Income from Joint Accounts If you are the joint owner of a non-registered investment, you should be aware of the income tax rules that the Canada Revenue Agency (CRA) imposes on reporting the income from jointly held investments. This blog is for information only and is not legal or tax advice. Be sure to speak with a qualified professional before taking any action. Proportionate Tax Reporting Each owner of a joint account is required to report their individual portion of the total income (e.g., interest, dividends, capital gains, return of capital) according to the same ratio as their proportionate contribution of funds to the joint account. Joint Account Tax Slip Reporting Although a single T5 or T3 tax slip may be issued for your joint account in your name with your Social Insurance Number (SIN), it does not automatically imply that CRA is expecting you to report all the income for tax purposes. The CRA only requires one SIN to be included on the tax slip. Therefore, only the primary account holder’s SIN number is displayed on your tax slip. For example, the tax slip may be issued to you even though you only contributed a portion of the funds or never contributed any capital to the joint account. The other joint account holder(s) who contributed the capital would be required to report their proportionate share or all of the income even though a tax slip was not issued in their name and SIN. If this happens, 1. Attach the original tax slips issued in your name to your individual income tax return, but do not report the income. 2. Provide the CRA with a brief explanation for the reason why you are only reporting your proportionate share of this income. If you didn’t contribute to the account, your proportionate share would be zero. 3. Provide the other joint account holder(s) with a copy of your tax slips in order for them to report their proportionate income on their tax return. They would simply attach the copies of the tax slips originally issued in your name to their income tax return, explaining why they are reporting this income even though the tax slips were issued to you. If you contributed all the funds to the account, 100% of the income would be yours. 4. Finally, if you are receiving tax slips in your name but didn’t contribute to the account, you can simplify your tax reporting in the future by asking your financial institution to switch your name from primary to secondary joint account holder which will ensure that you do not receive tax slips in the future. 5. If filing electronically, the above still applies. Simply retain your copy of the tax slip and your explanation in your own file in case you are asked for it. Capital Gains/Losses If an asset is sold within a joint account, the joint account owners must report their portion of the gain/loss. The reason behind the sale does not affect reporting requirements. For example: Your spouse wishes to withdraw cash (or “pull out their share”) from a joint account held by you and your spouse to which you contributed 80% of the capital. In order to fund their withdrawal, or to pull out their 20% of the joint account, an asset is sold and the sale triggers a capital gain. The resulting capital gain cannot be solely claimed by your spouse simply because they withdrew their proportionate share of the account. Instead, it must be split between you and your spouse according to the ratio of assets contributed to the joint account. In this example, 80% of the capital gain would be taxable in your hands while the remaining 20% of the gain would be taxable in your spouse’s hands. Conclusion Joint accounts cannot be used to achieve an income splitting tax advantage. In other words, you and the other joint owner(s) cannot arbitrarily split the income 50% each, solely on the basis that it is a “joint” account, or to choose some other ratio to report on your respective tax returns each year to optimize your tax savings. If you are the primary joint account holder receiving the tax slips, but are not responsible for reporting the income, consider asking your financial institution to switch your name to the secondary joint account holder. This will avoid having to make copies of your tax slips for the other joint account holder(s) who are responsible for reporting the income and providing CRA with explanations for not reporting the entire income amount, thereby simplify your tax reporting at the end of the year. If you have further questions on tax reporting requirements for joint accounts, you should consult a qualified tax advisor. Staid unchanged since 2003, CPP is scheduled to be increased by one percent phased in five-year period:
Started 5.1 percent in 2019; 5.25 percent in 2020, 5.45 percent in 2021, 5.70 percent in 2022 and 5.95 percent in 2023 Senior business owners still remember the rate was only 1.8 percent from 1966 to 1986! Registrants are required to keep adequate books and records that provide the information necessary to ensure taxes payable under the Excise Tax Act (“ETA”) can be determined. What may happen if a taxpayer has failed to file tax returns, filed patently deficient ones and/or a taxpayer’s books and records are not reliable or do not exist? Subsection 299(1) of the ETA states that the Minister is not bound by the contents of the return, but may assess by alternative means including the use of estimates or net worth approach. (Parallel provisions can be found under subsection 152(7) of the Income Tax Act.)
