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Thursday, 18 February 2016
Wednesday, 25 November 2015
U.S. Estate Tax Exposure
What may come as a surprise to many Canadians is that
they could be liable for U.S. estate tax. The estate tax is based on fair
market value of the property owned at the time of death and the tax is assessed
on U.S. situs assets. These assets include real property located in the U.S. as
well as shares of U.S corporations, either private or public.
If an individual’s U.S. situs assets are more than 60,000
USD then there’s a requirement to file the estate tax return with the IRS.
There are various exemptions available, such as a credit that shields the first
5,340,000 of worldwide assets (in 2014, this amount is adjusted for inflation)
which means that there’s not necessarily a tax liability however it does not
remove the obligation to file the return. This is of particular importance if
as a result of death there will be a transfer of title on real estate or if there
are investment assets with a U.S. company. To distribute the assets in
accordance with the will, the financial institution or lawyer will ask for a
transfer certificate. This is a certificate issued by the IRS which shows that
the Estate has complied with all the requirements and has no outstanding
obligations thus allowing for the transfer to take place.
There are numerous complexities depending on the
individual’s circumstances and cannot be covered in general terms. It is
important that the estate tax is not forgotten and is appropriately considered
when the purchase of assets is planned. Failure to consider this tax could
result in a substantial tax liability that could otherwise be mitigated or
avoided altogether.
Questions?
General Enquiries: 613-726-7788
Fax: 613-729-4477
general@mcintyreca.com
general@mcintyreca.com
200 – 900 Morrison Drive
Ottawa, ON
K2H 8K7
Principal Residence
One of the tax rules that most taxpayers are aware of,
though not necessarily in detail, is that there’s an exemption from tax on a
gain from a sale of the house they live in. If an individual (or family) owns
one house that they live in then the rules are fairly straight forward however
complications arise as soon as there’s some deviations in the scenario. What
the rules actually state is that the exemption is available for a housing unit
that the individual or family unit ordinarily inhabits. This means that there’s
a limit of one dwelling per family on which the exemption can be claimed. The
designation of the exemption is done for each year that the property is owned.
For example, the family owns a house for 10 years and a cottage for 5 years.
The exemption is first assigned to the house as that’s the only property owned
for the first five years and then a decision has to be made whether the house
or the cottage gets the exemption for the 5 years that both properties are
owned at the same time.
When there’s only one property then the situation is
fairly simply however as soon as another property is introduced then there’s
potential for a tax liability. It’s best to review all of the properties and
their potential gains prior to making any elections.
Questions?
General Enquiries: 613-726-7788
Fax: 613-729-4477
general@mcintyreca.com
general@mcintyreca.com
200 – 900 Morrison Drive
Ottawa, ON
K2H 8K7
Principal Residence – Rental property
A common scenario is that when an individual (or family)
moves to a new house, the old house is rented out rather than sold. What
happens in that case is called a “change in use”, the old house changed its
purpose from being used as a principal residence to a rent income producing
property. This change in use triggers a deemed disposition and a gain is
calculated between the original purchase price and the fair market value at the
time of the change of use. The property could fall under the principal
residence exemption so no actual tax is paid on the deemed disposition. If the
rental property is sold 2 years later then the gain is calculated between the
sales price and the fair market value of the property at the time of the change
in use. There’s an election available which allows the property to still be
designated a principal residence for up to 4 years following the change in use,
provided that no deduction is taken for amortization when calculating the
rental income from the property. Filing this election means that the new house
or the old house (up to 4 years) can be used as a principal residence and is
eligible for the exemption.
There’s also the possibility that the opposite happens.
An individual (or family) move into a housing property which was previously
rented out. In this scenario, there’s a deemed disposition for the property.
There’s an election available which could defer the gain on the change in use
until the property is ultimately disposed of.
There are a number of factors to consider when making the
decision to designate one property over another as a principal residence.
Things like potential gain in the future, current tax liability and the length
of time the property has been owned or will be owned are all factors which
could significantly impact the decision.
Questions?
General Enquiries: 613-726-7788
Fax: 613-729-4477
general@mcintyreca.com
general@mcintyreca.com
200 – 900 Morrison Drive
Ottawa, ON
K2H 8K7
Alter Ego Trusts
An alter
ego trust is an inter vivos created after 1999 by a settlor who
was 65 years of age or older at the time the trust was created. A key property
of this type of trust is that the settlor is the only one entitled to receive
any income or capital distributions from the trust during his or her lifetime.
It is only upon death of the settlor that the property passes to a beneficiary.
This type of trust is typically used to avoid probate fees (which are charged
at 1.5% on assets over $50,000 in Ontario) since the trust assets do not
formally pass into the estate.
