Chapter 5 / 6 - Main Considerations in Tax Planning / The Business and Its Employees Flashcards
If the income of a CCPC eligible for the small business deduction exceeds ___ , it is usually preferable for the shareholder officer to be paid through ___
$500,000
a salary or bonus
If the after-tax income is retained in the corporation, (i.e., not paid in dividends),
then what happens to the second layer of tax that usually is charged to the shareholder on the dividends?
It will be deferred until this income is paid out as a dividend in a future year
For its ___ income, even a small business corporation pays the full rate of corporate taxation
investment
The RRSP contribution is calculated based on earned income, which does not include ___.
dividends
The corporation should consider declaring a dividend when it has (2)
- refundable dividend tax on hand
- a balance in its capital dividend account (CDA)
Refundable dividend tax on hand consists of (2)
- refundable portion of Part I income tax on investments
*Part IV income tax on dividends
Refundable dividend: Only ___ are entitled to this kind of income tax refund.
private corporations
Private corporations may also accumulate the non-taxable portion of capital gains and the net proceeds of life insurance in the ___ and pay tax-free dividends to their shareholders out of this special account
CDA
A deferred profit-sharing plan is a tool that allows small employers to ___. Only the ___ pays into the deferred profit-sharing plan
pay their employees pensions
employer
Employees who, with related persons, hold more than 10% of the shares in a class of shares in the corporation are not eligible for
the deferred profit-sharing plan
when a corporation makes a loan to a shareholder (or individual connected to a shareholder), the full amount of the principal of the loan should be included in ___ in the year that the loan is made.
the income of the shareholder
Sharholder loan has the same impact as providing the same amount of salary to the shareholder. However, there are two differences:
- no deduction for the amount of the loan
- shareholder able to claim a deduction on personal tax return when they repay some or all of the loan.
loan is included in income only if ___
the person to whom the loan is made is a shareholder or is connected with a shareholder
A loan must be repaid when?
in the following taxation year
Loans and advances that are not repaid within one year following the end of the taxation year must be included in the taxpayer’s income unless the loan was made to allow the shareholder to acquire: (3)
- A house for individual or spouse
- unissued shares of the corporation or a related corporation
- An automobile for performance of duties
Shareholder officers must also show that it is reasonable to conclude that they obtained the loan on account of ___ and not because they are shareholders.
their employment
Individuals can defer capital gains realized on the disposition of investments in a small business, tax free, when ___
the proceeds of the disposition are reinvested in one or several eligible small businesses
Financial planners should ensure that their clients benefit as much as possible from the lifetime capital gains deduction.
Some helpful strategies toward achieving this: (4)
- Incorporate the sole proprietorship or partnership
- crystallizing the capital gains
- Transfer qualified shares or property to the spouse or children
- Hold income-producing investment property personally, rather than through the corporation, so that the corporation will remain a small business corporation
ADVANTAGES OF A PRIVATE HOLDING COMPANY (8)
- income and capital gains splitting among family members
- efficient estate planning tool
- Creation of earned income allowing the taxpayer to contribute to an RRSP
- Reduction in net personal income, to maintain certain tax credits and reduce refunds.
- Conversion of interest from non-deductible to deductible
- Control over amount and type of income received
- Avoiding alternative minimum tax for individuals,
- Payment of tax-free dividends from connected companies
The various tax measures offered to corporations fall under two main headings:
investments and job creation.
A corporation may earn an investment tax credit equal to __% of qualified expenditures for SR&ED. This credit increases to 35% for ___
15
Canadian-controlled private corporations.
Unused investment tax credits can be deferred over the next twenty years or the previous three years to reduce ___
Part I tax
Any eligible individual or company that is entitled to an investment tax credit but cannot
deduct it from tax owing for the year in question or a previous year can receive a refundable tax credit equal to 40% of ___
the unused Investment tax credit (ITC)
Eligible companies for the ITC must have been listed as a ___ during the entire year
CCPC
An SMB is a Canadian-controlled corporation whose assets (on the financial statements) of all
corporations in the group are less than ___
$50 million
The Small and Medium Business (SMB) tax credit in Quebec is increased to 37.5% on the first ___ in eligible expenses per year
$3,000,000
There are two kinds of anti-avoidance rules:
a general rule and specific anti-avoidance rules
general anti-avoidance rule is part of the arsenal at the disposal of tax authorities to battle abusive tax planning.
To minimize the risk of running afoul of this rule, financial planners must emphasize a number of points to clients: (3)
- Transactions must be undertaken primarily for non-tax-related reasons.
