In an “about face” from the January C19 Index, business confidence among AGN Member firms has risen significantly from -16% to +27%! Confidence relating to the past 30 days is now at the highest levels since June 2020.
Business confidence for the upcoming month shows increasing positivity – however, only 45% of respondents believe there will be some improvement within the next 90 days, in contrast to 54% in January.
That being said, the return to normality seems to be closer in range, as 23% of AGN members believe economic activity will return to normal within 12 months, up from 16% last time. There seems to be a picture of modest optimism alongside a recognition that there remains a long way to go. This might of course be particularly true as the withdrawal of various government interventions begins to be anticipated.
There are financial matters to be considered by baby boomers getting remarried that younger couples do not typically face. Estate planning is one of those matters.
It is frequently the case that estates are bequeathed first to the surviving spouse (especially for first marriages), and then subsequently to any children of the marriage. This is a routine and tax-efficient plan. However, if there are children to consider from a previous relationship then such decisions can become complex. In these scenarios, it is necessary to move beyond a “standard” tax-efficient plan. In a second marriage, a possible dispute may arise if an estate is left entirely to the spouse (thus allowing for a tax deferral), and he/she chooses not to provide for the children from a previous marriage (or to their bequests) causing the children to be left out of the estate entirely.
To avoid this, you can opt for creating a joint-partner trust which would allow you and your new spouse to enjoy the benefits and income of your assets while you live. In the meantime, you can name your children as the eventual capital beneficiaries upon the death of both spouses. If enacted properly, this structure is better than specific bequests to your children in your will because it adds the benefit of deferring taxes until the passing of both spouses and avoids probate fees (on the assets placed within the trust). Keep in mind though, that this structure is only available if the person who is transferring the assets is 65 years of age or older.
Upon the death of a spouse, the surviving spouse may opt to receive their entitlement under the existing will, or they may elect in favour of equalization of net family property under the Family Law Act (FLA).
When opting for the FLA election the entitlement of the surviving spouse is similar to what they would have received had the spouses separated. Stated simply, equalization allows for a surviving spouse to receive half the combined net worth of both spouses with some possible adjustments. These adjustments would allow the estate and the surviving spouse to deduct the assets that each spouse had contributed to the marriage. These include the equivalent worth of what each had on the first day of marriage with the possible exception of the family ‘matrimonial’ home and excludes any gifts/inheritances received during the marriage (provided that they have been kept separate and are identifiable).
Notwithstanding a long and happy marriage, (and an otherwise well-thought-out estate plan), the surviving spouse could circumvent the planning and potentially receive a larger share of the estate than was contemplated under the will. The FLA election (which can be made up to six months after death) prevents any interim distributions from the estate of the deceased spouse without the surviving spouses’ consent (or as authorized by the court).
In order to avoid the possible complications that may arise with a FLA election, a couple may want to enter into a domestic contract (often called a prenuptial agreement). This contract can set out what the specific entitlements of each spouse will be upon separation (or death of the other spouse). As such, if the marriage contract is written in harmony with (to mirror) the estate planning, then it should be possible to prevent differences in entitlements between the estate plan and the FLA election.
Proper planning can allow you to minimize and defer tax, streamline the resolution of your estate, and ensure your final wishes are carried out.
About the Author Mitchell Ornstein | MBA, CPA, CA, CBV, CFE, CFF
Mitchell has contributed to publications and has been quoted in Investment Executive magazine. In addition he has lectured on the subject of valuations at a graduate level at DeGroot School of Business-McMaster University, and designed his own valuations course in partnership with the University of Toronto which was accredited by the CBV Institute. Mitchell has also taught financial accounting courses at both the University of Toronto and the Schulich School of Business-York University. He is also a past-Chair of the Board of Collaborative Divorce Toronto and regularly volunteers through CPA Ontario to provide free income tax preparation services for low-income seniors.
Business confidence has plummeted from +11% to -16% in just two months – now below the levels seen in October 2020! However, the view for the month ahead remains largely positive, and there has been only a small decrease in AGN members who envisage an improvement in business performance in the next 90 days. But strikingly, far fewer members (almost half of last times result) are expecting economies to return to pre-covid levels within 12 months.
Effective October 1, 2020, real estate salespersons and brokers in Ontario are now allowed to carry on their business through a corporation. These corporations are referred to as Personal Real Estate Corporations (“PREC”). Incorporation allows these real estate professionals access to many tax benefits they did not previously enjoy as self-employed individuals. Some of the main tax advantages include:
DEFERRAL OF TAX
The most immediate benefit of incorporation comes in the form of tax deferral. In Ontario, the corporate income tax rate is only 12.2% compared to self-employed individuals who are subject to income tax rates as high as 53.5%. The low corporate tax rate allows more after-tax cash to be left in the company and invested. Leaving the money in the PREC and paying it out to the shareholder over time – especially in a low-income year – can result in additional tax savings. It is important to note that these tax deferral benefits are only achieved if the income is left in the PREC. If all or most of the income earned by a PREC is required for living expenses and therefore withdrawn annually by the shareholder, there will be negligible, or no tax deferral benefits.
INCOME SPLITTING OPPORTUNITIES
Shareholders of a PREC may include the real estate professional’s spouse, children and parents. This may allow for income splitting with lower income family members. We caution that, under current rules, income splitting is only allowed for family members who are active in the business. However, income splitting with a spouse in the future when the real estate professional turns 65 years of age is allowed and this provides an excellent opportunity to use the PREC as a tax-deferred savings vehicle for retirement.
