An Executor’s Nightmare

This is my last blog post of 2013. I would like to wish my readers a Merry Christmas and/or Happy Holidays and a Happy New Year. See you in January.

An Executor’s Nightmare

What is an executor’s nightmare? How about becoming the executor of two estates at once! That is what could happen if your spouse passed away while administering his or her Uncle Charlie’s estate. If you are your spouse’s executor, not only will you have to administer your spouse’s estate, but you may have to assume the executorship of Uncle Charlie’s estate. All this, while mourning the loss of your spouse.

As extreme as this seems, if Uncle Charlie did not provide for an alternate executor in his will, then subsection 46(2) of Ontario's Trustee Act permits you, as your spouse’s "personal representative" to act as executor under Charlie's will.  (Note: This post discusses Ontario. I am not sure if the law is the same in each province).

However, if Uncle Charlie named an alternate executor in the event of the death of his executor (i.e. your spouse) and his will was drafted such that the alternate could step in and perform those duties, then you can step aside.

Katy Basi, an estate lawyer and frequent contributor to this blog says "It is critical to ensure that you have a series of alternate executors/trustees appointed in your will, especially if your will creates trusts which could continue for a number of years after your death. If your last named executor/trustee dies, and the administration of your estate is not complete, or trusts are still ongoing, then the "personal representative" of your deceased executor/trustee may take over. This person could be a stranger to you, but Ontario's Trustee Act can swing into action and make it so."

Katy also notes that you have the ability to renounce your acceptance as the successor executor for Uncle Charlie without court approval, as long as you have not started acting as executor of Uncle Charlie’s estate or “intermeddling” in any way in Charlie’s estate. If you had started to act, you would need court approval to resign.

Finally, Katy says that if there are no named alternates, and you renounce as successor executor, then effectively there is no named executor and someone would have to apply to the court to be appointed as "administrator" (similar to the case of an intestate estate). Family members usually have first priority, but the court has discretion and may appoint a trust company or other non-family member under special circumstances. The consent of the beneficiaries entitled to the majority of the estate remaining at that time is often required for the application to be acceptable to the court. The court will need to approve the application, and the applicant cannot act until they get this approval, usually in the form of a probate certificate naming the applicant as "Successor Estate Trustee".

What should become clear from today’s post are two things:

1. If you are informed you have been named an executor, ensure the person naming you as executor has alternate replacements in their will, and that the will permits these alternates to act not only if you are deceased, but also if you are unwilling or unable to perform your duties as executor.  

2. Ensure your own will has alternate replacement provisions drafted with similar care.

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.

 

Financial Statement Reports for Dummies

In March 2011, I wrote a blog post titled Reading Financial Statements For Dummies. That post dealt with some tips on what to look for when reading financial statements ("F/S"). Today, I discuss the various types of reports that are attached to a set of F/S and the circumstances under which those reports are typically prepared.

Of course, "Dummies" is used in the popular culture context; since I even asked for help from my accounting standards quality control person in preparing this blog post. After all, I am first and foremost a tax guy, who the heck wants to be known as a boring audit guy :).

When you pick up a set of F/S for a private or public company, the first thing you will typically notice is the report attached to the financial statements. These reports which are signed by an individual accountant or accounting firm, indicate the level of assurance or credibility that a company wants or requires for its users (i.e. the readers of the F/S).

The type of report and the continuum of assurance goes like this:

Notice to Reader/Compilation Reports 

The lowest level report that can be provided by the preparer (typically an accountant or accounting firm) is a Notice to Reader report, often referred to as a compilation report; which actually provides no level of assurance. For these reports, the preparer receives information supplied by management or the owner of the company and “compiles” the financial information into a set of financial statements. It is clearly stated in the report that the preparers work is limited and that there is no assurance provided on the set of statements.

In a compilation engagement, the F/S do not have to be prepared in accordance with a financial reporting framework such as Canadian Accounting Standards for Private Enterprises (“ASPE”) (i.e. they could be prepared on a cash basis instead of the accrual basis, as long as this is specifically indicated).

