Kustom Design to Host Free Information Session This Month on 2011 Financial Boot Camp

News Release | January 11, 2011 | For Immediate Release

Kustom Design to Host Free Information Session This Month on 2011 Financial Boot Camp
Group recognizes how to save individuals on taxes and manage finances better

January 11, 2011 (Calgary, Alberta) - In our efforts to heighten awareness on the importance of taking control of finances, Kustom Design Educational is hosting a free information session to introduce members to our 2011 Level One Financial Boot Camp, which is designed to help individuals generate cash flow and excellent returns no matter what state the economy is in.

“We are very excited to host our free information session, and show people that it is possible for them to design the life they want to achieve,” said Kustom Design CEO Michael Lepitre. “People are accountable for the results they see financially, and Kustom Design’s information session focuses exclusively on the value of financial education and will show people how we can help them overcome any financial roadblock.”

Event: Kustom Design Free Info Session
Date: January 12th, 2011
Time: 7:00pm – 8:00pm
Location: Kustom Design Office on 221 18th St. SE in Calgary, Alberta

To sign up for Kustom Design’s free information session, and for more information on the 2011 Financial Boot Camp Level One visit http://www.kustomdesign.ca/.

About Kustom Design Educational
Kustom Design Educational, a member of the Kustom Design Group of Companies, is an organization designed to provide educational courses and resources on finance and taxes.

PDF News Release Download

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Media Contact:
New Wave Media | Ashley Feist | (403) 457-0919 ext. 228 | info@new-wavemedia.com

Donating Stocks to avoid capital gains while getting a donation credit

Giving should always be part of your financial and tax plan.  When you give you receive, and although that should never be the motivation of giving, it is an important fact.  Many people have realized that donating to charities can save significant tax savings.  Donating can save taxpayers hundreds of thousands of dollars in taxes by giving strategically. 

Giving stocks is not new, however over the last few years the rules are different in that their used to be a capital gain triggered when you donated a stock.  Now when you donate qualified stocks to a registered Canadian charity there is no capital gain triggered, yet you still receive the full donation credit for the value of the stock.

This can be particularly beneficial in the case of Flow Through and Super Flow Through Shares that have been acquired, considering there was already tax benefits for acquiring the Flow Throughs in the first place!  Although it is typically better to donate personally, many would ask what to do if they have stocks owned by a corporation.  In that case you could still donate the stock and receive a tax deduction for your corporation (instead of a tax credit) and the corporation would not trigger a capital gain.  This would also free up room in your capital dividend account to issue yourself or other shareholders tax free dividends.

Tips on Audit Proofing your Business Part 5

I cannot stress how important notes are when it comes to your source documents and bookkeeping, this is why I’ve mentioned it a few times in this blog series.  Because audits always happen years after the fact of the transactions, you must be able to go back in history and know exactly what happened.  So if you are not on top of your paperwork regularly (daily-weekly-monthly) you should not expect things to go well if you are audited.  At the end of each day, look at your receipts and make notes on them.  Make notes in your bookkeeping, or for your accountant to do the bookkeeping.  The more notes the better.  For example if you are claiming meals and entertainment expenses then ensure you note who you took out for the meals and entertainment or your claim will most likely be denied in an audit.

For claiming home office expense, ensure to have proof of your office/business usage and the square footage that proves the percentage of expenses.  This is something that CRA looks at frequently in audits.  For example if you have a house that is 2000 square feet and you are using 200 square feet for business purpose, then you can deduct 10% of your home overhead costs.  These costs include rent or mortgage interest, insurance, property tax, utilities and other over head costs.  Ensure you can prove this in the case of an audit.

One more tip for you at this time, it is best not to pay for business expenses with cash as cash is not very traceable.  If you lose the receipt you don’t have any statement or anything else to back the claim. 

Typically in most audit situations the CRA auditor will reassess whatever they can and the onus is on you to substantiate your claim.  Many claims by CRA may not be correct, however it is up to you to appeal if you don’t agree.  If you are reassessed you have 90 days from the date of that reassessment to file a Notice of Objection (appeal).  If the appeal doesn’t go in your favor and they still disregard your claim, you can appeal further to the tax court within 90 days of their denial of your Notice of Objection.

As we now wrap up this blog series you can see that there is a lot to think about in the case of an audit.  Be detailed and be able to prove everything.  If you have questions or concerns in regards to any of my blogs, please don’t hesitate to contact me.

