LOANS TO A RELATIVE’S BUSINESS: What Happens When It Goes Bad?

You’ve loaned money to a family member’s corporation. Perhaps it was an investment, maybe it was a favor, or both. Or, perhaps, it was made for a completely separate reason. Regardless, sometimes the loan may go bad and you are not able to collect on the debt. What happens from a tax perspective when this occurs?

If the loan was made to earn income and other conditions are met, you may be able to write-off half against your regular income as an allowable business investment loss (ABIL). A recent tax court case shed some light on defining whether the loan was made to earn income.

In a November 3, 2016 Tax Court of Canada case, at issue was whether an ABIL could be claimed in respect of the loan from a taxpayer to his daughter’s start-up company. Within approximately two years, operations had ceased and the daughter had claimed personal bankruptcy. The loan agreement stipulated that interest at 6% was to be charged from the onset, but no payments would be made for approximately the first two years, which, as it would turn out, was after the business eventually ceased. The Minister argued that no interest was charged, and therefore, there was no intent to earn income. This was partially based on accounting records of the daughter’s company which were inconsistent in their reflection of accrued interest.

Taxpayer wins

Despite the conflicting records, the Court opined that the interest rate included in the agreement was legitimate and that there was intent to earn income. The ABIL was allowed. The Court did not opine on whether the intention to earn income requirement would have been met if the agreement only stipulated that interest would begin to be charged or accrued at the time that repayment commenced (i.e. interest free loan for first two years, but interest generating thereafter).

Action Point: Loans to businesses of relatives are more closely scrutinized by CRA due to the inherent possibility that it was made for non-income earning reasons. If considering a loan to a relative’s business, ensure that the income earning nature is clearly documented.

 

Issued from the office of Yale & Partners LLP, Chartered Professional Accountants, Chartered Accountants, Toronto http://cdn4.yaleandpartners.ca/wp-content/uploads/2018/01/TTT121.pdf

 

2018 Federal Budget Highlights

  • a deficit of $19.4 billion for fiscal 2017-2018, and forecasts deficits of $18.1 billion for 2018-2019 and $17.5 billion for fiscal 2019- 2020
  • the new taxation regime for holding passive investments inside a private corporation, originally contemplated in July 2017. Under these proposals, if a corporation and its associated corporations earn more than $50,000 of passive investment income in a year, the amount of income eligible for the small business tax rate would be reduced, such that the business limit would be reduced to zero at $150,000 of investment income.
  • tax-tightening measures
  • does not include any changes to the personal or corporate tax rates, or any enhanced capital cost allowance in response to U.S. tax reform.

https://assets.kpmg.com/content/dam/kpmg/ca/pdf/tnf/2018/ca-2018-federal-budget-highlights.pdf

INPUT TAX CREDITS: Checking Up On Suppliers

Do I have to check up on a supplier when paying them GST/HST? Yes!

In a January 29, 2016 Tax Court of Canada case it was noted that CRA had denied over $500,000 of input tax credits (ITCs), and assessed penalties and interest, in respect of GST and QST paid to twelve suppliers.

Unknown to the taxpayer, the suppliers did not remit the tax. The taxpayer, a scrap metal dealer, obtained evidence of prospective suppliers’ GST and QST registration prior to accepting them as suppliers.

Taxpayer wins – mostly

A taxpayer must use reasonable procedures to verify that suppliers are valid registrants, their registration numbers actually exist, and that they are in the name of that person or business.

The Court held that the taxpayer’s procedures (reviewing the suppliers’ registrations, stamped by Revenue Quebec) were generally sufficient. It was not relevant that some suppliers did not have scrapyards and/or vehicles to carry on scrap businesses, nor that payment was often made in cash, making it difficult to verify the suppliers’ revenues. The taxpayer could not be expected to query government officials to ensure that GST registrations were properly issued.

