2125. This form is known as a statement of business activities. It lists the income earned, and breaks down all of the expenses incurred in that year.

What Documentation will I need to Complete my Income Tax Return?

To complete your return, you will need to gather information with respect to your income, your expenses, and mileage driven. Furthermore, you will also require:

• Your Annual Tax Summary from Uber (found at: partners.uber.com);
• Receipts, bills and statements for all tax deductible expenses;
• Your vehicle mileage from the beginning of the year, the end of the year, and separated between personal and business kilometres driven;
• Your Social Insurance Number; and
• Any other tax documents and slips related to any other employment you may have.

What Expenses may I deduct?

You are able to deduct certain business expenses from your income to lower the overall amount of tax you will pay. Some examples include:

• Mileage;
• Maintenance expenses (gas, oil, windshield washer fluid, new tires, tune-ups, etc.);
• Car washes;
• Vehicle insurance;
• Transponder for toll roads, tolls or parking costs;
• Cell phone expenses;
• Uber booking fees;
• Freebies for riders (water, candy, etc.);
• Cell phone mounts;
• Dash-cams;
• Phone accessories (chargers, auxiliary cords and hands free headsets);
• Car loan interest; and
• Accountant or bookkeeping fees.

When are my Tax Returns Due?

Self-employed persons must file their returns by June 15 of each year.

I Filed my Taxes but Cannot afford to Pay CRA the Money I Owe

If you are unable to pay the taxes you owe, you are still better off filing the tax return rather than holding onto it. If you do not file, you will be hit with penalties, and then interest will be charged on the original amount you owe plus the penalties. Once you have filed your return, the CRA will expect you to pay the balance in full. If you cannot, the CRA will expect you to enter into a payment plan where you are likely paying an amount monthly towards your tax bill. If you are having trouble negotiating a collections repayment plan, call us today because we can help.

Uber drivers are currently being targeted by the Canada Revenue Agency because recently, the CRA received a vast amount of information from Uber. The information shows amounts paid to independent contractors, which the CRA then matches up to ensure the Uber driver reported the correct amount of income. If the numbers do not match up, an audit is commenced. If you are being audited, or need some assistance with your taxes, call us today!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.  

by Jeff Kirshen

What is the Maximum CPP Benefit for 2018?

The Canada Pension Plan (“CPP”) are government payments representing a replacement of income where disability, retirement, or death are involved. It is also one of the three levels of Canada’s retirement income system. CPP is responsible for paying retirement funds and disability benefits. Established in 1966, the CPP aims to provide basic benefits for retirees and individuals with disabilities who contribute to the plan. If the recipient dies, their surviving family members can receive the plan’s benefits.

Contributing to the Canada Pension Plan

CPP is a similar concept to the U.S. Social Security program. Residents of Canada, other than those in Quebec, contribute and receive the CPP. If one is receiving CPP benefits, they will receive monthly amounts that are designed to replace approximately 25% of the contributor’s earnings on which initial contributions were based. Several rules govern the amount a person can receive upon their retirement, or if they have a disability. The amount is based on the Consumer Price Index and is based on the person’s age and how much they contributed to CPP while they worked. Unfortunately, CPP benefits are considered taxable income by the Canada Revenue Agency (the “CRA”).

Maximum CPP

The Canada Revenue Agency announced in late 2017 that the maximum pensionable earnings under the CPP for 2018 increased to $55,900, up from $55,300. As a result, the maximum employee CPP contribution for 2018 will increase to $2,593.80, up from $2,564.10. Additionally, the maximum self-employed contribution raised to $5,187.60.

The CRA announced in late 2018 that the maximum pensionable earnings under the CPP for 2019 would be increasing to $57,400, up from $55,900. As a result, the maximum employee CPP contribution for 2019 will increase to $2,748.90, up from $2,593.80. Additionally, the maximum self-employed contribution raised to $5,497.80.