A compilation engagement is typically prepared in circumstances where the only users are management and there is no need for all the disclosures necessary for a general purpose use (in most cases there are no notes attached to these F/S) and the company does not have any financing or arm's length shareholders. Thus, these statements are often just used to file income tax returns and as such, are the most cost effective F/S alternative.

The report contains a cautionary statement that the statements may not be appropriate for the users’ purposes. Even though no assurance is provided, when preparing a compilation report, the preparer must comply with professional standards, basic accounting principles and consider the reasonability of the information provided. The overall concept is that the preparer must ensure that the financial statements are not “false or misleading.”

Compilation services are not regulated in all provinces. One should check if the engagement is regulated and that the person engaged to perform the engagement is regulated.

The next type of report on the continuum of assurance is the Review Report:

Review Reports 

In comparison to a compilation report, a review report provides a moderate level of assurance. Specifically, a review engagement is commonly referred to as “Negative assurance” – meaning that nothing during the review has come to preparers’ attention causing them to believe that that the F/S are not, in all material respects, in accordance with Canadian ASPE.

The preparer determines the “plausibility” of the financial statements, primarily through the use of enquiry, analytical procedures and discussion with management and/or owner. “Plausible” is used in the sense of being worthy of belief, which is a moderate level of assurance.

This type of engagement is useful when a company does not need audited statements (which will be discussed next – which provide the highest level of assurance) – however, management or third parties want some assurance that the financial statements are plausible. For many of our client's who borrow money from the large banks, a review engagement is accepted in lieu of an audit and is the mid-price alternative (not that our clients are every concerned with price in respect of their F/S :).

Audit Reports 

An audit is the highest level of assurance that can be provided on financial statements. The procedures in an audit are much more encompassing than a review – such that the preparer can provide an opinion that the company’s financial statements are presented fairly, in all material respects, in accordance with the applicable Canadian accounting framework.

Although auditing has changed from the days of examining every document, current day computer assisting testing still requires extensive testing.

It is important to note that the audit provides “reasonable” assurance meaning that the preparer does not provide absolute assurance. Absolute assurance is not obtainable given the need for judgment, the use of testing and the fact that audit evidence is generally persuasive rather than conclusive.

Because of the detailed nature and the amount of work done, the cost to perform an audit and prepare audited financial statements can be expensive.

The type of report required is a matter to be discussed and agreed upon by the accountant/accounting firm and the client. You may be surprised to know that for each type of engagement, management is responsible for the preparation and fair presentation of the F/S.

As discussed above, each type of report provides a different level of assurance or credibility to the financial statements. If you have need to review a financial statement, it is important that you understand the level of reliance given to those set of statements, as all F/S reports are not created equal.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Gros Morne National Park - Part 2

On Monday, I recounted the first four days of my trip to Gros Morne National Park this summer. Today, I conclude with a summary of days five through eight.
 

Day 5

Lucky for us, it was a sunny beautiful day, with little wind for our hike to the top of Gros Morne Mountain. We had heard this hike could take anywhere from 6 to 10 hours and was considered very strenuous. Before we began our hike, we went to the Visitor Centre in Norris Point, where a helpful Parks Canada employee provided some clarification about the 16 km hike on the James Callaghan Trail. We were told the climb would start off with a fairly easy 1.5 hour

Such a pleasant warning

walk from the parking lot to the base. Next we would have a very hard 1.5 to 2 hour steep climb over broken rocks (shale and granite) called scree. Once we reached the top; we would then have a 3 to 4 hour trip back down. 

There was a more casual hike that wrapped around the mountain, but we selected the first option. In retrospect we were glad we took the direct route, as the alleged casual walk is not that casual in my opinion. It's full of rocks which are very hard on your feet. That is not to say the hike up the front of the mountain is a day at the beach. However, everyone we met hiking the direct route said they were glad they took the tougher steep climb than going up and down the casual route due to rocky gulches.

The walk to the base of the mountain was exactly as the park employee described. It is fairly easy and much of it was through forest which we appreciated as it blocked the sun. For us, the hike to the base took about 1hr and 15 minutes. The steep climb is as advertised. It is a very steep climb over broken rocks that never seemed to end. It felt like the mountain continually teased you as you thought you were done, only to find out you had more to go. The views going up are very nice, but the way up is not necessarily the greatest place to appreciate them and nothing compared to the views at the top of the mountain. 

