Tax Planning Flashcards
Tax-free income paid to a Canadian Controlled Private Corporation (CCPC) can be paid out to shareholders how?
List 2 examples of types of income that could be received…
- Paid out through a notional account called the capital dividend account or CDA.
- Corps could get paid tax-free from proceeds from an insurance policy and also the tax-free portion of a capital gain.
Describe a General Partnership
- Must be all general partners
- 2 or more people working together
- don’t need a formal agreement but it is recommended to have a shareholder agreement in place.
- Partnership Act sets out rules to govern in the absence of any agreement
- a person cannot be both a partner and an employee because you can’t enter into a contract with yourself.
What is the test to tell whether a Corp is really a Personal Service Business PSB
Two-Part test
- The person performing the service owns 10% or more of any class of shares in the corp
- Without the corporation, the person would generally be considered an employee or the corporation paying the fee.
What is the half-year rule?
Only 1/2 of the Max CCA may be claimed in the first year for certain leasehold expenditures or acquisitions
5-year lease
(75000/5) x .5= 7500
straight line method of CCA
CCA
buy for $10000
sell for $12000
$7000 UCC
so $1000 plus $3000 recapture
$4000 income?
Describe a Superficial losss
When a person sells securities for a loss and then repurchase within a 30-day window either before or after the sale
When was the taxation of capital gains introduced?
Dec 31, 1971
What are some signification exceptions to Capital Gains
- Principal Residence can be partially or fully exempt
- Transfer to the spouse at cost and tax paid on the sale
- Transfer farm property to family can be exempt until they sell
- Each taxpayer is entitled to $1 million of capital gains tax-free on farm property reduced by SBC LCGE used.
- SBC LCGE is $892,218
How much is each taxpayer entitled to realize if tax-free capital gains on a farm or fish property?
- $1,000,000 unless reduced because of prior use…then $900,000.
- There used to be a $100,000 capital gains exemption on all capital property. This was repealed in 1994.
- Important to get good tax advice if you own a property that has been farmed by family members in the past….it may still qualify as a farm property eventhough you are no longer farming it.
- cannot just transfer property to spouse prior to sale…not that simple…attr rules.
How do I transfer a farm to my spouse to save tax
- On death…rollover assets that would be tax-exempt…at cost
- the property would be disposed of at FMV on the second death
- You could also transfer anything in excess of the $1 million exemption to the second spouse through the use of the spousal rollover rules, ensuring gains are reported when the property is sold….spouse could use their exemption limit at that time.
- …so use both of your exemptions effectively 2 million instead of 1 million
Sale of Farm (purchased before 1972) Couple and Only one worked.
How can you claim both exemptions
- Check the Deed
- Did the spouse contribute any of their own funds to the purchase of the property?
- This may allow you to claim part of the exemption
- If you are younger it would be good to make sure your spouse is on joint title on the farming property.
Sale of Farm to Children
How can they use their lifetime exemption if the farm is passed to them
- They need to either own qualifying farm property or shares of a QSBC on which a capital gain is realized in their hands.
- you can transfer to children the farm property at your death …at your ACB…rollover allowed.
- When they sell eventually…they will use their exemption and pay the remaining capital gain
Passing the farm to the kids.
What are some complications that may arise?
- Relating to family farm corporations and partnerships
- critical that “all” or “substantially all” of the value of the assets in the corp or partnership be attributable to property that was principally used in a farming business that a family member was actively engaged in. …can solve this issue.
- You may be able to take advantage of the children’s capital gain exemption in your lifetime…freeze section 85 or 86.
- For the rollover to work you must be willing to gift any accrued gain to your children
- Rollover only if…you transfer you transfer ownership of your qualifying farm property to your children for consideration that does not exceed your tax cost
- If you ask more than this from your kids…you cannot exceed the FMV, you will have to report a capital gain…deemed proceeds will be the consideration you charge.
- If you had a very low ACB this could be an issue with…large tax bill for you.
Is there a good timing for transferring ownership of the farm to the kids?
- do it more than 3 yrs prior to the sale of your farm or you cannot do an intergenerational rollover.
- children must be 18 years or older in the year that the farm is sold to a 3rd party or there will be attribution…and they cannot use their $1 million exemption.
What are some other income and non-income issues of Farm property transfer?
In BC in Particular?
Some provinces have PTT…like BC
As you approach retirement what are some points about Capital Gains Exemption?
- No tax may have to be paid when the exemption is claimed but there can be other negative consequences:
- OAS…a TCG will increase net income…clawback
- Age Credit…TCG can also trigger a clawback
- AMT…may be triggered by a large capital gain…will be refundable in future years when regular income-tax exceeds AMT…can cause cashflow issues.
- CNIL…you will not be able to claim the exemption to the extent that you have a CNIL balance. CNIL = cumulative total of your business expenses less investment income since ‘87.
- ABILS…allowable business investment loss. 50% is allowable as a deduction against all sources of income. You may not be able to claim your full LCGE to the extent that you have claimed any ABILs in past taxation years.
- Other Benefits or Credits…Ei and others may be clawed back as well. May affect the eligibility of certain programs or benefits if you receive a large amount of money.
Family Farm Corporations
- LCGE is only available to individuals and not corporations…but all is not lost
- SHARES of family farm corporations can also qualify for this exemption.
- Important to structure the sale of your farm as a sale of the shares of the company and not a sale of the farming property that is owned by the company.
- Again make sure that all or substantially all of the assets are used in the farming business.
- May be possible to remove the redundant assets prior to sale to ensure that the shares are qualifying property.
