Employee Profit Sharing Plans (EPSP’s), Part 4 of 4

This is the last part of our EPSP blog series where we will discuss the remaining items on the summary of consultations. 

3. Limitations on contributions

Under the Income Tax Act, employers may deduct expenses and outlays only to the extent that they are reasonable in the circumstances. The Income Tax Act also includes specific limits to employer contributions to certain plans. For example, consistent with limits on other retirement savings vehicles, employer contributions to a Deferred Profit Sharing Plan may not exceed the lesser of 18 per cent of an employee’s compensation, or one-half of the money purchase Retirement Pension Plan limit (for 2011, one-half of the money purchase limit is $11,485).

While studies have indicated that a profit pool between 3 and 5 per cent of salaries/wages is sufficient to positively influence the behavior of employees, the Income Tax Act does not place a specific limit on the size of EPSP employer contributions ^[2]. This could change under the new provisions.

Is there a specific rationale for allowing unlimited EPSP employer contributions?

What would be the impact on your business or clients if employer contributions to an EPSP were subject to a specified limit, such as a certain percentage of an employee’s salary or wages paid directly by the employer for the year? What would be an appropriate limit?

4. Withholding Requirements

The Income Tax Act imposes withholding requirements on several sources of income and includes tax by installment rules. EPSP allocations are not subject to the same income tax withholding requirements as salary and wages paid directly by the employer, and can be structured to avoid tax by installment rules. This can allow related persons to delay the payment of income taxes.

As EPSP contributions are allocated directly from the trust rather than the employer, they are also not subject to EI and CPP withholding requirements. This could change with the revision.

What would be the impact on your business or clients if EPSPs became subject to income tax withholding requirements similar to those applying to salary or wages paid directly by the employer for the year? What would be the effect of this change if EPSP allocations were also considered employment income paid by the employer for EI and CPP purposes (and, therefore, subject to EI and CPP withholdings)?

5. Additional Questions

In the context of reviewing EPSP rules, are there additional aspects of EPSPs that you think should be reviewed, or taken into consideration, to ensure that EPSPs remain an effective compensation tool? Are there any technical improvements that could be proposed as part of the review of EPSP rules?

Currently, while we wait, it may not be good to set up an EPSP where the rules are going to change.  It is best to know all the current rules before getting into something such as an EPSP.  EPSPs can still be used for the purpose designed by the government, but should not be used as a way to avoid CPP and/or EI.  There are other ways to achieve this goal that are much more efficient and are not being looked at to be changed by parliament!  Don’t hesitate to contact us at Kustom Design to consult further on this topic.  

Employee Profit Sharing Plans (EPSP’s), Part 3 of 4

Here is the 3^rd part of our EPSP blog series.  In this 3^rd part, we focus on the consultations made in connection with some proposals to change EPSP rules.

If the rules change as we think they may, this could really put a damper on this loophole for many business owners.  Here is the summary of the consultation that was published.

1. Eligibility to participate in an EPSP

The Income Tax Act contains provisions that limit the ability of employees who do not deal at arm’s length with their employer to enter into certain compensation arrangements with their employer. For example:

• To be accepted for registration, a deferred profit sharing plan must exclude persons related to the employer and specified shareholders from participating in the plan; and
• To qualify for a deduction, employees who exercise stock options must deal at arm’s length with the employer.

With the proposed changes, EPSP provisions may include similar restrictions on the participation of employees.

Is there a specific rationale for allowing non-arm’s length employees to participate in an EPSP?

What would be the impact on your business or clients if employees who do not deal at arm’s length with the employer, such as related persons, were excluded as eligible EPSP beneficiaries?

2. Role of Minor Children

The Income Tax Act contains provisions to limit income-splitting techniques that seek to shift certain types of income (e.g., certain capital gains, taxable dividends, income from partnerships) from a higher-income individual to a lower-income minor. Under the tax on split income provisions, for example, income received by minor children is taxed at the highest federal marginal income tax rate (29 per cent). In Budget 2011, the Government extended the tax on split income to certain capital gains on shares of most unlisted corporations. EPSP allocations are not subject to these provisions currently, however the revision could change this.

Is there a specific rationale for excluding EPSP allocations from the tax on split income provisions?

