Tax Law Topics Discussion and Publications

Two things the builder as a taxpayer to be aware of, are: first, that once it is established by CRA that construction is your business, and is conducted for profit, you will need to pay income tax on your net income from that sale, and the second is that the HST will be calculated on whole price of the house sale. So, if primary residence exemption is denied by CRA, the tax bill may exceed profits ...



Part I

Corporation’s Sales and Expenses

1. Income additions

According to Section 12 of the Income Tax Act (ITA), included in income, shall be all amounts received or receivable with respect to goods and services being sold or provided. This means that all your invoices for the fiscal year will be added together to match the total sales figure that you have reported. If you keep accurate records that will most likely match, as this is how your bookkeeper has arrived at total annual sales figure as well. The audit, however, will try to uncover underreported sales by looking at total bank deposit figures that can be found in the bank statements.

As an example: total bank deposits to all company’s accounts for the fiscal year add up to 3,650,000.00 dollars. Sales that the company has reported for that period are 1,950,000.00. The audit then would propose to include 1,700,000.00 of additional sales on the company’s income statement. As the omission is greater than 10%, penalties would also apply.


However, the fact that total deposits vary from total sales might be properly explained. The burden of proof is on the taxpayer, so you will need to produce the evidence that will satisfy the audit. The reasons that there might be more money coming into the account(s) may include...

750,000 tax exemption

Section 110.6 if the Income Tax Act (ITA) allows 750,000 tax-free capital gains to individuals. This exemption is valid for the gain on sale of shares of small business i.e. “qualified small business corporation share”, as defined by ITA S.110.6(1) to be considered as such, the business has to meet several criteria:

“ (a) at the determination time, is a share of the capital stock of a small business corporation owned by the individual, the individual’s spouse or common-law partner or a partnership related to the individual,

(b) throughout the 24 months immediately preceding the determination time, was not owned by anyone other than ...

It has been widely common for the business owners to use their sole manager/director status to simply take funds for living from the corporation. Or, make the corporation pay for their personal expenses like home renovation or visa bills.
Not wishing to declare it as personal income, but rather say that it was a loan that will be paid back later. On the other hand, the employed person would have paid those same expenses from his/her personal salary. It is obvious that the difference between those two would be that the employee has paid personal taxes, pension and employment insurance contribution, before receiving his/her net pay.

Therefore, on average, 100k annual salary will give you a 60k net pay. The business owner, taking money directly from the business bypasses the source deductions, and receives access to the whole 100k. By The CRA rules, simplistically stated, If the company earns 250k net, and then pays the salary 100k, has 150k net income and needs to pay tax on 150k (16.5% for small business in Ontario). Then the person receiving 100k salary needs to pay personal income tax.(40-45% or more), and that is precisely what the average business owner is reluctant to do. For the same reason the CRA has concentrated its attention and developed a sophisticated set of laws and regulations to help enforce tax law in that area.

In particular, Section 15 of the Income Tax Act (ITA) outlines the CRA’s position on loans advanced to shareholders/directors. The idea is that any benefit provided by the company to the shareholder/director shall be included in his/her taxable income. S. 15(2) deals with “shareholder debt” saying that where the shareholder, or any person connected to the shareholder received a loan “amount of loan or indebtedness is included in computing the income for the year of a person…”;

There is, however ...

Foreign Persons Receiving Rental Income From U.S. Real Property - a quote from gov't official release...

U.S. real estate professionals and rental agents/property managers are encountering an increasing number of situations that involve foreign persons’ acquiring U.S. real estate as a part-time residence, for investment or in some cases to conduct a U.S. business. The U.S. tax rules that apply to ownership and dispositions of U.S. real estate by foreign persons are different in some important respects from the rules that apply to U.S. persons. U.S. real estate professionals must know how to properly deal with foreign investors in U.S. real estate in order to be in compliance with the federal tax laws affecting real estate transactions.

They must be familiar with the rules that determine whether an individual or entity is to be treated as a U.S. person or a foreign person. In addition, they must also be familiar with the fundamentals of U.S. federal income taxation of foreign investors with U.S. rental income. Under U.S. tax law, a taxpayer can depreciate the property. There are different depreciation rates for residential and commercial properties. This annual depreciation is deducted from income as an expense on an income tax return. However, it may be recaptured if the property is sold. Foreign Property Owner’s Tax Return Responsibility During Ownership and Rental of Real Property Interest Before agreeing to manage U.S. real property for a foreign taxpayer, a real estate professional or rental agent should discuss with the foreign client whether the rental income will be taxed as investment income through withholding, or on a net income basis as “ effectively connected with a U.S. trade or business, ” without withholding (although the owner may have to file estimated tax returns).

Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor’s personal tax status and regardless of whether the United States has an income treaty with the foreign investor’s home country. The method by which rental income will be taxed depends on whether or not the foreign person who owns the property is considered “engaged in a U.S. trade or business....

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