Andrew Feindel - Kickstart Your Corporation

This history is important as it demonstrates that tax policies can and do change. While many incorporated professionals will plan to use their CGE in retirement, in many scenarios it may make sense to use the lifetime CGE now, anticipating a potential rule change in the future. To use the exemption before retirement, you would trigger capital gains, resulting in an increase to the cost base of the shares. Then, when the shares are sold in the future the amount of tax paid would be dramatically reduced, due to the adjusted (increased) cost base.

In a word, no!

Dues for recreational or dining clubs, such as golf or tennis clubs, are not deductible expenses, even if the expense has a business purpose, as there is a specific rule in section 18(1)(l) of the Income Tax Act that prohibits the deduction of all recreational club dues. For meals and beverages consumed at golf clubs and the like, however, the deductibility rules are the same as those that would apply at other restaurants, so long as the costs are separately itemized (they are generally 50% deductible, with some exceptions). If the full charge is shown and not itemized, the full deduction is generally disallowed.

As an aside, there was a Tax Court of Canada case involving Gillis Truckways Inc. ( Gillis v. The Queen —2005 TCC 782) in which a golf membership was paid for by a corporation. In that case, the CRA reassessed a taxable benefit of 100% of the cost of the membership to Mr. Gillis, who brought the case to court; the judge directed the CRA to lower the taxable benefit down to 40% of the membership cost. Maybe with a golf lobby group the current tax rules could change!

Assuming you do not sell your practice shares, when you retire your professional corporation needs to remove the “professional” title, leaving you with a numbered holding company. This is usually done with the help of a lawyer and your accountant, but this change doesn't require you to sell any assets nor does it trigger any taxes. In addition, this change also allows you to modify the structure of shares however you wish. When looking at estate planning purposes, for example, you may want to freeze the value of your shares and issue new growth shares to other family members, or to a trust, to transfer future growth and taxes to that member.

In 2015, I sat down with a client in his late 60s who had a significant amount of assets in his corporation, which we'll call “123456 Ontario Limited.”

The client ultimately wanted to pass on his assets to his daughters in a tax-efficient manner. We collectively decided any life insurance solution was off the table—and starting in 2016, new top tax rates were coming into effect, with new surtaxes.

Here are my notes for the transaction we implemented:

Background: At present, retaining eligible dividend income within an Ontario corporation defers 0.49% in personal tax (the difference between the Part IV tax rate of 33.33% and the top personal marginal tax rate on eligible dividends of 33.82%). Assuming the Liberal party platform tax rate proposals are implemented, the top personal tax rate on eligible dividends will jump to 39.34%.123456 Ontario Limited has a general rate income pool (GRIP) balance of $1,295,018 (calculated as of April 30, 2015), which would allow for the payment of an eligible dividend of the same amount.The payment of a $1.3 million dividend would result in personal tax of approximately $439,660, but generate a refund of tax to the corporation of $433,333 (an incremental tax cost of $6,327).

Recommendation: As an alternative to paying a dividend, 123456 Ontario Limited could redeem a portion of the preferred shares issued to you.Assuming the preferred shares have a paid-up capital (PUC) (to be confirmed by your accounting firm), a redemption of $1.3 million worth of shares would generate a taxable dividend of approximately $1.3 million to you (the taxable dividend is the difference between the redemption amount and the PUC of the shares).The dividend can be designated by the corporation as an eligible dividend to the extent of the corporation's GRIP balance at the time of the share redemption.The advantage is that for a current net tax cost of $6,327, the future tax exposure of your estate will be reduced by a minimum of $347,880 (based on the anticipated 2016 top tax rate on capital gains of 26.76%), but more likely by as much as $519,220, assuming the preferred shares will be redeemed on your passing (and based on an anticipated 2016 top tax rate of 39.34% on eligible dividends).

While this transaction took several steps, one can see that with the easing of restrictions on corporations in retirement, there are a lot more potential opportunities for planning!

In many cases, professionals and business owners who are able to incorporate should do so—and the process may cost less than you think. So if you're able to incorporate but have not yet done so, ask your professional advisors why not?

The main benefits of incorporation include the increased flexibility and control you gain, which can allow you to reduce your tax bill each and every year you're incorporated.

Despite the benefits of incorporation, there are situations in which incorporating your business or establishing a professional corporation doesn't make sense. If one or more of those situations applies to you, consider holding off until the time is right.

Finally, keep in mind that the corporation isn't a “magic solution” to create tax benefits out of thin air: you'll still need to play by the tax rules within the structure of your corporation.

1 If you're not incorporated and believe you're able to incorporate and the time is right, ask your professional advisors why not?

2 If the time isn't right for you to incorporate now, ask your advisors when they think the time might be right for you, and for a plan to get you there.

3 If you are incorporated, ask your advisors to walk you through how the corporate structure is being used to it's full advantage for you, using this chapter as a guide.

4 If you are incorporated, do you have a plan for what happens with the corporation once you transition into retirement?

1 1. More information on the steps that follow incorporation can be found on the Government of Canada's Corporations Canada website at https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06646.html. Corporations Canada is Canada's federal corporate regulator.

2 2. Under section 248(1) of the Income Tax Act, the three-month limit is only available to CCPCs that (a) claimed the small business deduction in the current or previous year, and (b) did not exceed the small business limit on an associated group basis.

3 3. For more information, refer to the Canada Revenue Agency's web page on late filing of information returns at https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/penalties-interest-other-consequences/payroll-penalties-interest.html#late_filing_info_return.

4 4. For more information on your record-keeping responsibilities, refer to the Canada Revenue Agency's website at https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/keeping-records.html.

5 5. For more information on student loan forgiveness for family doctors, refer to this Government of Canada web page: https://www.canada.ca/en/services/benefits/education/student-aid/grants-loans/repay/assistance/doctors-nurses.html.