What would be the impact on your business or clients if EPSP allocations to minor children were subject to the tax on split income?

There are 3 items left on the summary of the consultation – Limitations on contributions, Withholding Requirements and Additional Questions.  We will take a look at these on the next part of this series. 

Employee Profit Sharing Plans (EPSP’s), Part 2 of 4

This is the 2^nd part of our 4-part blog series on EPSP’s.  This part will talk more about the benefits of EPSP’s and how they can affect your taxes.

Getting back to EPSPs, there have been some benefits to setting one up.  One is that the trust is not taxed.  No tax is payable by a trust governed by an E.P.S.P. on its taxable income. This means that like registered pension plans or R.R.S.P.'s, the income of the trust accumulates on an untaxed basis.  Another benefit is that employees are taxed annually on the activities of the trust.  The allocations are included in the employee’s income in the year of allocation but income tax is not withheld on the transaction.  The employer will deduct the amounts paid to the EPSP within 120 days of the Corporation’s year end.  The EPSP can be used as an opportunity to reward employees and help create loyalty.

Many EPSPs have been a way for small business owners to distribute profit among family members, children and other employees.  However, the original intent behind EPSPs, as a parliament initiative, was to create a way for business owners to align the interests of their employees with those of the business by sharing the profits of their business with their employees.  The intent was to create vehicles for employees to save money through the EPSP that would be invested tax free, allowing the profits plus gains to be distributed on an annual basis to employees.  Since many business owners have simply been using it as a way to get around CPP and EI, there are currently major consultations going on with the department of finance in the way of proposed changes.  If you’d like to see the consultations that closed just recently (October 25, 2011) go to http://www.fin.gc.ca/activty/consult/epsp-rpeb-eng.asp. 

On part 3, we’ll talk about the different scenarios involved when EPSP rules change. 

Employee Profit Sharing Plans (EPSP’s), Part 1 of 4

This is a 4-part blog series focusing on Employee Profit Sharing Plans or EPSP’s.  I will discuss this in as much detail as I can.  But if you need further clarification, please feel free to contact me at info@kustomdesign.ca.  Thank you and I look forward to hearing from you soon! Here is the first part of our series:

The average person does not hear about things like EPSP’s. However, over the last number of years, with the increase of knowledge through the internet and other sources, many other smaller private Corporations are beginning to use them.  In fact between 2005 and 2009, the number of EPSPs has increased about fivefold, mostly among small, closely-held Canadian-controlled private corporations.

So what is an EPSP?  An Employees Profit Sharing Plan ("E.P.S.P.") is a trust that allows an employer to share business profits with some or all of its employees. The E.P.S.P. does not require registration.  Amounts are paid to a trustee to be held and invested for the benefit of the employees who are members of the plan.  The idea is to invest the funds for growth and future distribution. However, many EPSPs have not been investing the funds, but instead just flowing through the profits to the employees as a way to avoid CPP on the employee’s earnings.  The government is currently looking at changing the rules as they don’t want to see EPSPs used to simply avoid CPP (and EI). 

That being said, avoiding CPP can be a good thing particularly if you’ve maxed out your lifetime contributions.  To find out if you have maximized your CPP contributions, you must contact Service Canada.  Avoiding CPP is better achieved by paying dividends.  Dividends can only go to the shareholders of the corporation (which may also be employees), so you must structure your affairs accordingly.

Next week, we’ll discuss the benefits of EPSP’s.  

Understanding the KiddieTax, Part 3

The 2011 Federal Budget has introduced a new legislation whereby after March 22, 2011 such capital gains will now be subject to the “Kiddie Tax.”  However, other capital gains realized by a minor (for example, from a publicly traded portfolio of assets or shares of a private corporation disposed of to an arm’s length person) will continue to not be subject to the “Kiddie Tax.”  As such, capital gains realized and taxable in the hands of a minor either directly or indirectly is still a common and effective income splitting tool in many cases.

Also, partnerships and trusts that provide services to arm’s length parties are also not subject to the “Kiddie Tax”.  Let’s say that a mom, dad, the kids and a trust all form a partnership.  The partnership’s purpose is to sell food and drink (something a whole family could do).  When the partnership receives profits it can allocate these profits to the partners, which include the minors.  Typically no “Kiddie Tax” would be applied in this instance.