Tips on Audit Proofing your Business Part 4

We are now getting close to wrapping up this series and you can see the theme is “be able to prove every expenditure and deposit”  The fact of the matter is that if you can’t prove expenses or deposits, CRA can just deem what they want whether it is true or not!  So you must always keep good back up documentation for every transaction, not just statements but receipts as well!  Keep a good record of all deposits, using a deposit book as well!

In my last blog we began to talk about Employee vs. subcontractors.  Employees must go on payroll and T4’s must be issued for employees.  Subcontractors do not go on the payroll, however a T4A should be filed at the end of the year (due the following February) stating how much was paid to the subcontractor.  

Let’s look a little closer at payroll.  Getting in trouble with payroll can close your business down.  The penalties and interest on late payroll remitting can cripple a business as the rates are so high!  To ensure you stay out of payroll trouble you can simply not have any employees, just subcontractors, or if you do have employees then ensure you always have accurate payroll remittance numbers and make your remittance on time!  You can use the Software produced by CRA, go on their website, or use approved accounting software to calculate your payroll remittances.  Payroll remittances are made on the 15^th of the following month.  So for example September’s payroll remittance is made on the 15^th of October, unless you have other arrangements in writing with CRA.

Subcontractors will remit their own taxes as they have their own business just like you do.  As mentioned they should have a Corporation with a GST number and they should invoice you in exchange for payment.  The invoice is your source document for proof in case you get audited.  In my last blog we listed the main factors CRA looks at to ensure that you have hired a real subcontractor and they are not an employee under the guise of a subcontractor.  If you want to hire and you don’t want employees due to the extra headaches and costs, then speak to us.  Even if it doesn’t look like the subcontractor can meet the criteria, we can help you set things up to ensure they are legitimate contractors.  Go to www.jobworksinc.ca for more info.

Tips on Audit Proofing your Business Part 3

We’ve been discussing some great tips on helping audit proof your business.  In reality the majority of businesses in Canada get audited at some point, unless they are short term in nature. Even the short term businesses do sometimes get audited.  So the key is to not hope for an audit, but be prepared in the case you do get audited!

Being prepared for an audit means that you can prove all your transactions with back up documentation and that all flow of funds have good paper trail.  One of the things that CRA almost always looks at in an audit is to confirm deposits going into the Company are either reported as income or elsewhere.  If the deposits into the corporation do not match the income reported, you will have to prove where the other deposits came from.  If you cannot prove where these deposits came from CRA may just deem it as income to the company.  An example of this is shareholder loans.  If you loan funds to your company, keep a good paper trail for proof of the transaction(s).

Another major area that CRA audits is the Shareholder Loan Accounts of corporations.  This is the account that has both incoming and outgoing funds.  Every time you, as a shareholder or director, put funds into the Corporation this shows up in the shareholder loan account.  Every time you pull funds out of the corporation this typically shows up in the shareholder account, until the Corporation’s year end where it may be cleared to dividends, wages etc.  If you cannot document that the payments to you are payments of shareholder loan then CRA could deem it as personal income to you the shareholder.  This is especially the case if they find the shareholder balance to be negative, meaning that you owe the corporation.  You are typically not allowed to owe the corporation any funds for more than 6 months.  In the past many people have set up loans from their corps with interest which used to stand up, but today CRA will just deem it as income to the shareholder or director! 

Tips on Audit Proofing your Business Part 2

The next tip for business owners is to ensure the business pays for its own expenses and the owners pay for there own expenses. As soon as you cross that line it is up to CRA scrutiny as to what happened. Instead of paying for expenses for your company, simply write a cheque to the company and let the company pay its own expenses. Same thing on the other side, don’t let the company pay for the owner’s personal expenses.

The next tip is to always make notes on your transactions. This is imperative as audits always happen years after the fiscal year(s) being audited. For example you may get audited in 2012 for the year 2009 and if they find things in 2009 they may go back further and audit years prior to 2009. For many people it is hard to remember what happened a couple months ago, never mind years ago. Notes in your bookkeeping and on source documents always help. Better to make a note and not use it, instead of not having a note when you need it.

Another tip is to ensure that vehicles are owned and expensed by the correct entity. If you are a shareholder of the corporation and you own a vehicle that is used for the business then you should not just have the corporation pay for your vehicle expenses. If you own the vehicle personally then you should track your mileage used for business and have the company reimburse you based on that mileage.(Currently acceptable: 52cents per km for the first 5,000 km and 45 cents thereafter) The reimbursement is an expense for the company, but not income to you. If you do it any other way an audit could cause you reassessment for personal use of vehicle expenses or the denial of company vehicle expenses.