- Proper planning and you may be able to utilize the LCGE on spouse and children as well
Family Farm Corporations
What are considerations to the Purchaser
of a Farm property vs shares of the farm corp?
- He would rather buy the property and assets related to the farm instead of shares as he may lose the ability to depreciate assets etc.
- the advantage to buying shares only comes to them when they sell the shares
- He may want a discount because of this…expect that.
- It may not be an issue if the main part of the sale is a non-depreciable asset like land.
Why would you want to transfer assets like cattle inventory to a Farm corp before a sale?
- This may allow you access to reduced corporate tax rates applicable to active businesses conducted by CCPCs by Canadian residents.
- May be able to improve the plan by transferring your interests in the family farm partnership to the corporation and taking advantage of the LCGE for qualifying farm property on any capital gains that are triggered.
- In certain cases, it may be advantageous to “wind up” the partnership on a tax-deferred basis so each partner owns an individual interest in the actual farm assets prior to their sale.
Retiring Allowances and Farm Properties
- as you approach retirement and take steps to wind up your farming business, it may be possible to reward key employees that will also be retiring, including family members.
- A Retiring allowance can be paid to employees of your farming business in recognition of long-term service
- if your farm bus. is incorporated it may also be possible to pay the owner a retiring allowance…has to be reasonable and will be a deduction against farming income for tax purposes. Very useful on a wind-up and sale of inventory and capital assets.
Retiring Allowances Continued
- Considered employment income to the individual who receives it.
- Can transfer it to RRSP within certain limits for years of service prior to 1996.
- These transferred amounts …tax-deferred until withdrawal.
- The amount of the retiring allowance must be reasonable…amount of time employed and amount paid while employed are considerations
- Retiring allowance can provide an income tax deduction now and boost the amount of funds available in an employee’s RRSP in their retirement.
- Farmers need to consider both the short and long term planning issues that will help minimize the tax that you and your family will have to pay.
U.S. Canada Planning
- Residence test…US green card status, substantial presence test, or election. In Canada 183 day rule or where an individual customarily lives.
- Income tax criteria…In Canada citizenship is irrelevant. The residence is determining factor.
- Gift tax…none in Canada but yes in the U.S.
- Generation-skipping Transfer tax…No GSST but most property subject to deemed disposition rule 21 yr rule
- Capital Gains tax…50%, principal residence excluded, LCGE $892,218 from the sale of shares of certain small businesses excluded.
What are the downsides of inadvertently triggering U.S. Residency
- Liability for U.S. income tax, estate tax, owing Canadian Departure tax,
- Mandatory U.S. Foreign reporting requirements
- Loss of Canadian healthcare system
- Loss of preferential tuition rates at Canadian Post-Secondary institutions
What Tax issues do Canadians deem to be considered U.S. Residents face?
- Subject to U.S. income tax on worldwide income
- by contrast, Canadian individuals considered non-U.S. residents are subject to the U.S. tax only.
To be considered a U.S. resident you must meet ANY of these 3 tests?
- Is a lawful, permanent resident of the U.S. at any time during the year (a green card holder)
- Meets the “substantial presence” test
- Has made an election to be taxed as a resident alien.
What is Canada’s Top Federal Rate?
What is the rate if you combine it with BC’s top rate?
29% Federal and then 45.8% combined with BC
What is the estate tax rate in Canada and BC?
There is no estate tax but deemed disposition of property on death,
which results in a capital gains tax.
For U.S. tax purposes what is the relevant test for US transfer tax purposes?
The Domicile test
Canadians who are considered non-U.S. residents are subject to on which income?
Only taxed on U.S. source income if they meet any of the 3 test.
Green card, substantial presence, and elected to be taxed as a resident alien
If a Canadian has a substantial presence in the U.S. what rule have they broken?
The 183-day physical presence rule. Can’t exceed it.
There is a ‘weighted average test’, for the current year plus 2 preceding years.
How do you calculate the 183 weighted average test?
current year days in the U.S. + ⅓ of the days in the first preceding year + 1/6 of the days in the second preceding year.
Complications can arise with the Canadian Residency Rules are also considered…may still be able to claim a ‘closer connection’ with another country.
How are the US and Canadian system different with how they define residency?
U.S. is based on citizenship and residency.
Canada is based solely on residency…citizenship is irrelevant.
What income are Canadian residents subject to income tax on?
Worldwide income if you are considered to customarily live in Canada
How should you hold property as a good strategy to avoid US Estate tax
In a CCPC
In a Canadian Trust
Hold it in tenants in common so only ½ is taxed
Sever Joint tenancy interest in US Situs Property
How should you hold property as a good strategy to avoid US Estate tax
In a CCPC
In a Canadian Trust
Hold it in tenants in common so only ½ is taxed
Sever Joint tenancy interest in US Situs Property
What are the 2020 U.S. estate and gift tax exemption thresholds
U.S. Estate tax exemption threshold is $11.58 Million in 2020
The annual U.S. Gift exemption amount is $15,000 per individual and $157,000 if the gift to a non-U.S. Spouse
Strategies to reduce or minimize your U.S. estate tax exposure?
- Make alternative investment choices with U.S. content
- Keep worldwide gross estate value below the U.S. estate tax exemption threshold
- Gift or sell U.S. situs property prior to death
- Transfer to your spouse at FMV on death
- set up irrevocable Life insurance trust during your lifetime (ILIT)
- Transfer property to a qualified domestic trust (QDOT)
- Sever joint tenancy interests with right of survivorship (JTWROS)
- Own U.S. situs property tenants in common
- Hold in a Canadian corp, partnership, Canadian Trust
- Transfer US-based retirement income to RRSP
- Make charitable donations to US charities