The employee and employer contribution rates will rise to 5.1% in 2019, versus 4.95% in 2018, and the self-employed contribution rates are increasing to 10.2% in 2019, versus 9.9% in 2018. These increases in contribution rate were implemented on January 1, 2019.

Receiving CPP

When planning for retirement, it is essential to understand how much you have made in contributions over the years because that directly impacts the maximum CPP you will receive when retired. The best way to determine how much CPP a taxpayer qualifies for is to get their CPP Statement of Contributions. To do so, you simply call Service Canada at 1-800-277-9914 and request a CPP Statement of Contributions. Service Canada will then provide you with access to your online copy.

As mentioned above, your contributions directly relate to how much you will receive in CPP benefits once retired. Eligibility to obtain the maximum CPP benefit is based on two criteria, one being the contributions and the other being the amount of contributions.

The first criteria being that a taxpayer must contribute into CPP for at least 83% of the time that they are eligible to contribute. For the typical taxpayer, this means they can contribute to CPP from 18 to 65, which is 47 years. 83% of 47 years is 39 years. Therefore, to get the full maximum benefits from the CPP program, a taxpayer will need to contribute into the CPP for 39 years.

The second criteria being that a taxpayer adds to their benefit for every year they work and contribute to the CPP between the ages of 18 and 65. On top of just working and contributing, the taxpayer must contribute the prescribed amount in each of those years. The CPP uses the Yearly Maximum Pensionable Earnings (YMPE) chart to determine whether the taxpayer contributed enough. To review the amounts in previous years, please click here.

Essentially, you need to make a certain amount of money to be able to contribute enough to the CPP to qualify for the maximum payout when retired. For example, in 2019 a taxpayer has to make at least $57,400 of income to be eligible for maximum contributions. As an aside, once you make your full contributions for the year, you will notice your pay cheques increase in amounts. This is because you have paid the maximum amount of CPP into the program for that year; thus you are no longer deducted for that year.

Have questions about your CPP benefits, or not receiving them as you should be? Give us a call today. We would be happy to discuss your options and ensure that you receive your proper pension amount from the Canada Revenue Agency.

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

What is a Taxable Benefit?

What is a Taxable Benefit?

A taxable benefit is a benefit that a taxpayer receives, typically paid for by a corporation, that is more related to personal choices than business expenses.  If this is the case, then the taxable benefit is counted as income to the person who receives it.

For example, in 2008, the head of Cirque du Soleil took a trip to the International Space Station. It was paid for by his corporation. He claimed that the trip was for advertising and promotion of his business. The Canada Revenue Agency disagreed and ruled that it was his personal choice to go to Space, and this should have been counted as his personal income, and not a business expense.

Are all Benefits Taxable?

The answer is no. Some benefits are not considered taxable benefits. There is a Canada Revenue Agency analysis found here, that determines whether a simple benefit will be deemed taxable or not. Essentially, the question is whether the taxpayer receives an economic advantage or benefit that can be measured in money, and whether the taxpayer is the primary beneficiary of the benefit.

What if the CRA thinks I received a Taxable Benefit, but I disagree?

If the Canada Revenue Agency is auditing you, or your company, and determines that you received a taxable benefit, there are ways of fighting it. First, you may argue that what you received is not a taxable benefit because it benefited the company, and was not a personal choice. If that argument fails, you may attempt to argue that even if it was a benefit, it cannot be measured in money. This is typically the argument for those who accumulate credit card points through a business, and then use those points personally. There are a number of Tax Court decisions on this issue, but the vast majority have ruled that unless the benefit can be measured in money, it cannot be considered a taxable benefit.

If the CRA determines that the benefit is measurable in money, and adds that amount to your income, you will need to file a notice of objection to any notice of reassessment you receive. You will then have the opportunity to argue any of the above points again, and you may even choose to argue that the benefit is worth less than what the Canada Revenue Agency is claiming.