There are other ways to avoid this “Kiddie Tax” as well, such as simply paying the minor for work rendered.  When your children work for you it can be legitimately be their income and taxed in their hands at a much lower rate.

The “Kiddie Tax” definitely makes the family income splitting more difficult, however there are ways to effectively split income.  Careful planning with professionals must be done before implementing any plan.  On top of the current rules making it more complex, the changes in income tax laws each year make it even more difficult.  Thus, if you are looking for ways to income split, don’t hesitate to contact us as we would be glad to plan with you!  Our professionals along with our strategic alliance of tax lawyers can help you plan for all types of tax savings!

This concludes are blog series on the Kiddie Tax. I hope you now have a better understanding of its rules and how it can impact your tax saving strategies! 

Understanding the KiddieTax, Part 2

Another common plan prior to January 1^st, 2000 was to have a partnership whereby the child (or a trust of which the child was a beneficiary) would be a partner and have the partnership receive income from a related entity.  For example, the partnership could provide consulting services to a corporation owned by the parents.  The income received by the partnership could then be allocated to the partners, including the minor child, thus providing for simple yet effective income splitting.

Now both of these income splitting plans are subject to the “Kiddie Tax” to the extent that the income is received by a minor child.  As with most tax rules, many people do not know or understand these rules so it is best to educate yourself (such as you are in reading this blog) and plan with professionals, such us Kustom Design.

One of the typical types of income that is not split income and therefore not subject to the “kiddie tax” is capital gains.  Many plans were set up that involved related corporations that were structured to realize capital gains income.  These plans mainly involved having shares of the corporation being sold to a related corporation and resulting in a capital gain that is taxable in the child’s hands.  Prior to the 2011 Federal Budget, such a plan was often used to the extent that the accountant and/or tax lawyer and their client believed that the general anti-avoidance rule (“GAAR”) would not apply.  The Canada Revenue Agency(CRA), however, was not amused and would often times apply the GAAR to such a plan (with many cases still in the system).  New legislation was then introduced through the 2011 Federal Budget.

We’ll continue our discussion on this new legislation as well as how the Kiddie Tax applies to partnerships and trusts next week.  

Understanding the KiddieTax, Part 1

On January 1^st, 2000 the “Kiddie Tax” came into the Canadian law books.  The main purpose of introducing this new tax was to deter the many Canadians from income splitting with their kids.  Before January 1^st, 2000 many Canadians would simply structure their affairs so investment income was realized in their kids hands, thus having a much lower tax rate (many times no tax was realized).

This “Kiddie Tax” applies to certain types of income that is structured in ways so the minor child receives the income.  We are speaking of kids under 18 that belong to Canadian resident parents.  This “Kiddie Tax” makes it so that instead of the minor child paying income tax at a lower rate (or no tax at all), they end up paying the highest tax rate possible!  Planning around this rule is a must when planning income splitting with your kids.  Of course the minors may not be able to afford to pay this tax, so the parents end up being liable for the tax as the ultimate liability for “Kiddie Tax” rests with the parents.

The most common type of income to which the “Kiddie Tax” applies is dividend income from corporations and trusts.  Before the new “Kiddie Tax” it was regularly part of the plan to structure affairs using a trust that receives dividends and then would flow it out to the minors which would pay little to no tax.  Some structures even allowed minors to receive dividends directly from a corporation of which they were a specified class shareholder.  Before the “Kiddie Tax” this simple plan was very effective in saving tax as the child could use up their personal tax credits and pay tax in much lower tax brackets.  In fact many times there was no tax to pay if the income was kept under certain levels.

We’ll continue our blog series on the Kiddie Tax on Thursday. Please check back! 

Improving your Credit & Maximizing your Borrowing, Part 4

Here are your rights within the Credit Reporting Act:

·         To be aware of what your credit says about you; and a list of everyone who has requested it recently.

·         Before any one is given access to your credit file, he or she must have your written or verbal consent or notify you by mailing you a notice.

·         Your report may only be given to a person seeking information only for the purpose of extending credit or collecting a debt; tenancy inquiry; employment or insurance verification; a direct business requirement.

·         The right to be told by a credit reporting agency the substance and sources of information it collects about you.

·         The right to know the name, address and phone number of the credit reporting agency responsible for preparing the credit file used to deny you credit.

