My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, June 27, 2016

What Small Business Owners Need to Know - Section 85 Rollovers

Section 85 of the Income Tax Act ("Act") provides for the transfer of certain assets with inherent tax liabilities to a corporation on a tax-deferred basis. Thus, accountants often utilize this section of the Act, to meet many of the objectives small business owners have.

Section 85 is most commonly used as follows:

1. Incorporation of a business – A sole proprietor has decided that their business is growing and ready for the next stage (incorporation). They can transfer all of their business assets to the new corporation under section 85.

2. Sale of a proprietorship – Section 85 helps sole proprietors looking to sell their business utilize the capital gains exemption by providing under certain circumstances for the transfer of their assets to a new corporation in exchange for shares; and those new shares are sold shortly thereafter. The typical 24-month holding period requirement for the use of the capital gains exemption will typically not apply in this situation (this is technical and your accountant should be consulted to ensure all criteria are met).

3. Crystallization of capital gains – A small business owner can make use of the capital gains exemption by using section 85 to transfer their current shares back to their corporation in exchange for new shares redeemable at a higher value – usually up to the maximum capital gains exemption available. For 2016, the exemption is $824,117 which is indexed annually. See this this blog post on the complexities of accessing the capital gains exemption.

4. Estate planning and income-splitting – Section 85 can help transfer an individual’s business to a future generation and allow the growth of the business to accrue to the new generation also allowing for dividend sprinkling. However the attribution rules and “kiddie tax” should also be considered when dealing with minor children.

5. Asset Protection – Section 85 allows small business owners to transfer assets usually land and building used in their active business out of their operating company to a holding company on a tax-deferred basis.

Some Technical Details


Section 85 is a valuable tool for corporate transfers because of the flexibility provided by a tax attribute known as the elected amount (“EA”). The parties involved in the transaction (typically the small business owner personally and corporation they own) can choose within limits, what the EA is and that becomes the deemed proceeds of disposition of the selected assets. Thus, in most transactions the parties elect the EA to be the adjusted cost base of the asset being transferred and thus, there is no gain, since the EA is the same as the cost. For example: if you have an asset with a cost base of $100 and a fair market value of $100,000, you could elect at $100 to avoid any adverse tax consequences.

If you elect a higher EA than the adjusted cost base, a capital gain will result. In cases where a small business owner wants to “crystalize” their capital gains exemption, they will often elect to trigger a gain equal to their capital gains exemption to bump-up their cost base of their shares and thus the small business owner pays no tax as their capital gains exemption eliminates the capital gain, however, alternative minimum tax may sometimes apply.

In order for subsection 85(1) to apply, both the taxpayer and the corporation must jointly elect in prescribed form T2057 – Election on disposition of property by a taxpayer to a taxable Canadian Corporation. There are various administrative matters that need to be considered when filing this election.

Section 85 is probably one of the most powerful and most utilized tax planning tools for tax practitioners. Therefore careful planning should be undertaken. When planning to utilize section 85 rollover, the below factors should be considered or adverse tax consequences could apply!

1. What types of property can be transferred? Attention needs to be taken when determining what types of property to transfer under section 85. The most commonly mistaken property that cannot be transferred is real property held as inventory i.e. land and building (Note: most people hold their real estate as capital property and not inventory). However other planning can be achieved to rollover real property held as inventory to a corporation on a tax deferred basis.

2. Should you transfer accounts receivable under section 85(1)? Other provisions of the Act should be considered to allow for the most tax efficient rollover of A/R.

3. What type of property can be received for transferring assets to the corporation? Can you receive cash or a promissory note in return without triggering punitive income tax consequences?

4. Do you have to receive shares in return for the assets being transferred? Can you receive a fraction of a share?

5. What type of corporation can you transfer the assets to on a tax deferred basis? Can it be a non-resident corporation or non-resident individual?

6. Determining the amount to elect if intellectual property is being transferred (i.e. goodwill)?

Once the assets are transferred to the corporation, there is no mirror provision available to roll them back out. It is generally advisable to include a price adjustment clause in case CRA does not agree with the estimated FMV of the property transferred (it is recommended that a valuation be undertaken to support the fair market value). The CRA recently published an Income Tax Folio: S4-F3-C1 – Price Adjustment Clauses that deal with the various types of situation in which a price adjustment should be included.

