Personal Real Estate Corporations in Ontario

Unlike other regulated professionals (doctors, lawyers, engineers, architects, dentists and accountants) who can incorporate their business, Ontario real estate agents are currently excluded from this group due to a technicality in the Real Estate and Business Brokers Act, 2002. But it looks like Ontario REALTORS are one step closer to being allowed to form personal real estate corporations.

Bill 104, Tax Fairness for Realtors Act, 2017, passed second reading in the Ontario legislature on March 23, 2017. If Bill 104 continues to move through the legislative approval process and receives Royal Assent, following third reading and a final vote in the legislature, it will become law in Ontario.

If passed, the bill 104 would permit realtors to form personal real estate corporations. This would enable real estate salespeople and brokers across the province to take advantage of the business benefits of incorporation.

Low Tax Rates and Tax Deferral Opportunities

Many tax planning opportunities available to other corporations and business owners would also be available to Personal Real Estate Corporation and the owners.

In Ontario, the top marginal rate is 53.53% on income over $220,000. As a Personal Real Estate Corporation, real estate agents would have access to the Ontario small business tax rate of only 13.5% on the first $500,000 of active income in 2018 for CCPC, and 26.5% thereafter. A significant tax deferral would easily be achieved if the real estate agent leave income in the corporation.

Income Splitting Opportunities

For some professionals, such as lawyers, ownership in their Professional Corporation is restricted to licensed professionals.However, it does not look like that would be the case with the Personal Real Estate Corporation. Bill 104 would allow for the issuance of non-equity shares to the family members of the realtor. As a result, Personal Real Estate Corporation can split income across family members by paying them a reasonable salary or issuing dividends.

Until Bill 104 passes into law, there will still be questions surrounding exactly how it will be implemented and what that will mean for real estate agents. Stay tuned with us.

#realestate #corporations #tax #planning

Tax on Split Income (TOSI Rules) – Impact to Dental, Doctor and Lawyer Professionals

The federal government has confirmed changes to tax rules that will restrict income splitting using private corporations. The changes, effective January 1, 2018, would expand the TOSI rules. The TOSI rules will generally apply to income from private business arrangements, such as dividends or interest paid from a professional Corporation.

Where the TOSI applies, the income is subject to the top marginal tax rate in the hands of the individual, and personal tax credits (with the exception of the dividend tax credit and foreign tax credit) are denied with respect to the amounts.

The TOSI measures include clear “bright-line” tests or safe harbours to automatically exclude individual family members. The exclusions are as follows:

  • The individual is over the age of 65.
  • The individual is over the age of 18, and he or she worked for the business for an average of 20 hours per week, in the present year, or in 5 non-cumulative preceding years.
  • The individual is over the age of 25 and owns more than 10% of the votes and value of the shares of corporation directly (not through a trust) and the business is not in the provision of services, and the corporation is not a professional corporation.
  • Individuals who receive capital gains from qualified small business corporation shares if they would not be subject to the highest marginal tax rate on the gains under existing rules.

Individuals aged 25 or over who do not meet any of the exclusions described above would be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate.



Tax Advices for Dentists, Family Doctors and Lawyers

As a practicing Dentist, Family Doctor and Lawyer, it may come as a surprise that the Canada Revenue Agency will be taking close to half of your hard earned money.  Did you know the marginal tax rate for income over $150,000 is about 47.97% and increases to 53.53% for income over $220,000?

Here are guidance and tax saving strategies for Dentists, Family Doctors and Lawyers:

First, set up a professional corporation.

There are three potential significant tax benefits of incorporating a professional corporation for a Dentist, Family Doctor and Lawyer:

  • Issuing salary or dividends to family members in lower tax brackets;
  • A tax deferral is possible by retaining earnings in the professional corporation;
  • The $800,000 capital gains exemption available for sale of a small business can only be claimed on the sale of shares of a qualifying corporation and not for the sale of a sole proprietorship or a partnership.

In Ontario, the combined federal + Ontario tax rate on the first $500,000 of active business income earned by a professional corporation is only 13.5% for 2018 and 12.5% for 2019. The average tax rate to earn the same amount of income personally is about 45%. The professional corporation provides a 30% deferral of tax leaving you with more cash to reinvest in your practice. Personal tax will be payable when funds are extracted from the professional corporation.