Climbing the face of Gros Morne Mountain

We reached the top in 3 hours from our start off position in the parking lot. We were very tired. We had packed a lunch and our reward for reaching the top was to eat while taking in the awesome views afforded to us by being 800 meters high. Our decent was down the back of the mountain. The views of the fjords are unbelievable. The walk down is worse than the walk up as the rocks just pound your feet. People with hiking shoes were complaining so you can imagine how those hikers wearing runners felt. (We wore our hiking shoes on all the trails and were pleased we did.) Our only disappointment on this trail was that given the top of the mountain is considered an Arctic environment, the only animal we saw on our hike were Rock Ptarmigan chicks.


View from the top of Gros Morne Mountain

In total, our hike took 7 hours, which included probably just over a half an hour for lunch and picture breaks. My wife found the climb up very challenging. 

We rewarded ourselves with dinner at Chanterelles, the Sugar Hill’s fine dining restaurant. The highlight was an awesome cod wrapped in prosciutto with smoked coulis sauce sitting on a scallion shrimp rosti and lemon tart for dessert. As you have no doubt noticed, my wife and I enjoy our food.

Day 6

The weather gods decided they had provided the Goodfield’s with enough sunshine and the weather returned to rainy and misty. However, since we wanted a lazy day to recover from our Gros Morne hike, we did not really mind the rain. We purchased curry tuna sandwiches from Sugar Hill and took a leisurely drive of 25km or so past Cow Head to Parsons Pond to the Arches Provincial Park to view the arched rocks formed by sea wave erosion. The arches were interesting, but compared to what we had seen in the previous days, they dulled in comparison.

We then drove to Shallow Bay Beach which is a nice long sandy beach – unusual for Newfoundland. Unfortunately upon our arrival, the rain intensified and we had to leave. We went back to Western Brooke and drove slow to look for moose and caribou but had no success. We headed back to the Inn to rest up for what everyone told us was a must see show by the Anchors Aweigh band, at the Ocean View Hotel in Rocky Harbour.

Norris Point

Before the show we grabbed another dinner at Justin Thyme Bean & Bistro. I had chili scallops and a steak with onions and mushrooms that were excellent. My wife had a spinach salad with blue cheese and a hazelnut orange citrus dressing and salmon with black plums and apricot, both of which she thoroughly enjoyed.

The show exceeded my expectations. I would urge anyone visiting the Gros Morne area to check out the band. Please note you must reserve your seats if you have any hope of getting in. The show lasted almost 3 ½ hours and I was sad to see it end. The band is extremely entertaining. They are funny, great story tellers and excellent musicians. They play mostly local music but mix in a bit of everything else. The show was also surprisingly educational as the band provides a historical trip through Newfoundland both in their music and their banter. You really gain an appreciation of the pride Newfoundlanders have in their province and how they appreciate the tourists who come. I reiterate, a must see.

Day 7

Here’s a surprise, it was foggy and rainy again, only on this day you could cut the fog with a knife. Our intentions were to hike the Green Gardens, which is a very highly recommended trail in Woody Point. When we arrived at the trail we could not see five feet in front of us and debated whether it was worth hiking since we had almost no visibility. But as we had nothing else to do, we went for it. This trail takes you

Green Gardens Coastline

down to cliffs above a beach. We truly wondered about our intelligence as we could see absolutely nothing. About half way down the hill to the beach, the fog began to lift and our visibility began to improve. We could not see anything in the distance, but we could see immediately in front of us. After an hour or so down the hill, we arrived on flat land, which is essentially the land above the cliffs overlooking the beach. To our surprise, we were able to observe some awesome cliffs and coastline sites. I would recommend this hike, especially on a nice day. The hike back up was somewhat tiring and it took us three hours in total going up and down – not an easy hike.