However, in respect of one supplier, the facts showed that the taxpayer had been sloppy to the point of gross negligence in accepting evidence of registration where it was clear that the registered supplier was not acting on their own account.

Those ITCs were denied, and the related gross negligence penalty upheld. As well, one purchase was made on the date the supplier’s registration was cancelled, so the supplier was not a registrant on that date, and the ITC was properly denied. However, the related gross negligence penalty was reversed, based on the due diligence undertaken in respect of the supplier previously.

Action Item: Implement a system for checking GST/HSTnumbers, especially for major purchases, in CRA’s GST/HST registry. You may want to select a purchase dollar level for which extra revision of supplier GST/HST numbers is performed. The registry is located at https://www.businessregistration-inscriptionentreprise.gc.ca/ebci/brom/registry

 

http://yaleandpartners.ca/resources/tax-tips-traps-issue-121-2018/

 

CRA Audit- Will I Be Selected?

Reasons Specific to Individuals

We see far more desk audits (information requests in regard to certain deductions claimed) than full blown audits for individuals. You can expect an inquiry if you claim any of the following:

  • a significant interest expense,
  • an allowable business investment loss (usually if you held shares in a bankrupt private Canadian company),
  • tuition from a university outside Canada (typically the child and parent are tied together as most children transfer $5,000 of their tuition claim to their parents),
  • a child care claim for a nanny; even if you have filed a T4 for the nanny with CRA. Why CRA cannot crosscheck their records is baffling and befuddling.

In all the above cases you are just providing back-up information, these are not audits.

In past years individuals who purchased any tax shelter other than an oil & gas or mineral flow through have been audited. However, in most cases the CRA is auditing the tax shelter itself and the individual investors just get reassessed personally.

Full blown audits seem to occur with regularity in regard to individuals who earn commission income or self employment income and claim expenses against that income. In those cases, CRA gravitates to auto expense claims, requesting logs books they know one in 100 people actually keep, and advertising and promotion expenses they consider personal in nature.

Reasons Specific to Corporations

Corporations seem to be selected for three distinct reasons.

They carry on a business that is CRA’s flavour of the year; some prior flavours have been pharmacies, contractors and the real estate industry and any other industry CRA feels is a “cash is king” industry.

Corporations file General Indexed Financial Information known as GIFI. This information provides a comparative year to year summary of income and expenses. It is suspected by many accountants that CRA uses this information to review year to year expense and income variances of the filing corporation and to also compare corporations within a similar industry sector to identify those outside the standard ratios, but we don’t know that for certain.

The final reason is that it is just your turn. I have no knowledge of this, but it seems like CRA just runs down a list and if you don’t get caught in regard to #1 or #2, your turn just eventually comes up.

In all cases it is imperative you keep your source documents to provide to the auditor; CRA more then ever wants source documents. It is also vitally important if you and not your accountant are meeting with the auditor that you try and keep your cool. In the end, the auditor is just doing his or her job and if you treat them badly, you are not doing yourself any favours.

Mark Goodfield, CPA

http://www.thebluntbeancounter.com/2011/02/cra-audit-will-i-be-selected.html

Dying without a Will

A will is a document that says how you wish property to be divided after your death.

In Alberta, if you die without a will or if you leave property that is not disposed of by will, the Wills and Succession Act determines what will happen to your property.

 If you die leaving children but no spouse, then everything is divided equally among your children. If any of your children died before you, but left children (your grandchildren) who survive you, are entitled to share the portion of your estate which your child would have received if he or she was alive.

If you are married or in an adult interdependent partnership and you have children who are also the children of your surviving spouse or adult interdependent partner, your spouse or adult interdependent partner is entitled to receive your entire estate.

 If you are married or in an adult interdependent partnership and you have children who are not also the children or your surviving spouse or adult interdependent partner, your surviving spouse or adult interdependent partner will be entitled to receive either 50% of your estate or an amount set out in the Act at the same time of your death, whichever amount is greater. Your children are entitled to share the balance of your estate equally. If any of your children died before you, but left children (your grandchildren) who survive you, those grandchildren are entitled to share the portion of your estate which your child would have received if he or she was alive.