In the case where the corporation owns the vehicle, then it is best to own your own vehicle personally to separate the 2. Simply use the business vehicle for business and the personal vehicle for personal. Many business owners, however, only own 1 vehicle that is used both for the business and them personally. In this case a mileage log should be kept to determine business vs. personal usage. Another thing to remember about vehicle expense deductions is that whoever owns the vehicle, should pay for the expenses. If you own the vehicle, you will either want to get reimbursed for business mileage or you may want to sell the vehicle to the business so it can pay for the expenses. Either way, if you use the vehicle for both personal and business use, you should keep a mileage log to determine personal vs. business usage. Mileage logs do typically stand up in audits.

Tips on Audit Proofing your Business Part 1

I’ve been asked by people before if they could audit proof their business. That question is interesting as no business is audit proof in that there is always a great chance that CRA will audit your business. However, that being said, there are many things you can do to keep your business from being reassessed after an audit. The key here is that if CRA finds things wrong when you are first audited, then you may be audited again in future years. If they don’t find any issues the first time they audit the company, then they may never come back as they can see the company has proper backup documentation and paper trail and accurate reports.

Many business audits start with either a payroll or GST audit. Payroll audits may be simple trust examinations, where they just want to look at who the company is paying, and if all the remittances are being made to CRA. It could also be a full payroll audit that would look at much more, such as did any employees receive taxable benefits, did the owners receive benefits, are the shareholder loan accounts accurate and much more. GST audits on the other hand will look at all your income and expenses that incur GST and determine if you reported your GST accurately. Any of these audits can lead to a full audit if the auditor determines that one may be needed. In a full audit they may go through your entire business in great detail, not something any business would want!

As discussed in my prior blogs, you do not have to speak with CRA, you can request everything in writing and in the case of an audit you can authorize a representative, such as an accountant, to handle your audit. If you are ever going to send any documentation to CRA, do not send originals!!! Always send copies, because if they lose any of your documentation (hey have lost people’s documentation before!) then the onus is on you to still prove the numbers you reported on your tax returns. Now let’s get into some tips…

The first tip for audits is to never give CRA any of your printouts, handwritten papers, or any other personal documentation that may be mixed in with your business paperwork. Many people put notes and other things in their paperwork which can cause CRA to dig deeper to find more things to audit. Keep your notes and other documents to yourself. If you are audited, you should go through your documentation and pull out such documents.

More tips on my next blog! 

Tips when Dealing With CRA Part 4

In my next 2 blogs I would like to discuss some of the tactics that CRA uses. Some of these tactics are in phone calls and conversations with CRA, some are even done in writing. For example when CRA is going to reassess a tax shelter, they will write in the letter to the taxpayer that they are going to audit the taxpayer’s participation. Of course people will read this as if they are going to get audited, when in reality the CRA has all the details of their tax shelter participation. Tax Shelters are monitored by CRA through the Tax Shelter Identification number. This allows the CRA to monitor every tax shelter and who is participating, how much and when! People who participate in tax shelters sometimes get scared when CRA uses their tactics, but others that don’t continue on saving tax year after year. The CRA can be tricky so you must watch out for the potential tactics they try and use.

Here is a short list of some of the tactics to look for and what do to do about them:

1. Ignorance – If you don’t know the rules, too bad! This seems to be how all of our regulators work in today’s day and age, so before you start a business, acquire an asset or do anything that has a potential larger tax consequence, seek professional advice. (Kustom Design is here to assist you, so please do come consult with us)
2. Fear – They will say things to you and provide written correspondence in ways that will keep you in fear of trying to do anything that saves tax! It seems that much of our system is now keeping people living in fear. Don’t live in fear, know your rights and always stand up for yourself! Surround yourself with others that are living in freedom of fear! We are here to help you stand up for your rights!
3. Intimidation – The CRA will try and intimidate you with their position of authority. Don’t let them! They are just people like you and I. If you know your rights and know that you haven’t done anything wrong, then don’t let them intimidate you.
4. Threats – CRA collection agents may threaten you with what they will do to you if you don’t pay. If you are in this position then you must communicate with them. Typically if you communicate with them in this position you can negotiate a deal with them that will hold back any potential of threats becoming reality.
5. Delay – CRA does their work after the fact. So if you incurred income in 2007, CRA may not contact you about this year until 2009. Then they can drag it out for months and even years as they do not always have the manpower to chew everything they’ve bitten. If they are delaying things, this may or may not be good for you. In precedent setting cases where CRA has really delayed and won in court, the taxpayer typically doesn’t pay more than a 1-3 years of interest because CRA took so long in dealing with the issue. If you determine that the delay is not good for you, like if you are waiting for a refund, then contact them regularly until it gets taken care of. Contacting them regularly puts the pressure on!