We then went into Woody Point for lunch and had lobster sandwiches at the Galliott Studios, a store, gallery and restaurant (essentially the only item on the menu are lobster sandwiches). The studio has excellent coffee and lattes. While waiting for lunch, a whale swam by a boat docked at the studio giving it a good shove. Unfortunately, we did not see the whale, only the evidence of the rocking boat.
 

Day 8

Guess what? It was raining heavily again. Our best investment turned out to be North Face waterproof windbreakers we had purchased at Sporting Life earlier that summer. I cannot say enough about how our windbreakers kept us warm cut the wind. 

We were flying home later that day so we decided we would go back to the Tablelands for a 10:00 guided tour that is provided free of charge each day. The park representative was just outstanding

Tablelands in the fog

and tied together the visual surroundings with the geological history. The Tablelands are the result of the collision of the two ancient continents, that I discussed on Monday, but in this case, the way they collided caused the floor of the ocean to rise above the earth’s crust. Very little plant life grows or survives because of the heavy metal concentration in the earth, you are truly walking on the bottom of the ocean. 

If we did it again, we would take this tour at the beginning of the trip to gain a greater understanding of the geology we saw throughout the week. 

For lunch we went to Trout Lake and ate at the Seaside restaurant. The restaurant came highly recommended. We had soup and cod and it was very good, however, the restaurant is not cheap for lunch. 

Summary

Although the weather could have been better at times, my wife and I loved Gros Morne; but doing it as a pure hiking trip is not for everyone. The geology and beauty of the area are second to none and the people are friendly. I would definitely recommend visiting the Gros Morne area, particularly Norris Point, Woody Point and Rocky Harbour, for at least two to three days if you are travelling around the province.

P.S. If you are a hiker, here is a detailed list of some of the top hikes in Gros Morne.

Gros Morne National Park

Last summer my wife and I traveled to Gros Morne National Park in Newfoundland. We had a fantastic time! The variety of scenery, geological history, people we met and the seafood we ate made it an awesome week; even if the weather did not always cooperate. Today and Wednesday, I am going to recap our vacation, so if you are looking for my standard tax or money blog post and have no interest in Newfoundland, you may want to hit the escape button now. However, you may want to read on and learn about this very unique national park.

Newfoundland is a large province, so we made the conscious decision to just stay in Gros Morne National Park and hike its various trails. Do not let the word "park" fool you. The park is larger than some small countries.

View from top of Gros Morne Mountain

The park is a UNESCO World Heritage site. Under the UNESCO criteria, Gros Morne qualifies as an “outstanding example representing major stages of the earth’s history” and as an “area of exceptional beauty”. The historic criterion is met because the rocks of Gros Morne and Newfoundland demonstrate the theory of plate tectonics which describes how the surface of our planet is in constant change. As I understand it, Tuzo Wilson, a Canadian geologist, suggested the idea that the Atlantic Ocean closed and reopened and that an earlier ocean basin was crushed between two colliding continents raising the Appalachian Mountains – the western side being the rocks of ancient North America and the Eastern side being the rocks of Africa.

We selected Norris Point as our base and the Sugar Hill Inn for our accommodations. The four star inn is more upscale than most options in the area and you could certainly find cheaper alternatives. The inn has very nice rooms, an excellent restaurant and was centrally located, making it easy for us to travel to Rocky Harbour, Woody Point and various other points of interest in the park.
               
For those interested in travelling to Newfoundland and Gros Morne in particular, I will provide a brief summary of what we did, where we hiked, what we saw and some of the places where we ate. Just a word of warning: if Rogers is your cellphone carrier, you may not have use of your phone (which was actually a blessing in disguise).

Day 1

We flew into Deer Lake, picked up our rental car and drove about an hour to Norris Point. As we started our drive, a sign quickly caught our attention, noting that there had been four moose/car accidents this year. We were careful not to collide with a moose in the dark.

Day 2

We woke to a rainy, misty day, with low visibility. We had read that a good rainy day activity was to visit the Discovery Centre in Woody Point and that’s where we headed. The centre has exhibits on the natural and cultural history of the area and a great lookout on the Verdana when there is visibility. In retrospect, I would suggest the Discovery Centre is better visited later in your trip, after you have hiked the area and the geological information has greater context. 

