Difference between Common Law and Marriage

You have more rights and responsibilities when you get married. If you are not married, you don’t get some rights no matter how long you and your partner have lived together. You have to go through a legal marriage ceremony to be married.

There is no real difference between common law and marriage in terms of custody, access and support claims

Married couples and common-law couples usually have the same rights related to children including rights to custody, access and child support.

The only difference in terms of support is the act that is used. The Divorce Act and the Federal Child Support Guidelines govern a divorced couples, however, the Family Law Act and the Ontario Child Support guidelines govern a common law couples. The requirements for making out a claim for support are the same regardless of the act, and the amounts listed in the guidelines are also almost identical.

There are different rights between a marriage and a common law relationship to the assets and liabilities, matrimonial home

Assets and Liabilities

When you get married, the law assumes you are in an equal partnership. When a marriage breaks down the Family Law Act provides you and your partner with a regime to share assets and liabilities. The assets and liabilities of each spouse at the date of marriage and the date of separation will be used to calculate a payment from one spouse to the other.

A common law relationship, on the other hand, has no regime to share assets and liabilities. Common-law partners only have to share the property you own together. You can try to claim a share of your partner’s property in some situations, but it can be very hard to prove you should get a share.

Matrimonial Home

Only married couples can have a matrimonial home. Common-law couples cannot have a matrimonial home, so they have different rights.

In a marriage, you and your partner have an equal right to stay in a matrimonial home and right to claim a share in the value of a matrimonial home as part of an equalization payment rule even if a spouse owns the matrimonial home fully. Additionally, under the Family Law Act a spouse can apply to the court for an order for exclusive possession of the matrimonial home. This can even result in the person who owns title to the house being forced to leave.

If you were living common-law, then your right to stay in the home after you separate usually depends on who owns the home or whose name is on the lease or rental agreement.


GST/HST New Housing Rebate and New Residential Rental Property Rebate

If you are buying a new residential complex from a builder, the builder will collect the GST/HST at the time of sale. The CRA provides relief of a portion of the tax collected by the builder in the form of rebates: New Housing Rebate and New Residential Rental Property Rebate.

The rebates are divided into two components – federal and provincial.

If the property is in a GST province like Alberta, etc., you only concern with the federal rebate calculated as 36% of the 5% GST on properties valued $350,000 or less. The federal component of the rebate is phased out for properties valued between $350,000 and $450,000. If exceeding $450,000, there is no federal rebate available.

If the property is in an HST province like Ontario, etc., there is an additional rebate of the provincial component equal to 75% of the tax that is capped depending on the province (in Ontario, the provincial portion of the rebate is capped at $24,000). Unlike the federal component, the provincial component is not subject to the phase out rule.

It’s important to understand the difference between the GST/HST New Housing Rebate and the GST/HST New Residential Rental Property Rebate. This will ensure a complete and correct rebate application.

GST/HST New Housing Rebate

If you bought the new home with the intention for use as your (or your relation’s) primary place of residence, the New Housing Rebate is for you.

You or your relation must live in the new home as the primary place of residence for at least the first twelve months. In order to prove that the new home is your primary place of residence, make sure to change your address with CRA and address on your government issued IDs after moving in.

If you sell the home before the initial twelve months from closing, you must pay the rebate back in full.

If you are buying an investment property, this rebate does not apply to you.

GST/HST New Residential Rental Property Rebate

If you’re a buyer who intend to rent out the residential complex on a long-term basis, you must file for a New Residential Rental Property Rebate.

The property must be rented out for more than one year before resell to another buyer. Otherwise, The rebate must be paid back in full.

Getting It Right

Regardless of which rebate you claim, there is a two year limit in which you can make the claim. However, the CRA is not restricted to that two year limit for assessing errors related to rebate claims.

Therefore, if a new housing rebate is incorrectly claimed in place of a new residential rental property rebate and the error is identified following the close of the rebate claim period, the CRA may be in a position to demand repayment of the rebate plus interest and penalties.

Ensuring the GST/HST on your real estate investment is handled correctly can prevent a lot of heartache later.

Professional Services

BBTS provides professional services with the GST/HST new housing rebate and new residential rental property rebate.

With BBTS, clients can rest assured that application paperwork is submitted correctly and always on time.

Income Splitting with Family Members

Income splitting is a tax-planning technique designed to shift income from a taxpayer paying a high rate of tax to another taxpayer within the family unit paying tax at a lower rate. Unfortunately, there are a number of legislative provisions—“attribution rules” and other anti-avoidance measures—designed to prevent saving taxes by shifting income between taxpayers.