Watch for my next blog as we will go through some more of the tactics that CRA uses and how to deal with them.

Tips when Dealing With CRA Part 2

As per my last blog, please ensure you know your rights as a Tax Payer according to the Tax Payer Bill of Rights. Here are 3 other important facts in dealing with the CRA:

1. Don’t ever take what a CRA agent says on the phone as fact. Get it in writing! They can never be held accountable to what they say on the phone, and typically you are getting a junior agent that may have just started working at the CRA!
2. Don’t take what the CRA website says as fact! (see their disclaimer) Here’s a link and below is what is written in the disclaimer:

http://www.cra-arc.gc.ca/ntcs/dsclmr-eng.html

Disclaimer: Some of the information on this Web site has been provided by external sources. The CRA is not responsible for the quality, merchantability and fitness for a particular purpose of products or services available on external sites and listed or described on our menu; nor is it responsible for the accuracy, reliability or currency of the information contained on our Web site and supplied by external sources.

3. If you don’t agree with their assessment, appeal (See further in this blog for details)

APPEALING

Number 4 on the Tax Payer Bill of Rights states that you have the right to a formal review and subsequent appeal. So, if after they review your file you get reassessed, you can appeal their Assessment if you don’t agree with it. This assessment typically comes in 2 forms, a Notice of Assessment (N.O.A.) or a Notice of Reassessment (N.O.R.A.). Either one may be appealed as long as the appeal is within 90 days of the date on the N.O.A. or N.O.R.A. To appeal a decision you should file a Notice of Objection: http://www.cra-arc.gc.ca/E/pbg/tf/t400a/t400a-09e.pdf. Once your Notice of Objection is sent in you should receive a letter stating that they’ve received your Objection and that they will be reviewing your file. If after the review is completed, which sometimes takes a considerable amount of time, they state the Assessment still stands than you can appeal to the Tax Court of Canada. Their correspondence will come with the paperwork and steps to do so, however if you need assistance in your Notice of Objections or appeals, please don’t hesitate to contact us.

Please watch for my next blogs as I will continue to give you tips and information when it comes to dealing with the CRA.

Tips when Dealing With CRA Part 1

As I’ve just finished a full series on the Family Trust I was debating on what would be my next topic to blog on. After some thinking I came to the conclusion that one of the biggest issues many people face is dealing with CRA, the Canada Revenue Agency. Formerly they were called CCRA, Canada Customs and Revenue Agency and before that they were simply called Revenue Canada. The CRA is an agency that administers tax law for Canada, which means in essence they are a big part of implementing the tax legislation put forth by parliament. This is of course not their only function as they also administer other areas of benefits and tax programs to the public and they also currently work with international trade regulation. It’s interesting that this is what they are to do, but the majority of the public sees them as being a collection agency. The appearance of CRA does not seem to say anything different when they are harassing millions of Canadians for money even when they may not owe it!

The first thing you must realize when dealing with CRA is that they do not make the final decisions in regards to how tax legislation applies. Above the CRA is the Tax Court of Canada, The Federal Court of Appeal and the Supreme Court of Canada. So, in essence, the CRA is at the bottom of the totem pole when determining the law. The real issue is that many people do not know they can appeal further than CRA, nor do they know that they have specific rights as a taxpayer. You, as a taxpayer, have many rights that could be disregarded by CRA. Part of the problem is that it is not a requirement for CRA agents to know the tax payer bill of rights, and on top of that, many of CRA’s positions are transient as many employees either leave the CRA or move departments. I’ve asked numerous CRA agents if they know about the Tax Payer Bill of Rights and you would be surprised to find that many don’t know about it, and if they do, they haven’t had a chance to read it! You need to know your rights to ensure they are being upheld, here is the link to the Tax Payer Bill of Rights: http://www.cra-arc.gc.ca/E/pub/tg/rc4417/rc4417-09b.pdf

Now that you know your rights ensure you are never walked over by the CRA. If your rights are broken then you should contact your member of parliament, contact the Tax Payer’s Ombudsman and appeal any decisions you don’t agree with. There are good people that work at the CRA, however as a whole the CRA needs to collect as much from the taxpayers as possible as Canada is in a major deficit. Where do you think they get the loans from? Obviously not the United States as they are Trillions in debt! The fact is that the Bank of Canada is able to print amounts of funds based on a number of factors, including the basis of how much tax us Canadians can pay! …and we wonder why all the reassessments and audits are so rampant. In my next series of blogs, I will go into a number of tips in helping you deal with CRA.