As described by the Federal Court of Appeal in Hsu v R (2001 FCA 240), “…a net worth assessment is an arbitrary and imprecise approximation of a taxpayer's income…Where the factual basis of the Minister's estimation is inaccurate, it should be a simple matter for the taxpayer to correct the Minister's error to the satisfaction of the Court.” In Troung v. The Queen (2017 TCC 22), the Tax Court of Canada (“TCC”) deals with net worth assessments and the case illustrates again that credible evidence from the taxpayer is the key in defeating such assessments. In Troung, the Minister issued an assessment of unreported income and GST against the Taxpayer after analyzing the Taxpayer’s bank accounts, acquisitions of real property, acquisition of motor vehicles, gambling records, business expenses/losses and declared income. The Taxpayer appealed the net worth assessment to the Tax Court of Canada (“TCC”). The main issues before the TCC were (1) whether the net worth assessment was flawed because certain assets or personal expenditures allocated to the Taxpayer were not hers and (2) whether the allegedly taxable income, which increased the Taxpayer net worth assessment, arose from non-taxable sources of funds. As the Taxpayer did not produce books or records of her business activities at the hearing, the TCC made its decision based on oral evidence given by the Taxpayer’s witnesses at trial, the Minister’s documentary evidence and third party official and business records. At the end, the TCC found that the Taxpayer failed to provide credible evidence or explanation to defeat the Minister’s alternative assessment and dismissed the Taxpayer’s appeal. Generally speaking, a taxpayer may contest net worth assessment by (1) challenging its necessity or method chosen in the first instance; (2) challenging specific aspects of the quantum, methodology or inclusions, and/or (3) submitting evidence concerning non-taxable sources of income received by the taxpayer. It is generally advisable to seek professional advice in order to determine the best way to “fight” a net worth assessment. Trust
A trust is a relationship whereby a person called a trustee is bound to deal with trust property over which he or she has control for the benefit of beneficiaries. Trust is not a separate legal entity. However, our tax laws treat a trust as an individual. Although it is not common to directly operate a business in form of trust, it is still quite useful in many cases. Merits of Trust
Demerits of Trust
Corporation
A business corporation is a separate legal entity, which is incorporated under federal or provincial/territorial business corporation act. The corporation issues shares to the owners or shareholders. The funding of the corporation can be done through the issue of shares or via borrowing. Instead of contribute a large amount in capital shares, shareholders can also lend money to the corporation, and invest only a nominal amount in the shares. Being a separate legal entity, a corporation pays corporate income tax, which is calculated completely separately from the shareholders' personal income tax. Merits of incorporation:
Demerits of incorporating:
Partnership
Partnership is a relation that subsists between persons carrying on a business in common with a view to profit. A partnership is an unincorporated business. However, its partners can be an entity in any one of the four legal entities. The income or loss of a partnership is allocated to its partners. Therefor if a partner who is an individual, the income from the partnership is taxed at personal income tax rates. Advantages of partnership: 1 The setup costs of a partnership are relatively low if compared to corporation. 2 A partnership is less regulated than a corporation. A partnership agreement can be drawn up to avoid unwanted arguments and issues. 3 Business losses can be written off against other income of individual partners. 4 Pooled Broader experience, knowledge and skills. 5 Power of partner to bind partnership. Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member, bind the firm and the other partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner. Disadvantages of a partnership: 1 The biggest concern of a partnership is unlimited liability if partners are individuals. The partners are JOINTLY liable for all debts and other liabilities of the business. If the business is sued, all the business and personal assets of very individual partner are at risk. An exception to this is a Limited Partnership. Limited Partners, who only contribute capital but do not actively participate in the management of the business, will have their liability limited to the amount of capital that they have contributed. The partners who participate in the management of the business are called General Partners, and will still have unlimited liability. 2 All Major Decisions may have to be made jointly. 