Taxable benefits are a difficult subject because there are many business expenses that may be considered more of a personal choice than a business expense. However, these expenses typically do provide benefit to the company paying for them, as well as the person who receives the benefit. If the CRA is asking you about taxable benefits, or if they ruled that you received a taxable benefit, you have right. Call us today to see what we can do for you!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

The CRA and Director’s Liability

What is Director’s Liability?

In Canada, corporations are considered to be separate legal entities with their own assets and liabilities. It is a basic principle that employees, officers, and directors are not personally responsible for the debts incurred by their corporation. However, there are some circumstances where directors may be put under the microscope by the Canada Revenue Agency (CRA). If the CRA cannot collect an amount owing from the corporation directly, it may assess the director(s) personally for certain debts accrued during the time they were in that position. This is most common when there are unpaid source deductions, and GST/HST liability.

For more background material on director’s liability, feel free to consult our blog post that discusses the topic at greater length. This article reviews remedial actions you are able to take after receiving a letter threatening director’s liability, or a notice of assessment for director’s liability. First and foremost, we recommend you seek professional assistance to help navigate the complexities of this process as it can have very serious consequences.

What can I do after Receiving an Assessment for Director’s Liability?

We highly recommend reviewing your corporate by-laws and various agreements. All corporate law statutes, under which corporations are incorporated, permit corporations to indemnify their directors for claims brought against them. However, they can only indemnify their directors to the extent that it is permitted by statute. In some circumstances, the corporation may be required to indemnify the directors, while others they may be allowed to refrain from doing so. While bylaws are boring and often ignored, they are very relevant because they can help shield you from liability.

You should also start compiling records that demonstrate that you acted responsibly and with due diligence. A significant portion of legislation that imposes liability on directors permits them to avoid this liability if they can establish a due diligence defence. The due diligence defence basically means that you did all you reasonably could to avoid the current circumstances. For instance, the director of a corporation with large payroll deductions debts must demonstrate that they were diligent in trying to prevent the failure; that they acted as any reasonably prudent person would in comparable circumstances.

This involves documenting any actions you may have taken that demonstrate you fulfilled your duties responsibly. Document actions taken at meetings. If you dissented at a board meeting because you felt they were taking an unreasonable course of action, look to see if that dissent was recorded. This also includes any evidence that you relied on in good faith on experts through your course of work, for example: financial statements, interim reports, advice from an employee or officer, lawyer, accountant, engineer, etc.

The CRA and Director’s Liability

The CRA takes unpaid liabilities extremely seriously. They will go after everyone, and anyone they can to recover funds they claim are owing to the government. They will very likely pursue director’s liability, while at the same time looking into whether they may assess someone under section 160 of the Income Tax Act, or section 325 of the Excise Tax Act.

Directors may resign from the corporation, but this must be done very carefully, and they may still be assessed for unpaid tax arrears that accumulated during the time they were a director for a certain period of time. As mentioned, resigning will help to prevent incurring further liabilities. However, it will not protect you from liabilities arising from events that occurred while you were director, but it can effectively put an “end date” to your potential liability.

You must resign in writing because a resignation becomes legally effective at the time it is written and received by the corporation, unless it specifically names a later date. Also you should make sure that it is actually delivered to a senior officer at the corporation, with proof of receipt.

That is not all! You must also make sure that your resignation is reported on the public record. In Ontario, this involves filing an appropriate Notice of Change under the Corporations Information Act. This puts the fact of your resignation in the public record and allows you to report the date that you believe your resignation became effective. The date of resignation can also be relevant for limitation period considerations.

If you have received a letter threatening director’s liability, or an assessment for Director’s Liability, we strongly recommend giving us a call at 1 844 53 TAXES. As a director, you may be held liable for enormous amounts of money due to unpaid GST/HST or source deductions even when it was not your fault. The process can be quite complicated, with many moving parts that are time sensitive, so it is best to have legal counsel helping you navigate through it. Don’t delay, contact us today!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 legal questions you should consult a lawyer.

by Jeff Kirshen

Income Sprinkling and Reasonableness

In the recently announced changes to the Income Tax Act, “reasonableness” takes centre stage. Taxpayers running businesses who pay money out to their family members in the form of dividends or salary, can currently “spread” that money around, distributing it to those with lower incomes so that the family unit as a whole pays less in taxes. This is what is known as income sprinkling. The proposed changes force taxpayers to consider whether or not these payments (salary or dividends) are “reasonable in the circumstances”. If the Canada Revenue Agency states that they are not reasonable in the circumstances, the recipient of the payment would be forced to pay the highest possible tax rate on the income received.

