Don't make this expensive mistake while flipping property for profits -Wall v Canada
Introduction:
My name is Aman, and I am a Chartered Professional Accountant practicing in the metro Vancouver region of British Columbia, Canada. In this blog post, I will discuss an interesting case law that involves Mr. Wall's tax dispute with the Canada Revenue Agency.
The Wall vs. Canada Case:
Mr. Wall, a licensed real estate agent in Vancouver, found himself in a tax dispute due to his real estate-related activities. Between 2004 and 2010, he purchased three houses, demolished them, constructed new ones, and then sold them. He believed these properties qualified for the principal residence exemption and did not report any gains resulting from their sale.
Reassessment and Appeal:
However, the Canada Revenue Agency reassessed Mr. Wall under the Income Tax Act and the Excise Tax Act, claiming that the gains from the property sales were on an income account, and the supplies of the properties were taxable. In response, Mr. Wall appealed to the Tax Court of Canada.
Key Issues:
The primary issue at the Tax Court of Canada was whether Mr. Wall sold the homes on account of income or on account of capital. A secondary issue was whether gross negligence penalties were properly assessed.
Mr. Wall's Defense:
Mr. Wall argued that he intended to acquire all three properties as his principal residence and that he qualified for the principal residence exemption. He claimed that changes in his circumstances forced him to sell each home after living in it for a period.
Court's Evaluation:
The court considered various factors, including the nature of the property, the length of ownership, the number of similar transactions, work expended on the properties, circumstances leading to the sales, and motive. Motive was deemed the most crucial factor.
Court's Decision:
The Tax Court found Mr. Wall not to be a credible witness, given his lack of documentary evidence and selective memory. It concluded that his true intention was to build and sell the houses for a profit. Additionally, the court ruled that Mr. Wall was not exempt from GST because the properties were not used as places of residence.
Appeal to the Federal Court of Appeal:
Mr. Wall appealed to the Federal Court of Appeal but did not succeed.
Conclusion:
This case highlights the importance of seeking professional guidance from a Chartered Professional Accountant to avoid costly tax mistakes.
Stay Informed:
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Thank you for reading, and I look forward to sharing more insights with you in my next post.
Should You Incorporate Your Rental Properties? Tax Considerations
Introduction:
Hello, I'm Aman, a Chartered Professional Accountant practicing in Metro Vancouver, British Columbia, Canada. In this blog post, we'll delve into a crucial question: should you put your rental properties into a corporation?
The Small Business Deduction (SBD):
The Small Business Deduction offers significant federal and provincial tax savings. However, both companies and the Canada Revenue Agency (CRA) are eager to claim or deny it, respectively.
Rental Income in a Corporation:
The Income Tax Act (ITA) and CRA treat rental income inside a corporation differently. Rental income, along with dividend, interest, and royalty income, falls under Specified Investment Business income (SIB), subject to a 50% tax rate with 30% refundable upon distributing taxable dividends.
Can You Reduce the 50% Tax Rate?
Yes, it's possible by employing more than five full-time employees. But building a portfolio requiring this many employees can be challenging.
Case in Point: Huntly Investments Ltd. V. The Queen:
In the Huntly Investments case, the taxpayer claimed the SBD on rental income from five downtown Vancouver buildings.
However, the taxpayer didn't employ five full-time employees. Instead, they used arm's length property management companies and related corporations owned mostly within the same family.
CRA's Denial and Tax Challenge:
The CRA denied the SBD, increasing the tax bill. The taxpayer challenged this in tax court, arguing that outsourcing work to associated companies shouldn't disqualify them from the SBD.
Two-Step Test:
The court applied a two-step test:
- Determine how many full-time employees the corporation employed.
- Assess how many full-time employees would be required for the services provided by associated corporations.
Court's Ruling:
Under the first step, it was noted that building managers, who were couples, didn't qualify as full-time employees.
For the second step, the court analyzed the services provided by associated companies. It found that the taxpayer couldn't justify the need for certain positions, such as a CEO, executive assistant, CFO, and a full-time accountant if the associated companies already offered these services.
Conclusion:
The court ruled that the regular day-to-day rental operation didn't require these employees, siding with the CRA. Consequently, the taxpayer couldn't claim the small business tax rate.
Professional Guidance Is Key:
To claim the small business tax rate for your rental property, it's vital to navigate within the purview of tax law and with guidance from professionals like Chartered Professional Accountants.