3 If the business is profitable, and the partners are individuals, it will usually be paying higher taxes than if it was incorporated as a Canadian controlled private corporation. 4 The death or retirement of a partner will not end the partner's liability for debts and obligations of the partnership that were incurred prior to the death or retirement. It will be passed to the partner’s estate. Also, if a partner retires and does not make the retirement publicly known, he/she could still be held liable for obligations incurred by the partnership after the retirement. 5 Partners are bound by acts on behalf of partnership. An act or instrument relating to the business of the firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm by a person thereto authorized, whether a partner or not, is binding on the firm and all the partners, but this section does not affect any general rule of law relating to the execution of deeds or negotiable instruments Legal Structure for Your Small Business-Option 1
In terms of tax laws, there are four legal entities for businesses in Canada: sole proprietorship, partnership, corporation, and less commonly trust. We discuss the choice of legal forms here for business starters. Sole Proprietorship A sole proprietorship is one individual operating a business, without forming a corporation or other forms. The income of the business is then taxed in the hands of the owner (the sole proprietor), at personal income tax rates. The income is considered income from self-employment, and is included on the personal income tax return of the owner. Some Merits of sole proprietorship: 1 Setting up a business in the form of a sole proprietorship is relatively simple and the costs are low. You may don’t need to do any registrations under certain conditions. 2 If the business loses money, the losses can be written off against other income of the sole proprietor. 3 Sole proprietorships are less regulated than corporations. The administration of a sole proprietorship is less costly than that of a corporation. However, sole proprietorships are regulated by the provincial/territorial governments, and the proprietorship may have to be registered. 4 The sole proprietor is the only boss, and pockets all profits of the business. Some Demerits of a sole proprietorship: 1 The big issue of a sole proprietorship is unlimited liability. The sole proprietor is liable for all debts and other liabilities of the business. If the business, even carried under a separate business name is sued, all the business and personal assets of the sole owner are at risk. 2 If the business is profitable, it will usually be paying higher taxes than if it were otherwise incorporated as a Canadian Controlled Private Corporation 3 A sole proprietorship also has a lack of continuity if carried under an individual’s full name. Here are 10 questions that you may need to ask yourself to see if you are ready to start your own business:
1. Do I really have a passion for a new venture? 2. Am I a strong believer in my own idea? 3. Is my plan clear enough? 4. Can I face the fear of failure? 5. How much cash available for the ? 6. Am I in the midst of major life changes? 7. How much experience do I have in my new business? 8. How much I know about business itself? 9. Am I good at managing time? 10. What are the risks of owning a business? A Goods and Services Tax/Harmonized Sales Tax (GST/HST) rule, commonly referred to as the “holding corporation rule”, generally allows a parent corporation to claim input tax credits to recover GST/HST paid in respect of expenses that relate to another corporation. This rule provides that, where a parent corporation resident in Canada incurs expenses that can reasonably be regarded as being in relation to shares or indebtedness of a commercial operating corporation (a corporation all or substantially all of the property of which is for consumption, use or supply in commercial activities) and the parent corporation is related to the commercial operating corporation, the expenses are generally deemed to have been incurred in relation to commercial activities of the parent corporation.
The Federal Government intends to consult on certain aspects of the holding corporation rule, particularly with respect to the limitation of the rule tocorporations and the required degree of relationship between the parent corporation and the commercial operating corporation. At the same time, the Government intends to clarify which expenses of the parent corporation that are in respect of shares or indebtedness of a related commercial operating corporation qualify for input tax credits under the rule. Consultation documents and draft legislative proposals regarding these issues will be released for public comment in the near future. If you have anything to say please contact us. |
AuthorFounder of BizAccTax Services Inc. |