The GST/HST has a significant effect on dental practices across Canada.  What are important implications of GST/HST and is there any way a practitioner can mitigate its effects or benefit from its application?  

British Columbia (BC) transitioned from HST back to GST/PST on April 1, 2013. What effect did this change have on practitioners in BC?

GST/HST in Canada

GST/HST is a value added tax.  GST is a federal tax and is set at 5%.  If a province harmonized their sales tax (turned their sales tax into a value added tax), it is added to the GST to become HST.  In July 2010, BC sales tax was turned into a 7% value added tax and was added to the 5% federal GST to result in a 12% HST.

GST/HST applies to the sale of most tangible property and most services.  There are few exceptions; the supply of dental services is one of these exceptions.  Most dental services are categorized as an “exempt supply”, meaning no GST/HST is collected from the patient on the supply of the service.  At first glance this seems like a good thing, unfortunately, the status of an “exempt service” also means the practitioner does not get to claim an input tax credit (refund) for GST/HST paid on its expenses.  GST/HST on large expenses like rent or the acquisition of equipment can be significant.  The inability of a practitioner to claim an input tax credit for GST/HST increases the cost of doing business. 

Cosmetic services and sales of goods outside basic dental treatment are considered a “taxable supply”. This means the practitioner must collect GST/HST from the patient if the practitioner is registered for GST/HST.  The practitioner providing a taxable supply will be able to claim input tax credits to get a refund of the GST/HST paid with respect to the provision of those taxable supplies. Registration is only required when sales of taxable supplies is greater than $30,000 in a year.

The sale and rental of orthodontic appliances are a taxable supply but zero-rated, meaning the practitioner does not collect GST/HST (the tax rate is 0%). The practitioner can claim input tax credits on the portion of costs that relate to this particular practice area. Canadian tax authorities administratively accepted one-third of orthodontic services to be zero rated. This position allows recovery of one-third of all GST/HST associated with the orthodontic services. Laboratory services are fully zero-rated. With good records and appropriate billing procedures, any practice can recover a percentage of GST/HST paid. The proportion of lab bills to total dental billings can be applied to recover an equal proportion of GST/HST paid in the practice.

Dentistry is unique in that most practices can have a combination of exempt supplies and taxable supplies; zero rated supplies are less common.  Property planning and business structures can reduce the cost of operating a dental practice by minimizing GST/HST cost.

If you are a dental practitioner and looking for guidance on tax and other issues, contact one of our trusted advisors here.

There are many types of entities that can be used to hold real estate, each with its own advantages and disadvantages. The common types are:

  • Proprietorship (i.e., individual)
  • Corporation
  • Partnership
  • Joint venture
  • Trust

The simplest ownership structure is to own real estate personally. This minimizes administrative costs; however, it does not offer any liability protection and offers little flexibility for tax planning.

A corporation is a separate legal entity from the shareholders, and any income earned is taxed within the corporation. The after-tax income of the corporation would then be paid to the shareholders as dividends. A corporation can be advantageous as it provides liability protection to the shareholders and can allow for certain tax planning strategies.

A partnership exists when at least two persons carry on business with a view to profit. Partnerships are flow-through entities for tax purposes. They are not considered separate taxable entities, so all income and/or losses are taxed in the hands of the partners. Depending on the type of partnership, a partnership may or may not offer some liability protection to the partners. 

Similar to a partnership, a joint venture is a flow-through entity for tax purposes; however, there are slight differences in the way the income is allocated to the venturers. Generally, joint ventures are the simplest way for multiple parties to share ownership of real estate. They can be less costly to administer and easier to dissolve than partnerships; however they generally do not offer any liability protection to the venturers.

Although less common, a trust can also be used to hold real estate. There are various types of trusts designed for specific purposes. One common type of trust is a personal trust, which is controlled by a trustee (or group of trustees) and can be used to provide income to selected beneficiaries.

