Business Tax and Structures Flashcards
What can’t create losses
cca, home office expenses
Once you opt into gst
you’re stuck with it
Business vs hobby
reasonable expectation of profit, marketing, a business plan, appropriate training
pr exemption
can only designate one home per year but can use +1 rule.
Change of use from rental to pr
have to pay recapture and capital gain if cca was ever claimed. if cca wasn’t claimed, can defer capital gain until property is disposed of. if changing from pr to rental, can do so for 4 years but cant claim cca or designate another home as pr.
Partnership liability
not liable for personal obligations of partners but are liable for their business activities of partners
corporations as partnerships
corps will be liable for a ‘slip and fall’ although there will likely be liability insurance. liability will extend to corps but not the shareholder of those corps.
section 97
bring assets into partnership or corp without disposition
ucc and acb for partnership and wind up
ucc is acb for tax purposes. ucc (acb) will be increased by owners allocated percentage of net income and reduced by drawings from the partnership. when property is sold and partnership is wound up, proceeds greater than acb treated as capital gain.
partnership agreement income stipulations
can stipulate that partnership is to be wound up in year where one person is responsible for much more of income generated
death implications
partnership is wound up (like sole prop). unless partnership dictates otherwise.
very few situations where partnership makes more sense than corp. (unless a partnership among corps)
limited liability partnerships and general partners
partners are liable for partnership issues but not the acts of other partners. ie, if another partner assaults a client, not liable. if an associate hurts a client, all partners liable. no general partner. liable for own mistakes. lawyers prefer to act as llp so they’re not punished for another lawyers mistake.
limited partnerships
at least 1 general partner. limited partners can only lose their investment plus any amount lent to partnership
legal structure of corp
shareholder - only investment at risk, no other liability.
bod - sets direction of corp (if they declare a dividend with debt, maybe recoverable from shareholder. owe employees advanced notice if corp is wound up. directors are fiduciary to corp.
employees-no liability unless actions are outside scope of job
up to three share class rights
right to equity, rights to dividends, voting rights
normal corp share setup
class a - 1 vote, dividend at discretion of board, equity right based on net equity when corp is wound up. (unlimited amount in treasury)
class b - identical to a. unlimited number in treasury
class c - 1 vote per 100 shares, discretionary dividends, equity rights paid after a and b are paid, if anything is left.
class d - same as class c
preferred shares - 100 votes per share, fixed dividend (maybe $100 per share), fixed redemption value of 1k per share, for example. unlimited in treasury
all defined in articles of incorporation
Corporate ownership strategy
give spouse different class of shares so you can choose to pay yourself dividends and not them (avoid tosi rules). easier to do at the beginning. if done later, spouse/children has to bring value in the business to purchase shares at fmv and avoid tosi rules
children - give class c/d shares to children.
whats in articl;es of incorporation
directors, number of directors, share amount and classes, address of corp.
is a usa mandatory
no. dispute would be handle through business corps act and they would go to court. (courts may ask to be left out of it)
Unanimous shareholder agreement
addresses questions and situations likely to arise.
common usa clauses
tag along drap along. minority shareholders can’t block sale by majority but majority must get a price that makes sense
-restrictions on ownership[ (no corps or trusts, perhaps) or transactions, discussion around using shares as collateral
shotgun clause - something causes offer to be made (14 days notice for example) to buyout other party for certain amount ex 1m. The other party has to either accept the offer or buy out the offering party for that amount.
shotgun clause issues
one party can be taken advantage of. ex. one party dies or becomes incapacitated and the remaining business partner makes a weak offer on the assumption the remaining spouse/poa doesnt have the knowledge or financial resources to buy them out for that price
alternative to shotgun clause (also in usa) and considerations associate
buy sell agreement (considerations below)
circumstances that trigger - crime, death, serious disability, marital breakdown, serious illness, non resident, loss of professional status, morals clause, unresolvable disagreement,
source of funding/payment arrangements - insurance, funds in corp, time to pay (5 years, vendor funded for example)
how price is determined - fixed price, formula, method (annual valuation, valuation at the time of sale, use of certified business valuator)
ways to deal with different situations in buy sell
death - life insurance (will need to be increased from time to time, guaranteed insurability rider may be appropriate)
unresolvable difference - cbv may be more reasonable. each party can pick a valuator and split the difference.
funded buy sells make the business more attractive for financing and capital raising
prof corp for doctors and liability
prof corp doesn’t protect dr from being sued personally in case of botched operation (unless its a slip-and-fall situation, then its the corp) 1st example is medical malpractice and second is general liability
things that can vary by provinces for professionals
hold co’s, trusts, spousal and child ownership, trusts,
why incorporate
succession planning, perpetual ownership, tax deferring, tax splitting (to some degree), no liability extended to personal assets (except with personal guarantee), separation of affairs, easier to give shares to spouse instead of assets (if a sole prop) in the caser of a marital breakdown (especially if assets of a company). hold co assets safe from lawsuit against op co (in most situations).
liability protection and limitations (nothing is 100%)
seg funds (with irrevocable beneficiary or, child, grandchild, spouse).
rrsp safe from bankruptcy (except amounts from last 12 months)
hold co. (low likelihood assets are taken)
tax rates
9% fed active income small business, 15% general rate, 3.2% ontario active income small business, 11.5% provincial general tax rate. 38.67% tax on investment income fed, 11.50% ontario
cash damming
transfer personal debt to business debt. need very good record keeping. cra will assume you’ve de risked your investments first