Getting Money and Assets out of a Trust Part 2

In my last blog we discussed some of the ways to get money and assets out a trust. As we can see the 2 main ways that people use are loans and income from investments or businesses. In the case of loans you must remember that loans need to be at the current prescribed interest rate or higher. It is very important that you look up the current rates when you are doing a loan to or from a trust, corporation or spouse to make it a compliant loan. Prescribed rates are typically much lower than prime. Recently we’ve seen the prescribed rates 1% and lower. As discussed prior, loan interest must always be paid one month after the year end of a trust, which is almost always December, except in the case of some testamentary trusts. Thus most loan interest is due January 31^st.

Getting money and assets out through income is the other main method people use. This can be extremely beneficial in income splitting, capital gains splitting, multiplying the capital gains exemption, utilizing dividends and more. Some income may even be able to be given to minors, however planning is key as special tax could apply.

The trust may own assets and these assets can be given to beneficiaries. For example if the trust owned a property the trust may choose to give that property to one or more beneficiaries. If the trust owns other assets or investments the trust may choose to distribute a portion or all of the assets to beneficiaries. It is again up to the trustees discretion if it is a discretionary trust. This can be done on a tax deferred basis if the beneficiary provides collateral or if a Rollout is used, however if a rollout is used, the trust may close and the beneficiary can no longer be a beneficiary.

It is key to plan with advisors when it comes to maximizing the use of your trust. Kustom Design, our associates and our advisors are all here to assist you in your planning. Please don’t hesitate to email us with any questions or contact us to book an appointment. Initial consultation is always free, and if you are on a Kustom Design package then you have lots of hours of included consulting. In my next blog we will be wrapping up our series on maximizing the use of trusts.

Kustom Design Strategies Inc. launches new service

In efforts to provide clients with more options to succeed financially, KDSI now provides CanEquity Mortgage services Calgary Alberta (September 3, 2010) – Kustom Design Strategies Inc. has collaborated with CanEquity Mortgage and is now offering clients comprehensive mortgage consulting services. Recognized for being a national Canadian mortgage brokering company that provides Canadians with mortgages that have the best rates in Canada, CanEquity has access to over 75 major lending institutions across Canada and is able to offer home loans in all provinces and territories, as well as Lines of Credit and commercial lending. Focusing on providing distinct client service and extensive expertise and education, Kustom Design Strategies Inc. has extended its services to provide clients with the service and mortgage options needed at the best rates possible while shopping the mortgage market. The majority of CanEquity’s mortgage services are provided for free by the company’s mortgage brokers, who are all qualified and licensed independent professionals. To find out more about CanEquity please visit www.canequity.com. To book an appointment with one of KDSI’s associates visit us online, send an e-mail to info@kustomesign.ca or call (403) 219-0602. About Kustom Design Group The Kustom Design Strategies Inc. is a self-motivated accounting firm that strives to build lasting relationships of integrity through quality client service and widespread expertise and education. Click here to download this News Release as a PDF

Getting Assets into and Funding your Family Trust - Part 4

Family Trusts should avoid earning active income as it could incur liability through any active income arrangements. If you want to earn income from a trust you should set up a different type of trust, such as a Limited Partnership Trust or Income Trust.

Some examples of passive income that the trust would receive are:

1. Dividends from Corporations owned by the Trust
2. Capital Gains from the sale of a Stock owned by the Trust
3. Interest from investments and promissory notes owned by the Trust
4. Rental Income from Real Estate owned by the Trust

There are many other ways to receive Passive income, however the main types of passive income you will see coming into your trust are dividends, interest, capital gains and rental income. Each form of passive income is taxed differently in the individuals’ hands, however in a trust this is not always the case. Dividends and interest income that are retained by the trust incur the highest marginal tax rate. (currently 39% in Alberta). For Capital Gains, 50% of the Gain that is retained by the Trust is taxed at the highest marginal tax rate. Rental income gets the rental expenses deducted from it, and any net income that is retained by the trust is taxed at the highest marginal tax rate.