Secondly, pay reasonable salaries to family members in a lower tax bracket

If a family member performs administrative duties for the practice, you can pay him or her a salary as long as it is reasonable (i.e. comparable to what you would pay anyone else to perform the same duties).  If your family member is in a lower tax bracket, this would result in an overall tax savings.

If you would like to take advantage of these tax planning opportunities for your practice, contact us today.

Principal Residence Exemption when Moving into Nursing Home

Gains on the sale of a principal residence are not necessarily exempt from tax. The tax authorities can tax on capital gains in certain circumstances, such as when owner leaves their principal residence to move into a nursing home.

For seniors considering a move to a nursing home, they or their children must decide what to do with their principal residence and should understand the related tax implications.

To take advantage of the principal residence exemption and not have to pay tax on the sale of their principal residence, the property must meet all of the following four conditions:

  • It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
  • You own the property alone or jointly with another person.
  • You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
  • You designate the property as your principal residence.

If a senior who has no spouse or child leaves in her/his principal residence when moving into a nursing home, she/he loses the right to claim the principal residence exemption for the years in which she/he must live in a nursing home.

To avoid such a surprise, here are some considerations as seniors explore the possibility of transitioning to a nursing home.

Sell the Home

The default option is to sell the senior’s principal residence. In this case, they can use the principal residence exemption to eliminate any capital gains tax on the property. The proceeds could be used to fund their nursing home and provide an early inheritance for their beneficiaries.

Have an Adult Child Live in the Home

If a senior does not wish to sell the property, they may wish to take advantage of the ordinarily inhabited rule by having an adult child occupy the home during this period.

Rent out the Home and File a Subsection 45(2) Election

When a taxpayer converts a principal residence to a rental property, Income Tax Act deems the taxpayer to dispose of and to immediately reacquire the property at fair market value.

Generally, income-producing properties cannot be designated as a taxpayer’s principal residence unless the taxpayer qualifies for and files a subsection 45(2) election. The subsection 45(2) election deems no change in use to have occurred and allows a taxpayer to designate the home as their principal residence for up to four tax years during the time it is used for income-producing purposes–thus deferring the deemed disposition until the property is sold.

Benefits being reviewed?

If you receive a letter from CRA that the agency is reviewing your benefits, it could be a routine check.

As per CRA, it sends about 350,000 such letters every year to “make sure Canadians are receiving the benefits and credits they’re entitled to.”

The letter or questionnaire may ask for documents to confirm that the information in our records is right and up to date. For example, we may ask you to validate your marital status, where you live, and who cares for your children.

It’s important that you reply and send all the information requested as soon as possible. This will help the CRA review your file quickly and easily. If you need help, we’ll work with you to answer any questions or concerns you may have.

Taxpayers usually have 45 calendar days to respond, and CRA says it will tell taxpayers how to send documents in its letter.

If you can’t get the documents we’re asking for or if you need more time to reply, it’s important that you call the number provided in your letter.

If you don’t reply, CRA says that “your benefits will stop and you may be asked to repay benefits that were previously sent to you.”

Personal Emergency Leave vs Family Medical Leave

On November 27, 2017, the Fair Workplaces, Better Jobs Act became law, resulting in a number of changes to the Employment Standards Act (ESA). The new rules were in force as of January 2018. Read a complete summary of the changes to the ESA.

Personal Emergency Leave

Most employees have the right to take up to 10 days of job-protected leave each calendar year due to illness, injury, death and certain emergencies and urgent matters. This is known as personal emergency leave. Special rules apply to some occupations.

The personal emergency leave can be because of your needs or the needs of a family member. And you can take up to 10 days even if you started working for your employer partway through the year. If you only take part of a day, your employer can count it as one of your 10 days.

You have the right to be paid for 2 days of personal emergency leave each year if you’ve been working for your employer at least one week. If you take part of a day off as personal emergency leave, your employer still has to pay you for the hours you worked.

Family Medical Leave

Family medical leave is unpaid, job-protected leave of up to 28 weeks in a 52-week period.

All employees, whether full-time, part-time, permanent, or term contract, who are covered by the ESA are entitled to family medical leave.

There is no requirement that an employee be employed for a particular length of time, or that the employer employ a specified number of employees in order for the employee to qualify for family medical leave.

Under the federal Employment Insurance Act, 26 weeks of employment insurance benefits (called “compassionate care benefits“) may be paid to EI eligible employees who have to be away from work temporarily to provide care to a family member who has a serious medical condition with a significant risk of death within 26 weeks and who requires care or support from one or more family members.


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