Thinking Strategically Before Year End - Tax Planning & Tips

Peter Cuttini and Rebecca Dziarski

Francois: With the end of the year also means the season taxes, all that kind of planning, but we have a great team. So, Peter Cuttini from BDO Canada. Peter's accounting expertise is in real estate investing. And also, an expert for people that are investing outside of Canada. Rebecca is one of the BDO's real estate specialists, a real estate investor herself. She has worked in the UK, developed international experience and closer to home also sits on an advisor's, a condo board on their financial matters, so that can get complicated. In her spare time. You might see her zipping by, as she checks out real estate investing on her motorcycle.

So, tonight, Peter and Rebecca are here to get us thinking strategically before the end of the year. So, we still have a bit of time. Maybe there's some things we can do, some tips and tricks and planning 

Welcome.

So, what do we need to know?

Peter: Thank you Francois, 

Rebecca is going to be in the background. She'll be answering any questions on the chat. She's going to monitor the chat and we'll go from there. I'm going to share my screen with everyone just to go over the PowerPoint presentation.

So ultimately that's us, you know where to reach us and go from there.

Year-End Tax Tips:

Tax planning is always important. And what I would always say when it comes to your intact planning, is do it before the end of the year. It's such a shame, such a simple thing, but most people don't do it before the end of the year.

I'm not sure why go see your accountant, go see your advisors before the end of the year, whether it's the end of your corporate fiscal year or the end of your personal tax year, there's so much more planning that can be done when you do it past before the year  end, as opposed to after I hate saying that sometimes we're just keeping score and you're paying your tax on whatever you made and there's really not a lot of tax planning that you can do. So, let's move forward here. 

Like I said, always have it before the year end, not after. One of the biggest discussions we always have with clients, especially our corporate clients, is how are we going to pay it this year? Or is it going to be a salary? Is it going to be a loan? Is it going to be a bonus? Is it going to be dividends? There's a whole bunch of different tax planning, and you want to get an 

• Understanding of what kind of remuneration. 

1. You're going to need from a financing perspective and 
2. How much tax you're going to need to pay on that personal remuneration.

And it's important to do it before the end of the year, because you don't have a lot of time after the end of the year to make these decisions. 

So always get this remuneration planning done before the year end or within the first couple of weeks after the year end. A couple of basic things, for sure.

 

• If you are going to buy capital assets, purchase them before the year end. I know that seems simple, but it starts at the amortization of those assets. You get that extra year. I know clients who, if you're going to buy it January 3rd, by December 31st and holding, it just makes so much more sense. You get that extra year right away.

You get a bigger deduction right away. Now, the one thing I will say when it comes to that, don't buy capital assets just for the auction. If you need them, buy them before the end of the year, but don't go crazy and go out and buy something you really don't need. Cause I hate for you to spend a dollar to save 50 cents. To me, that just makes no sense. 

• If you've got inventory accounts receivable also consider writing those off. Why are we paying tax on receivables income that we may never get or old inventory write it off because it becomes a deduction, no point keeping that on the books. If it's worth nothing, consider writing it off and move forward from there. Okay. So, it's always a big issue. 

 

• How do we compensate family members? Gifts are an option. You may want to gift money to your children. One thing for sure, with a gift, once you've been gifted, you never get it back. It's an actual gift. They have control of it. So if they pay it back to you, that's one thing. But a gift must be that you give up control of that. Whether it's an asset, whether it's cash or whatever the case may be, if you pay it out to the family member, gifted to the family member it's in their control at that point in time. Now, salary to family members. CRA's 2018 really cracked down on this. It used to be a lot easier to do. What I suggest here is that the salary to the family member must be reasonable.

Now, what is reasonable? That's always a gray area, but you wouldn't be paying a hundred dollars an hour to your kid to do filing or to cut the grass. You would never pay a third party that much money to do it. There's no way you can justify that for your kids. 

• Consider loss trading. If you've got accrued gains during the year, and you recognize a crude gains trading portfolio, you sold some property.

You may want to do some loss trading at the end of the year to have some capital losses to go against those capital gains. It's important to do it at the right time. You also can't buy the exact same stock back within 30 days, if you buy it back within 30 days, but deny that loss to you. Not what a lot of people do.

Let's use the Bank of Montreal. I own Bank of Montreal. But if I'm seeing it's in a negative position and I want to sell it, I might sell Bank of Montreal, apply it against my capital gains for the year, but then turn around the next day and buy RBC. I'm still relatively in the same position as I was before, but I've now crystallized that capital loss to go against capital gains. 

• Payout of capital dividend. Now in a corporation, if you sell something for a gain to capital. Property, half of it is taxable in the corporation. Okay. The other half that's non-taxable goes into the capital dividend account and it's important to get the right timing. When you pay up this capital dividend account, it's going to cost you a bit of money, but you may want to consider doing it before the end of the year, because if there's a loss next year, it can grind down that capital dividend account.

And obviously, sorry, I should've said the capital dividend account is actually tax-free money to the individual shareholders because it was not taxable to the corporation it's not taxable to the individual shareholders.