·         If you are denied Credit due to information on your credit file, you are entitled to a free copy of your Credit File if you make a request within 30 days of denial.

·         The right to have investigated within a reasonable amount of time, information that you believe is inaccurate or outdated.

·         The right to have inaccurate information deleted from your credit record if a credit reporting agency’s investigation finds erroneous information.

·         The right to have disputed information on your credit file deleted if the credit reporting agency cannot verify it through investigation.

·         The right to include a brief statement that will become a permanent part of your credit record explaining your side of any dispute that cannot be resolved.

·         The right to have negative credit-related information, such as unpaid debts, judgments, and bankruptcies removed from your credit file after 6 years.

·         The right to sue a credit reporting agency on the condition that it deliberately or negligently violates the law.

There are many things to consider with Credit!  The Credit Bureaus are for profit companies, they are not government organizations.  Always do what you can to pay less interest and maximize your lending.  Sometimes the best time to get credit is when you don’t need it.  If you get a line of credit and don’t use it, you pay nothing until you use it!  Please don’t hesitate to contact us if you are looking for more info in regards to your credit or obtaining credit.

Improving your Credit & Maximizing your Borrowing, Part 3

Here are some useful information you should know about Credit Scores.  I’ve listed the main areas used in calculating your credit score, top ways to improve your credit score and other tidbits you might want to be aware of. 

There are 5 Main Areas used in calculating your credit score:

1.    Your payment history – Have you paid your bills on time regularly

2.     Amounts you owe – Do you owe a lot, are you close to your credit limits?

3.     Length of your credit history – How long have you had credit?

4.     Types of Credit Used – Ie. Consumer debt is not treated as well as lines of credit

5.     Your New Credit – Have you recently gotten new credit?

Here are the top 5 ways you can improve your credit:

1. Pay all bills on time.
2. Keep revolving credit balances low.
3. Limit your credit.
4. Be focused when you go for credit.
5. Manage your credit responsibly and regularly.

Here are some other good things to know about Credit:

·         We live in a credit society, vs. the cash based society of our (grand) parents.

·         Treat Credit as an asset as it can work for you producing your cash flow.

·         It is hard to live in today’s world without credit. (i.e. Rentals / payments / home purchases)

·         Extension of Credit is the banks most important function.

·         You need to monitor your credit regularly, knowing all changes at all times.

·         There are 3 Major Credit Bureaus in Canada: Equifax Canada Inc., Trans Union of Canada Inc. and Northern Credit Bureaus Inc.

·         You are entitled to one free credit report per year.

·         Lenders require you to have at least 4 open L.O.C.’s to show stable history.

·         You should have an overdraft and never bounce any cheques or payments.

Improving your Credit & Maximizing your Borrowing, Part 2

The main thing that every bank or company uses to determine whether or not you can borrow is your Credit Score.  There are other names for the Credit Score, such as FICO Score or beacon score.  They are essentially the same thing.  However, there is more than 1 Credit Bureau they can get a score from.  The main Bureau that everyone uses is Equifax. However, some also use TransUnion or Northern Credit.  You can get a good handle on your credit score by using Equifax. 

One of the first things you need to know about your credit score is that there are soft checks and hard checks on your credit.  When you check your credit, it is a soft check and does not affect your score. However, when an institution or lender checks your credit, it is a hard check and negatively affects your score. So don’t go and just shop around for credit, allowing each potential lender to check your credit as that will bring your score down.  Each time it is checked, it will go down so be cautious on who you authorize to check your credit!

To check your credit, you can simply go to www.equifax.ca and get your credit report.  If they can’t verify you online, you may need to call and rectify. But once you have an account, you can get your credit any time for a small cost.  You can also subscribe to different credit systems where they send you a regular report and notify you if anyone checks your credit.  Although you can get a free credit report in the mail each year it doesn’t have a score, so doesn’t tell you all that you need!

One of the main reasons for checking your own credit, other than knowing where you’re at with your credit score, is to see if there are any errors on your credit.  Many times people find things on their credit report which shouldn’t be there.  Even though they may not be correct, they are still on your credit and could be negatively affecting your score! Errors can be fixed!  Equifax has a form that you can submit and they provide instructions on their website as to what to do when you find errors on your credit report. 