If you leave no spouse or children or descendants, your estate goes to your nearest kin, in the following order: to your parents in equal shares, or to your surviving parent; if both of your parents are dead, then to your brothers and sisters in equal shares. The children of deceased brother and sisters inherit their parent’s share. If you have no surviving nieces or nephews, then your estate would be left to your next of kin according to different degrees of blood relationships. For example, your estate would pass first to your grandparents. If your grandparents have died before you, your estate will be divided equally among your surviving aunts and uncles. If you do not have surviving aunts and uncles, your estate will be divided among your cousins. If you do not leave any traceable next of kin, your estate goes to the provincial government and is used for universities to provide funding for scholarships or fields of research.

The Wills and Succession Act does not consider the needs of each particular family and some unfair situations may result.

A surviving parent may go through needless inconvenience when the other parent dies without a will. For example, where part of the deceased’s estate is to go to the children and the children are under 18 years of age; their share may be held in trust for them by the Public Trustee of Alberta.

As a result, a parent or guardian with small children may only be allowed to use that money if he or she applies to the Public Trustee each time she needs money to buy something for the children. The Public Trustee invests the money held in trust, and charges an administrative fee for acting as trustee for the children.

When the surviving spouse is elderly and the children of the deceased are adults who are able to earn a living, it may be the case that the surviving spouse needs the inheritance more than the adult children do. However, without a will, the estate will not necessarily pass entirely to the surviving spouse. This problem could be avoided by making a will which would leave the entire estate to the surviving spouse.

If you do not have any traceable relatives, you probably still wish to decide what happens to your estate when you die. You may prefer to leave your estate to a charitable organization or a friend rather than to the provincial government. You can state your preference in a will. If you leave any portion of your estate to a charitable organization, your estate will receive a tax benefit as a result of the donation.

Alberta has additional legislation that affects what happens to your estate if you die without a will. For example, The Dower Act, which prevents a married person from selling, mortgaging, or willing away the homestead without the spouse’s consent, entitles the surviving spouse to the use of the homestead for the remainder of his or her life, subject to the interests of any mortgagee or other registered creditor. Under the Dower Act, a homestead is the land upon which there is a dwelling house occupied by the owner (that is the deceased spouse, prior to his or her death), as longs as there are no joint owners on title to the land. The surviving spouse is allowed to occupy the dwelling house during his or her lifetime, or can rent the land and receive the income. This is the case regardless of the terms of the will or the provisions of the Wills and Succession Act.

If you die without a will and the share going to your dependent family members under the Wills and Succession Act is not enough for their proper maintenance and support, your dependent family members may apply to the court for more money. The judge, in such cases may make changes as he or she sees fit. According to the Family Maintenance and Support provisions of the Wills and Succession Act, dependent family members include your spouse or adult interdependent partner, children under the age of 18, and children over the age of 18 who are unable to earn a living due to a mental or physical disability. These provisions also apply where a will is made but does not make adequate provision for dependent family members. If you leave a will, you can specifically address the individual needs of your spouse and minor or disabled children. You can also state your reasons for not leaving a larger portion of your estate to certain of your family members. For example, if you and your spouse have signed a pre-nuptial agreement in which you agree to keep your finances separate, you may wish to make reference to that agreement in your will.

In summary, if you die with a will in Alberta, there are laws that determine what happens to your estate. You should make a will if you want to decide what will happen to your estate when you die, rather than have the provincial legislation do it for you.

http://clg.ab.ca/programs-services/dial-a-law/dying-without-a-will/

 

CRA Collections and the Small Business Owner

Have you ever wondered how your personal assets would be affected should the CRA send you an advisory or audit for collections? Here are eleven tips that will help safeguard small business owner’s personal asset’s from CRA collections.