So you must be wondering “Why I would retain income in the trust if I am going to pay the highest marginal tax rate?” Before answering this question you must have the knowledge of what marginal tax rate you are at personally. Obviously if you are already at the highest marginal tax rate personally then you may not want to take any further income from the trust. The next thing to look at is why you would need to retain income in the trust. You can simply flow through that income to the beneficiaries, which include yourself, your spouse if you are married, children if you have any, and so on. Trusts are great to flow through income, and most income that the trust receives can flow to the beneficiaries retaining the same characteristics from when it comes in to when it goes out. For example, if the trust is receiving dividends, it can typically pay dividends in the same amount to the beneficiaries. Dividends are taxed lower to individuals as we receive a dividend tax credit on these dividends and we also pay no CPP! Typically you can split the income between multiple beneficiaries which is key in tax planning!

There are many examples of how not to retain income in the trust. Another example would be to own real estate in a Corporation that is owned by the trust. This Corporation can deduct all the rental expenses and then can further pay more expenses, such as a management fee, to offset any profits. Trusts can do this as well, but there may be more benefits and options to do it in this way.

There are many more strategies that can be incurred using a trust, and there may be some specific instances where you would want to retain income in the trust, such as a Capital Gains sale where you can apply the Capital Gains Exemption. Trusts do require thought and planning and Kustom Design is here to help you plan and maximize the use of your structures, minimize your taxes, minimize your liability, create more cash flow and put your assets into the hands of the next generations without the Government taking half of them!

Getting Assets into and funding your Family Trust – Part 3

We have been discussing the 4 main ways that you can get assets or funds into a trust and each of them are dealt with differently for tax purposes:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

We’ve now gone deeper into #1 and #2, so let’s now discuss the other 2.

Similarly to gifting to a trust, when the trust is purchasing an asset in an arm’s length transaction it should purchase the asset at Fair Market Value. We’ve already discussed Fair Market Value in a prior blog, however “arm’s length” is another term we must become familiar with. Some examples of an arm’s length purchase by the trust would include purchasing assets from the Trustee, the beneficiaries, the settler or a corporation that the trust has ownership of. If the asset is purchased by the trust in a non arm’s length transaction then the Fair Market Value is not important and we can just deal with the asset at the actual purchase price.

When you are selling assets to a trust, similarly to other sales, cash is not the only form of payment that can be used. For example the trust could give a promissory note, another asset such as shares, or a combination of assets and promissory note. The same rules for the promissory note that we discussed in prior blogs would apply when it comes to interest and payments. As always with specific transactions of your trust it is best to seek Professional advice, Kustom Design is here to work with you for all your financial, accounting, tax and structuring needs.

The other main way to get assets into a trust is to simply receive income from business and/or investments. Typically the businesses and investments that the trust is receiving income from are owned by the trust. Trusts would typically receive non active income, such as dividends, interest or capital gains from these businesses and or investments.

Getting Assets into and Funding your Family Trust - Part 2

As mentioned at the end of my last blog, there are 4 main ways that you can get assets or funds into a trust and each of them are dealt with differently for tax purposes:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Let’s start with lending to a trust. You can lend money or assets to a trust, by simply taking back a Promissory Note. This means that the Trust is taking a loan from you and is going to pay interest no less than once a year and intents to one day pay back the principal. When lending to a trust the current prescribed interest rate must be used as the minimum interest rate for the loan. You can go higher if there is a purpose for doing so. Currently the prescribed interest rate is quite low at 1% (as of the date of this blog) and has been that low for over a year now. This is extremely beneficial for loaning to a trust or Corporation as well as for spousal loans. If you have any such loans that are still at a higher interest rate, now would be the time to reissue the loan at the lower interest rate. Interest on loans must be paid within 30 days after the trust’s year end. A Family Trust has a year end date of December 31^st, so the interest must be paid by January 31^st of the following year.

Let’s now talk about gifting to a trust. Gifting to a trust is not used in many circumstances as there are many issues around gifting to a trust. As discussed in the last blog, when assets are put into a trust they must be put in at Fair Market Value. This is of course true if a gift is coming to the trust, meaning that the person gifting the assets may have a capital gain on the “deemed disposition” of the asset. If there is no gain on the asset then this would be irrelevant, however it is something that must be considered before the gifting happens. We also must look at attribution when an asset is being gifted to a trust. For example if someone gifted the trust some stocks, then the income from the stocks may be attributable back to the person who gifted the stocks. There are many considerations when looking at gifting to a trust, and in fact it may not be the best option to get assets into a trust. Typically the settlor and trustees would not want to make gifts after the set up of the trust.