Other items to remember include GST/HST. Usually this tax will apply to the transfer price or the FMV of the assets. However an election can often be made which would allow the transfer of the assets to be exempt from GST/HST if certain conditions are met.

Section 85 is a very powerful provision of the Act and must be used with care. All of the above questions should be considered prior to commencing a rollover. There are other issues not mentioned above due to complexity. Always consult a tax specialist when dealing with rollovers.

[Thanks to Lorenzo Bonanno of BDO Canada LLP, for his assistance with this blog post]

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Small Business Owners - Get on my Mailing List


If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area. [I have not yet sent out a mailing, as I have been busy with December 31st corporate year-ends due June 30th. I will for sure send out something this summer].

Monday, June 20, 2016

Life Insurance - Review Your Coverage

Many of us purchase life insurance between the ages of 30 and 40 and subsequently pay no further attention to our life insurance needs. Today, I have a simple objective: to encourage you to review your current coverage.

Ask yourself this question. Has there been a change in your personal circumstances since you last purchased life insurance? If the answer is yes, now is the time to ensure you have sufficient coverage.

We hate paying life insurance for two reasons:

1. It forces us to accept our mortality.

2. As we age, the cost of life insurance becomes prohibitive, so most people who are lucky enough to live a full life, let it lapse (especially in the case of term insurance) and thus, have paid substantial sums of money for no monetary return (although, I think living is probably a fairly good non-monetary return).

Luckily, most of us get over these two hurdles and purchase life insurance to cover, amongst various things, the following:

1. Income replacement – life insurance acts as a replacement of income for the deceased person. This is very important where one spouse/partner is the breadwinner. The objective here is to allow your family to live in the manner they are accustomed to.

2. Financial security for dependents – somewhat related to #1, insurance ensures your spouse/partner is taken care of the rest of their life, and your dependants are financially covered until they are ready to join the workforce.

3. Mortgage protection - insurance pays off the family’s largest debt, typically the mortgage on their home.

4. Funding of University - many parents want to ensure their children are educated and use insurance to backstop that goal, in case they were to pass away.

Your Life Insurance Coverage Check-up


You may wish to review the following items or issues, to ensure your current life insurance coverage is up-to-date:

1. Your current salary or self-employment income – review your income. Has it changed significantly since you put your initial life insurance in place? If the answer is yes, and you are like most people in that your monthly family spending has expanded in proportion to your higher income, you will need more insurance to replace that income and increased family spending.

2. Life Expectancy – life expectancy continues to increase. In Canada, the average female is expected to live to about 84 and the average male to about 80. There is approximately a 25% chance one spouse/partner will live to the age of 95. The question for you is: what assumptions did you make about life expectancy when determining your life insurance needs for you and your spouse/partner/family? You may want to revisit those assumptions.

3. Debts – review your current debt load. Has your mortgage increased or decreased? Have you tapped into your Line of Credit for home renovations or investment purposes? Have you incurred any new personal debt?

4. University – many children attend university outside of Canada because the enrollment at many Canadian professional schools is very limited. Do you think your child(ren) may need to do such? If so, those costs could be 3-5 times higher than those of a child who studies in Canada.

5. Cottage – do you plan to leave the cottage to your children? You may want to ensure you and your spouse/partner have enough insurance to cover the taxes on the last of your deaths.

6. Estate Planning – some parents wish to use their insurance to leave a legacy to their children. If that is you plan, is your current insurance sufficient? If you are one of those parents, consider converting part of your term insurance to permanent insurance, if your policy allows such, or consider purchasing some new permanent insurance. If you have a private corporation, consider a corporate funded insurance policy as discussed in this blog post.

The above discussion is fairly simplistic. As noted, the main objective of this post is to have you review your current life insurance, to ensure it is sufficient for your current needs. If you determine your insurance is insufficient, make an appointment with your insurance advisor.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, June 13, 2016

The Income Tax Implications of Divorce Where You Own a Home and a Cottage

A few months ago, I was at a party when one of the party-goers started chatting to me about their
divorce. I ended up fielding various financial questions for which I referred them back to the matrimonial lawyer (I should have known they were not talking to me because of my bubbly personality).

