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Business Transfers To Family Members

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family-325218_1920Inadequate Succession Planning

 

According to reports published by CIBC it is expected that 30% or close to 310,000 Canadian business owners will sell or transfer ownership of their businesses in the next five years. The growing number of transfers has a significant impact on the Canadian economy and predecessor owners.

The lack of effective tax planning and knowledge  has resulted in predecessor owners paying significant income tax. This directly affects retirement savings and future well-being.

Transferring Among Family members

Business owners might have family succession allowing them to transfer their family business to the next generation. This allows business to be kept in the family and continue to operate much like they did in the years before. However, section 84.1 of the Income Tax Act (ITA) creates a significant economic loss for the business owner if they decide to keep the business within the family.

The transfer of a business to a family member is administered through section 84 .1 of the ITA, which is in place to prevent tax evasion. In most cases this section of the ITA deprives the predecessor owner of the capital gains exemption, which can save thousands in taxes. This would make selling the business to a third party much more attractive because you can realize the capital gains exemption. Resulting in lower income tax for the business owner.

Section 84.1 has overly complicated the succession planning process. It hinders the business owners if they decide to keep the business in the family.

Recommendation

Like many other, The Canadian Chamber of Commerce has proposed that the federal government modify the ITA section 84.1 to “to facilitate  business transfers to family members and make this type of transfer at least as advantageous as transfers involving  unrelated third parties through the following measures”.

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What is a professional corporation?

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Professional Corporation

Professional Corporation

What is a professional corporation? 

A professional corporation operates much like a business corporation with few exceptions. A professional corporation has to abide by the regulations set by the Business Corporations Act (Ontario) and by the respective governing body. A professional corporation  can-only carry on activities of its profession. A professional corporation must meet the requirements of its governing body and receive a Certificate of Authorization or equivalent.

Many professionals are allowed to operate their business as a professional corporation.  Examples of professions that can operate under a professional corporation:

 Accountants  Lawyers  Medical professionals
 Engineers  Architects  Social Workers
 Veterinarians  Pharmacists  Chiropractors

Historically professionals have operated through a sole proprietorship or partnership which limits tax planning  and results in higher taxes (see “How to setup a business in Ontario” for more in depth discussion). Professionals have lobbied the provincial governments which have allowed them to incorporate their practices.

Does a professional corporation have limited liability? 

In “How to setup a business in Ontario” we discussed that a corporation is a separate legal entity and it has limited liability. A professional corporation is slightly different and does NOT have full limited liability (exception for architects and engineers). A professional corporation only offers limited liability in certain areas. When it comes to business debts, the shareholder is only liable up to his or her investment in the business.  However, in other circumstances such as malpractice, the corporate veil is lifted resulting in unlimited liability.

 

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CRA Auditing – HST New Housing Rebates

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Goods and Services Tax/Harmonixed Sales Tax (GST/HST) New Housing Rebate

Goods and Services Tax/Harmonized Sales Tax (GST/HST) New Housing Rebate

The Canadian Market

The housing market in Toronto and the suburbs has been booming over the last several years. This has allowed investors from all over the world to cash in. The strategy was to purchase a newly constructed home or condominium unit from the builder and sell it a few months later for profit. This strategy seemed like people had finally figured out how to pull ahead in this struggling economy. For some this had even become a full time job with endless rewards. With the Canada Revenue Agency (CRA) only taxing half of the capital gain this was the right way to retain your money.

HST New Housing Rebate

With the CRA looking to increase tax revenues they started reviewing the New Housing Rebate applications  and determined a large number of people had claimed the GST/HST New Housing Rebate incorrectly. They were able to determine a large number of investors never even moved into the newly constructed property but they had sold it few months after they took possession. In this case they would not qualify for the rebate and they would be required to pay the HST balance to the CRA. A lot of investors had already sold the property and had failed to collect HST on the sale, which would mean they were still required to pay back the HST. This was a sticky situation with some investors on the hook for over $24,000. In some instances the CRA waited 3 years to reassess the taxpayer. Read more

How to setup a business in Ontario?

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What type of structure is right for you?

How to setup a business in Ontario?

Setting up a business can be an overwhelming task with a lot to comprehend. It all starts with a dream and a vision, but how do you turn that dream into reality. The dream of becoming your own boss and having the freedom to make your own decisions can be a complicated one at the beginning. Once you have determined on the actual business and its inner workings, you will have to move on to the next step of executing that business. This is where a lot of people get stuck and don’t really know where to go next.

In this article I will explore and shed light on several different business structures available in Ontario. I will also explain how to be in compliance with Canada Revenue Agency (CRA) tax obligations.

The three most common structures are Sole proprietorship, Partnership, and Incorporation.

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