However there are some drawbacks to using this type of
trust. The alter ego trust cannot use the capital gains exemption available in
respect of qualifying property such as small business company shares. In
addition, any losses within the trust can only be used to offset the gains of
the trust and do not attribute back to the individual. In the year of death,
capital losses can be used to offset non-capital gains in the year of death or
the preceding year. Depending on the makeup of the investments, this could be a
substantial benefit which may be unavailable. The alter ego trust does not form
part of the Estate and therefore the assets cannot be used to form a
testamentary trust. This is a type of trust that forms on death of a taxpayer
and unlike an inter vivos trust, has the benefit of the marginal tax rates that
apply to individuals. The potential savings are up to $17,000 per year however
recently CRA has been discussing limiting the access to the marginal tax rates
for a period of 36 months from the date of death.
Provided that the most common use of the alter ego trust
is to avoid probate fees, the trust will typically have more than $500 of
income and therefore would be subject to the annual filings requirement. Ensure
that review both the benefits and the drawbacks to this type of arrangement to
ensure that it meets your needs.
Questions?
General Enquiries: 613-726-7788
Fax: 613-729-4477
200 – 900 Morrison Drive
Ottawa, ON
K2H 8K7
Tuesday, 24 November 2015
A Tax Effective Way To Pay Off Your Med School Debt
You’ve just finished your
residency and have finally started practicing medicine. Congratulations!
If you’re like most people
finishing med school, you have a pile of student debt, which is weighing on
your mind. You’re probably also getting lots of advice from colleagues, family,
friends and financial planners.
Your first instinct might be to
pay it down as fast as possible. Let’s call this the traditional approach. It’s a good strategy, but it might not be the
best plan.
Another strategy is to set up a
medical professional corporation that will enable you to leave money in the
corporation and pay taxes at a lower rate and invest the savings. Let’s call
this the combined approach.
In order to explore the
difference between these two approaches to paying off your medical school debt,
let’s start with certain assumptions based on common scenarios that we often
see.
- Debt is at $100,000 and interest is being accrued at 3%
- Annual income from medical services is $200,000
- Your spouse contributes $25,000 to the household income
- Your annual family budget for personal expenses, mortgage, travel, clothing etc. is $80,000
- You have elected to be remunerated using a growingly popular dividends only option (using 2013 tax rates)
- Investments are assumed to be earning 6% per annum tax effected down to 3%.
The Traditional
Approach
The traditional approach involves
putting your head down, working really hard and paying off your debt as fast as
possible. With this option, you would only incorporate once your debt is paid
off. The debt would be fully repaid during the middle of year two. By the end
of year three, there would be $176,854 in your corporation’s investment
account.
In this scenario you would earn
all of your income via self employment in the first year. Once you have paid
your personal expenses and personal taxes you would be able to put $68,658 towards
your debt, but there would be no money left to invest. In year two, you would
spend part of the year self-employed, pay off the remainder of the debt and
then you would incorporate in the middle of the year. The rest of the year you would be paid via
dividends of $13,654 from your corporation. In year three you would earn the
full income within the corporation and pay yourself dividends in the amount of
$59,000. The remaining funds would remain in the corporation to be invested.
The Combined Approach
The second option is called the
combined approach. This option involves setting up a medical corporation early
and paying yourself enough dividends to cover your personal expenses.
Additional dividends are paid out (to be used for debt repayment), only until
you reach the top marginal tax rate. The reason for doing so is that once you
go over that top marginal tax rate you would pay more in tax than you would in interest
on your loan.
The debt in this scenario is
repaid by the end of the third year rather than the second year. However, at
the end of year three you have $203,685 within your corporate investment
account.
In this scenario you would pay
yourself annual dividends right from the start – $105,000 in years one and two and
$102,000 in year three. After paying personal taxes and personal expenses, the rest
of the money would go towards paying off personal debt.
The total difference yields a tax
savings/deferral of $26,831 over 3 years. In order to be accurate, we must also
factor in the additional corporate accounting costs you would incur by
incorporating one year sooner. These fees run between $2,000 and $3,000, so the
total benefit would actually be $23,831- $24,831. This approach works for many
situations and in certain circumstances the benefits can be much larger. For
example, if your spouse is earning lower or no income, you can income split through
the corporation to further increase the tax savings.
If you think this approach might work
for you, be sure to speak with a qualified accountant or tax practitioner to
find out what steps you’ll need to take.
By Larry Hasson CPA, CA
613-726-7788
ext.249
Monday, 2 November 2015
Our Fall 2015 Publication is Now Available
What you will find in our new publication:
Please Note: Publications are in PDF file format.
- Common U.S. - Canadian Tax Issues "What is the substantial presence test? and does it involve me?"
- CRA's Prescribed Interest Rates "What will I owe if I am late on my income tax payments?"
- What' s New at McIntyre & Associates
- New and Improved McIntyreca.com just for you!
Please Note: Publications are in PDF file format.
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