But all was not lost. One of the questions they asked me about was the income tax implications of transferring their principal residence to their name, and the cottage to their spouse, as part of their divorce. As these transfers are often “messed up” and/or ignored in divorce agreements, I realized they had a least provided me a future blog topic. So today, I discuss the implications of transferring your home or cottage to your spouse upon divorce.

Principal Residence Exemption


In general, where you have lived in your home since its purchase, any gain upon the sale of that home is tax exempt because of the principal residence exemption (“PRE”). Where you own a house and cottage, things get more complicated, as you and your spouse may only designate one residence between you for purposes of the PRE, for each tax year after 1981 (prior to 1982, each spouse could designate one principal residence and thus you could possibly claim the PRE on both your home and cottage).

If you are happily married and own a home and cottage, in general, when you dispose of the properties, you would allocate the PRE to the property with the largest yearly capital gain. This calculation can be complex and typically leaves one property as taxable, or at least partially taxable (i.e. you may have owned your home 5 years before you purchased your cottage, so you have 5 years of PRE to claim on your home).

Where a couple is divorcing, how you allocate the PRE claim on your cottage and home is often problematic.

Spousal Rollover on Divorce


Unless you elect otherwise, where you transfer capital property, the Income Tax Act provides for a tax-free rollover to your former spouse if the transfer is in settlement of their property rights (transfers by title pursuant to a court order or provincial legislation also are provided for). In plain English, you can transfer, say a cottage, to your former spouse with no immediate income tax consequences, although, they assume the cost base of that cottage.

The Issue


One would think that based on the PRE and the tax-free spousal rollover, that where a divorcing couple has a home and cottage, things should be simple. However, since a couple can only claim one PRE during the marriage (other than when a spouse who was throughout the year living apart from and was separated under a judicial or written separation agreement) that is definitely not the case. This one PRE rule per couple is clearly noted in this interesting case, Balanko v The Queen.

Consequently, it is vital that the right to the PRE or the allocation of the PRE must be accounted for in any marriage settlement, for both purposes of the actual claim, and the related income tax one of the spouses may incur. If the use of the exemption is not addressed in the separation agreement, it is then a first-come, first-served claim.

In this article, the authors on page 1122 suggest that you consider at the time of separation or divorce that you complete a principal residence designation Form T2091.

Example


Say Tom and Katie are seeking a divorce and jointly own a family home (the home cost $300,000 and is now worth $1,000,000) and cottage (the cottage cost $500,000 and is now worth $1,000,000). In their divorce settlement, they agree that Tom will take the home and Katie the cottage (in real life, the house and cottage values and related income tax costs may be disproportionate and the value and tax discrepancy is equalized in some manner). This cross transfer of title can be done tax-free as discussed above; Tom assumes a cost base of $300,000 on the family home, and Katie a cost base of $500,000 on the cottage.

Katie has plans to sell the cottage immediately and to buy a new house. Katie’s lawyer and tax advisor decide to keep silent on the issue as to who can claim the PRE, since they know she will claim it first. Should Katie claim the PRE, Tom could be stuck with a tax liability approaching $175,000 when he eventually sells the home.

Luckily for Tom, he has hired sharp advisors. They raise the issues during the divorce negotiations. After some back and forth, the parties agree that Katie will claim the PRE; however, Tom is entitled to an extra $87,500 in family assets to equalize him for his future income tax liability.

If you and your spouse have a home and cottage and are unfortunately in divorce proceedings, or in a dissolving marriage, it is imperative your family lawyer and/or tax advisor consider/negotiate which spouse will be entitled to the PRE and whether a PR designation and/or tax equalization payment needs to be considered.

This blog post is for general information purposes only. The author is not a lawyer and the discussion above does not constitute legal or other professional advice or an opinion of any kind. The information above is provided solely to raise awareness of the issue. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 30, 2016

Financial Ethical Wills - For Estate Planning and Managing Family Wealth


Last week, you read about the benefits of an ethical will. These wills are a way for you to share your personal beliefs, spiritual values and hopes for the future with your family. Today you will discover how some people are using ethical wills, to set forth their financial principles and values.

As a parent, a financial ethical will can help you accomplish one or all of the following:
  1. Allow you to explain your estate planning
  2. Assist your family in maintaining the wealth you created
  3. Provide your family guiding principles of how to conduct business
  4. Set forth how you hope your monetary legacy is to be used 
  5. Discuss your philanthropy values and principals.