Again, it is best to consult with a professional before making any movement of assets and/or funds into and out of a trust. Kustom Design is here to help you. In my next blog we will discuss the other 2 ways to get assets and funds into a trust.

Getting Assets into and Funding your Family Trust - Part 1

If you’ve been reading the series of blogs on Family Trusts, you should now have a good understanding of the how to set up a trust, the basics of using it, and the benefits and drawbacks associated with having the trust. We will now begin to discuss some of the different ways to get assets into your trust, as well as how to get funds into your trust.

As already discussed, when you are setting up a Family Trust it is best to have someone else settle the trust with a small asset, such as a silver ingot. This is the initial property of the trust and should be the only asset given to the trust without consideration. Typically when assets or funds are put into a trust there should be consideration for the asset or funds. For example if we’re going to put real estate into the trust, there must be consideration to acquire the real estate, such as currency or another form of asset in consideration for the real estate. This is a general rule although there are some small exceptions which are very specific and will not be covered in this blog series.

When putting assets into the trust we must consider the tax consequences. First of all we must understand that all assets going into a trust should be at Fair market Value. Fair Market Value is the current price that the asset would sell for on the open market. For example if it is real estate, you can look at a Market Assessment by a licensed realtor, an appraisal from a licensed appraiser, or sometimes the value on the Property Tax Assessment of the property. This means that if you own the asset that is going to be put into the trust, you will most likely have a disposition that could result in a Capital Gain. Before transactions are made that add property into a trust or take property out of a trust, you must plan for the potential tax consequence. Kustom Design can help you with the planning, but it is up to you to ensure you take the time and book the consultation.

There are 4 main ways that you can get assets or funds into a trust:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Each of these methods are dealt with differently for tax purposes. In the next blogs we will begin to look at each of these ways to get assets and funds into a trust.

Drawbacks of a Family Trust part 2

Another issue to look at with Family Trusts is the potential attribution that could happen. The trust must use its own funds to acquire property. That is, the trustee and any other beneficiary of the trust must not ever give property to the trust. If such a person does give property to the trust, then all future growth of the trust’s property could be attributable to that person for income tax purposes. It is important that all professional fees incurred on the creation of the trust be borne by the trust itself. Fees paid by persons other than the trust could cause unintended attribution. There are ways to loan funds to the trust which we will talk about in later blogs.

This issue can also be big if you are trying to get real estate into the trust that has a lot of equity. The trust must have the capital to acquire the property. If you are the trustee, you may be able to co sign a mortgage for a trust, however you have to be careful in how you construct this transaction. What you may want to do instead, is have someone else acquire the real estate, and then have the trust acquire it from that person/entity.

One other drawback that I want to mention is in regards to non-resident beneficiaries. If you do have beneficiaries of your trust that are non-resident to Canada, you may have to take withholding tax on any distributions to these beneficiaries.

As you can now clearly from the last series of blogs, the benefits of a family trust far outweigh the drawbacks. Over the next blogs we will get into how to get assets into a trust, and then we will discuss how to get income and assets out of a trust. If you have any further questions in regards to trusts do not hesitate to contact us!

Drawbacks of a Family Trust part 1

Over the last number of blogs we’ve covered many of the benefits of the Family Trust. As you will see after we cover some of the main drawbacks of a trust is that the benefits of a family trust far outweighs the drawbacks!

One of the main drawbacks of a family trust is the cost associated with setting up the family trust. Setting up a family trust requires legal documentation being drafted, thus the majority of the cost is the legal fees to set up the trust. Fees to set up the Family Trust can range anywhere from $2,500 to $8,000, with the average cost being around $5,000 for set up. The fees vary depending on your situation. For example do you need to set up a corporation, set up a holding company, or do you have existing corporations that you want to have the trust own. Although this is costly, keep in mind it is a one time fee. Once it is set up it is quite simple to maintain annually with the major annual cost being the T3 Return filing, which Kustom Design’s T3 prices start at $350 per year. In comparison to the value you get for you and the next generations the price is minimal.

Another drawback of the Family Trust is that CRA has a 21 Year Deemed Disposition Rule. This rule states that a Trust has a Deemed Disposition on assets 21 years after they are acquired, and every 21 years thereafter. The 21 Year Deemed Disposition Rule can be avoided by distributing property to the Beneficiaries before the 21st year or by providing in the Trust that the property will indefeasibly vest in the beneficiaries prior to the deemed disposition.

