As a business owner and/or real estate investor, what should your business and real estate accountant be advising you about for the 2017 tax season, and the coming of 2018? With big changes in 2017/2018 with the corporate tax changes being implemented by the Federal Government, including those on income splitting, these critical issues for real estate investors and business owners are more important than ever.
1) Income Splitting
Since July 18, 2017, the country’s business owners have been closely following the proposed tax changes for private corporations put out by the Federal Government. One of the three major pillars of these changes are new income splitting rules. On December 13, 2017, the Department of Finance and Canada Revenue Agency released draft legislation and explanations for your reading pleasure over the holidays. Merry Christmas and Happy Hanukah! While a little later than expected, we now have a better idea of the rule framework for income splitting. Notice I didn’t say we know what the rules are, despite the release of the legislation, which takes effect January 1, 2018.
In its simplest form, the government is attempting to greatly restrict the ability of business owners and investors to divide their income amongst multiple family members. Income absorbed by one individual will generally generate greater taxes compared to the taxes owing where income is divided amongst multiple family members due to each person’s tax brackets which have escalating tax rates.
I will leave the technical details of the announcements to my colleagues who have prepared the following notice: Tax Alert: Government Simplifies Measures to Rein in Income Splitting.
In summary, the government has created a series of strict rules about who can be remunerated and by how much, but additional exemptions may be applicable for investors to avoid or decrease the reach of these rules. Further, this framework is very subjective. It will take years of court cases, and financial and emotional pain to provide true definition.
But, you still have opportunities your tax advisor can assist with. I will be describing some of these in further detail in future articles. As quick comments, there will be opportunities around using exemptions or changes from the initial proposals related to:
- Business owners who are 65 years of age and older and splits income with a spouse
- Dispositions of shares qualifying for the “capital gains deduction”
- Certain shares inherited where the deceased would not have been subject to the split income tax rules
- Distributions from “excluded businesses”
- Distributions from “excluded shares”
- Profits from compound income
- Recognizing that aunts, uncles, nieces and nephews will be excluded from “related individuals” in contrast to the original proposals
- Reasonable returns can be earned (although restricted if individuals are less than 25 years of age)
I urge you to speak with your tax advisor sooner rather than later to ensure you are taking advantage of these opportunities.
2) Review your year – what happened to you and your real estate investments last year?
Do you remember how little you remember about last year? What expenses did you have and what did cash spent relate to? Here are some recommendations on where to start getting ready for your tax return:
- Review last year’s tax returns for items that are likely applicable this year
- Review your notes from your last planning meeting with your real estate accountant for new items
- Review the personal tax checklists on our website for new deductions, changes to your business that provide opportunities for new deductions, or to see if there are additional points you haven’t thought of before. We have checklists of common deductions for real estate investments, automobile expenses, home office expenses, business/investment deductions and general items.
- Make a promise to yourself after you organize your information to stay organized. The same thing will happen next year, unless you organize yourself better now.
3) Decide: to CCA or not to CCA this tax season?
Tax season brings many questions from our clients about CCA. Taking depreciation on a property, or capital cost allowance (CCA) in tax terminology, allows you to shelter taxable income from immediate taxes. Ultimately, these taxes will likely be repaid when the property is disposed of as part of “recapture”. Generally though, when you sell a property, money is available to pay taxes as compared to through the years of ownership when money may be harder to come by. So, in effect, often the question should be rephrased to ask, “Would you like an interest free loan from the government for a number of years or not?”
Are there exceptions? Absolutely. If a property may be used as your principal residence, which can ultimately be disposed of tax free, claiming CCA typically removes this possibility of receiving the proceeds tax free. Or, in a particular year you may have a lower income so it doesn’t make sense to claim CCA. Instead you can save it for higher income years.
4) Determine repairs vs. capital expenditures…deductions now or over time?
Each year we have discussions with our clients about what they can or can’t claim as repairs, which they can deduct immediately, and capital expenditures, which are deducted over a long period of time. While admittedly more of an art than a science, we need to consider:
- Is this something that has an enduring benefit to the property?
- Is it to maintain or better the property?
- Is it integral to the property or a separate asset?
- What is its relative value compared to the total value of the property?
- Is the expenditure incurred during the first year or year of sale?
All of these factors go into helping decide whether you can claim the expense, or have to capitalize it over many years, thus potentially taking CCA over many years.
As some common examples, provided the expenditures were not in the first or last year of ownership, replacing a roof or windows tends to be repairs in my opinion, whereas adding a room or finishing a basement is capital in my mind. Refinishing bathrooms and kitchens tends to be areas where we look for more specific details before judging.
5) Condo special assessments…review special tax treatments with your real estate accountant
You have discovered that your condo corporation has approved a special assessment for your investment units. Essentially, additional funds need to be raised beyond what the normal monthly condo fees will cover. How do you account for these costs at tax time?
Fortunately, in many cases, the amounts are simply deducted as they are incurred. Essentially, you have to determine what the purpose of the special assessment is to see whether you can expense or capitalize the amount. For example, if the assessment relates to installing a new pool and fitness centre, you will capitalize the amounts. Whereas repairing common areas or landscaping would typically be expensed.
6) Get online now…before your tax deadline
CRA continues to add more access and services to its online portal, so it’s a good idea for you to set up online access to your account right now as the process takes a little time. Once you are registered for your personal and/or business accounts, you can authorize other people on your accounts, find notices of assessment, make requests, and make payments.
7) Start thinking about the coming year now
Start planning with your real estate accountant…but after March and April please. (And, if they have lots of time in tax season, should you be working with them?) We and other advisors appreciate your understanding. When you need the time, we’re there to help you answer the question: “What is my plan?” It should integrate and develop your financial, business, family, health, spiritual, fun, and personal sides. Life is short. Do your best to ensure that what you do now gets you to where you want to be.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Real estate accountant, real estate investor, speaker, author