Estate Planning - Explaining Your Decisions


As you may have read in my blog titled One Big Happy Family - Until We Discuss the Will, I am a proponent of family meetings to discuss your estate planning (or at least parts of it). Given that many people are uneasy with having a family meeting to discuss money and inheritances, an ethical will provides you the opportunity (albeit after you have died) to clarify for your family your thinking and decision making process in respect of your estate planning.

However, be mindful; if the objective in writing your ethical will is to be positive and motivating, you may need to consider whether the clarity you wish to provide to your family relating to your estate planning decision making process, is in keeping with this objective.

Business - An Ethical Will Provides Guidance for a Family Business


Given the tremendous failure rate of second and third generation businesses (only 30 percent of all family-owned businesses survive into the second generation and only 12 percent will be survive into the third generation), an ethical will can be used to convey the guiding principles of your family business, and even set forth the challenges and opportunities you foresee for the company going forward.

In his article "Reintroducing the Ethical Will: Expanding the Lawyer’s Toolbox", written for the American Bar Association, author Scott E. Friedman provides the following insightful comment:

“In contemplating the scale and variety of intra-family conflict, we have come to the conclusion that many such conflicts are, in part, attributable to the death of a leader who had not thought to clearly transfer his or her intentions, wishes and wisdom to the surviving family members. Lacking direction and the benefits gleaned from a legacy of insight and wishes passed on by the patriarch or matriarch, surviving children often become absorbed in the negative emotions of selfishness, resentment and jealousy, which all inevitably leads to trouble for the business”.

Thus, any guidance and direction you can provide to your children may be invaluable as they try to navigate through the issues of succession of a family business.  

Philanthropy - Setting the Tone for Family Giving


You can use an ethical will to ensure your philanthropic values are carried forward by your children. Here is a quote taken from an article by Eric L. Weiner, Ph.D. written for the practice management section of the Financial Planning Association, in which a parent said the following:

“I would love to see you become responsible members of the community and philanthropists. To that end, I have set up a donor-advised fund as the main conduit for our philanthropic interest. This fund will give you and possibly your children the ability to make grants to worthy causes. I want portability so that you can direct grants to your own communities, as well as to national and international interests”.

Alternatively, instead of setting up a charitable fund, you could just encourage philanthropy by speaking to the importance of charity in your ethical will and hope you lead by example and your children follow in your charitable footsteps.

Ethical wills provide you with a tool to impart both your spiritual and financial values and beliefs and principles to your children. You may therefore, wish to consider using an ethical will in addition to the traditional Last Will and Testament.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 23, 2016

Ethical Wills


Wills are typically matter-of-fact documents, as they have to be drafted to withstand legal challenges. Wouldn’t it be nice to have a “softer” complementary document, letter or even a video, in which you can express the following?

1. Your values

2. Your hopes for your family

3. Explain the decisions made in your will

4. Provide for or ask for forgiveness

Today, I will discuss such a will, commonly known as an ethical will.

What is an Ethical Will?


According to Wikipedia, “the ethical will is an ancient document from the Judeo-Christian tradition. The original template for its use came from Genesis 49:1-33”. These wills were designed to pass ethical values from one generation to the next. Modern day ethical wills had been adapted and modified and they remain excellent conduits to ensure our ethics, morals and standards are passed down and on record.

While ethical wills have typically been used to pass personal values to your family, some people are now using ethical wills to include financial issues and/or provide business guidance and values to second generation business owners. I will discuss these “wealth” wills next week.

The website for Celebration of Life, a company that helps people with their legacies, suggests you may include some of the following in an ethical will:

  • important personal values
  • important spiritual beliefs
  • hopes and blessings for future generations
  • life lessons
  • love
  • forgiving others and asking for forgiveness

Shae Irving, J.D. suggests you may also want to include the following in an ethical will:

  • family history
  • cultural and personal beliefs
  • reasons for charitable and personal financial decisions
  • personal stories about items of property left to inheritors
  • how you would like to be remembered after death

When Do You Present an Ethical Will?


Ethical wills can be written and presented literally anytime from cradle to grave. You can write such a document when your son or daughter gets married, has their first child, or as a statement at the end of your life; but in no way are you limited to such occasions.