• Make RRSP payments. You've got till usually it's February 28th of March 1st, depending on the year to make your RRSP payments.

If you are going to do that as part of your tax plan, make sure that you get it done. I like to make my RRSP payments before the end of the year. I just do it throughout the year, actually. And the reason for that is I don't want to play the market. I think you get into it when you have the money you move forward.

But, if you're going to wait till the end of the year, make sure you make those RRSP payments on time, because if you don't make them on time by that February 28th deadline, they won't apply for this year. So, you can make the payment February 28, 2022, and it will apply on your 2021 tax return.

• And then manage shareholder loans. A lot of clients, myself included. We pull money out of our corporation. We don't declare it as a dividend right away, or a salary or anything. It's a shareholder loan. The key with the shareholder loan is it must be repaid within one year of taking it out or it becomes income to you.

And that can be okay if you're going to be in a year where you're going to have high personal income, you may want to take that shareholder loan out, keep it personally, you owe it to the company, but then next year, assuming that you're going to have lower personal income would be the year to pay the dividend out, to take that shareholder loan.

To credit it back. That's your payment to the corporation. So ultimately that shareholder loan is going to be very important on how you manage it. You cannot continuously have the shareholder loan outstanding to the company. Like I said, if it's not repaid within one year or paid out as a dividend within one year, it becomes taxable to you as an individual.

Moving forward. I always laugh at this one. This one is truly important. I've seen a lot of people with bad bookkeeping and Rebecca can attest to this. It drives us nuts. It's so important to have this done. If you can't do your bookkeeping, whether it's monthly or quarterly, outsource.

You don't have the time to do it. And for most real estate investors, they don't have the time or they're not good at it. Outsource it, whether it's to us, whether it's to somebody else with cloud bookkeeping programs out there. Now, QuickBooks online Xero is just so simple. My bookkeepers can go into your bank account, download all the transactions directly into QuickBooks online.

And then it becomes relatively easy to categorize where those go. It can save you so much time if you're set up properly. The other part is, I hate people who do their bookkeeping once a year, because I guarantee you, you are going to miss something. You're going to forget something you're going to be like, oh, what was that?

Or just completely messed up. If you have joint ventures, every book, we have so many real estate investors who want to be a working partner, get joint ventures in. You look good when you promise your joint venture to have the bookkeeping to them within one month and you get it to within two or three weeks of the year end, not six months, and they're doing their tax return or later you want to make sure you're ahead of what you promise your joint ventures. Not before. Okay.

Audit proof. This is going to be critical to make sure you have all your ducks in an order. Everyone's going to get audited. I almost guarantee it, I've been audited on my stuff. What you want from an audit is you want to have the ability. They ask you all the questions you want to have the ability that within a day, you can find everything that they need.

And here you go. I'll give you an example. When I got audited, I got a really good accountant bookkeeper. It's my wife and she actually is CA as well. So, she did this binder. It was tabbed. It had all the receipts. They were looking for it. The auditor came into our office. But nine in the morning, I gave him the book of what we had checked in around 10:30. And he was like, no, I got nothing, no questions. Perfect. At noon, I went down and said, hey, if you want lunch, you can go over here. And he just looked at me. He goes, I've got nothing signed off half a day out of the office. If you're scrambling for stuff or you can't find stuff. It's going to give pause to that auditor is going to ask, wait a second. What else is in here? And he's going to dig deeper and deeper, and I'll share a funny story with you.

We've got a client he's very aggressive. He just getting audited and going through his meals and entertainment. The auditor was like, sir, what is this?

And then what's this? Oh, I took lunch, the date of that receipt was February 14th and it said right on there, couples’ dinner, couples Valentine's dinner. He took his wife out for dinner and tried to expense it. Now we all think it's 80 bucks.

He should have taken his wife to a better restaurant. That's beside the point. But for $80, he had that auditor convinced that he, this guy's a liar. And was that the guy's office for five days, going through everything all because of his stupid, silly little receipt, don't worry about those Mickey Mouse deductions investor-friendly like I said, you make sure you get the reports to your JV partners.

And I hate saying this. How do you know if you don't show your booking? How do you know you're making money? How do you know where you stand? How do you know, should you be selling something? How do you know how to do that? Year-end tax planning that we're talking about. If you can't provide me with the numbers, I can't provide good advice to you on what we should be doing.

That's why it's key to have this done. Like I said, monthly, if not quarterly. If it's quarterly, great. We can go off this September or what the third quarter and make decisions from there. Assuming that we think that the fourth quarter is going to be exactly that or similar to the other three quarters, make sure you have this done.

I stress this enough. I can't stress this enough. We see many people who can't get this done. And it costs them in the end. I'll give you an example. It wasn't a client of ours, but. Someone's property joint venture does the property manager had 23 different joint ventures? Unfortunately, they didn't do their bookkeeping and they didn't know whose money they had.

