MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
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Desharnais & Associates
TEAM F
Tahirah Massop – Amyn Damji – Lucie Wei
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MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Corporate tax issues
Personal tax issues
Recommendations + Other considerattons
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MANDATE CORPORATE
Current Situation
PERSONAL RECOMMENDATIONS CONCLUSION
Mr. McShane
Portes et Fenêtres
McShane (PFM)
Established in 1991
$10,000 for 10,000 common shares
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MANDATE CORPORATE
Desired Situation
PERSONAL RECOMMENDATIONS CONCLUSION
Portes et Fenêtres
McShane (PFM)
90% 10%
Jessy Grégoire Mr. McShane
Not an acquisition of control due to Jessy being a key employee in
PFM
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MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Qualified Small Business Corporation (QSBC) 110.6(1)
1- Canadian controlled private corporation (CCPC)
2- No unrelated party should have owned the shares in last 24 months
3- At the time of sale of shares at least 90% of fair market value
(FMV) should be used to earn active business income (ABI)
4- At least 50% of FMV of assets are used to earn ABI in the last
2 years
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Qualified Small Business Corporation (QSBC) - Calculation
2015
• $12,590,994 / 15,393,615 = 81.79 %
• Do not meet 90% threshold
Solution: Purification
 Sell off investments and pay off liabilities
2014
• $9,644,896 / $10,658,042 = 90.49%
Eligible for lifetime capital gains deduction $813,600
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Corporate Tax Implications 2: Investment Tax Credit (ITC)
Engage in research + development activities
First 3 million – Current expenditures
• ITC : 35%
• Refund: 100%
Excess of 3 million
• ITC : 15%
• Refund: 40%
Be careful 3 million may be reduced depending on taxable income earned in Canada
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Corporate Tax Implications 3: M&P Credits
Manufacturing & Processing Credits
13% tax rate reduction for company on M&P
• Engage in manufacturing and processing activities
Better off claming GRR of 13%
• Easier
Building  Factory
• Add cost renovations to ACB
• Put in separate class
• If greater than 90% use for manufacturing  10% CCA
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MANDATE CORPORATE
Administration
PERSONAL RECOMMENDATIONS CONCLUSION
Capital Dividend Account (CDA)
• Balance of $72,000
• Pay out as tax free dividends
Refundable dividend tax on hand (RDTOH)
• Pay out 3x RDTOH as dividends = $45,000
• Max dividend refund $15,000
• GRIP balance : pay out as eligible  gross up at 38%, DTC 6/11 of gross up
Instalments
• Tax payable > $3,000
• Several ways to calculate
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Notes to Financial Statements
Note 1: Tavel expenses of $42,887
• 100% deductible due to employee travel
Note 2: Employee meals of $5,000 per meal
• 50% deductible for tax purposes
Note 3: Employee education costs
• Related to business
• Deductible for corporation
• Employees do not have to include in tax return
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Notes to Financial Statements
• 500 km personal use – assuming 12 months
• 2,500 km work related
• Standby charge: 500/1667 x 2% x 45,000 x 12 = $3239
• Operating cost benefit: Lesser of
• 1- $0.27 x 500 = $135
• 2- 50% of SC = 1649
Total income inclusion: $3,374
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MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
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MANDATE CORPORATE
Income Splitting
PERSONAL RECOMMENDATIONS CONCLUSION
Jessy makes $240,000
Husband no longer works
 Consider Income Splitting
1- Employ Nick and pay a reasonable salary
• Must be reasonable or cannot be deducted by Ms. Grégoire’s company
• Salary will allow for RRSP contributions
• Can contribute 18% of earned income or maximum of $24,930
2- Can also pay dividends up to $35,553 per year
• CDA account  tax free dividends can be paid out
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MANDATE CORPORATE
Income Splitting
PERSONAL RECOMMENDATIONS CONCLUSION
3- Jessy can contribute to Nick’s RRSP
• Jessy can deduct contribution
• Contribution belongs to Nick
4- Jessy can make a loan to her husband
• Reasonable repayment terms, prescribed rate, paid within 30 days of year end
5- Jessy pays all family expenses
• Use Nick investment income  taxed at lower tax rate
Pay out a mix of salary and dividend to husband
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Ms. Grégoire - Credits
Mr. Grégoire can use his personal tax credits with income splitting
1- Spousal amount
• $11,327 – Nick’s Net income
2- Family tax cut
• Currently eligible for $2,000
• One spouse makes over $150,000, other makes $0
• Couple is married with children under 18
• With income splitting family tax cut may be reduced to 0.
