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Keeping track of changes and developments in GST/HST, Quebec sales tax and other provincial sales taxes across Canada, can be a full-time job. The consequences for failing to adequately manage your organization’s sales tax obligations can be significant - from assessments, to forgone recoveries and cash flow implications, to customer or reputational risk.
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In today’s competitive and global marketplace, your employee mobility strategy is a critical factor for success. International opportunities are key to attracting top talent and instilling a global mindset across your organization. Your people truly are your most valuable asset, and as your expatriate workforce continues to grow, a seamless global mobility program is essential to achieving your overall business goals.
US corporate tax
The United States has a very complex and regulated tax environment, that may undergo significant changes. Cross-border tax issues could become even more challenging for Canadian businesses looking for growth and prosperity in the biggest economy in the world.
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Whether your business is only beginning to sell to US customers, or US customers represent the core of your business, anticipating and dealing knowledgeably with the US tax environment is critical to your bottom line. Our full-service US corporate tax group can help in all tax aspects of doing business in the US. Given high US corporate tax rates, don't be surprised by a US tax liability only to find out that there were planning opportunities available to reduce it.
While there is great opportunity for businesses looking to expand globally, organizations are under increasing tax scrutiny. Regardless of your company’s size and level of international involvement—whether you’re working abroad, investing, buying and selling, borrowing or manufacturing—doing business beyond Canada’s borders comes with its fair share of tax risks.
Transfer pricing is a complex area of corporate taxation that is concerned with the intra-group pricing of goods, services, intangibles, and financial instruments. Transfer pricing has become a critical governance issue for companies, tax authorities and policy makers, and represents a principal risk area for multinationals.
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Real estate agents and brokers have historically been prohibited from carrying on their business through a corporation. However, with the passing of Bill 145, Ontario’s real estate professionals will now be permitted to incorporate by setting up a Personal Real Estate Corporation (PREC). The benefits of incorporation can be considerable, including the opportunity to defer up to 40 percent in personal taxes. To maximize those benefits, however, there are some traps you’ll need to avoid. Here are five key steps you can take to get it right.
1. Determine if incorporation is right for you
Incorporation confers a range of tax planning and other benefits. Key among those is the ability to defer taxes. For a real estate agent in Ontario, the highest marginal tax rate on earnings over $220,000 is approximately 53.5 percent. Earning income through a PREC, however, would allow the corporation to pay tax on the income earned inside the corporation—at rates ranging from 12.2 percent to 26.5 percent in 2020. You could even use the savings for additional corporate investments, giving you the opportunity to enhance your wealth over time.
Yet despite these benefits, a PREC won’t be right for everyone. At a high level, incorporation likely makes sense if you’re an agent who:
- Has income in excess of personal spending requirements
- Wants to take advantage of income tax deferral opportunities
- Wants to invest excess cash in income-producing assets
- May be able to split income with family members
- Wants to take advantage of the $883,384 lifetime capital gains exemption
Your next move
Meet with your Grant Thornton tax advisor to conduct a cost-benefit analysis to determine if incorporation is right for you.
2. Follow the tips and avoid the traps when choosing an ownership structure
If you use excess cash to purchase real estate or other income-producing assets, incorporation may give you the ability to more effectively structure your real estate holdings. You may also be able to split income with your family members, such as a spouse or adult children, by paying them dividends or a salary. You just need to remember these strategies can be quite complex.
For instance, tax treatment varies for “buy and hold” vs. “property flipping” transactions. While flipping property generates business income, buy and hold can generate passive income (e.g., rents, interest or royalties)—which attracts higher tax rates. If your passive income exceeds certain thresholds, the P-REC may even lose the ability to claim the small business deduction.
There are also strict rules related to tax on split income that you’ll need to comply with. Get this wrong and you may lose the tax advantages you were trying to capture.
Proper planning is key to avoiding these traps and realizing the tax benefits of incorporation.
Your next move
Plan ahead for how you’ll structure your corporation and future investments. We’ll work with you on tax-efficient planning that meets your overall objectives.
3. Know the value of your assets in advance
To maximize the tax advantages of incorporation, real estate professionals will likely transfer most of the assets they currently own into the PREC. Notably, this transfer must take place at fair market value. Determining this value may be simple enough for your tangible assets, such as property holdings or existing investments. However, it’s not as straightforward for your intangible assets.
What is the value of your business goodwill, for instance? How about your current listings or your advertising and employment contracts? Assigning value to these assets in advance will be critical as it could impact the tax treatment of your PREC.
To determine the value of intangible assets, professional valuators typically take a wide range of factors into account. Given the complexity of this calculation, it’s important to get help when assigning values to your intangible assets before they’re transferred to the corporation.
Your next move
Determine the value of the assets being transferred to the corporation. A certified business valuator at Grant Thornton can assist you in this determination.
4. Make sure your tax and legal advisors work together
To set up a PREC, you’ll need to engage a lawyer to create a transfer agreement to transfer your assets from your sole proprietorship into the corporation, as well as to draft and file articles of incorporation and related resolutions. Although these are uniquely legal activities, the decisions you make at this stage will affect how the corporation is taxed. As such, your tax and legal advisors should work together from the outset.
With proper collaboration, for instance, your tax advisors can help make sure that your share structure is set up to take your future needs into account. That way, if you decide to do an estate freeze at a later date, you won’t have to amend your articles of incorporation at that time. Similarly, your accountant will know what the CRA typically looks for on review of your documentation, and can help you meet their expectations from the start.
Your next move
By bringing your tax and legal advisors together, they can provide you with professionally aligned advice on how to move forward with incorporation.
5. Plan ahead
Although setting up a corporation can be exciting, it’s also fraught with complexities. Assessing if incorporation is right for you is only the first step. From there, you’ll need to decide on an appropriate ownership structure and take time to determine the value of your assets in advance. There are also countless traps you must avoid if you hope to maximize the tax benefits associated with incorporation.
Planning ahead is the best way to get it right. By getting started early, you’ll be ready to hit the ground running as soon as the legislation passes. That’s why it makes sense to meet with your Grant Thornton advisor as soon as you can. To get the most out of the meeting, come prepared to share the following information:
- Your 2019 personal income tax return (and your spouse’s, if applicable)
- An outline of your monthly expenditures, after tax
- An overview of your current real estate investment holdings, current contracts and active real estate listing
- Your retirement savings goals
Your next move
To realize the advantages of setting up a PREC, book a consultation with your Grant Thornton advisor today.
For the latest insights and information on personal real estate corporations, visit our PREC hub.