What is Reasonable in the Circumstances?

Given the similarity between compensating a family member for their contribution through salary and through dividends, the test for reasonableness in the context of salary payments could be a useful guide.

Manchester v The Queen provides an example of a family that elected a number of its adult children as directors of a corporation, which was run by their parents. While it paid the children a salary, as opposed to dividends, the facts of this case and the children’s’ role is similar to many arrangements involving dividends.

Simply because they were directors, the children did have some obligations, and the shareholders had elected them, even if they were motivated by tax concerns. As such, the children had contributed something-they still had to show up to the occasional meeting, after all, even if they did not contribute much. The fees paid to the children, rather than being based on their contribution to the business, were instead based on their expenses in the year. The Tax Court determined the absolute maximum that could be reasonably to pay the children, simply on the basis of being directors and opening themselves up to director’s liability, to have been $11,500 annually, and denied the rest of the deductions, increasing the businesses income. This suggests that the final interpretation of the changes may still provide some opportunities for family businesses, particularly relatively small ones, to income spread where adult children take on a limited role in the management of the businesses, such as by being named as directors.

Income Sprinkling and Reasonableness

A test that would disallow income spreading benefits where the value of dividend payments “markedly departs” from the value of the recipient’s contributions, or where “no reasonable businessperson” would have paid the value of those dividends to the recipient as a salary in exchange for their services, would be in line with constraints on deductions for salaries paid to family members.

Here, the details will matter a lot. How Parliament and the Courts hammer out the technical points of the new rules will make a large difference. Because the money must flow through the corporation before it is paid out, there are more moving parts than just dealing with salaries. There is also the conceptual issue that “reasonableness” does not apply as cleanly to what a business does with its profits as it does with whether a given expense is cost-justified. For another, the fact that income paid out in unreasonable dividends defaults to the highest rate may mean that for families where the owner of the business is below the top tax bracket, paying out too much in dividends could result in a higher tax bill than just having the primary earner keep the money themselves.

Reasonableness Tax Tests

As with reasonableness in general, the most likely end point is that the test will end up involving a mix of factors that, while they may make sense to the person on the street, make it hard to know exactly where you stand.

On paper, a bona fide family businesses where all family members are making reasonable contributions would still be able to structure itself in more or less the same way. But this does not take into account the fact that reasonableness is challenging to determine in advance. Especially before the legal approach to determining what is reasonable is hammered out, it is likely that many such small businesses will be faced with audits, leading to objections, and even Tax Court appeals to prove that their income sprinkling is reasonable.

If you are concerned about the impact of the proposed tax changes for your businesses, or are considering reorganizing your finances to adapt them, consider speaking with one of the Tax Lawyers at Rosen Kirshen Tax Law, whose advice is always reasonable in the circumstances. Contact us today!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Ontario Real Estate Agents and Professional Corporations

Realtors in Ontario have traditionally been left out in the cold when it comes to taking advantage of the tax benefits of professional corporations.  Under the definition section of the Real Estate Brokers Act, real estate brokers and salespersons are required to be individuals. The effect is to prevent real estate brokers and salespersons, unlike lawyers, health care workers, insurance agents, and architects, from forming a professional corporation (i.e.personal real estate corporations (“PREC”)).

However, a light may be appearing at the end of the tunnel for Ontario Realtors. Bill 104, titled the Tax Fairness for Realtors Act, 2017, passed the second reading on March 23, 2017, and is currently under review by the Standing Committee on General Government. After the third-reading at the Standing Committee, the Committee will provide commentary to the legislature and propose potential amendments at which time the legislature will vote. If Bill 104 passes, Ontario real estate professionals stand to reap many tax advantages.

