Connect with us
[bsa_pro_ad_space id=12]

Local Business

Sometimes it Pays to be Unreasonable – a TOSI story

Avatar

Published




TOSI – Tax On Split Income – the brain child that is going to tax the wealthy, and not the middle-class (and those working hard to join it).

In Episode 18 of my podcast, Brainstorming (+tax), we looked at the new Tax On Split Income rules, and brainstorm the idea: what if we were unreasonable on purpose?

Over the past year, a lot of emphasis has been placed on how only “reasonable” amounts of dividends can be paid to related shareholders.

So where is “reasonable” defined in the Income Tax Act?

Truth is, it isn’t, which makes it that much harder to comply or prove you are being “reasonable”.

In fact, the closest thing you can come to is in Section 67 that states:

“In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances”

Translation – if it looks unreasonable, then you cannot deduct it for tax.

This provision only disallows the deduction for tax purposes, it does not remove the fact that it still may be income to the recipient on the other side of the transaction.

So what does this mean?

It means that if I was going to pay a $100,000 wage to my spouse that is not active in my accounting firm it is extremely likely that the CRA would not allow the deduction in my corporation, and so I would not save the 12,000 of small business corporate income tax (or $27,000 of high rate) income tax the deduction would have given me.

Sounds like we should make sure we avoid this transaction doesn’t it?

But let’s brainstorm.

If I am a small business making less than $500,000 of profit in a year, and I want to pay my inactive spouse a dividend, in Alberta, she is going to pay roughly 41.6% on every dollar I allocate to her under the new Tax On Split Income rules.

If she is already in the highest tax bracket, then there is no issue, because it is the same rate either way. In fact the real impact is on those that are not in the highest tax brackets.

So what happens if instead of giving her a $100,000 dividend, I decide to pay her an unreasonable salary of $100,000 instead?

Now before we go any further, we must keep in mind that there may be other payroll taxes and the CPP to consider in these calculations which could change your results, but you will see that at lower amounts, this becomes less of a concern, and more of a plan.

So in Alberta if I paid my inactive spouse that has no other income, a $100,000 dividend would cost $41,600 in taxes. However, if I paid her a wage, she would only pay $24,600 in taxes.

What would I lose?

Assuming that the $100,000 is not deductible, and I am a small business, I would not get the deduction and lose the $12,000 in savings that the deduction could have given me.

But do we care?

Keep in mind, even by losing that deduction, dividends are not deductible either, so the tax inside the corporation is the same either way. The real difference then, is a Tax On Split Income Dividend vs the tax on the Unreasonable Wages.

In this Alberta small business example, the difference is $17,000 before factoring in CPP requirements.

Now I’ve done the math for every province, and it appears to work for almost every situation where the active spouse is already in a high tax bracket situation.

Every single province shows a benefit of doing this in either the small business, or the large corporation that has no small business deduction.

What we have to look at, however, is the balance between having the ACTIVE taxpayer receive a dividend based on their tax brackets, vs the inactive taxpayer receiving an unreasonable salary as well as any related payroll costs and compliance costs (those pesky accountants).

Now will the CRA or Finance look for other ways to close this possibility down?

Will they try to argue that there is somehow a “shareholder benefit” by having something not deductible to a corporation?

What about our friend the General Anti Avoidance Rule?

While I personally think those are both a bit of a stretch, it definitely seems to be something to think and be aware about in your specific circumstances.

——-
Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr is the President & Founder of CGL Strategic Business & Tax Advisors; you can find out more about Cory’s biography at http://www.CGLtax.ca/Litzenberger-Cory.html

If you like this, share it!
Advertisement [bsa_pro_ad_space id=12]

food and dining

One Eleven Grill shows off new renovations and some new menu creations

Avatar

Published

on




One of Red Deer’s favourite restaurants has put some major effort into updating their space and creating some new menu items. One Eleven Grill opened its doors in 2011 with as a fresh and innovative entry into the local dining scene.

They’ve recently completed renovations and spent considerable time and effort developing some tasty new menu items. Watch the video above to get an idea of what you’re in store for next time you head down to one of the city’s finest restaurants.

About One Eleven Grill: An inviting and stylish restaurant tucked into the heart of Red Deer just waiting for you to discover or rediscover.

Opened on the first day of November in 2011, One Eleven has been thoughtfully and skillfully preparing delicious food and drinks for Central Alberta for years.

Our passion is STEAK! We are committed to quality, serving only the very best locally-owned, grass fed Alberta Triple AAA Beef in both classic and unique cuts.

Our warm, inviting ambiance is the perfect backdrop for everything from a romantic evening, a gathering with friends and family and even a quiet business lunch during the week. We even feature live jazz every Friday and Saturday. Add in one of the best selections of wine in the region, and One Eleven will set the perfect tone for your weekend.

At One Eleven we’re committed to your total satisfaction and we celebrate the people and food of Red Deer and Central Alberta every day.

For amazing food, great music and good times with family and friends, keep One Eleven in mind.

If you like this, share it!
Continue Reading

Local Business

Red Deer Chamber of Commerce accepting nominations for Business of the Year

Avatar

Published

on




Now Accepting Nominations for the 2019 Business of the Year Awards

The Business of the Year Awards are organized by the Red Deer & District Chamber of Commerce and held annually in conjunction with Small Business Week.

The Business Awards are presented, in five categories, to exceptional businesses within the Red Deer area. All companies, Chamber members and non-members, are eligible for nomination for an award in their respective category.

“We have organizations doing extraordinary work in our community and far too often their accomplishments and charitable activities go unrecognized. Our entrepreneurs and businesses are incredibly humble so it gives of great pleasure to be able to recognize them” said Rick More, CEO of the Red Deer & District Chamber of Commerce.

The Red Deer & District Chamber of Commerce is now accepting nominations for the Business of the Year Awards in the following categories: 1-10 employees, 11-20 employees, 21+ employees, Young Entrepreneur and Non-Profit. Nominations can be submitted from the online nominations form. The deadline for application submission is July 26, 2019 at 4:30pm.

The Business of the Year Awards will be held on October 16, 2019 at the RDC Arts Centre & Foyer.

The Red Deer & District Chamber of Commerce is a collaborative leader in building a vibrant community and fosters an environment where businesses can lead, be innovative, sustainable, and grow.

If you like this, share it!
Continue Reading

june, 2019

fri07junAll Daymon17Edmonton Pride Festival(All Day)

sun16jun9:00 am1:00 pmWalk for ALS9:00 am - 1:00 pm

mon17jun1:30 pm4:00 pmWellness Recovery Action PlanningCanadian Mental Health Association1:30 pm - 4:00 pm

fri21jun(jun 21)6:30 pmwed03jul(jul 3)12:00 amTHE WORKS ART & DESIGN FESTIVAL6:30 pm - (july 3) 12:00 am

sat22junmon01julEdmonton International Jazz Festival7:30 pm - (july 1) 9:15 pm

mon24jun1:30 pm4:00 pmWellness Recovery Action PlanningCanadian Mental Health Association1:30 pm - 4:00 pm

Trending

X