Permitted arrangements

There are still a number of legitimate tax-planning arrangements that can be used to effectively redistribute income in a family unit:

  • Make contributions to a spousal RRSP. Setting up a spousal RRSP is a good idea if you expect your spouse or common-law partner to be in a lower tax bracket than you on retirement. When funds are withdrawn from the spousal RRSP, they are taxed in your spouse’s or common-law partner’s hands at his or her lower tax rate (this arrangement is subject to special rules to prevent abuse). This reduces your family’s total tax bill. This strategy also means that benefits such as the pension credit can be made available to both of you, and you may reduce your exposure to the Old Age Security (OAS) clawback
  • Share CPP payments – The Canada Pension Plan Act permits you to assign a portion of your retirement pension to your spouse or common-law partner. If your spouse or common-law partner is in a lower tax bracket than you, shifting this income to his or her hands helps lower the total family tax bill. The number of months you have lived together is a factor in determining how the benefits are split.
  • Pension income splitting. If both spouses are in the same tax bracket, income splitting will not provide the benefit of a reduction in the marginal tax rate.  However, pension splitting may still be useful if it creates or increases a pension tax credit for the spouse.
  • Loan to spouse or partner at prescribed rate 1% to invest. The net tax savings to the couple would be having the dividends taxed in spouse or partner’s hands at the lowest rate.
  • Transfer or sell assets to family members for FMV consideration, any subsequent capital gain or loss realized on a sale to a third party can be taxed in your spouse or common-law partner’s hands (rather than in your hands).
  • Gift to minor children capital assets that are appreciating in value so they can earn capital gains not subject to attribution.
  • Give cash or other assets to your adult children. Gifts of cash could enable them to maximize their deductible RRSP contributions.
  • Take advantage of the fact that income earned on income is not subject to the attribution rules. Although the initial income earned on property loaned to a non-arm’s-length person may be attributed back to the person making the transfer, income earned on that income will not be attributed.
  • Invest child tax benefit payments in your child’s name.
  • Contribute to an RESP.

If you are small business owners, the ability to sprinkle income among family members was greatly curtailed. However, there still are some limited exceptions to the new rule that will be discussed in our next newsletter.

It’s crucial that you confer with your tax adviser, who can review your personal situation and give you advice about which income-splitting strategies best fit your circumstances.

Maximize Your Business Income Tax Deductions

Tax Deductions and Business Expenses

The first rule for maximizing your business income tax deductions is to have all your business-related receipts. The CRA (Canada Revenue Agency) insists that all of your business expenses need to be backed up with receipts, so you have to collect them (and keep them for six years, as the CRA may want to look at them sometime).

Income Tax Deductions and the Cost of Doing Business

Have you deducted all of your business taxes, and business-related dues, memberships and subscriptions?

If you’ve borrowed money to run your business, have you deducted all the interest and all the related fees?

Have you deducted all your insurance business expenses?

Have you deducted all your management and administration business expenses?

Have you deducted all your relevant maintenance and repair business expenses?

Have you deducted the full cost of all your office business expenses and supplies?

Home Business Tax Deductions

Have you deducted an appropriate portion of all of your home maintenance costs?

If you own your home, have you deducted expenses related to home ownership?

Automobile Income Tax Deductions

If you use a vehicle in the course of your business, have you deducted all of your business expenses related to your automobile(s)?

Travel-Related Income Tax Deductions

If you’ve traveled to conduct business over the past year, have you deducted all related travel expenses when calculating your small business tax deductions?

Income Tax Deductions Related To Employing Your Spouse or Child

If you’re going to deduct your family employee as a business expense, you must:

  • pay the spouse or child a salary,
  • pay the same amount of salary that you would pay someone else to do the job,
  • pay a salary that is reasonable for the child’s age,
  • and the spouse or child must be doing work that is necessary for earning business or professional income.

All of these conditions must be met before your child or spouse is considered a legitimate employee for income tax purposes.

Income Tax Deductions Related To Advertising, Legal Fees & Other

Dumping the Landlord & Buying Your Own Business Space

Congratulations! Your business has grown to the point where you no longer want to pay someone else’s mortgage and you have decided to buy your own property. You have a lot of issues to deal with; one of the chief ones being “How should I acquire the property?”

If your business is an unincorporated proprietorship and you buy the property personally, one of the key concerns is going to be paying down the debt used to acquire the property. Assuming that you are in the top tax bracket in Ontario, for every dollar of profit earned you will pay 46.41 cents in income tax and have 53.59 cents left to pay down the principal on the mortgage.

This might be a good time, therefore, to consider incorporating your business and acquiring the real estate in a corporation. The first $500,000 annually of “active business income”, or ABI, is taxed at 15.5% in Ontario. That would mean that for every dollar of profit earned you would have 84.5 cents left to pay towards the principal and so this will help speed up the debt repayment process.

But should you buy the property in the same corporation as the one in which you carry on your business (which I’ll call Operating Company)? What if you want to sell your business down the road but want to keep the real estate and be someone else’s landlord to finance your retirement? Having the operations and the real estate in the same company like this may prevent you from accessing your $750,000 lifetime capital gains exemption (CGE) because you may be stuck with selling the business assets of Operating Company (which would be taxable) as opposed to the shares of Operating Company (a portion of which may be non-taxable). It can be very difficult to separate out the business from the real estate in the future if a sale is already in the works. What if your business runs into trouble? Having the real estate in the same company as the operations may expose the real estate to claims of creditors.