The Discovery Centre parking lot is also where you pick up the Big Lookout trail. The hike has some excellent views; unfortunately our views were limited because of the weather. The hike is uphill and we decided to use the trek as a warm-up for our future hikes, despite the rain. The hike took about  1.5 hours (after a few hikes we realized we were always at the lower end of the hike estimates provided at the beginning of the trails – so if you want a gauge, 50 year olds in fairly good shape can do most hikes in good time).

After our hike we drove to the Old Loft restaurant in Woody Point. We had lunch outside on the deck. My wife and I both had the cod, which was very fresh and pan fried. The accompanying salad and fries were also very good. By the end of the trip, we considered this restaurant one of the best restaurants we had dined at when you consider quality and price. 

The Tablelands

Following lunch we went to the nearby Tablelands. To say the Tablelands have a unique terrain is an understatement. You are essentially walking on the ocean floor. The rain and fog made for poor visibility and our view of the Tableland Mountains was impaired. However, the walk was a very easy, flat walk that can take from 1.5 to 2 hours depending on how often you veer off the main track. (I will discuss the Tablelands in greater detail in my day 7 summary.)

After returning to our car, we drove back to Norris Point, about an hour drive and checked out Neddies Harbour Inn which was our other consideration when booking our accommodations. Neddies has a beautiful view of Norris Point, however, we did not get a chance to see any of the rooms.

Day 3

The weather on day 3 was very similar to day 2 a misty, cloudy day. We decided we would hike Bakers Brook Falls, a fairly easy 2 to 2.5 hour walk and is not dependent on clear views. The walk is not very interesting, but the prize at the end is some very nice waterfalls. This was a perfect hike for a misty day.

We then went for lunch at Java Jacks which was highly rated online. The restaurant is very quaint and we had nice salads and very light fish cakes. We also tried the mussels which were fresh and large, but the broth was watery. IMHO, when preparing a broth for mussels, the water from the mussels must be drained first and the broth should be tasty enough to dip your bread. This is a nice restaurant that many people rave about, but the watery broth took the restaurant down a notch in our opinion. 

We then drove to Lobster Cove to a scenic lighthouse. I guess it is a make work project, but there were two Park Canada employees in what seemed like a 20 square foot space in the lighthouse. Anyways, I digress, the view was awesome at the lighthouse and many people bring a picnic lunch. We also loved the two red Muskoka chairs placed at the end of the little trail where we could sit and admire the view. We later learned that these signature chairs were placed strategically on many trails and scenic spots. On our subsequent hikes we would look for these two red chairs. 



View from Jenniex house in Norris Point

On our way back to the Inn we stopped at a tea house called the Jenniex house in Norris Point. The view of Bonne Bay and the Tablelands is just spectacular from this vantage point. This is a must-see picture destination.



For dinner we ate at Justin Thyme Bean and Bistro, a new restaurant that was opened only two months earlier by a husband (Justin the chef) and wife (Lynne) team. We ended up eating at this restaurant several times, since the menu is imaginative and changes daily.

We started our meal with the aptly named Justincredible mussels. Where Java Jacks’ broth was waterlogged, this broth was a taste sensation. The mussels were large and fresh and the pesto cream sauce (the water from the mussels was drained) was excellent. We soaked up all the sauce we could with Justin’s homemade bread. My wife had read online about Justin’s butter poached lobster and had called ahead asking if he could prepare lobsters. We were pleasantly surprised that not only had Justin got the lobsters as per our request, but later found out he had made a special trip to get live lobsters at the fishery given the supply is limited post lobster season. All this for two people who might not show up for their reservation. The poached lobsters were outstanding - two of the best lobsters we have ever eaten anywhere in our travels. Overall just an awesome meal, if not a cholesterol nightmare.

Day 4



Western Brooke Pond

The travel gods were finally with us. We needed a clear, sunny, beautiful day for our pre-booked boat tour of Western Brooke Pond and got that day. This tour was a must according to any review we had read about Gros Morne and it did not disappoint.  

To get to the tour you had to walk 45 minutes (this is a very long walk and many of the elderly people we passed where struggling and later told us they had not expected such a long walk) to a dock. Once your reach the dock you set-off on a two hour boat tour; which more than lived up to its billing. Don't miss this tour if you go to Gros Morne. 