Bill 104

Bill 104 would permit a PREC to register as a real estate broker or salesperson, provided the individual professional/equity shareholder of the PREC has the necessary qualifications to be registered.

The Bill would require PREC’s to be a corporation under the Ontario Business Corporations Act (“OBCA”). The Act mimics other professional corporate statutes by restricting the corporation’s activities to trading real estate and requiring an individual to own the equity shares.

Tax Benefits

Real estate professionals conducting their business through a PREC could potentially reduce their tax burden significantly and gain the ability to defer their tax liabilities. Real estate professionals using PRECs would be accessing Ontario’s 15% tax rate for Canadian controlled small businesses on the initial $500,000 of their taxable income. Corporate income above $500,000 would then taxed at $26.5%. Compared with Ontario’s top marginal tax rate for individuals of 53.53%.

Real estate professionals would also gain the ability to keep their earned income in their PREC. This option creates a deferral opportunity by delaying taxation on the income until it is removed from the corporation, allowing for more advantageous tax planning.

Bill 104, if enacted in its current form, would also allow “income sprinkling” by allowing immediate family members to own non-equity shares in the corporation and therefore receive dividends. However, the Bill was drafted before the Federal Government proposed plans to limit this form of tax planning.

If Bill 104 becomes law, real estate professionals in Ontario should speak with their legal advisors about carrying on their trade through a PREC to utilize the numerous tax benefits. Rosen Kirshen offers a suite of tax and corporate advisory services to professionals in Ontario, and we would be thrilled to help you capitalize on this potentially exciting opportunity. Kindly contact us today to learn more!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

How Professionals Incorporate To Save On Taxes

Professional Corporations

Legislation in Ontario specifically permits certain professionals to practice their profession in a corporate form even though the professional is the sole employee of the professional corporation (PC). The Ontario Business Corporations Act (OBCA) permits a professional to practice in a professional corporation if it “holds a valid certificate of authorization or other authorizing document issued under an Act governing the profession”.

Under the Income Tax Act (ITA), significant tax advantages may be available to a professional who practices through a corporation, rather than directly from a practice operated in his or her own name.

The two main tax advantages of incorporating a professional corporation is tax deferral and income splitting. There are also significant tax planning structures that can be achieved using a PC.

Both of these advantages derive from the fact that a PC pays tax at a preferential rate on its active business income (ABI) earned in Canada each year up to a maximum of $500,000, also known as the Small Business Deduction (SBD). A PC’s entitlement to the SBD is crucial to the advantages of operating through a PC.

Tax Advantages

The tax advantages that are available to a PC are:

• A PC is able to borrow funds, and repay debt at a much easier and faster rate then an individual due to its lower tax rate;
• PC’s will have significantly more after-tax income available for investment because the PC will be subject to a lower tax rate on the first $500,000 of taxable practice income earned by it in each fiscal year;
• Income splitting (please see below);
• The shareholders will be able to make use of the lifetime capital gains exemption; and
• The shareholders are able to pay themselves through dividends.

There are also tax deferral advantages for a PC and that is because the corporation pays tax at a lower tax rate than the professional would pay personally. For example, the top individual marginal tax rate for 2016 for an individual resident in Ontario with a taxable income of over $220,000 is 53.53%. As you can see, if a professional would pay tax at the corporate rate instead of at this top marginal rate, he or she is deferring the payment of tax of about $0.40 on each dollar of taxable income. This is achieved by leaving funds, otherwise known as retained earnings, in the PC for investment or for the repayment of practice related debt.

There is a common misconception that operating through a PC effectively leads to double taxation – the Corporation pays corporate income tax and then from its retained earnings (after tax income) it can distribute this capital in the form of dividends to its shareholders who then must claim this income on his or her personal income tax return and pay additional income tax. However, the concern is unfounded when dealing with a PC with the SBD. Generally speaking, passive investment income (rent, interest and royalties), capital gains and portfolio dividends will be taxed at approximately the same tax rate regardless of whether the income is received by the corporation and distributed to the shareholder, or received by the individual directly.

