SOURCE: Mew & Company

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September 21, 2017 17:17 ET

Vancouver Tax Accountants Mew and Company Look at Proposed Tax Planning Changes

Vancouver tax accountants Mew and Company examine how one proposal may impact Capital Dividend Account tax planning

VANCOUVER, BC--(Marketwired - September 21, 2017) - The Vancouver-based tax accountants at Mew + Company provide strategic tax consulting and accounting services to businesses all across Vancouver. In light of proposed tax rule changes made by Finance Minister Bill Morneau, the team has published a blog about how those changes may impact Capital Dividend Account tax planning. For more, go to: http://www.mewco.ca/blog/capital-dividend-account-tax-planning/

One of the biggest perks of having a corporation is that the tax rate is only 13%, up to $500,000 of corporate net profit. Hence, many successful corporations have retained earnings invested in an investment portfolio, or real estate earning passive income.

When an investment is eventually sold many years down the road, only half the gain is taxable, the other half is completely tax free. The tax-free rule is the same for a small private corporation, or an individual earning a salary as an employee.

When an individual sells an investment and pays the taxes owing, the net retained is still in the individual's hands. However, when a corporation sells an investment and pays the taxes owing, the net retained is within the corporation, and the shareholder needs to extract money out of the company, which creates personal taxes.

Under existing rules, the tax-free half of the gain (aka Capital Dividend Account) can be taken out by the shareholder tax free. This is one of the things Ottawa is considering changing (Don't forget that if the investment was held personally, the individual gets automatic access to the tax-free gain without further taxes).

The proposed changes have garnered plenty of criticism, and it's not clear what shape the final law will take. It's unlikely that the balances accumulated in the CDA already will simply disappear under the new law. Nonetheless, it is still advisable for people to contact their lawyers and accountants in order to extract the balance since it's currently tax free.

Another suggestion would be to crystalize the gains on all investments that have increased in value. This will have the effect of adding the tax-free half to the CDA that can be extracted.

It is difficult to crystalize gains on real estate without actually selling the property, however. But with stock portfolios, the stock can be sold and purchased back right away to crystallize the gains. Again, only stocks with gains should be sold. Selling stocks with losses will decrease the CDA balance. The goal here is to create as big a CDA balance as possible for extraction.

It's important to note that setting up a holding company to transfer the retained earnings of the operating company will be unconducive. Ottawa wants to tax the retained earnings that were subject to the small business deduction limit, and they will likely find a way to tax the holding companies.

The proposed changes are meant to tax retained earnings invested in passive investments. Businesses need real estate to operate out of, and there is no word on the retained earnings being accumulated to buy land and buildings to operate out of (not to rent out).

As for budding entrepreneurs who are just about to incorporate or reorganize their existing corporate structure, the corporate tax accountants at Mew + Company recommend holding off until more clarity is provided from Ottawa.

About the Company

At Mew + Company, we've got the solution to your taxation problems. With a simple philosophy of building long-lasting customer relationships, the company has been serving corporate clients in a variety of fields-including restaurants, real estate, retail, and the service industry. Investing in their specialist services will undoubtedly be fruitful for all kinds of clients.

To learn more about Mew + Company and discuss their services, log on to http://mewco.ca/

Contact Information

  • Lilly Woo, CPA, CA, CFE, CFP
    Mew + Company Chartered Professional Accountants
    604 688 9198
    Company Website: http://www.mewco.ca