Never use your home address as your business address. If you have a business location outside of your house use that location. If CRA collections issues a direction to the sheriff to prepare a report of assets, the sheriff will go to the business address.

If the corporation has debts to the CRA, attempt to make a payment arrangement. A payment period of 6 – 24 months has a better chance of acceptance by CRA collections. You provide post-dated cheques for the payment period.

If a payment arrangement has been made, and the cheques issued to CRA, provide this proof to the sheriff who will include this information in their report of the assets.

Ensure there are sufficient funds in the bank account to cover the amount of the cheques. A bounced cheque forces the CRA collections officer to look for other sources to obtain the money.

Keep all CRA filings and payments up to date during the period of the payment arrangement. This includes GST/HST, payroll taxes, and income taxes, etc.

Apply for interest relief while the corporation is paying off the debt to CRA. If accepted by CRA, the outstanding balance will be decreased.

If you can make an additional large payment while paying the arrangement, this will reduce the interest on the outstanding balance.

Be honest with the CRA collections officer, whether you have nothing (or something) to hide. Do not say anything to cause the collections officer to be concerned.

Similarly, if the CRA collections officer requests information, be sure to provide it. Try to build trust with the collections officer, so that the person may show some discretion.

Be polite to the CRA collections officer. They are just doing their job.

If there is a personality conflict between the CRA collections officer and you, request a meeting with them, their supervisor and you. Attempt to improve the relationship to resolve your tax issues.

 

August 1, 2017/in News /by Chris Hammond

http://www.countbeans.com/how-to-safeguard-the-small-business-owners-personal-assets-from-cra-collections-officers/

ESSENTIAL TAX NUMBERS: UPDATED FOR 2018

http://www.advisor.ca/

WORKING CLIENTS

Maximum RRSP contribution: The maximum contribution for 2017 is $26,010; for 2018, $26,230.

TFSA limit: The annual limit for 2017 is $5,500, for a total of $52,000 in room available in 2017 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009. In 2018, the annual limit is $5,500, for a total of $57,500 for someone who has been eligible since 2009. The annual TFSA limit will be indexed to inflation in future years.

Maximum pensionable earnings: For 2017, the maximum pensionable earnings is $55,300 ($55,900 in 2018), and the basic exemption amount is $3,500 for 2017 and 2018.

Maximum EI insurable earnings: The maximum annual insurance earnings (federal) for 2017 is $51,300; for 2018, $51,700.

Lifetime capital gains exemption: The lifetime capital gains exemption is $835,716 for 2017 and $848,252 in 2018.

Low-interest loans: The current family loan rate is 1%.

Home buyers’ amount: Did your buy a home? You may be able to claim up to $5,000 of the purchase cost, and get a non-refundable tax credit of up to $750.

Medical expenses threshold: For the 2017 tax year, the maximum is 3% of net income or $2,268, whichever is less. For 2018, the max is 3% or $2,302, whichever is less.

Donation tax credits: After March 20, 2013, the first-time donor super credit is 25% for up to $1,000 in donations, for one tax year between 2013 and 2017.

Basic personal amount: For 2017, it’s $11,635, line 300. For 2018, it’s $11,809.

OLDER CLIENTS

Age amount: You can claim this amount if they were 65 years of age or older on December 31 of the taxation year and have income less than $84,597 in 2017 (the 2018 threshold is not yet available). The maximum amount they can claim in 2017 is $7,225, and in 2018 is $7,333.

Pension income amount: You may be able to claim up to $2,000 if they reported eligible pension, superannuation or annuity payments.

OAS recovery threshold: If your net world income exceeds $74,788 for 2017 and $75,910 for 2018, you may have to repay part of or the entire OAS pension.

CLIENTS WITH CHILDREN

Family caregiver amount: If you have a dependant who’s physically or mentally impaired, you may be able to claim up to an additional $2,121 in calculating certain non-refundable tax credits.