More on Credit Scores on my next post!

Improving your Credit & Maximizing your Borrowing, Part 1

Many people really don’t realize how important their credit actually is.  Your Credit is an asset.  1 bad mark on your credit could costs you thousands of extra dollars in interest on a loan, or 10’s of thousands or even 100’s of thousands of dollars on a mortgage.  Why pay more?  The better your credit the better your rates on loans, mortgages, lines of Credit and more.  Did you know that if you have good credit you can even renegotiate your current interest rates!  Do your best to keep your credit score as high as possible so you can get the best rates and keep more in your pocket!

When you go to borrow money, there are 3 main things that determine how much you can borrow and at what rate.  Here are the 3 areas:

1. Credit Score
2. Debt Service Ratio
3. Your history with the company/bank that you are borrowing from

I will work backwards to cover these 3 areas, starting with your history with the company/bank that you are borrowing from.  Each institution that borrows money keeps great record of your history with them, such as how long you’ve been a client, your payment history, how many loans and other products you use and so forth.  Many companies/banks take this into account when loaning you money.  If you’ve had a great history with them, this will assist you in your borrowing needs if you use that company or bank to borrow money.

Debt Service Ratio is a much more complicated topic. A Debt Service Ratio is a calculation made by a lender to determine if your current income can service your debt(s). Many different lenders require different Debt Service Ratios, so there is no sure way to know that you will pass their Debt Service Ratio unless you ask what it is.  Don’t be afraid to ask as many questions as you can when you are considering borrowing.  Not only do different institutions have different Debt Service Ratios, but each type of lending can have different Debt Service Ratios.  For example borrowing for a vehicle would have a different Debt Service Ratio then borrowing for a home.  Debt Service Ratio is typically calculated by dividing your monthly payments on your current loans and general cost of living items by your gross income.  Again because each company/bank has different Debt Service Ratios, it is best to ask the questions and how they calculate their Debt Service Ratio.  If you can’t meet their debt service ratio, then it may be a waste of time and a mark on your credit when you apply for the credit, so why bother?

We’ll get into our discussion of the Credit Score on my next blog. Please check back! 

The Transition from Employed to Self Employed Part 3

Let’s now move onto the 3^rd option in the transition from employed to self employed.  The 3^rd main option for making the transition from employed to self employed is through a 3^rd party contract service, such as the one we use called Job Works.  A third party contract solution allows you to have a steady contract with one company, similar to being employed with the same company.  The main difference is that you would be legally on contract, saving lots in tax through deductions, income splitting, dividends and more!  The key here is legal structuring as you don’t want CRA to come back and say you are an employee!  In a 3^rd party contract solution, you would have a corporation set up that contracts with the 3^rd party contract provider.  The 3^rd party contract provider has a contract with the company that pays the 3^rd party contract provider for the services that you will provide and then the 3^rd party contract provider has you fulfill the work that the company is looking for.  So in essence, your corporation that you work for and are an owner of, works through a 3^rd party contract provider to provide services for a company that has contracted with the 3^rd party contract provider.  There are many people who have been employed by a company and then the company that they worked for agreed to go through the 3^rd party contract provider allowing them to transition from employed to self employed!  For more information on Job Works, a 3^rd party contract service provider, you can go to www.jobworksinc.ca 

If you want to discuss your transition from employed to self employed, or the possibility of making the transition, don’t hesitate to contact us.  Also if you are an employer or a business that is looking to hire or transition your current employees, do speak with us first!

The Transition from Employed to Self Employed Part 2

We’ll pick up where we left off on my previous blog where we started our discussion on the first option for the transition from employed to self employed.

As we mentioned already, a gradual transition is when you continue to work while starting your business on the side.  The bad thing about a gradual transition is that it will now be like having 2 jobs, where you will work days, nights and weekends.  The workload will be much more, and as the business grows you will get to a point where you feel that you can’t manage both the job and the business.  When it comes to that point, it is time to look at the full transition to self employed!