- Avoid end-of-year planning. It is best to draw up tax planning strategies as early as possible, preferably at the beginning of the fiscal year.
- Each specific transaction should be analyzed before it is finalized
If it cannot be demonstrated that there is a meaningful contribution to the business, then the client is only allowed to split income with: (3)
- A spouse, once the owner turns 65
- Adults aged 25 or older who hold a 10% voting share in a non-professional corporation that earns less than 90% of its income from services
- Adults aged 18 or older who have averaged 20 hours of work in the business per week during the year, or any of the five previous years
Attribution rules concern ___ income, not business income
property
taxable benefit is added to one’s income at the lesser of either(2)
the cost of the item or the fair market value (FMV) of the item.
The value of the standby charge on an automobile represents the benefit derived from having ___ at disposal or on standby for personal use
an employer-supplied vehicle
value of the standby charge can be reduced if the following two conditions are met:
- The automobile is used primarily (i.e., more than 50%) for business purposes.
- The distance travelled for personal purposes is less than 1,667 kilometres per month.
Trip logbook must indicate
the number of days in the year that the automobile was placed at the employee’s disposal, as well as the distance covered each day for personal and business use.
Simplified Method - If the automobile were used more than 50% for ___ , this method could be used.
business purposes
training activities and tuition fees reimbursed to employees constitute a taxable benefit and the value must be included in the calculation of employee income. one exception, however, is
training activities are undertaken at the employer’s request or required for the employee’s success at work
The value of the following tax-exempt benefits should not be included in the employee’s income: (2)
- A non-monetary gift given for a special occasion (such as Christmas, a birthday, a wedding, or a similar occasion), up to a value of $500 (including taxes) per year.
- A non-monetary reward given in recognition of certain accomplishments, up to a value of $500 (including taxes) per year are intended as a gift that is given periodically, not on an annual basis, and should not be included.
The following benefits are fully taxable and their value should be included in the employee’s income: (3)
- Gifts and rewards paid in cash, or easily convertible into cash
- Personal insurance premiums that the employer pays
- Gifts and rewards for work performance
The following positions are not subject to EI premiums: (4)
- Casual employment
- Positions where there is a non-arm’s-length relationship (especially for a spouse or children), provided it has been established that the position would not exist otherwise
- Positions occupied by persons holding more than 40% of the corporation’s voting shares.
- Employment that is an exchange of work or services (barter).
Eligibility for EI benefits is calculated by the number of ___ in a given year
hours worked
Self-employed individuals have to contribute both the ___ share of the QPP premiums
employee and employer
Any Quebec employer with a total payroll of more than $2,000,000 is subject to the Act to
promote workforce skills development and recognition.
employers must earmark 1% of their payroll for
training activities to develop the competencies
of their personnel
Commission de la santé et de la sécurité du travail (CSST) provides insurance for employees who are injured in an ___ or who ___
industrial accident
contract an occupational disease.
All companies with at least one employee, whether full-time or not, are obliged to register with the ___
CSST
The following individuals may register with the CSST for coverage under the Act: (5)
- Self-employed individuals who are not considered employees
- Sole proprietors of companies that employ workers
- Partners in a general partnership
- Directors of corporations who also perform supervisory functions as part of ongoing operations management
- Domestics
CSST is calculated principally by looking at three factors:
- The size of the employer’s payroll
- The dangers associated with the employer’s industry in general (e.g., office worker vs. steelworker)
- The employer’s performance
HIRING OF SELF-EMPLOYED WORKERS - tax authorities consider such individuals to be ___
employees
Businesses that hire an eligible apprentice may receive a non-refundable tax credit equal to __% of the eligible salaries and wages payable to eligible apprentices, to a maximum of $__ per year, for two years, for each eligible apprentice.
10
2,000
To calculate overtime, the regular workweek has been set at 40 hours. For certain employees, however, the regular
workweek is as follows:
* A regular workweek for employees working in a forestry operation or a sawmill is __ hours.
* Security guards who guard property for a surveillance services enterprise have a regular workweek of __ hours.
* Security guards who do not work for an enterprise supplying surveillance services have a regular workweek of __ hours.
47
44
60
For employment contracts of indeterminate duration, employees who have at least three months of uninterrupted service with the same employer are entitled to a layoff notice. The length of such notice is as follows:
- One week, for less than one year of uninterrupted service
- Two weeks, for one to three years of uninterrupted service
- Three weeks, for three or more years of uninterrupted service
