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Can Tax Really Be Avoided?

What do they mean when they say avoid tax? Can it really be avoided or is tax just a zero sum game like accounting?

The Income Tax Act has options for calculating and paying income tax. Tax is not a zero sum game. There are options to what rates are used. There are options to what number is used to calculate the tax. These options can reduce your taxes paid.

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Canada Tax: Disposition Of Real Estate For Business Income Vs. Corporation Capital

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

A disposition of property can be categorized as business income or as a capital gain or loss. There are various factors to consider in determining if the disposition is business income or capital for a corporation.

As capital gains are only 50% taxable in Canada, it is generally more favorable for the taxpayer. However, capital losses are only deductible against capital gains. The capital losses can be carried back 3 years and carried forward against future capital gains. Therefore, your tax advantage may vary depending on the situation. Read more

Canada Tax: Qualifying Non-Resident Employee And Withholding Tax

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

If you are a certified qualifying non-resident employer, then you do not have to withhold taxes from the salary or other compensation paid to employees that are qualifying non-resident employees in Canada.

Discussion:

In order to be a qualifying non-resident employee, the employee must meet the following criteria:

  • Be a resident of a country that has a tax treaty with Canada at the time of the payment;
  • Not be liable for income tax in Canada due to the tax treaty and the type of payment received; and
  • Either works less than 45 days in the calendar year in Canada or is present less than 90 days in any 12 month period in Canada.

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Canada: Inventory Value of Real Estate

In real estate, once a property is being developed or held for resale it will generally be classified as inventory. It is important that inventory is valued properly as it can have a significant impact on net income year to year.

Real property can be valued at the lower of cost or market value. The method used in valuing a corporation’s inventory must be consistently applied year to year. There must be an acceptable reason for changing methods and it must be acknowledged by Canada Revenue Agency (CRA).

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Canada: Capital Cost Allowance For Real Estate

Capital cost allowance (CCA) is the tax term in Canada for the deduction of amortization on capital assets. There are separate classes of CCA for property, plant and equipment and different rates that apply to each class. There are some specific rules for claiming capital cost allowance related to real estate.
Discussion:

Once construction is complete, a building can be sold as inventory and earn business income, used to earn property income, or used to operate an active business. If the building is not being sold, then it will generally become depreciable property for the corporation. In order to be classified as depreciable property, the building must meet the following conditions:

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Tax Treatment Of Leasehold Improvements

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

In real estate, property and building leases are common signed agreements between two corporations. Leasehold improvements are generally building additions for the lease space paid for by the tenant (lessee). These costs are considered capital and amortized over the length of the lease.
Discussion:

Common lease periods for real property are 5 to 10 years.

The lease rates are negotiated by the lessor and the lessee at fair market value. The periodic lease payments are a deduction for the corporation. Upon termination of the lease, the leasehold improvements usually revert back to the lessor unless the lessee can remove them. Read more

Canada Tax: Qualifying Non-Resident Employer And Withholding Tax

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

A qualifying non-resident employer can be certified and thus will have to withhold tax from the salary or other compensation paid to qualifying non-resident employees in Canada (to be covered in a future FAQ). This eliminates withholding taxes. Which can be a big cash flow savings. The certification will be valid for up to two calendar years.

To be eligible to be a qualifying non-resident employer, the employer must be a resident in a country that has a tax treaty with Canada. Read more

Ownership Structures In Real Estate

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

The common types of ownership structures in real estate are owned as an individual, in a corporation, in a partnership or in a joint venture. The type of structure generally depends on the purpose of the use.

Individual Ownership

  • Less complexity but income is taxed at personal tax rates which can be the highest rates.
  • Any losses incurred can be offset against any income.
  • There is no liability protection for the individual besides the insurance policy on the property.

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Canada Tax: Capitalization Of Development Cost Under The Income Tax Act

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

During the development phase or period of construction, there are many costs that are incurred. The majority of these expenditures are added to the capital cost of property or to the cost of inventory.

Soft costs do not have to be capitalized once the construction is complete or on the day that the building is substantially (at least 90%) used for its intended purpose. An occupancy certificate or completion certificate issued by the municipal building department is sufficient evidence that construction is complete. Read more

Real Estate Expenses After Acquisition Of Property For Tax Purposes

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

After a property is purchased, there is generally a time period that a property is held before it is developed. Common expenses that are incurred are property taxes and interest. Other expenses incurred can be classified as an operating expense, added to inventory cost or capitalized for tax purposes.

Property taxes and interest on vacant land are generally capitalized or added to the cost of inventory for real estate. These expenses on vacant land can only be deducted in the same tax year if there is property income received and the corporation is not in the business of development. Read more

Tax Consequences For Corporate Entry Into Canada

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

A company is considered to have immigrated to Canada if the corporation’s central management and control has moved to Canada, regardless if initially incorporated in Canada or not. Therefore, when a business owner moves to Canada, so does the business.

When the company enters Canada, the company is deemed to have disposed of and reacquired all of the company’s assets and liabilities at their fair market value (FMV) right before coming to Canada. As the assets and liabilities of the company are being re-valued at the FMV, this is considered to be the company’s valuation date. Read more

Non-Active Canadian Corporations Are Not Required To File A Corporate Tax Return…Or Are They?

Grant Gilmour, Tax Advisor, Tax Blog, Vancouver, Canada, TaxConnections

Non-resident corporations that have no activity in Canada during its fiscal year are not required to file a Canadian corporate tax return. However, without filing a Canadian corporate tax return, the Canada Revenue Agency (CRA) will not know that you did not have activity in Canada. Therefore, CRA may send you a letter requesting that a return is required to be filed.

If CRA requests that a return be filed, even though your company had no activity in Canada, you may be tempted to file a return in order to be in compliance. Read more

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