The fjords of Western Brooke Pond are what caught my attention on the “Come to Newfoundland” TV advertisements that got me interested in taking this trip. I remembered thinking to myself, this place looks like Norway. As I understand it, the pond actually started as a true fjord (which is saltwater) but as the glaziers moved and the land closed, it became a fresh water pond and is technically not a true fjord anymore. The scenery and fjords are spectacular.

After the tour we planned to hike Snug Harbour in the Western Brooke Pond area. However, at the start of the hike there was a water crossing which ran about 4 feet deep. To forge the water passage you needed a bathing suit, boots or water shoes, none of which we had.

As we were returning to the parking lot we saw a moose about 50 yards away in a field. Two minutes after we pulled out of the parking lot towards Cow Head, we saw three caribou. We had lunch and then headed back to undertake the Coastal Trail hike. It was very windy and while there was a nice ocean view, the scenery was mostly scattered driftwood. Not one of our favourite hikes, but supposedly it has a great view at sunset. One cool thing on this hike was the Costal Tuckamore, where coastal trees grow only on the protected side of the water so that they seem to lean away from the sea as they grow.  The mini forests have openings and you could walk under these contorted trees if you wished, however, they are pretty eerie and you would almost expect to be attacked by bats or witches :)

We had a light meal as we got psychologically ready for our penultimate hike of Gros Morne Mountain the next morning.

On Wednesday, I will conclude my Gros Morne travel recap. Hopefully, I have you sufficiently interested in Gros Morne and Newfoundland to read my conclusion. If not, you may want to at least read my Day 5 summary to see if I survived my trek up Gros Morne Mountain in one piece.

Should You Transfer Your Sole Proprietorship into a Corporation?

To minimize costs and test the economic waters, many Canadians start their own business as a sole proprietorship. If your business proves successful, you are then faced with the decision of whether

or not to incorporate. Today’s post discusses the income tax and business issues you must consider before deciding to move from a sole proprietorship to a corporate structure.

Legal Liability

As a business grows, sales tend to become larger and the consulting engagements more complex. Consequently, the risk of a product flaw or error becomes greater. As a proprietor, any legal action taken against your business places all your personal assets at risk, including your home (if it is in your name and not your spouses). Therefore, the decision to incorporate often makes sense just to ensure your personal assets are protected.

Until you incorporate, it is vital to ensure you maintain adequate business insurance and minimize the assets held in your own name.

Profitability and Tax Rates

As a proprietor, you must report your business income on your personal income tax return. As such, your profits are taxed at your marginal income tax rate. If you require all your business profits to fund your lifestyle; it does not make sense to incorporate your business (subject to other issues I will discuss below). However, if your business has become profitable enough that you do not need all the income generated, incorporation begins to make some sense as a tax deferral mechanism.

For example: In Ontario, the first $500,000 of active business income is taxed at only 15.5%. If you need $80,000 to live on and can leave the rest of the money in the corporation, you would defer at minimum 20% in income tax by utilizing a corporation (The marginal rate of income tax in the $80k range is approximately 35.5% vs. 15.5% corporate rate). If you are in the highest Ontario personal marginal rate you could be deferring upwards of 34%. By the way, active business income means what it sounds like: running a real business - manufacturing, wholesale, consulting, etc. A passive business earns income from stocks, rental properties, etc.

Capital Gains Exemption

One of the main advantages of incorporating is potentially being able to access the capital gains exemption for qualified small business corporation shares. The exemption is currently $750,000 per shareholder, but is scheduled to rise to $800,000 beginning January 1, 2014. Based on the 2014 exemption, a husband and wife who are 50/50 shareholders could sell their business for $1,600,000 and not pay any income tax, subject to the criteria discussed below. If you think your company may be worth millions in the future, you may even want to consider utilizing a family trust that would provide an exemption of $800,000 for every family member you include in the trust.

