For real estate and construction businesses, whether concerned with cash flow now, or planning for recovery and future opportunities, tax planning ideas are well worth your time.
In April, we held a series of real estate and construction webinars focused on preparing and responding to COVID-19:
- Real Estate & Construction Industry: Cash Flow and Tax Strategies amid COVID-19 – Part One
- Real Estate & Construction Industry: Tax, Insurance, Contractual and Digital Considerations amid COVID-19- Part Two
Now, though, we want to start looking at what recovery may look like, and how to prepare for the future.
For many of us there are challenges as cash flow is frequently restricted but, an opportunity may be here or shortly here to save considerable taxes in the future. Addressing these challenges may effectively require an investment in funds – paying something now for a larger return later on. We have an unfortunate situation upon us now, but it may be prudent to implement planning today for the future.
As perspective, if you believe that governments will be increasing taxes to help pay for the COVID stimulus, you will be increasingly concerned about your after-tax income. For example, is it possible that the capital gains inclusion rate could increase, the capital gains exemption be eliminated, or tax rates increased? All of this means we will want to implement tax plans that help our businesses, families and investments recover.
What can real estate and construction businesses discuss with their BDO advisor?
Now is the time to talk with your BDO advisor to review specific tax planning strategies. These discussions may revolve around a variety of strategies, including:
- Recalculating instalments, and potentially reduce them, to save cash flow
- Potentially redirecting existing instalments to GST/HST or payroll accounts
- Carryback of losses and/or trigger capital losses to recover previously paid taxes – watch for various stop-loss and superficial loss rules, and implications to your capital dividend account, implications to refundable taxes over the relevant time period
- Prescribed rate loans for income splitting to decrease current and future family tax burden
- Unlocking trapped losses in a corporate group to protect existing and future profits
- Considering interest deductibility opportunities while restructuring assets and lending arrangements
- Caution regarding when personally owned real estate (for example) is refinanced if looking to transfer (may limit tax deferral opportunities)
- Considering transfers of real estate inventory while values are lower
- Considering transfers of real estate if land transfer tax is applicable while values lower
- Considering selling assets now if you were otherwise likely to sell shortly to take advantage of the 50% inclusion rate, use personal tax brackets, or offset losses
- “Freeze” or “refreeze/thaw” – locking in the value of your business at a lower value may ultimately save approximately 25% of value of decrease and future appreciation of business, liquid investments, real estate, etc.
- “Crystallize” – lock in the capital gains exemptions
- Tax planning strategies to take out larger sums of funds from a corporate group in a tax effective manner are available
- Look at a family trust in combination with different strategies from a tax, legal, succession, estate planning, financing perspective
- Compliment asset protection planning from your legal team with a tax reorganization to help prepare for the next recession and protect against normal business risks
- Consider tax effective acquisition strategies for potential buying opportunities
- Consider changing your remuneration model to what may be less tax effective (regular wages to owners/family) to potentially qualify for future programs for a potential future crisis.
- Tax implications of losing investment deposits on bankrupt condo or other developments that can’t come to fruition – timing of triggering losses
- Tax implications of having to foreclose on 2nd mortgage for your investments, differences given property values etc.
- Allowable business investment loss (ABIL) which can be deducted against different sources of income vs. capital loss which is generally restricted to application against capital gains
More complex strategies and those unique to your business should be discussed with your BDO team. Many of the ideas listed above may be implemented more efficiently if done at the same time.
Talk with your BDO team for suggestions that are applicable to your business, investments, team and family.
George E. Dube, CPA, CA
Tax Partner, Real Estate and Construction Industry, BDO Canada
Chris Witzel, CPA, CA
Senior Manager, BDO Canada
