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Newsletter Page 2 - Toronto Certified General Accountant
Newsletter #10 December 2010
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Small Business Needs (Cont'd)
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Family Income Splitting (Cont'd)
However, once they reach 18 they can receive up to $37,485 of dividends tax-free (in Ontario) if
they have no other income, and if they are students with tuition of $7,000 and no other income, the
tax-free dividend increases to $43,566 (in Ontario). These amounts vary every year.
Holding Investments for Retirement
The longer you can delay the payment of tax, the more you have to accumulate and make
investments. Think of your holding company as a retirement pension “holding” your investments.
By paying tax-free dividends from Opco to Holdco, you can diversify your holdings and have Holdco
make investments. Without the holding company structure, you would have to pay tax first from the
dividends from your operating company, leaving less to reinvest.
Protection from Creditors
By establishing a holding company, funds can be transferred away from future risks associated with
the operating company without incurring additional income taxes. Funds can be paid as tax-free
dividends from Opco to Holdco, which protects those earnings from creditors of Opco. Since the
operating company likely needs the funds for operations, the holding company can lend the money
back to Opco on a secured basis.
The Disadvantages of a Holding Company
Additional Legal and Accounting costs
An additional corporation means additional accounting and legal costs associated with it i.e. financial
statements and corporate tax returns, legal preparation of annual corporate minutes.
Qualification for the Lifetime Capital Gains Exemption
Individuals who dispose of shares of a small business corporation are eligible for a lifetime $750,000
capital gains exemption. This means that the capital gain reflected in the growth of your operating
company (since incorporation) of up to $750,000 can be exempt from capital gains tax if certain
conditions are met. Shares of a holding company, which in turn owns shares of an operating
company, can qualify for the capital gains exemption when sold. However, accumulation of
investment type assets in the holding company may impede the ability to use the lifetime capital
gains exemption. This potential problem can be remedied by consulting with your accountant and
appropriate steps are taken prior to sale.
Stay tuned….
My next newsletter will discuss the strategy behind salaries and dividends as compensation to
owners of companies.
The Principal Residence Exemption
- A principal residence is defined as a housing unit owned by the taxpayer either by himself or herself or jointly, and ordinarily inhabited by the taxpayer, the taxpayer’s spouse or common-law partner, the taxpayer’s former spouse or common-law partner, or the taxpayer’s child under the age of 18 at any time in the year
- “Ordinarily inhabited” can mean residing for a “short period of time”, for example, a seasonal residence like a cottage, as long as the main reason for owning the property is not to earn income or to flip it for a profit
- A principal residence includes up to a half hectare (about 1.24 acres) of land surrounding the home, and any land in excess of a half hectare that can be shown to be necessary to the taxpayer’s use and enjoyment of his residence
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Toronto Certified General Accountant
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