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A family-run business is built on value and trust. It becomes a strong foundation within a community. Family-run businesses usually pass the ownership to the next kin. If you run a business and you decide that it’s time to hand over the reins to your next of kin, you could be wondering what’s the best way to do that.
One of the options to transfer business ownership to next of kin, current management or even a friend is through an estate freeze. If you want to get estate freeze right, it is best to hire an accountant.
What is an Estate Freeze?
An estate freeze is quite possibly the most tax efficient manner to transfer the ownership. You transfer ownership without making a sale. After transferring ownership, you continue to receive shares worth the current value of your business and defer the income taxes on the capital gain to the time of the actual disposition.
In a usual estate freeze, you exchange your business shares for preferred shares. Preferred shares have a permanent or frozen value, which is equal to common shares’ fair market value at the time of the estate freeze. Basically, preferred shares ensure that you receive a fix dividend with a high priority than common share dividends.
Furthermore, the new owner can subscribe new common shares and sell them to raise capital for the business. Upon your death, the preferred shares will go back to the business.
If you have an incorporated business worth $3,000,000 that undergoes an estate freeze, you will be issued preferred shares worth $3,000,000.
A key facet of an estate freeze is that the reduced tax liability is fixed in respect with your company’s shares.
Preferred shares serve as a source of retirement income
You have the option of creating a family trust to hold common shares. The family trust allocates dividends to family members with lower marginal tax rates.
An estate freeze may turn into a difficult option if children create a dispute to control the business
Divorce and separation can impact your estate freeze
How much control you maintain after an estate freeze depends on how much control you decide to relinquish to your successor. You can remain on and have voting rights or be present on an advisory capacity. It is entirely up to you.
Before you settle down for an estate freeze, it is crucial to discuss it with all the stakeholders. Resolve any succession disputes before you start the estate freeze process. Once your family is in agreement, you should hire an accountant to ensure that the estate freeze is implemented correctly. You will find ATS Accounting is quite adept at fulfilling yours and your business’s needs.
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The Canada Revenue Agency (CRA) has set aside relief provisions for those who wish to have their taxes waived or cancelled. The term ‘cancellation’ implies that relief is granted for a penalty that has been calculated. The term ‘waive’ implies that relief is granted for a penalty that has not been calculated. The applicant for relief may be an individual, employer, corporation, partnership, organization, trust, estate, or goods and services tax/harmonized sales tax registrant. The CRA takes the following factors into consideration before granting relief.
This takes into account natural calamities such as earthquakes, tsunamis, landslides, floods, and fires. It also includes civil disturbances or disruptions in services such as a postal strike. Furthermore, it also addresses serious mental disability, illness, emotional duress, such as death in the family or an accident causing physical disability like paralysis.
Errors by the CRA
The CRA is also prone to make errors and penalties resulting in eligibility for relief. These errors include processing delays that fail to inform the taxpayer incorrect information in CRA material, undue delays in resolving an objection or an appeal, or in completing an audit.
The CRA might consider relief if the individual is destitute and unable to pay. Such a case exists due the loss of employment, a separation, or other hardships. The CRA must grant relief in such a case otherwise the individual will be unable make daily expenses (for medical, food, and other such expenses).
Filing for relief is a tricky business and requires a host of supporting documents. Seeing how the CRA take their sweet time to respond to an application, applicants are advised to seek professional help and get it right the first time. Tax planning for business tax returns can go a long way in avoiding penalties from the CRA.
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The long term success of every business enterprise is determined by not just its profit, but also its Net Income after Taxes (NIAT). A profitable year in business will count for little, if only a negligible portion of the gross profit/income is composed of deductible expenses .The tax expense liability of the business owner can be minimized by regulating the nature of the expenses to attract more deductions, leading to increased NIAT.
The Canada Revenue Agency has, in this regard, laid down certain guidelines, wherein, it has listed various deductible corporate expenses and also clarified that personal expenses as well as expenses incurred in the process of acquiring any capital gain have to be excluded from income tax deduction. Every business owner has the opportunity to limit the tax expense liability and increase the NIAT by complying with these guidelines.
Listed below are deductible corporate expenses, subject to qualifications, as validated by the Canada Revenue Agency:
In addition to the above expenses, the deductible corporate expenses would also include the following:
Thus, every business owner has the opportunity to reduce his tax exposure by regulating the nature of the expenses to attract larger deductions, thereby increasing the Net Income After Tax .The residual profits provide the business the extra capital required to expand, increase the market share and pave the way for a future full of hope and limitless potential for growth.
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The Canada Revenue Agency, or CRA, regularly conducts audits across the country. If you have just found out that your business is going to be audited, there is no need to panic. An audit is a routine process for CRA. The cause of the audit may be worrisome, however, unless you have really fudged your books or conducted an illegal activity, there is no real reason to panic.
With so much so of disinformation surrounding CRA audits, here are 7 things you should be aware of.
You may have been Selected Randomly
There is always a chance that your business activated an audit trigger, such as failure to report income, claiming an aggressive tax shelter, or reporting recurring losses, however, in many cases CRA’s audits are random.
It can happen to any business as a routine check and does not necessarily suggest that your business is being targeted due to a wrongdoing.
Expect a Detailed Audit on-site
The audit will be as detailed as possible. CRA does a thorough job, using a fine comb to ensure that no detail is left out. The audit will occur at your business’s physical location, so you have to make certain that every necessary document is available.
Have all your Documents in order
It helps to spend a day in advance to get all your documents in order. You need to have every shred of financial document ready. This includes:
Documents for personal or business purchases
Any other tax-related documents
You should also have all the necessary documents as far back as 6 years, since CRA does require that you keep records for the last 6 years.
It will take Time
CRA audits are known to take anywhere up to a few hours and even go up to a few weeks. You will have to play a balancing act to follow CRA’s requests and processes along with having your business operations run without interruptions.
Have your Accountant present
If you are not the person managing the bookkeeping and accounting, you can have your accountant with you during the audit. Your accountant would be the best person to answer the queries of the auditors and provide relevant documents.
This also gives you a free reign to ensure that business operations run as usual.
Demonstrate Valid Claims
The CRA auditors may present a counter-claim to any expense or tax benefit that your business has claimed. You need to be able to demonstrate that your claim is valid by presenting the required documents.
The CRA auditors are not looking to impose fines and penalties on your business. If an error is identified as an honest mistake or wrongful interpretation of a tax regulation, you will just be required to make the correction and pay any outstanding tax balance.
CRA audits are standard procedures and it is the government’s process of ensuring that businesses are staying within compliance.