Disability amount: The amount for 2017 is $8,113 (non-refundable credit; $8,235 in 2018), with a supplement up to $4,733 for those under 18 (the amount is reduced if child care expenses are claimed; $4,804 in 2018). Canadians claiming the disability tax credit (DTC) can file their T1 return online regardless of whether or not their Form T2201, Disability Tax Credit Certificate has been submitted to CRA for that tax year.

Child disability benefit: The child disability benefit is a tax-free benefit of up to $2,730 (for the period of July 2016 to June 2018) for families who care for a child under age 18 with a severe and prolonged impairment in physical or mental functions.

Canada Child Benefit: This non-taxable benefit is effective as of July 1, 2016. The maximum CCB benefit is $6,400 per child under age six and up to $5,400 per child aged six through 17. In the 2017 Fall Economic Update, the government pledged to index the benefit beginning in 2018.

Universal child care benefit (UCCB): This benefit was replaced with the Canada Child Benefit as of July 1, 2016. However, Canadian residents can still apply for previous years if they meet certain conditions, including living with the child and being primarily responsible for the child’s care and upbringing.

Child care expense deduction limits: As of 2017, the maximum amounts that can be claimed are $8,000 for children under age seven, $5,000 for children aged seven through 16, and $11,000 for children who are eligible for the disability tax credit.

Children’s fitness tax credit: This credit has been phased out, and is gone as of 2017.

Children’s arts tax credit: This credit has been phased out, and is gone as of 2017.

Originally published on Advisor.ca

1/26/2018 Essential tax numbers: updated for 2018 | Advisor.ca

 

Perspective on cash flow

A 26-year financial services veteran’s perspective on cash flow

Posted on: October 19, 2017 | Author: Myron Feser, vice president of sales, ATB Financial

Cash is king. For no one is this more true than for the entrepreneur who’s working to get their new business off the ground. Learning how to manage cash flow is a crucial milestone on the road to success.

Cash flow is the health of your company. Access to working capital will allow you to provide stability during tough times, while having cash available helps your business grow and thrive during prosperous ones. The ability to handle the ups and downs of any economic cycle also shows the bank that your company is well managed!

Of course, like many things involved in entrepreneurship, it isn’t as easy as it sounds. In fact, effectively managing cash flow can be downright overwhelming, especially if you’re just starting out. It’s always a good idea to engage financial experts, like a business accountant, to help you. As your business grows, you may even want to think about bringing in someone to orchestrate your cashflow full-time.

Whether you’re managing your finances on your own or if you’ve brought in an expert, the next step is to understand your business cycle. That means knowing how quickly the goods or services you provide can be turned into cash. For example, if you have a manufacturing business your cycle might look like: Take raw materials -> manufacture product -> sell the product -> turn the receivable into cash.

The shorter the cycle, the better it is for your business as you’ll have more cash on hand. Even shortening your business cycle by one day can have a significant impact on your company’s working capital position.

Again, having working capital is crucial to building a successful business. Most businesses don’t fail because they aren’t profitable. They fail because they run out of cash. Keep an eye on your cash and your business cycle, and your business should thrive!

Myron’s top cash flow tips:

Entrepreneurs often underestimate how much working capital is required to grow their business. Talk to your banker and figure out how much you need.

Finance any capital purchases like capital assets so that you don’t tie up too much of your working capital.

Make sure you understand your finances and cash flow—even if you do bring in outside help. Monitoring your cash flow on a daily or weekly basis is critical.

Develop strategies to make your business cycle as short as possible.

Definitions

Working capital: the money you use for day-to-day operations. Current assets minus current liabilities.

Capital purchases: significant purchases that a company makes as an investment to acquire or improve long-term capital assets.

Capital assets: assets owned by the company, like buildings or equipment.

Business cycle: how fast you turn your inventory, product or service into cash.