The second option to make the transition from employed to self employed is to do an instant transition.  This means that as soon as you cease to be employed, you are going full time into your business!  The issue with using this method is that you will no longer have the steady paycheck of employment, so if your business is struggling to make enough income at the beginning, you and your family could be affected by having little to no income for a period of time.  The key to making an instant transition is to either have capital in reserve, have a spouse that can cover your closed circle budget, or to have business arranged that will generate enough income to run your business immediately and provide for you personally!  In looking at the option of gradual transition and instant transition, you may want to look at a combination of the two.  For example you may want to change the employment from full time to part time for a period of time until you are ready to fully leave the employment.  There are many options to look at, and all of the details revolve around planning.  If you are considering a transition, don’t hesitate to come see us to assist in planning your transition!

We’ll discuss the 3^rd option on my next blog. 

The Transition from Employed to Self Employed Part 1

Many people who are employed at one time or another in their life, consider making a transition to being self employed.  Be it a dream of opportunity, more freedom, more time to spend with family, more options to travel, or other dreams and goals, many things can draw the employed to becoming self employed!  Although these things may draw people, they forget that it can be much harder work, longer hours, and less free time when the self employment starts!  This of course is not always the norm, and if you work hard at the beginning, you probably will have more free time later down the road!  Becoming Self Employed is a major decision and should not be taken lightly.  If you are considering becoming self employed than you want to ensure your family is on side with this decision because the more support you have in becoming self employed, the better chance you have of succeeding.  Self Employment is not for everyone, so weigh out everything very careful when making this decision.

There are many ways people make the transition from employed to self employed, however they mainly fall into 3 categories:

1. Gradual Transition
2. Instant Transition
3. 3^rd Party Contract Services

In this blog series we will discuss all 3 of these options.

Let’s start with the first option – Gradual Transition. 

The first option to make the transition from employed to self employed is through a gradual transition.  This means that you would continue to stay employed while starting your business on the side.  The good thing about a gradual transition is that you will continue to have stable income from employment while you build your business slowly. If the business doesn’t work out, you still have your job.  Many businesses do not start with a lot of income, so in the case where you will build up income in your business slowly you will still have the comfort of a steady paycheck.

We’ll continue our discussion on Gradual Transition on my next blog post! 

Taking Money from your Corporation Part 3

The 3^rd main way that you will take money from you corporation is through payroll.  Payroll can come in the form of wages, salaries, bonuses, benefits, severance and more.  Payroll may be good if you have a lot of employees, however it is very inefficient if you are a small corporation with little to no employees!  Payroll brings great administrative work, regular $ remitting requirements, and extra CRA filing requirements.  If you are late on a payroll remittance by even a day you could wind up with large penalties, tacking on interest daily.  Having payroll also makes you more prone to a CRA audit as many CRA audits begin with Payroll Trust Exams!  There are many reasons to stay away from payroll, so please do talk to us about your options. 

The key when deciding how to take money from your corporation is understand the rules and follow them.  Now that we’ve outlined Shareholder Loans, Dividends and Payroll in this blog series you have a little understanding of what you can and can’t do.  Here is my tip to you: The best way to take money from your corporation or pay yourself is to simply take draws monthly of what you need to live on (your closed circle) and then when tax planning at the corporation’s year end, we can decide if the draws you took were shareholder loan, dividends, wages or a combination of!  This principal applies the same for taking out a lump sum when necessary.  Keep in mind that if you are married and your spouse is also a shareholder of the corporation, the draws should be in both of your name and put into a joint bank account to give maximum control of income splitting. This is very efficient for tax planning and is legal as you are allowed to borrow/draw money (shareholder loan) from your corporation for up to a year past the corporation’s year end.  In the case of the tip I just gave you, we wouldn’t even need to go past the current corporate year end before we claim it as income, and if there is a reason to not claim it as income this year then we have the option of deferring it.

You now have some great knowledge on the basics of taking money out of your corporation.  Do it wisely and save many headaches and taxes, putting more in your pocket!  For questions, to talk further about this topic and others, or to look at Kustom Design taking care of your corporate accounting and tax needs, don’t hesitate to contact us!

Taking Money from your Corporation Part 2

The other side of the shareholder loan is when you borrow money from the corporation.  This may be a one time lump sum, or may be a series of draws monthly, regularly or sporadically.  You are allowed to have a shareholder loan owing to your corporation for up to one year after the Corporation’s year end date.  So, for example, if you borrowed money from your corporation in the year and then still owed the money on your corporation’s next year end, you would have 1 year from that corporate year end to either pay back the loan, or claim it as personal income.  Now that we understand that rule, does it not seem simple to just take monthly or semi-monthly draws from the company and then at the end of the year, determine if it is in fact shareholder loan, wages, or dividends?  A lot of times you may not know until the year end anyway!  This is a great alternative to trying to keep up with all the payroll administration, remitting and filing headaches!  We will discuss this further in this blog series.