Finally, if the professional has personal investments or assets, they can transfer the assets to the corporation on a rollover basis pursuant to s.85 of the ITA. To understand the benefits of this tax plan consider the following example:

If a professional has assets with a fair market value (FMV) of $250,000 and a tax cost or adjusted cost base (ACB) of $100,000 (being the amount initially paid for the assets), the professional could transfer the assets to the PC on a tax-neutral basis for a $100,000 promissory note and $150,000 worth of fixed, non-voting, non-participating, non-capital growth preference shares. The professional could then withdraw the $100,000 from the PC on a tax free basis as this is merely the repayment of capital, by calling the promissory note. The professional would then pay tax on the redemption of the shares at a rate of 20-25%. Shares are not typically redeemed at one time but instead a small amount of shares are redeemed each year depending on the amount of funds the professional wishes to withdraw. The result if done personally is that the professional would have paid a top marginal rate of 53% tax on the disposition of the assets being roughly $79,500. Instead, when using a corporation, the professional pays a dividend tax rate being roughly $37,500 on the disposition of these same assets.

Income Splitting

Income splitting for PC’s is tricky and one must use the advice and assistance of a professional tax advisor or lawyer to ensure you do not trigger the attribution rules.

Most PC’s do not allow shareholders of the corporation to be persons other than those licensed by the professional. However, doctors or dentists are the two professions that can benefit from income splitting. Their respective legislations permit non-voting participating shares of a medical or dental PC to be held by a professional’s spouse, child or parent. This permits family members who are not active in the PC to share a portion of the PC’s after tax income by receiving dividends on shares that they directly own. If these family members are 18 years or older, are in a low tax bracket and the corporation is properly structured, then the family as a whole, will pay less tax than if the professional had earned all the income personally. It should be noted that one cannot income split with children under the age of 18 as this is effectively restricted by the imposition of ‘Kiddie Tax’ – a harsh tax introduced in 1999 to defer this type of tax planning.

Currently, an individual resident in Ontario without any other source of income can receive about $33,000 of non-eligible dividends tax free by virtue of his or her basic personal tax credit and dividend tax credit for non-eligible dividends. A non-eligible dividend is a dividend that has been paid out of a PC’s retained earnings that have benefited from the SBD. If the dividends are paid to such an individual, this person can use the funds to pay for certain family household expenses that the professional would otherwise pay, resulting in a tax savings of up to $0.45 on the dollar of taxable income.

Be advised that the ITA contains a number of rules intended to prevent high rate income earners from arranging his or her affairs to split income or minimize tax liabilities so that one’s combined household tax liability is reduced, known as the rules of attribution. Without careful planning and consultation, the attribution rules could result in increased tax liability. Therefore, we strongly encourage you to consult a tax professional before these tax planning arrangements are untaken.

Which Professionals Can Incorporate a Professional Corporation?

• Chartered accountants;
• Lawyers;
• Social Workers;
• Veterinarians;
• Physicians and surgeons;
• Physiotherapists;
• Psychologists;
• Dental hygienists;
• Dental surgeons;
• Dental technologists;
• Denturists;
• Dieticians;
• Chiropodists including podiatrists;
• Chiropractors;
• Massage therapists;
• Medical laboratory technologists;
• Medical radiation technologists;
• Midwives;
• Nurses;
• Occupational therapists;
• Opticians;
• Optometrists;
• Pharmacists;
• Audiologists; and
• Speech language pathologists and respiratory therapists.

Are you in any one of these professions? If so, contact Rosen Kirshen Tax Law who can incorporate a Professional Corporation and help you save a significant amount of taxes!

**Disclaimer

This article provides information of a general nature only. It does not provide legal 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 this article. If you have specific legal questions you should consult a lawyer.