Most ethical wills are written as end of life statements and can be shared while alive or after you pass away. I would suggest that most people would prefer to have their ethical will shared after they pass away as it avoids confrontation; although personally, I think there is something to be said for explaining decisions and setting forth your values and beliefs in person.

Ethical wills are very personal documents and no two, will be the same. Should you wish to write such a document, the discussion and considerations above, should give you a good start on writing your ethical will.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 16, 2016

What Small Business Owners Need to Know - Severance Costs Can be Expensive


When I meet with my clients to review their financial statements, I typically have an agenda of various topics I wish to discuss with them. One topic I like to review is their staffing situation. We typically analyze "accountant numbers" such as staffing costs as a percentage of sales, but I also like to review other employment related issues such as whether the client has updated employment contracts and have they entered into consulting contracts (employee vs independent contractor issues).

Once on this topic, clients often want to discuss their severance cost obligations with respect to (a) dismissing an employee (b) downsizing if their business fell off and (c) obligations should they sell the business? Since those issues are way beyond my skill-set, I refer them to their employment lawyer.

Since I thought you may wish to know the answers to these questions, I asked Stephen Shore of the firm Sherrard Kuzz LLP, an employment and labour law firm, if he could provide his expertise on the severance issue.

Stephen kindly agreed to write a blog post on The Top 5 Severance Issues for Business Owners in Ontario. Before I turn it over to Stephen, please note that; employment law can vary significantly from province to province and the below commentary is limited to Ontario. The commentary is also general in nature. You should seek employment law counsel in your own province that addresses your specific situation. With all these caveats out of the way, let's get to Stephen's post.

The Top 5 Severance Issues for Business Owners in Ontario
By Stephen Shore, Sherrard Kuzz LLP, Employment & Labour Lawyers


The following are in my professional opinion the top 5 severance issues for business owners in Ontario.

1. Obligations on Termination – How much will I owe?


The “cost” of terminating an employee will depend on many factors, including the following:
  1. Is there a valid employment agreement?
  2. How long has the employee been with the company?
  3. How old is the employee?
  4. How much did s/he make?
A business owner who has not pro-actively considered the cost of termination is often surprised by the size of the “bill”. On the other hand, those who plan ahead achieve two extremely valuable objectives: (1) lower cost and (2) cost-certainty.

The easiest and most straight-forward way to achieve these objectives is through the use of a written employment agreement which defines the terms and conditions of employment, including what happens on termination. Properly drafted and executed, an employment agreement can limit an employee’s entitlement upon termination to the minimum amount set out in the employment standards act (roughly one week per year of service). Without an employment agreement, that amount can be upwards of one month per year of service, and even higher. That can amount to a very big financial difference, particularly if the employee has been with the company for many years.

An employment agreement may also be used to secure other significant protections such as non-solicitation and confidentiality obligations.

A business that operates without written employment agreements leave itself vulnerable to the will of the employee-friendly courts. This is not a desirable place to end up.

The most prudent approach is to have all employment contracts prepared by experienced employment counsel, and reviewed periodically, to ensure the language used is and continues to be enforceable. Employment contracts should not be attempted without professional assistance.

2. Employment Standards Act Requirements – Do I owe statutory severance pay?


The Employment Standards Act (“ESA”) sets the minimum (floor) for what an employee is owed upon the termination of employment.

There are two (2) categories of potential payment under the ESA: “termination pay” and “severance pay”. Though the general public tends to use these terms interchangeably, “termination pay” and “severance pay” are not the same.

Under the ESA, an employee is entitled to advanced “notice” of termination, which notice can be given in the form of “working notice”, “pay in lieu of notice” (“termination pay”) or a combination of both.

“Severance pay” is owed to an employee regardless whether the employee is entitled to “termination pay”, but is only owed to an employee who has greater than five (5) years of service and whose employment is terminated by an employer with a payroll greater than $2.5 million dollars.

In calculating whether the 2.5 million dollar payroll threshold is met, an employer must look at: (i) the aggregate wages of employees in the fiscal year prior to the severance, and (ii) the product of the total wages of employees during the four (4) weeks prior to the termination multiplied by 13. If either amount exceeds 2.5 million the threshold is surpassed and the employee is entitled to “severance pay” in addition to whatever “notice” to which the employee is entitled.