3- Child care benefit – 3 year old child
• Can receive additional funds for child  should be given to Nick
Beware of income attribution to spouse when giving Nick money 74.1
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MANDATE CORPORATE
Ms. Grégoire
PERSONAL RECOMMENDATIONS CONCLUSION
4- Registered Education Savings Plan
• Can contribute to your children’s RESP
• Maximum lifetime limit per child is $50,000
• Can receive additional amounts from
• Canada  $500
• Quebec  $250
• Contributions are not deductible, however, when the amounts are given to the children:
•  Will be taxed in the child’s hands
•  Method of income splitting
• Must distribute funds to children before age 31
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MANDATE CORPORATE
Ms. Grégoire
PERSONAL RECOMMENDATIONS CONCLUSION
• 118.5 Tuition maximum $5,000 x 15% = $750
• 118.6 Textbook $65 x 8 x 15% = $78
• 118.6 Education $400 x 8 x 15% = $480
• 118.02 – Travel to school – Public transportation for children under 19  15% of total paid
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MANDATE CORPORATE
Ms. Grégoire
PERSONAL RECOMMENDATIONS CONCLUSION
Mortgage interest
• Mortage interest is not deductible
• Should use investments to pay off mortgage
• Use income for investments and then the interest will be deductible
• Investments must have an expectation of profit
Allowable business investment loss
• Investments that are sold at a loss
• If the company is a small CCPC that carries on active business in Canda
•  Then losses become an allowable business investment loss when the shares are sold
• Can be applied against any income
• If not a CCPC
•  Loss will be a capital loss – applied against capital gain.
• Will reduce future lifetime capital gain deduction
Investments – Interest & Broker fees = deductible
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MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Purchase of PFM - Funding
20% as a donation to her daughter is not deductible for Catalina Beauty
• Will be considered a gift at FMV, will have immediate tax consequenses
80% interest bearing loan
• Jessy will have to make interest payments within 30 days of year end
 Not the best option
Let’s look at other options
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Purchase of PFM - Funding
Not viable
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Purchase of PFM - Funding
• ITA 15(2) Shareholder loan as Jessy and Catalina are related
• Must have bonafide repayment terms ITA 251(2)
• Loan must be used to:
• 1) Buy a house X
• 2) Buy a car for work X
• 3) Buy shares in Catalina Beauty X
Not viable:
Jessy will have to include the full amount in her income
 Higher tax consequences
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Purchase of PFM - Funding
Not viable
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Purchase of PFM - Funding
1- Outright Gift
• Shares will deemed to be disposed of at fair market value
• Will have immediate consequences for Mr. McShane
•  Not viable
2- Instalment Sales
• Can defer tax consequences on capital gains
• Cannot defer tax consequences on recapture
• Jessy will require the funds
3- Can do an 85(1) Rollover to a Holdco
• Will need to create another company = expensive
• Can allow for crystalization of LTCGD
Beware of kiddie tax 120.4
84.1 Deemed dividend, 74.1 attribution, 74.4 attribution
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Purchase of PFM - Funding
• Will have immediate tax consequences
• Normally created for estate planning
• Can bring Catalina into the company and defer any tax consequences
• Do not have to create another company
• Will not have to sell investments to purify and crystallize
Recommendation = Combination of 86 Reorg + Trust
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
How to Do 86 Reorganization
1- Mr. McShane exchanges 100% of his common shares for preferred shares in
PFM
2- Mr. McShane will take consideration
• Boot = PUC of PFM shares = $10,000
• This will prevent 84(3) redemption dividend when Mr. McShane is redeeming his common shares
3- Preferred shares will be
• Dividend bearing
• Voting
• Redeemable and retractable
• Have a price adjustment clause
• Non participating
Value of the preferred shares will be FROZEN at the LSC of the shares
 Important for estate planning as deemed to dispose assets at FMV upon
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
How to Do 86 Reorganization
• Will have no value and can be transferred at a nominal value
• Both have children, can plan for their futures
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
How to Do 86 Reorganization
Mr. McShane can place 10% of common shares in trust and sell 90% to Jesse
• Make his children beneficiaries
Jessy can place 30% of her shares into the trust
• Make her 3 children beneficiaries
• Growth attributed to them
Intervivos
• Still alive when created
• Testamentary upon death
Discretionary
• Both Mr. McShane and Jessy can change the benefiaries of their respective trusts
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MANDATE
Trust
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Taxed at 29%
Must file a T3 trust return
Deemed disposal at FMV every 21 years
All beneficiaries will be eligible for LTCGD of $813,600
Beware of 74.1 Attribution and 120.4 kiddie tax
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MANDATE
Trust
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Trustee:
3 rd party: accountant or lawyer
Mr.
McShane
100% Preferred
Shares – Frozen
Value
Trust
90% of growing common shares
Beneficiaries:
- Children
- Grandchildren
- Spouse
- Holdco
PFM
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MANDATE CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Other Considerations
1- Mr. McShane can deduct any interest paid on investments made in the stock market and loan for building
• If he has the intention of makin money
• Will have to include any interest or dividends received
2- Mr. McShane should make timely payments on building for the loan as he pledged his patent
3- Bonus from McShane
• 0-180 days = include in income
• 180 days – 3 years = cash basis
• 3 year = deferred salary
4- Catalina’s mother should pay out CDA tax free and make use of the RDTOH balance of $483,325
• Can pay up to $4,000,000 eligible
• If CCPC wil pay 38% - 10% - 17% = 11% federal + 8% provincial = 19% total tax
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MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
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MANDATE
Summary
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Corporate tax issues
Personal tax issues
Recommendations + Other considerattons
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MANDATE
Mandate
CORPORATE PERSONAL RECOMMENDATIONS CONCLUSION
Desharnais & Associates
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