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Sometimes it Pays to be Unreasonable – a TOSI story

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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

CEO | Director, Canadian Tax Advisory CGL Strategic Business & Tax AdvisorsWith the Income Tax Act always by his side on his smart-phone, Cory has taken tax-nerd to a whole other level. His background in strategic planning, tax-efficient corporate reorganizations, business management, and financial planning bring a well-rounded approach to assist private corporations and their owners increase their wealth through the strategies that work best for them.An entrepreneur himself, Cory started CGL with the idea that he wanted to help clients adapt to the ever-changing tax and economic environment and increase their wealth through optimizing the use of tax legislation coupled with strategic business planning and financial analysis.His relaxed blue-collar approach in a traditionally white-collar industry can raise a few eyebrows, but in his own words: “People don’t pay me for my looks. My modeling career ended at birth.”More info: https://www.CGLtax.ca/Litzenberger-Cory.html

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#RedDeerStrong

Downtown Wednesday Market returns!

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It’s Back!! Downtown Red Deer Market offering local goods and produce on Little Gaetz Avenue

Throughout the summer season, the farmers’ market comes to Little Gaetz Avenue in Downtown Red Deer every Wednesday from 3:30 – 6:30 p.m.

You can purchase farm fresh food from nearby farms including meat, fresh vegetables and fruit, baked goods and handmade items at this accredited Alberta Farmers’ Market.

Check out the Downtown Red Deer Market Facebook page for regular updates throughout the market season.

COVID-19

The 2020 Downtown Red Deer Market is launching on June 3rd.  During Market, precautions will be taken to ensure physical distancing and hand sanitization practices are adhered to.

The health and well-being of our staff, vendors, and the public is our number one importance and we encourage you to stay informed by regularly reviewing information on the Canadian government’s COVID-19 webpage.

https://www.canada.ca/en/public-health/services/diseases/2019-novel-coronavirus-infection.html

Please note: Dogs are not permitted on-site during the market, as per Alberta Health Services regulations. We apologize for any inconvenience this may cause.

Interested Vendors

If you’d like to join our market as a vendor, please send us a completed application form. We welcome both seasonal and weekly vendors, and approve applications as they arrive throughout the season.

Please allow 2-3 business days to process applications. Click here to access the 2020 vendor application form.

Some of our regular vendors include:

Parking at the Market

See our parking page for Downtown parking options near the market site.

#RedDeerStrong – Tacoloft can’t wait to open for customers again on day 1 of phase 1 this Thursday

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Alberta

German Fitness Trainer Finds Himself Stuck in Calgary – And Making the Best of It!

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Cultures collide as COVID-19’s descent on the world leaves personal trainer global adventurer Darian Bessell stuck in Calgary. 

Originally from Germany, Darian has been travelling the world for the last year and a half, landing in Canada in February with plans to stay and work for a year. After getting all his permits in place and obtaining a work visa, he was hired by one of the major gyms in Calgary as a personal trainer. Unfortunately, he was immediately laid off after COVID-19 hit the city.

Seeing the situation as an opportunity to strike out on his own, Darian began offering his services as a personal trainer online, offering free consultations by Zoom or in person. His first client, Matt Keay, connected with Darian during his search for a way to improve health and mobility as well as mental wellbeing in his demanding role as a CEO. 

“I look over at my two-year-old daughter and she’ll be holding a squat position playing with toys for nearly an hour, totally natural for her,” says Keay, “why can’t I do that?” Keay suffers from sore hips and wrists due to years of abuse from skateboarding and poor diet. This proves difficult, as his role as a leader demands high performance and consistent energy.

“I’ve got training every day with Darian … well, it’s more like all day long,” says Matt, “I’ve heard people say how fitness is a lifestyle, well I really understand that now. I am standing more at my desk, doing more stretches, busting into a squat in the boardroom and the pain I’ve dealt with for years is melting away.”

Darian Bessell, newly appointed Business on Camera Director of Physical and Mental Health will bring health and wellness to high-performance entrepreneurs in Calgary. “The knowing-doing gap is a worldwide common issue,” offers Bessell, “people know that enjoying nuts as a snack is healthier than a chocolate bar, and they know the way they feel physically could be better. Often some simple support tools to improve mobility can have a huge impact on overall fitness and hold the key to a new healthy lifestyle.”

The human body sends signals that it is in poor condition by aching and demonstrating discomfort.  The mind also sends signals, for example, feeling depressed or tired all the time. Most people know that they have to change something, but it is all too easy to get caught up in routines and maintain bad habits. 

“Most people have the desire to do more for their mental and physical health, so why not just do it then?”

Health and fitness is one of the most flooded industries on the market with new gadgets, diets and methods constantly emerging, leaving no shortage of options when it comes to personal health. 

“Choosing to work with Darian was based on the education he had regarding the symbioses between mental health and physical performance, nutrition and mobility. He often referred to a program created by Dr. Kelly Starrett called “Becoming a Supple Leopard,” continues Keay, “a ton of professional athletes and stunt actors are Supple Leopards; I would describe it as intentional and intuitive.  For me at this time, the goal is to feel better everywhere, increase mobility, energy, and mood in under thirty minutes a day.”

Darian’s goal is to help individuals overcome the disconnect between desire and action by cultivating discipline and a strong commitment to health and happiness in his clients. “People have to take a huge step to get over the gap between knowing what is good for them and really having the discipline to do it,” says Bessell, “Human beings get used to things so fast and fall into a cycle of ‘I need to do something about that’, then continue to ignore it, and fall into the deep hole between knowing and doing.”

 

Darian gives people that much-needed kick in the butt. By helping clients reposition their approach to fitness and replace negative habits with positive changes, his program addresses physical and mental wellbeing, leaving clients feeling better than ever. “Other benefits include better sleep, more focus and better work-life balance,” says Darian, “it is all about implementing a holistic approach to health to get your body in an efficient, healthy position, and maintain it with intentional practice.”

Keay is thrilled with his results and excited to see where the program takes him. “I am constantly paying attention to my body now,” he says,  “the way I sit, the way I walk, engaging my core, doing a squat instead of bending over to pick something up…it’s really had a tremendous impact on my ability to move properly, and we’re just getting started.”

Darian can be reached by phone at 403-478-3836 or [email protected]

 

For more stories, visit Todayville Calgary.

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june, 2020

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