The determination of the “right” ownership structure for a real estate investment depends entirely on the specific situation. Often, a combination of entity types will be utilized to allow for the most tax planning flexibility and to meet various investment objectives.

If you are looking to invest in real estate or already have real estate investments and wish to re-evaluate your ownership structure, please contact us to discuss your options.

Disclaimer: We caution that the above is a high level analysis and should not be construed as advice. There are several tax and other considerations beyond the scope of this article that would need to be considered in each situation.

For business owners, understanding the value of their business before they retire is essential to developing a proper retirement plan. Whether the business owner funds their retirement through the sale of their business, or if they decide to remain a shareholder and make cash draws, a formal business valuation will help them make an informed decision. To learn more about the benefits of a formal business valuation read our full article here. 

Landlords will often offer inducements to commercial tenants to sign long-term leases. Common types of inducements are:

  • Free rent periods
  • Renovations
  • Allowances paid to the tenant

These inducements result in differing accounting and tax treatments, which may not follow the actual cash flows.

For accounting purposes, any immediate cash outlay (e.g., renovations, allowances paid to tenants) will generally be recorded as an asset and expensed over the term of the lease. If a lease includes a free rent period, the total expected revenues from the lease are recognized on a straight-line basis over the term of the lease (including the free rent period); resulting in a receivable being setup during the free rent period, which is then reduced once rent is collected from the tenants.

For tax purposes, tenant inducements may be considered capital expenditures, expenditures to be deducted over the lease term or expenditures to be deducted as incurred. If the landlord directly incurs the renovation costs, then the renovation may be considered a capital improvement and treated as an addition to the Capital Cost Allowance pool. Depending on the nature of the payment, if there is a cash outlay that is not capital-in-nature (e.g., allowance paid to the tenant), then it may be deductible as incurred or over the term of the lease.

In the case of free rent, since there is no actual cash outlay, the free rent period is generally ignored for tax purposes, and the rental revenue is recorded based on the actual cash received.

If you are a landlord that offers tenant inducements, please contact us for further information.

Disclaimer: We caution that the above is a high level analysis and should not be construed as advice. There are several tax and other considerations beyond the scope of this article that would need to be considered in each situation.

Often the ownership structure for real estate investments involves a corporation holding an investment in a partnership or a joint venture (“JV”). Until 2011, this structure could be used to defer taxes if the corporation had a different year-end from the partnership or JV.

In 2011, this tax deferral opportunity was eliminated, as the corporate partner must now accrue additional income based on the estimated income earned during the “stub period” between the end of the partnership/JV’s fiscal period and the end of the corporate tax year. Transitional relief was offered in the first year that the corporate partner was required to adopt this new rule, provided that an election was made.

If you are a shareholder in a company that has investments in a partnership or JV, please contact us for further information.

Mergers and acquisitions are a complex process that can take years to complete and involve a number of factors. Director of Valuation Services Ron Hooge takes a moment to advise readers on the ins and outs of purchasing or selling, usually one of the most significant decisions a business owner makes. To view full article and learn about the various factors to consider in order to maximize the value of your business click here.

 

Many entrepreneurs and family business owners dream of passing on their companies to the next generation. After working for years to build the business, keeping it in the family is important to many of them. 

But what if the next generation isn’t ready to lead? Or what if they aren’t interested in running the business?

 While you can’t force your heirs to take over, you may have more success in transitioning your business to them by following these five steps:

 1. Start early. Make sure your kids spend time at the company and learn about the commitment it takes to support not only your family members but also the families of other employees. Give them business responsibilities when they’re young, from sorting the mail to mowing the lawn at the office. These early efforts will pay off with an appreciation of the efforts and rewards that come from business ownership.

2. Prepare them for leadership. If you were hiring a successor from outside the family, what would you look for in terms of education, training and skills? These are the same qualities your children should have if they are going to lead your company into the future.

For example, a college education, graduate training or specific certifications may be required for future leadership, so set these expectations for your children. Some owners insist that their children work outside the family business for a few years so that they gain perspective and experience before joining the family firm.