Stay Informed:
If you want to receive notifications about our new tax-related content, please consider subscribing to our YouTube channel.
Thank you for reading, and I look forward to sharing more insights with you in my next post.
Title: Should You Incorporate Your Rental Properties? Tax Considerations
Introduction:
Hello, I'm Aman, a Chartered Professional Accountant practicing in Metro Vancouver, British Columbia, Canada. In this blog post, we'll delve into a crucial question: should you put your rental properties into a corporation?
The Small Business Deduction (SBD):
The Small Business Deduction offers significant federal and provincial tax savings. However, both companies and the Canada Revenue Agency (CRA) are eager to claim or deny it, respectively.
Rental Income in a Corporation:
The Income Tax Act (ITA) and CRA treat rental income inside a corporation differently. Rental income, along with dividend, interest, and royalty income, falls under Specified Investment Business income (SIB), subject to a 50% tax rate with 30% refundable upon distributing taxable dividends.
Can You Reduce the 50% Tax Rate?
Yes, it's possible by employing more than five full-time employees. But building a portfolio requiring this many employees can be challenging.
Case in Point: Huntly Investments Ltd. V. The Queen:
In the Huntly Investments case, the taxpayer claimed the SBD on rental income from five downtown Vancouver buildings.
However, the taxpayer didn't employ five full-time employees. Instead, they used arm's length property management companies and related corporations owned mostly within the same family.
CRA's Denial and Tax Challenge:
The CRA denied the SBD, increasing the tax bill. The taxpayer challenged this in tax court, arguing that outsourcing work to associated companies shouldn't disqualify them from the SBD.
Two-Step Test:
The court applied a two-step test:
- Determine how many full-time employees the corporation employed.
- Assess how many full-time employees would be required for the services provided by associated corporations.
Court's Ruling:
Under the first step, it was noted that building managers, who were couples, didn't qualify as full-time employees.
For the second step, the court analyzed the services provided by associated companies. It found that the taxpayer couldn't justify the need for certain positions, such as a CEO, executive assistant, CFO, and a full-time accountant if the associated companies already offered these services.
Conclusion:
The court ruled that the regular day-to-day rental operation didn't require these employees, siding with the CRA. Consequently, the taxpayer couldn't claim the small business tax rate.
Professional Guidance Is Key:
To claim the small business tax rate for your rental property, it's vital to navigate within the purview of tax law and with guidance from professionals like Chartered Professional Accountants.
Stay Informed:
If you want to receive notifications about our new tax-related content, please consider subscribing to our YouTube channel-https://youtube.com/@CloudiverseCPAs
Thank you for reading, and I look forward to sharing more insights with you in my next post.
How to use Holding Company for your advantage
As a small business owner, You may have heard of holding companies, but you aren't sure what they are or why someone would incorporate one.
Well, let's start with a discussion of what is a holding company, you see, in simple words, it is a company that doesn't produce goods or services but holds shares of an operating company.
The holding company is simply inserted between you, the business owner and the active business that allows profits to be flowed up as tax-free dividends and retained in the holding company or Holdco in short form. That income can be held inside that Holdco until, perhaps, a later year when you, the business owner, actually need the money. You see, this gives you more control to plan when you want to receive the money and pay tax. This flexibility is also beneficial where multiple shareholders hold shares in the operating company, in short form Opco, through their individual holdcos.
Please beware, new anti-avoidance rules may treat inter-corporate dividends paid in excess of retained earnings as a capital gain, So, you will need expert tax advice from A CPA to determine the number of dividends that may be safely paid.
Another reason you might want to use a holding company is for asset protection. "If a creditor of your opco decides to sue your opco, [the creditor] could have access, theoretically, to all of the Opcos assets."
You see, to prevent these assets can be protected by removing excess cash or investments not needed for business operations to a holding company.
You might also wonder whether the investments which you already own personally should be transferred to a holding company for tax purposes. The answer is generally no, as
There's actually a tax cost from earning investment income inside a private company compared to earning that same investment income personally.
Moreover, as the Small Business Deduction dollar limit must be shared among associated corporations.
Passive Investments in Holdco affect an associated operating company's ability to claim the small business rate. You might want to watch the video on the top left to get more details.
As a small business owner, if you are interested in creating a holding company, you might want to first seek assistance from a lawyer and a CPA.
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