So assuming you decide to set up a holding company to buy the property, then your next question may be “How do I pay off the debt in Holding Company?” Operating Company and Holding Company would enter into a lease agreement whereby Holding Company would lease the property to Operating Company. The rental income earned by Holding Company would be taxed at the 15.5% rate (because it would also be considered ABI) and so Holding Company would use the after-tax profit to pay down the debt.

Another good question concerns the ownership of Holding Company. With proper planning, family members could own an interest in Holding Company. This could allow for additional CGE claims on the sale of the shares of Holding Company, thus reducing the income tax bill on the eventual sale of the real estate even more (consideration could be given to bringing the family members into ownership of Operating Company now as well).

What if instead of buying an existing building you decide to build your own? In Holding Company, the entire cost of the building would be written off for income tax purposes on a very slow basis (it would take almost 40 years to write off 90% of the cost). With some planning, Holding Company could bear the cost of the main structure of the building and Operating Company could bear the cost of the interior “fit-up”. Operating Company would treat this cost as a leasehold improvement and could write it off over 6 years, thereby significantly increasing the tax write-off and the resulting tax savings.

As indicated above, only the first $500,000 of annual ABI is eligible for the 15.5% tax rate and in Ontario, this rate goes to 25% for income above $500,000. Operating Company and Holding Company would have to share this $500,000, so if their combined income exceeds $500,000, the higher rate applies on the excess.

Who is most likely to be audited?

It’s every taxpayer’s worst nightmare: A notice from the Canada Revenue Agency (CRA) informing you that you’re going to be audited.

The CRA will send out around 30,000 such letters this year.

While it is impossible to say how likely it is for a given individual or business to be audited, here are some general guidelines about audit risk:

  • Business are far more likely to be audited than are employees.
  • GST/HST is the most common source of CRA tax audits.
  • Submitting a request to amend a prior income tax or GST/HST return will often trigger audit activity.
  • Industries with a record of poor compliance (such as construction, retail or the restaurant industry). The CRA has singled out those industries, where businesses are often heavily cash-based, for extra scrutiny due to high rates of tax evasion.
  • Keep reporting rental and/or business losses.
  • Reported drastic swings in income, especially if self-employed.
  • Income doesn’t match your postal code. Are you making significantly less than your neighbors?
  • Taxpayers with “outlier” claims – compared to their own tax history or the history of other taxpayers similar to them – are much more likely to be tagged for audit.  For businesses similar taxpayers are found in the same industry and for individuals similar taxpayers can be compared in the same neighborhood, postal code or employment type.
  • Employees who have untaxed employer benefits such as use of company vehicles, parking spaces, travel and entertainment are at higher risk of audit.
  • Large funds transfer, particularly made internationally, are reported to the Federal Government and can raise audit flags with the CRA.

Each year the Canada Revenue Agency refines the way it analyzes taxpayer information and attempts to identify and audit taxpayers with “high risk” indicators.

Ontario Public Holiday Pay Changes

Effective July 1, 2018, the public holiday pay calculation will revert to the old formula that applied prior to the Bill 148 that was passed on November 22, 2017.

On May 7, 2018, the Ontario Government filed O. Reg. 375/18 as an interim measure. Public holiday pay will return to the following calculation under the ESA:

The employee’s public holiday pay for a given public holiday shall be equal to the total amount of regular wages earned and vacation pay payable to the employee in the four work weeks before the work week in which the public holiday occurred, divided by 20.

O. Reg. 375/18 will remain in force until December 31, 2019.

The Bill 148 amendment of the public holiday pay formula removed any proration of an employee’s holiday pay based on the amount of time the employee had actually worked in the qualifying period, resulted in enhanced holiday pay obligations for many employers, particularly in relation to part-time and casual workers.

New Rules for Splitting Income with Family Members

Starting on Jan. 1, 2018, changes to the Income Tax Act regarding income sprinkling take effect. It no longer makes sense for incorporated professionals and many business owners to income split via dividend with their families because legislation introduced Dec. 2017 proposes to extend the current “kiddie tax” anti-income sprinkling rules to a spouse or partner as well as to adult children who are not “actively engaged on a regular, continuous and substantial basis in the activities of the business.”

There are some exceptions under the new rules. One of those exemptions will need owners of private corporations to take action before the end of 2018.

If your company is non-professional Canadian Controlled Private Corporation that earns less than 90 percent of its income from services, you can have your spouse or common-law partner and/or adult children aged 25 or over participate in an incorporated business by owning 10% voting shares acquired with their own funds. This would allow company profits to be distributed to them in the form of dividends. Owners of private corporations will have until the end of 2018 to re-structure their business to meet the 10% rule.

It’s crucial that you consult your tax adviser, who can review your personal situation and give you advice about which income-splitting strategies best fit your circumstances.