The criteria to determine whether shares qualify for the capital gains exemption are very complicated. The rules look back at the last twenty-four months prior to a sale and at the company on the date of the sale. In addition, the more successful you are, the harder it is to qualify. If you have excess cash and investments in the company you may fall offside the rules. I will discuss these confusing and complicated rules in a separate blog post in the future; but keep in mind, tax planning is imperative to ensure you qualify for the capital gains exemption.

Income Splitting

Income splitting opportunities for a corporation are often over-estimated. However, if you include your spouse as an owner, there may be significant income splitting benefits through the use of dividends. Dividends may be based on pure ownership (i.e.: Mr. A and Mrs. A each own 50%, so they each get 50% of any dividend paid) or you may be able to structure the corporation with discretionary shares that allow the dividends to be paid in any proportion to either Mr. A or Mrs. A (i.e.: 100% of the dividends are paid to Mrs. A and none to Mr. A). This type of structuring is complex and again you need to ensure you get proper tax and legal advice before utilizing a discretionary share structure.

How Do I Go from a Sole Proprietorship to a Corporation?

There are specific rollover provisions contained in Section 85 of the Income Tax Act that allow for you to transfer your sole proprietorship to a corporation on a tax-free basis. Shares of the corporation must be received on the transfer. The rollover is undertaken by filing Form T2057. Although this is a standard transfer provision, it is fraught with landmines.

The combined legal and accounting fees to undertake this transaction can range from $5,000 to $10,000 depending upon the complexity of the transfer. As such, many people decide to forgo this step, especially when they consider their main proprietorship asset to be personal goodwill (you are  the business and without you, it is worthless) as opposed to business goodwill (the portion of the business value that cannot be attributed to business assets such as inventory and equipment. i.e. The value of your business name, customer list, intellectual property etc). However, if you ignore filing Form T2057, you do so at your own risk.

This is because when you transfer your assets and goodwill from your proprietorship to a corporation, you are deemed to have sold or disposed of these assets at their fair market value. In order to avoid this deemed sale and to ensure you do not create any income or capital gains upon the transfer of these assets, I always suggest filing the tax-free rollover under Section 85.

As noted above, I have had clients argue they have no business goodwill and that all their goodwill is personal in nature. While in some cases there may be some validity to this argument, I think it is penny wise and pound foolish to take the risk that the CRA will deem a large gain on the transfer of your proprietorship goodwill when you can just make the election and eliminate that concern.

Once you have decided to rollover your goodwill to the corporation, it needs to be valued for purposes of the T2057 form, which can be a costly exercise. While not recommended, if you will be issued all the shares of the corporation, accountants may accept a client’s estimate of their goodwill for purposes of the election if it is reasonable and supportable. However, where other family members will become shareholders, a professional valuation is required. For example, if John transfers his proprietorship to a corporation and a valuator determines his shares are worth $500,000, John must be issued special shares worth $500,000 to ensure he has not conferred a benefit on his spouse or children. Once the special shares are issued to John, his spouse, family and/or trust subscribe for new common shares at $1.

It is important to note that I am glossing over several complex attribution rules here and you should not consider including any family member in the new corporation until you obtain proper income tax and legal advice. It is crucial to understand the ramifications of either decision and whether dividends must be paid to you in order to avoid the attribution rules.

Cost and administrative considerations

The cost of maintaining an incorporated company is far more expensive than operating a proprietorship. You must file financial statements with the CRA and the corporate income tax returns are complicated. You require annual legal resolutions and the administration is far more costly. Thus, I would not recommend the use of a corporation (subject to the other factors such as creditor proofing and the capital gains exemption discussed above) unless you could leave approximately $50,000 at minimum, but more like $75,000 of taxable income in the corporation after any salary you require.

Proprietors sometimes have difficulty separating their corporate funds from their personal funds as they are used to taking draws and simply paying tax on their business income. The corporate structure is more formal and personal drawings must be paid in the form of salary with income tax withheld and/or dividends. Both require filing of government forms (T4/T5).

The income tax benefits of a corporation can be significant. However, the transfer of a proprietorship to a corporation is very complex, especially when introducing family members as shareholders. It is thus vital that you engage an accountant and a lawyer to explain all the income tax issues to you before undertaking the transfer.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.