Ian: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses. I’m your host, Ian Portsmouth, the Editor of PROFIT Magazine and we’ve developed this podcast in cooperation with BMO Bank of Montreal.
No business owner wants to pay more tax that he or she should. So with the 2008 tax year drawing to a close, it’s a good time to review some of the ways your business can pay less tax. In this episode of the Business Coach Podcast, we’ll learn about some last minute tax strategies from Stephen Pasquale. Stephen is Senior Tax Partner with Fuller Landeau LLP, a mid-market accounting and advisory firm based in Toronto. Stephen, welcome to the Business Coach.
Stephen: Thank you. It’s a pleasure being on the show.
Ian: So tax planning is often described as a year-around task and we shouldn’t be waiting till November, December to do it. So is it not too late to start thinking about these things now?
Stephen: It’s not too late but tax planning immediately before the year end limits your ability to properly plan. For example, there are tax motivated actions available in December, they are likely to be a flow through in oil and gas unit or mining unit or stage production unit. These are generally just buying a number to put on a tax return without any regard for planning. Some types of planning require some time to be effective. For example the sale of qualified small business corporation shares in which you are trying to claim the capital gains exemption require 24-month hold period. Using estate planning technology, it’s possible to increase the available number of capital gains exemptions amongst the family, unless it is done 24 months prior to the sale, the disposition by other family members will not qualify for the capital gains exemption.
Ian: Ok now, you know, the point of this podcast is to educate entrepreneurs as to which opportunities are available to them. Shouldn’t your accountant know about these things or is it helpful to remind them that these opportunities exist?
Stephen: Information on tax planning is readily available on many websites. It’s, in my mind, a precautionary responsibility to learn about the strategies that we are talking about today. I also believe that it is the entrepreneur’s responsibility to challenge the advisor especially where there are entertaining a significant transaction that could give rise to a significant amount of tax. If you receive bad news from your doctor, you seek a second opinion. Same theory only with financial help.
Ian: Now, a lot of businesses have been struggling with volatility on the currency exchange markets in 2008. Is there a tax strategy around that that can help save some money?
Stephen: I believe so. Even though the value of these assets that an individual acquired may not have changed in the local currency because in Canada, we report everything in Canadian dollars, and moving it of the exchange rate could give rise to either a gain or a loss. So over the last twelve months, the U.S. dollars has gone from +10% to -14% a significant swing. So I think it is prudent to take a look at the value of your assets in Canadian dollars and it is possible that you may be able to create a capital loss or a capital gain or an income loss or an income gain depending on the nature of the asset.
Ian: And how about inventory which is a certain type of asset. You know, as markets have been changing, the value of your inventory conceivably could change. Is that correct?
Stephen: Absolutely. For income tax purposes, inventory may be valued at a lower cost of market. An analysis of what is included in inventory its aging, its cost, its market value, might result in a deduction arising in a taxable income. As markets have tightened the market price of inventory that is already slow moving might become less than cost resulting in unavailable deductions for tax purposes.
Ian: Now during recessionary times which we appear to be heading into if we are not already in them, receivables can get stretched out and they may diminish in value. So what’s the tax strategy around your receivables?
Stephen: Well, same as the inventory where terms are offered to a customer, a review of each receivable might provide a deduction when the collectibility of the receivable is doubtful. Look at some of the blue chip companies that are experiencing challenging times currently.
Ian: Now is it all about the collectibility? Who decides how collectible the receivable is for tax planning purposes?
Stephen: The income tax return is the responsibility of the taxpayer. So the taxpayer must look at the receivable and determine at the time of filing the return whether the receivable was doubtful or not.
Ian: And can you just say I don’t think this is going to come in?
Stephen: That’s exactly right Ian. The taxpayer saying “I have extended terms to this entity, this entity has been slow at paying and we’ve talked to them about when we might receive payment and they give us a song and a dance and we are of the opinion that as at the end of the year, when we are filing our return for that tax period, that we may not get paid.”.
Ian: Now let’s talk a bit about the individual tax return and estate freezes. How do those work at the end of 2008?
Stephen: Estate planning is not generally a year-end type thing. I think it is currently because values are depressed but one should entertain looking at whether or not it is the appropriate time to do an estate freeze. Estate freeze is the term that practitioners use to crystallize the value of an asset owned by an individual at a number which would be the current market value and any future growth would accrue to the benefit of the individual, that that person wants to enjoy that increase in value.
So, in a private corporation situation, if today’s value is 1, and we anticipate it going to 2, we would freeze at 1, as the grown shares owned by the family members either directly into a trust and they would enjoy the future growth on death of the person that did the freeze, we know what the tax is because their value is set at 1. And we now know how much tax and look at methodology of filing that tax liability whether it is through the use of an insurance policy or other assets of the family. Because the values are depressed right now it may be a very good time to do the freeze so that more value is pushed off into the future. As well as if people have done a freeze in the past, it might be prudent to take a look at current values which may have been left then at the time that the freeze was done and thaw and re-freeze at the lower value. Prior to any estate freeze, the advisor must question the quantum asset required by the individual to maintain lifestyle. It is nice to defer tax, it’s not so nice to ask your heirs for money to support your lifestyle.
Ian: Now, I think most entrepreneurs are aware that they should probably take a look at their basic personal investment portfolio and look at any losses or gains they have incurred over the last year. So can you give us a couple of tips on where to look in your investment portfolio for savings?
Stephen: Over the last number of years, investors have enjoyed significant increases in the value of their portfolio. Some of this value has eroded over the last few months, but over the past three years, and I use three years because that’s the number of years we can carry losses back. Some of those gains may have been realized so it would be prudent for everybody to take a look a the gains that they realized and paid tax on over the last three years and take a look at their current portfolio and possibly crystallize losses which could be carried back for three years and recup the tax that has been paid. One other comment in that regard is recent developments indicate that it is not conclusive whether the loss on the sale of marketable securities is on capital account or income account, the difference being capital losses id deductible only against capital gains while an income loss is deductible against any type of income.
Ian: Stephen, thanks for sharing those tax planning tips for the close of the year and thanks for joining the Business Coach.
Stephen: You’re welcome. Thank you.
Ian: Stephen Pasquale is Senior Tax partner with Fuller Landeau LLP, a mid-market accounting and advisory firm. He joined us from his office in Toronto.
Well, that’s it for another episode of the Business Coach Podcast. Be sure to check out other episodes which you can download from BMO.com, profitguide.com or iTunes. If you have any comments or suggestions about the podcast, please send them to me at email@example.com.
Until next time, I am Ian Portsmouth, the Editor at PROFIT Magazine, wishing you continued success.