Second, we will now discuss dividends as a way to take money from your corporation.  For more on dividends, please do search my blogs as there is a lot more in depth teaching on dividends.  Dividends are simply a payment of profit from the corporation to its shareholders.  The first rule of dividends from corporations is that dividends can only be paid if the end result, after the dividends are paid, is that the Retained Earnings of the corporation are positive (above zero).  The Retained Earnings of a corporation put simply are a sum of the profits and losses of the corporation, less dividends, since the corporation’s inception.  The second rule of dividends paid from corporations is that each shareholder that owns the same class of shares must receive the same amount of dividends per share.  This is an important topic that is discussed in great length in some of my other blogs, and is important in determining your share structure.  Simply put, if you plan on paying dividends to anyone but yourself (ie. Spouse) then ensure they have a different class of shares than you do, so you remain in control of the income splitting (who gets how much).  Dividends are claimed on the corporation’s T2 income tax return, and are given to you on a T5 reporting slip, which is filed as income on your T1 personal income tax return. 

We’ll cover the third way to take money from your corporation in the next blog. 

Taking Money from your Corporation Part 1

If you own a corporation (or if you are a shareholder), you must know all the ways to take money from the corporation.  Maybe you work for this corporation full time or part time, or maybe you don’t.  Many people from CRA try to convince you to set up a payroll account and make monthly remittances.  This is definitely not the most efficient way to get money from your corporation.  In fact, it’s one of the least.  What if the corporation owes you money for money you loaned it or for an asset you sold to the corporation?  This is called a shareholder loan.  Shareholder loans must always be considered when taking money from your corporation.  In this blog series, we will understand the basics in 3 categories of taking money from your corporation:

1. Shareholder Loans: Loans to and from your corporation
2. Dividends: Payment of profits of the corporation to the shareholders
3. Payroll: Direct Remuneration for work/services rendered

A Shareholder Loan is a loan that can be both from the shareholder to the corporation and from the corporation to the shareholder. Let’s start by looking at a loan from the shareholder to the corporation to get the basic idea.  If you put start up capital into your corporation, pay for expenses on behalf of the corporation or loan the corporation money the corporation now owes you, the shareholder, the money.  You typically won’t collect interest, but you may want to in specific circumstances. 

Another way that you may have a shareholder loan owing to you from your corporation is if your corporation was in need of certain assets that you own personally, such as a car or computer, and you sold the assets to the corporation.  For any asset that the corporation purchases from you it must purchase the asset at Fair Market Value.  Keep in mind that if you are selling an asset that appreciates (not depreciates) than you may end up with a Capital Gain personally when you sell the asset to the corporation.  (This can also be deferred in certain instances)  When you sell the asset to the corporation, the corporation will either pay you right away for it, or pay you later.  If the corporation pays you later then you simply have a shareholder loan owing to you. 

There is another side to the shareholder loan that we will be discussing on the next blog. Please check back next week! 

Charities 101

A registered charity is an organization established and operated for charitable purposes, and must devote its resources to charitable activities. The charity must be resident in Canada, and cannot use its income to benefit its members. Charities are usually registered as Corporations, or are governed by a trust or a constitution. They may be under a covering of a parent Organization.

The main advantages of charities are:

Ø  Charities are able to receive gifts tax free.

Ø  Charities provide receipts to donors for tax savings.

Ø  Charities are tax exempt

Ø  Charities make a great impact in our communities, provinces and our country!

The main disadvantages of charities are:

Ø  Charities take time to set up.

Ø  It is a large undertaking to set up a Charity, and there are ongoing requirements.

Ø  Charities must meet a public benefit test.

Ø  You cannot keep profit of the charity.

Ø  If you lose charitable status, all assets are taxed, or if break any of the various charitable rules you could face various consequences.