3. Temporary Lay-off vs Termination – Am I permitted to lay-off an employee for a period of time?


Many business owners are surprised to learn that – at law – an employer does not have the right to “lay-off” an employee for any time period, regardless whether there is a good reason or however short the period of time. The act of “laying off” can be treated by the employee as the termination of his or her employment and a wrongful dismissal suit may follow.

That being said – the “right” to lay-off an employee can be introduced into an employment relationship through an employment contract or practice. That is to say, an employer and employee can agree in a written employment agreement (or, in the case of a unionized workplace, a collective agreement) that an employee can be laid-off without triggering a termination. Alternatively, if the employee has experienced lay-off on several previous occasions without complaint, then it may be implied that, through practice, the right to do so has been introduced into the relationship.
It is important to note that even where the right to “lay-off” has been introduced into the employment relationship, the “lay-off” must comply with the provisions of the ESA which sets limits on the length of time a temporary lay-off may last and requires certain employee entitlements to continue during a period of layoff (i.e., group benefits). Once again, a lay-off provision should not be attempted without professional assistance.

4. Mass Termination – Are there special rules for a major restructuring event?


Yes – there are special rules which apply when fifty (50) or more employees are being terminated in a four (4) week period.

These special rules are subject to exceptions and qualifications, and legal advice should be sought in every case of a potential mass-termination. That said, the ordinary consequence of a mass-termination is an increased advance-notice requirement or, failing that, an increased liability for ESA “termination pay”. The amounts are as follows:
  1.  For 50 – 199 terminated employees: At least 8 weeks’ notice
  2.  For 200 – 499 terminated employees: At least 12 weeks’ notice
  3. For 500 or more terminated employee: At least 16 weeks’ notice
In addition to the increased notice / “termination pay” requirements, an employer who carries out a mass-termination has reporting and posting requirements imposed by the Ministry of Labour (Ontario) which, if ignored, can have enormous financial impacts.

A mass-termination event is a very sensitive event which imports significant regulatory obligations. An employer is well advised to seek expert assistance well in advance of a potential occurrence.

5. Termination Meeting – How do I tell someone their employment is being terminated?


In carrying out a termination meeting, an employer is expected to be respectful, fair and compassionate. The failure to do so could result in significant damages.

This does not mean an employee is entitled to an explanation, justification or discussion concerning the merits of the decision to terminate. Rather, it requires an employer avoid being harsh and insensitive by, for example, publicly humiliating the employee or terminating the employee on his/her birthday or holiday.

The communication in the meeting should be direct and firm. The employee should be provided with an original signed copy of the termination letter.

Other best practises would be to have a second company representative present to take notes. The meeting should be held towards the end of the working day (if possible) or at a time when the employee would be able to leave without encountering his or her colleagues. Following the meeting, the employee should be permitted to retrieve personal belongings and security should be on-hand and utilized only if required. It is sometimes appropriate to offer the employee transportation home (i.e., taxi).

Once the termination meeting is complete, access to email and electronic records should be discontinued and a communication should be sent to other employees advising that the employee is no longer with the company.

Additional considerations may apply where the termination is for cause, where an offer of settlement is being made or where other factors are involved (e.g., unionized environments, mass-terminations, etc.). Professional advice is always recommended to ensure all legal and technical aspects of the termination are covered.

Stephen Shore is an experienced employment and labour lawyer, representing employers. Stephen regularly writes for a variety of employment and labour law publications and speaks on his areas of expertise. Please feel free to contact him directly at 416.603.6264 or by e-mail at sshore@sherrardkuzz.com. Sherrard Kuzz LLP is one of Canada’s leading employment and labour law firms exclusively representing the interests of management. Recognized nationally and internationally, this team is consistently named among Canada’s Top 10 Employment and Labour Boutiques (Canadian Lawyer®), Canada’s Leading Employment & Labour Law Firms (Chambers Global®) and as Repeatedly Recommended (Lexpert®).

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. 

Small Business Owners - Get on my Mailing List


If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com.

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area. Now that tax season is over, I will start the mailings shortly.

Thanks to the many readers who have already signed up.