Though the income splitting opportunities with inactive family members are currently minimal, it is always possible the government may change or relax the rules in the future. It is beneficial to issue shares to multiple family members when a PREC is formed because it is far more complicated to bring in new shareholders after the PREC has been in business.
LIFETIME CAPITAL GAINS EXEMPTION
Individuals are allowed a significant tax break if they sell shares of a private company that carries on an active business, such as a real estate professional’s business. The capital gains exemption ($883,384 in 2020) allows shareholders to shelter gains upon sale of the PREC shares. Therefore, incorporating a business could enable the real estate professional to shelter the growth in the value of the company tax free, up to the lifetime capital gains exemption.
EMPLOYEE VERSUS SELF-EMPLOYED
The tax benefits of incorporation are not available to individuals who are considered employees of a brokerage. CRA has issued guidelines specific to real estate professionals as a useful reference for individuals who are uncertain whether they are working as employees of a brokerage or as a self-employed individuals. CRA’s guidelines can be found here: https://www.canada.ca/en/revenue-agency/services/tax/canada-pension-plan-cpp-employment-insurance-ei-rulings/cpp-ei-explained/real-estate-agents.html#determine
COST OF A PREC
Although incorporation can provide many tax benefits, there are administrative requirements and costs to consider. It is important to remember that a PREC is a separate legal entity. In addition to the initial legal costs of setting up the corporation, there are annual filing, bookkeeping and accounting expenses to consider.
The PREC must maintain annual corporate minutes, adequate record keeping for the CRA and potential payroll remittance requirements. HST compliance is also important. In many cases, setting up the PREC will require transferring the existing business into the PREC and proper elections need to be filed to ensure the transfer of the business is done on a tax-deferred basis.
Many self-employed individuals may have been preparing their own tax returns in the past. Tax compliance for a corporation will normally require the services of a professional accountant.
The PREC must ensure it meets the requirements of the Trust in Real Estate Services Act at all times. This Act prescribes the conditions the corporation must meet in order to receive remuneration from a brokerage.
A PREC may be a great tool to reduce the tax burden. However, there is no one size fits all approach, and each individual situation is unique. If you wish to further discuss the option of a PREC, we would be glad to guide you through the process.
The COVID-19 crisis is impacting every aspect of our daily lives. People are genuinely worried about their health, their children’s schooling, the plans they’ve had to postpone or cancel, the role they can play in containing the outbreak, and many other wide-reaching personal and community concerns.
Many might ask, why are accountants an essential service?
Consider this, if the previously mentioned concerns weren’t enough, people are also anxious about their financial future. Many of our clients have had to reduce hours or temporarily close their doors to abide by the Province of Ontario’s order to shut down none-essential businesses. They are deeply concerned about their financial future, revenues are down, markets continue to fall. Uncertainty thrives.
As Accountants our clients look to us for accurate, up-to-date financial information and updates about government incentives to help them get through this crisis and avoid shutting down or at least only do so temporarily. Similarly, our employees want to be reassured about the future, and they want our guidance on how to best help our clients through this difficult time. As the world works together to try to contain this pandemic in the coming weeks and months, we are making it a priority to communicate frequently, openly, and empathetically with all stakeholders. More so than ever before, Adams & Miles LLP is
“A Trusted Partner, Today and Tomorrow.”
Adams & Miles LLP welcomes Kurt Breen from a partner firm in New Zealand, Gilligan Sheppard Limited, on an AGN Staff Exchange program.
Adams & Miles LLP is pleased to announce our newest Partners: Christina Ajith and Jan Kundakci.
Both are passionate about helping clients and leading a great team of professionals.
Right around the time that the CPA releases their exam results for the Common Final Examination (CFE, pronounced See-Fee) you may see many congratulatory and celebratory posts from individuals and accounting firms alike. You may wonder why achieving a CPA is a big deal to us accountants and why we endeavour to publicly celebrate the students, and even gloat a little when our students achieve a higher than average pass rate.
For most, the next few months are just like any other. For recent university and college graduates, it’s often a time of uncertainty and worry, as they now must decide what to do with their expensive piece of paper. Many have to move back in with their parents, which presents a different set of problems for both parties. Others have to contend with the veritable mountain of student debt they were left with, while others might be forced to operate without any financial assistance at all. On top of all of this, many grads struggle to find work pertaining to their careers for some time after leaving school, with the current Ontario youth unemployment rate sitting at 10.7%.
With this in mind, it’s fair to say that putting one’s degree to good use is a daunting task. It can be difficult to know where to even begin. This is where Adams and Miles can help. Forget the student debt horror stories you’ve heard and reach out to us so we can assist you in planning your financial future.
Most youth understandably have their parents file their taxes. Yet by the time they graduate they are left to figure it out for themselves. Adams and Miles’ accountants can help make sure your financial obligations don’t impede your financial goals, whether you’re a successful entrepreneur or a struggling post-grad.
If you’re someone who has never heard of a RRSP or a TFSA, you find yourself drowning in debt, or you simply want to save what you have, then our team can be there. Recent graduates are in a precarious position, with their whole future ahead of them. They need somebody they can trust with guiding that future. Adams and Miles’ roster of over forty professional accountants pride themselves on providing that trust for all their clients.