FEDS CLARIFY INCOME SPRINKLING PROPOSAL

Advisor.ca http://www.advisor.ca/tax/tax-news/feds-clarify-income-sprinkling-proposal

The federal government provided revised income sprinkling measures, offering clarity about how its controversial changes to the Income Tax Act will be implemented.

Specifically, the feds provided bright-line tests for determining whether family members are significantly involved in a family business, and thus are excluded from potentially being taxed at the highest marginal tax rate (known as the tax on split income, or TOSI).

A key requirement is “regular, continuous and substantial” contribution to the business, says Walsh. Family members who fall into these categories won’t be subject to TOSI:

Family members who fall into these categories won’t be subject to TOSI:

  • The business owner’s spouse, provided the owner meaningfully contributed to the business and is aged 65 or over. This aligns with current pension income splitting rules.
  • Adults aged 18 or over who have made a regular, substantial labour contribution – generally an average of at least 20 hours per week – to the business during the year, or during any five previous years. The measure recognizes that post-secondary students may step back from the business during the school year. Hours will be prorated for seasonal businesses.
  • Adults aged 25 or over who own 10% or more of a corporation that earns less than 90% of its income from services, and isn’t a professional corporation. This is consistent with current tax rules concerning capital, and recognizes that some service-based or professional-based businesses often don’t require significant capital to do business. (Service- or professional-based businesses must pass the labour test, above). Business owners have until Dec. 31, 2018, to adjust to this exclusion.
  • People who receive capital gains from qualified small business corporation shares and qualified farm or fishing property,if they wouldn’t be subject to the highest marginal tax rate on the gains under existing rules. This is consistent with the feds’ withdrawal in October of the lifetime capital gains exemption measures.

Family members aged 25 or older who don’t meet any of these exclusions would be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate.

In certain cases, adults aged 18 to 24 who have contributed to a family business with their own capital will be able to use the reasonableness test on the related income.

In a conference call, a spokesperson for Finance Minister Bill Morneau said CRA audits will require proof when it comes to claiming an exemption for a family member.

Wills and the Executor

A will specifies your instructions as to how your assets will be distributed on your death. In the will, you name an executor to act as your personal representative and to deal with all the tax, investment, administrative, and other duties involved in distributing and overseeing your assets as per your instructions.

Some people feel honored to be named as the executor, in that it suggests respect and trust in their abilities. However, most people fail to realize how much responsibility is required, the amount of time and effort that the appointment often.

Here are some of the responsibilities of an executor:

Locate the will of the deceased. Determine that the will is the last will of the deceased.

  • Locate the will of the deceased. Determine that the will is the last will of the deceased.
  • Make the funeral arrangements if necessary. Obtain the death certificate.exe
  • Take control of the assets. Arrange security and insurance if required. Have the assets valued for the date of death.
  • Manage the assets for the estate as the trustee.
  • Dispose of perishable assets.
  • Contact financial institutions to change the name on the accounts to “the estate of”,
  • Open a bank account for the estate.
  • Arrange the probate of the will if applicable.
  • Assess the income tax situation and file any required returns.
  • Pay the bills of the deceased and the estate.
  • Make provision for the immediate needs of the spouse and any dependents.
  • Set aside reserve funds for the payment of estimated debts, taxes, probate fees, and compensation for the executor.
  • Prepare an interim distribution to the beneficiaries if available.

Conflicts often arise between the executors and the heirs. The beneficiaries may be suspicious of the executor because he or she does not have enough knowledge or skills, is insensitive, is too hasty, shows favoritism, etc. Anyone who is appointed as an executor should be aware that these are common situations during emotional times.

An executor requires many skills. One of the most important is the ability to know when outside expertise is required. An executor frequently hires a lawyer, accountant or trust company for assistance. Sometimes, appointing an independent outside party, such as a trust company as the executor may be the best choice, especially when a family conflict can be expected, although it can be costly

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