Monday, May 9, 2016

Capital Gains Reserves

Last year, I asked you, my readers, for some topics you would like me to write about. One reader suggested I discuss the subject of the capital gains reserve and tax planning around the reserve. As they say, better late than never. Today I will discuss the machinations of the capital gains reserve and some planning, especially in respect of the sale of a cottage to other family members.

The reader, who asked the question, stated that his 65 year-old spouse was going to sell a rental property and wondered if it made income tax sense to transfer half the property to their son before the sale. I will address that question later in the post.

What is the Capital Gains Reserve?


The Income Tax Act ("The Act")  contains a provision [subparagraph 40(1)(a)(iii)] that allows you in general, to claim a capital gains reserve where all of the proceeds from a sale of capital property (typically real estate or shares in a corporation) will be not be received in the year of sale. To make a claim you must file form T2017 – Summary of Reserves on Dispositions of Capital Property with your income tax return.

The Act states that at least one-fifth of the capital gain must be reported in the year of sale and each of the following four years (where the gain arose because of a transfer to your children of certain farm property, fishing property or shares of an Small Business Corporation, you typically can claim a ten year reserve).

Thus, the maximum reserve for each year is as follows:

Year of sale - 80%
2nd Year - 60%
3rd Year - 40%
4th Year - 20%
5th Year – nil

I say maximum, because the reserve is calculated each year based on the following formula:

The lesser of:

a) capital gain x amount payable after the end of the year / total proceeds of disposition

b) One-fifth of the total capital gain x 4 minus the number of preceding taxation years ending after the disposition

For example. If you sold your rental property for $1,000,000 and had a capital gain of $540,000 and you receive $400,000 upfront and will be paid a $150,000 for the next four years, your reserve would be as follows:

Year 1 – lesser of:

a) $324,000 ($540,000 x $600,000/$1,000,000)
b) $ 432,000 (4/5 x $540,000)

Thus, the reserve would be $324,000 for year one and you would report a capital gain of $216,000 ($540,000-$324,000)

Year 2 – lesser of:

a) $243,000 ($540,000 x $450,000/$1,000,000)
b) $324,000 (3/5 x $540,000)

Thus, the reserve would be $243,000 for year two and you would report a capital gain of $81,000 ($324,000 yr. 1 reserve -$243,000 yr. 2 reserve).


Strategies and Considerations for Using the Capital Gains Reserve



Family Transfers


I mentioned earlier that the reader had asked about whether his wife should gift the property to her son before the sale to reduce the family income tax bill. Unfortunately, as I have discussed several times on the blog, transfers of property to family members result in a deemed disposition (sale) at the property’s fair market value (if the transfer is to your spouse, there is an automatic tax-free transfer unless you file an election opting out of the automatic rollover). So if the reader’s wife was selling her property for a $1,000,000 and transferred it to her son before the sale, she would be deemed to have sold the property for $1,000,000; the same consequence as if sold to an arm’s length buyer.

Timing of Repayment


What the reader's wife and anyone selling a property where the proceeds are paid over time need to understand is that you must ensure you leave yourself with enough funds to pay the income tax liability (i.e. the 1/5 required gain each year). That is typically not an issue; however, if you have a long term of repayment, say 10 or more years, this can become problematic. Therefore, for both business and income tax purposes, you will typically want full payment of your proceeds within five years.

Cottages

One of the most challenging assets to tax plan for is a family cottage. I wrote a three-part series on this topic, which you can find under my favourite posts on the right hand side of this page, under the topic, "Family Cottage".

Where you wish to sell your cottage to your children, you may want to consider allowing them at least five years to repay the purchase price and tailor the purchase terms to the capital gains reserve.

If you plan to gift the cottage to your children, you will have a deemed disposition at the cottages fair market value as discussed above and you will have to report the capital gain and pay the related tax in the year of gift. Consideration should be giving to selling the cottage to your children for promissory notes which you may or may not forgive in your will. However, by selling, subject to advice by your accountant, you may be able to utilize the capital gains reserve to defer the tax on the gain for up to five years. [If your child is married, you should consult a family law lawyer before gifting or selling property to your child].


Capital Gains Guide


You may find it useful to review the CRA’s T4037 Capital Gains Guide

You should always obtain professional advice before the sale of any property; especially one is which you hope to use the capital gains reserve, as the legislation is complex. However, when used properly, the reserve can smooth your income tax liability over as many as five years.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.