3. Create family employment policies. Does everyone in the family automatically get a job in the company? How much do family members get paid relative to non-family employees? What are the expectations for career paths, benefits and behavior?

Your employees will respect your children more if they pay their dues and earn their positions just like everyone else.

4. Remember that fair isn’t necessarily equal. Each of your children has different gifts and talents. While you may love them all equally, only one can be the next leader of the company, and everyone must make peace with this reality.

Remember, treating all of your children fairly doesn’t necessarily mean treating them equally. Those who work in and lead the business should have a different incentive and pay arrangement than those who may be shareholders but are not actively involved in day-to-day management. Talk to your financial advisor about setting up a fair way to compensate your heirs.

5. Figure out your plans for the future. If you’ve followed these steps, the next generation will be ready to lead your company boldly and brilliantly. But first, you have to get out of the way.

Spend time planning your next move, whether it’s retirement, another career or some other passion. It’s up to you to ensure a smooth transition — and the sooner you start, the more options you and your family will have to ensure your legacy.

It’s never too early to plan for business succession.  Let us help you start the conversation, please contact us for further information.

Yes, tax season is here. So now’s the time to collect all your tax slips, receipts and supporting documents and schedule an appointment with your accountant to review your tax situation.

The CRA has not issued particularly big changes for tax year 2011, but here are few tax saving opportunities of note:

Pension Income Splitting — Pensioners can jointly elect with their spouses or common law partners to split eligible income if they meet certain requirements. Only one joint election can be made per tax year, so if you both have eligible pension income, you will have to decide which pension income you will split for tax purposes.

Public Transit Tax Credit —You can deduct the cost of monthly public transit passes for unlimited travel on local buses, streetcars, subways, commuter trains or local ferries.

Children’s Arts Credit — You can deduct up to $500 per child for the fees you paid in 2011 to enroll your child in a prescribed program of artistic, cultural, recreational or developmental activity. Children must have been under 16 years of age at the beginning of 2011 in order to qualify for the credit. Eligible activities include a range of programs, from art, chess, drama, music and languages, to scouting, sewing, photography and painting.

Tradesperson’s Tools Deduction — You may be able to deduct the cost of eligible tools you bought to earn income as a tradesperson. Eligible items include tools and associated equipment that was certified as necessary for you to provide and use in your job, but does not include electronic communications devices (like cell phones).

Paperwork, Please

Of course, the CRA requires documentation for all of these credits, so be sure to find and save your receipts. Also, consider some other transactions or events of 2011 that might impact your tax situation:

• Marital status change

• Births or adoptions

• Sales of stock

• Medical expenses

• Purchase of a new home

In addition, go through your receipts for the year and organize them to save time. One easy way to do this is to look at the CRA line numbers on your last tax return and gather receipts by line number. Also, keep all of your slips — your T-4s, T5008s, T5s, T3s, T4RSPs — and year-end statements in one place so you can deliver them to your accountant in a timely manner.

Finally, remember that it’s never too early to discuss tax planning for 2012. For example, since you can only carry investment losses back three years, is there something you could sell at a loss this year to offset gains from prior years? Also, if you’re planning a major purchase, planning to get married or divorced or expecting a large medical expense in 2012, now is the time to discuss these events with your accountant.

Remember, the tax-filing deadline is April 30 for individuals, so please contact us soon to schedule a time to meet. If you have self-employment income, note that the deadline to file without penalty is June 15, but your taxes are still due by April 30.

We encourage you to keep good records throughout the year. Having your income and expenses well documented makes tax preparation easier and faster.

If separation and divorce weren’t hard enough, there are important tax and financial decisions you need to consider at this time. Adding to the confusion, the rules and administrative policies governing the taxation of separated and divorced spouses have undergone some significant changes in recent years. To read more about this click here.

Death, like virtually every other significant human event, comes with its own set of tax consequences and obligations. To read more about them click here.

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