Many people have asked what the difference is between a charity and foundation in Canada.  The main difference is that charities are public and foundations are private.  Foundations in Canada are charities and mostly operate by the same rules.  Foundations are typically used to raise funds privately to distribute to other charities.

Charities should not be confused with non profits.  Non profits have much less regulation than charities, however they are treated similarly in that they are typically tax exempt and cannot distribute profit to benefit ownership.  The biggest difference between charities and non profits is that non profits are not allowed to issue tax receipts for donations to receive tax credits!

Professional Corporations 101

A professional corporation is a corporation engaged in providing professional services, where a profession governed by its professional body allows its members to practice through a corporation as opposed to a sole proprietorship or partnership.  Examples include Doctors, Dentists, Chiropractors, Lawyers and Accountants.  To have a Professional Corporation you must belong to a professional governing body.

The main advantages of professional corporations are:

Ø  Having a Professional Corp. allows you to belong to Professional Organizations.

Ø  Having a Professional Corp. allows you to be recognized as a Professional.

Ø  Many people like to deal with Professionals that are governed by another body for accountability.

The main disadvantages of professional corporations are:

Ø  There are more tax filing and other rules for a Professional Corporation than a regular Corporation.

Ø  A Professional Corp’s life is ended if the person/people holding the designation passes away or loses their license.

Ø  You are under the rules of the Prof. Organization that may not allow you to have shareholders or partners that don’t belong to the organization. (hold credentials).  Typically the exemption to this is immediate family members, such as a spouse or children.

Ø  The articles of incorporation, in addition to all other requirements, must limit the activities of the corporation to the profession.

If you belong to a professional governing body they may require you to have a professional corporation.  Please contact us if you require more information on business structuring or professional corporations.

The last part of the series on structures will be about Charities. Check back next week and we’ll discuss some general information about these organizations!

Partnerships 101

In this blog we are talking about unincorporated partnerships.  Check our other blogs for other forms of corporate partnerships, limited partnerships and more.  A partnership is established when two or more people agree to pool their financial, managerial, technical and other resources in order to operate a business for profit.  Like a sole proprietorship, a partnership is not taxed as a business that is separate from its owners.  The income from the partnership is included as part of the partners’ personal incomes and taxed accordingly.

The main advantages of partnerships are:

Ø  Because two or more people will be in business together, they can combine their finances in order to invest more than either could have done individually.

Ø  A partnership will most likely be able to borrow more than a sole proprietorship because creditors will have the credit & collateral of two or more people instead of only one to secure their lending.

Ø  Partners can pool talents and resources to accomplish more.

The main disadvantages of partnerships are:

Ø  Like a sole proprietorship, partners in a partnership are also exposed to unlimited liability incurred by the business, in relation to their % of ownership.

Ø  The partnership ends every time a partner leaves, unless provided for in a partnership agreement.

Ø  Start-up costs can be as high as, or even higher than, the cost of incorporating, due to the cost of Partnership Agreements.

If you are considering a partnership you may not want to use this typical form of partnership, but instead consider using a corporation or limited partnership.  Please contact us if you require more information on business structuring or partnerships.

My next blog will be about Professional Corporations so please visit my blog again!

Limited Partnership 101

Limited Partnerships are a special form of partnership, often used where investors want the tax treatment that comes from a partnership relationship, without incurring personal liability for all of the partnership debts.  Limited Partnerships (LP’s) consist of a General Partner, responsible for managing the business of the LP, and the Limited Partners, the silent investing partners that have no say in the business activities. 

The main advantages of limited partnerships are:

Ø  Limited partners have limited liability.

Ø  Both Income and Losses are flowed through to limited partners.

Ø  It is easy to attract investors to an LP.

Ø  Allows for experienced general partners to use their expertise in running the business.

Ø  Limited partners can leave without LP dissolution.

The main disadvantages of limited partnerships are:

Ø  There are more filings, formalities, requirements with limited partnerships.

Ø  It can be costly to form a Limited Partnership.

Ø  General partners assume personal liability.

Ø  Much due diligence is required before investing as you are trusting your money in the hands of the General Partner.

Both General Partners and Limited Partners can be corporations.  There are many uses for Limited partnerships, including minimizing and deferring tax.  If you have any questions on Limited Partnerships or other structuring  questions don’t hesitate to contact us!

We’ll take a look at Partnerships next week!