Another potential issue with Family Trusts is If income is left inside a Trust, the highest marginal tax rate is paid. (Unless it is a Testamentary Trust) Also, in most cases Losses cannot be flowed through like income and gains, however losses can be claimed against Trust Income. Trusts take tax planning to maximize, when used properly they are extremely beneficial and will save you a lot of tax, however if you do not plan properly you may pay more tax.

Benefits of a Family Trust - Part 4

As we are learning there are many benefits to setting up a Family Trust. Today we will wrap up the benefits of a family trust, however we will continue this blog series on the Family Trust, including areas such as drawbacks of a family trust, how to get funds and/or assets into a trust and how to get funds/assets out of a trust. As we wrap up this section on the benefits of a Family Trust, please keep in mind that there are even more benefits than what we’ve discussed here and you should consult with us further in regards to your needs.

Another benefit of using a Family Trust is that you can multiply the Capital Gains Exemption. Currently in Canada we all have a Lifetime Capital Gains Exemption of $750,000. This lifetime Capital Gains Exemption does not have to be used at once, but is cumulative throughout your lifetime. Although we discuss this in another blog, the Capital Gains Exemption means you are exempt on the sale of qualified small business shares, qualified farm property and qualified fishing property. Each beneficiary of the trust has a Lifetime Capital Gains Exemption of $750,000. The Family Trust also has its own $750,000 Capital Gains Exemption. So if you were to sell the shares of a corporation that is owned by the Family Trust, it may be possible to make millions of dollars in gains and pay little to no tax by splitting the Capital Gain amongst the beneficiaries and leaving some in the trust. Many people build a company and sell it, the Family Trust is very beneficial in the tax planning for the building and selling your Corporation.

Yet another benefit of having a Family Trust is that you can own shares of multiple Corporations, and if structured properly you may be able to make it so your Corporations are structured in a way that they are not associated corporations. Corporations can make up to $500,000 in net income before paying very much tax (currently 14% total in Alberta), this is due to the small business deduction. When you own multiple Corporations with the same ownership you may only be able to make up to $500,000 in net income amongst all the Corporations before paying a higher tax rate as they can be deemed “Associated Corporations” However, with proper structuring it may be possible for each of the corporations to not be associated, thus allowing each of them to make up to $500,000 net paying low tax.

One more benefit I’ll share with you is that a Family Trust is a great way to pass on the use of assets to the next generation tax free. Because a Family Trust stays “Living” there is no deemed disposition upon death of the settler, trustee or beneficiaries. The reason why people are taxed so high when they pass away is due to deemed disposition. This means that all gains and income on your assets is all taxed together the day you pass away. Because a Trust stays “Living” the assets remain in the trust. To allow the next generation to have access to and use the assets in the trust you can simply make them the next trustee of the trust. You may also set up specific clauses in the trust agreement (deed or amendments) that make up rules for the next generation.

If you want to know more about how a family trust can help you, please contact us!

Benefits of a Family Trust - Part 3

As you are starting to realize from this blog series on Family Trusts, there are some great benefits to setting up a Family Trust! We will continue to discuss more benefits of a family trust, however these benefits can be tailored to meet your needs so do come and consult with us for further clarification on family trusts.

Another Benefit of having a family trust is the privacy factor. The assets of a trust are typically described as being owned by the trust. For example, the records of a Corporation will state that its shares are owned by a trust, as opposed to being owned/held by an individual. Further, the trustee of a trust can be a numbered corporation. Also, the trust can have any name such as “The Rock” instead of “X Family Trust”

You can also use a Family Trust as an alternative to a will. A will should still be done, however none of the assets owned by the trust will have to be included in the will, thus avoiding probate! The more assets you can get into the trust, the less that will have to be dealt with through the will and probate when you pass away. By using a trust, there is a reduced risk of legal challenges that are often faced by wills. Some examples include undue influence, lack of capacity and “greedy relatives”. Because the assets of the trust would not be subject to the will of anyone, those assets will not be listed or described in any court document. A will, to some extent, becomes a public document when it becomes a court document during and after the proceedings for probating a will.

A Family Trust may also be used as an alternative to Power of Attorney. In the unforeseen event that the trustee becomes incapable of dealing with the trust property, a replacement trustee could take over the role of trustee. This alternative provides more administrative ease and dignity to the trustee in the event of incapacity than would someone else obtaining a power of attorney that would be needed to deal with the property of the trustee during his lifetime (absent a trust). A Family Trust makes asset transition much more private and tax advantageous. A Family Trust allows us to plan as a family and plan generationally!