THE ANNOTATED FINANCIAL STATEMENTS GUIDELINES INCOME

Transcription

1 THE ANNOTATED FINANCIAL STATEMENTS GUIDELINES INCOME Steve Z. Ranot, CPA, CA, CBV, IFA June 19, Bloor Street West, Suite 2603,Toronto, Ontario M4W 3E2 Tel: (416) Fax: (416) sranot@marmerpenner.com Website:

2 ASSET ALLOCATION Income vs. Growth (paragraph 19 (l) (e)) Intentional Underemployment (paragraph 19 (l) (a)) Income Shifting to Non-Arm s Length Parties Salary vs. Options 1

3 TIMING IS EVERYTHING Capital Gains and Losses Stock Options Year end Bonus Declaration 2

4 SELF EMPLOYED INCOME Payments to Non-Arm s Length Parties Personal Expenditures 3

5 UNREPORTED BUSINESS INCOME Business Expense Analysis Lifestyle Analysis Opening New Worth + Income Expenses = Ending Net Worth Gross Up for Tax? (19 (l) (c), 19 (l) (h)) 4

6 ACCESS Capital reinvestment requirements vs. depreciation Banking restrictions Financial health of the company Accounting methods Changes in shareholder loan balance 5

7 BUSINESS EXPENSES WITH PERSONAL COMPONENT Home office expenses Auto expenses Travel expenses Meals and entertainment Promotion Club Dues Legal and accounting fees Renovations 6

8 HIDDEN BENEFITS Interest free loans Personal use of company assets: - House - Cottage - Automobile - Boats 7

9 GROSS-UPS ON SIGNIFICANT PORTION OF INCOME FROM CAPITAL GAINS OR DIVIDENDS If someone earns all dividend income from their CCPC, we know to gross-up the income for the lower tax rate Same for someone with mainly taxable capital gains But does itapply if the spouse earned, say, $10,000 of capital gains ordividends? The Guidelines allow a court to impute additional income to a spouse who benefits from deriving a significant portion of income from capital gains and Canadian-source dividends Who gets to define significant? Merriam Webster? large enough to be noticed or have an effect Parties tend to agree <10% is not significant and >25% is What about the grey area between 10% and 25%? Significant is used in the Income Tax Act six times with five defining it at 10% or more and once as 25% or more With that guidance, one should be prepared to treat significant as close to 10% or more Marmer Penner Inc. 8

10 FOREIGN INCOME TAX RATES Guidelines allow court to increase a payor s income if the payor lives in a jurisdiction that has effective rates of income tax that are significantly lower than in Canada Questions: a) What is significant? If we stick to the 10% rule, then any jurisdiction with marginal rates below 48.17% may be significantly lower than over 53.53% current rate in Ontario. Isn t that everycountry? b) Why won t courts apply the converse if the payor pays higher rates? c) Why won t courts consider higher cost of living if so in part because of lower tax rates? Marmer Penner Inc. 9

11 ALLOWABLE EXPENSE FOR INCOME TAX John Singleton was a partnerin a law firm He wanted to buy a house and needed a $300,000 loan He withdrew $300,000 from the firm capital and used the money to buy his home CRA denied his interest deductibility Tax court agreed saying the withdrawal of capital and home purchase should be considered asone transaction Federal Court of Appeal disagreed and allowed the interest expense because the direct use of the loan was to refinance the capital account CRA and tax courts now bound by this decision If Mr. Singleton were a separated spouse, would you add the interest expense back to his income? Marmer Penner Inc. 10