They went bankrupt and had to give away everything. And they had 23 joint ventures and I think 30 plus properties, you don't want to be that person. Okay. Moving forward, always talk to your accountant at the end of the year. Are you structured properly? And not only are you structured properly today, are you structured properly for tomorrow where you're going? Because we don't plan just for today. We plan for 5, 10, 20 years from now. I've seen too many people who structure. It's using techniques from 20, 15, 16, 17, that may not work today. Governments have changed it and we had an election last night. I'm anticipating more tax changes. Make sure that your structure is working optimally for you.

And it seems relatively straightforward, but it's not. You may need to tweak it. You may need to add a family trust. You may need to add another corporation. These are all the kinds of stuff that we will have a discussion with you. In terms of your year end meeting. And like I said, do it before the year end. Always integrate your tax and legal and investment strategy or your mortgage broker.

We need to be talking, we need to be discussing it with your lawyer. We all need to be on the same page. I can save you a bunch of money on tax planning, but if you can't get the mortgage because your income is too low, you're going to hate me. We need to have that balance. Talk to your mortgage broker, talk to your bank.

We always have discussions with them. Hey, I need X. Okay. We can do that. And how do we do that in the most tax effective manner. Avoid mortgage fraud, disclose everything to your banker it's one of the worst things we see is when people don't disclose and you always hear the bare trustee and I'm going to say this is probably going away.

Especially after last night, Justin Trudeau did say by 2025, he's going to have beneficial ownership of all real estate in Canada. So, they're going to know it's going to be supposedly going to be public banks will probably know all this. The bare trustee. I think it's going the way of the dodo.

The ventures disclose everybody. That's the way to do it, make sure. And there are opportunities now to get financing rights are dirt cheap. I just didn't want them personally. And it was really nice. So, there's opportunities now, but you need to be discussing it with your tax legal and a finance team.

They all need to be on the same page.

I'm just going to be a plug for us, but you need strong advisors. You need advisors who can work with you, who can make sure you grow. You don't want to have your best mortgage broker and your best lawyer out there. And then going to a discount shop usually doesn't work. I used to use that line a lot.

You're as strong as your weakest link. Can you imagine you're going to some discount lawyer to do everything that may not be the best images to co ventures? I hate saying this. I've got clients who say, I want to use you because I know your reputation out in the marketplace. And when they go attract co ventures, I got some very large clients who say they purposely went with us because of our reputation in the marketplace.

What's their experience? Are they real estate investors? I'm a real estate investor. My business partner, George Dube is. You probably have heard we're all real estate investors. We're looking at stuff every day. We've got a purchase coming down the pipe, make sure they are real estate investors.

Don't do it alone. Trust your advisors, your legal, your tax, your mortgage advisors, and make sure they are integrated and make sure they are talking to each other. Does it cost to do tax planning? Yeah. It's deductible. If you've got a corporation, you should be doing this annually at minimum, I've got clients, we do business monitoring on a quarterly basis.

We could talk about the numbers. We make sure we go from there, but definitely do it on an annual basis. Make sure you guys are all aligned. It's not going to be something quick that we can just say, hey, can I see it more? When we get doing this, you need some lead time to do this. So, make sure that your tax planning meeting, you're having with your advisors, you're talking about your taxes and you're also monitoring the business.

How you doing? That's what I go back also to the bookkeeping. How do you know what you're doing? If you don't have that book you've been done, this is just a plug for us. And I am using this more and more because I've seen a lot of advisors out there, whether it's legal or accounting who are sending stuff overseas.

And I don't know about you. I don't want my social insurance number to be overseas. I don't want my accountant, my legal advisor to be overseas. I want to make sure that they're here. Make sure that everything is properly secure in Canada. It causes Canadian jobs. And make sure the advisor isn't sending stuff off shore.

If you're comfortable with that. Great. I wouldn't be comfortable with that. I would rather pay a little bit more for a Canadian made solution. I just think it makes more sense and make sure that they are doing Canada. And I will guarantee you. George and I, and the firm has made a 100% commitment that all the work will be done in Canada.

The only time work will not be done in Canada is if one of us was on a vacation or spring training or something, and I needed to do something, but that's it, all my teams in Canada, all the work's going to be done in Canada. We're not shipping it off to the Philippines or India or wherever the case may be.

Make sure that you understand this for whether you're using us or any other advisor. Quickly wrap up. You can contact us for introduction consults for tax planning, for business monitoring, for your year-end tax, compliance needs. Whether it's personal or corporate, I will say this.

We're not the cheapest. We're not perfect, but I guarantee you, we delivered a good bang for your buck. And at that there is where you can contact us, feel free to reach out to myself, reach out to Rebecca. Best place to start is probably reach out to Taylor. One of my admin assistants, she has got control of my schedule and book us in for an appointment if we need to speak.

And with that, I think there was already a disclaimer, but my lawyer friends will always say, make sure you're doing this. With the advice of a qualified tax professional, don't do this on your own. I hate too many people saying; my friend can get this. Yeah, but it's a completely different situation. So it doesn't work for you. Make sure you get the right advice.

Sarah: Awesome. Peter, as always, that was excellent. Lots of things to think about as we are getting our ducks in a row as we say. So that was very insightful. So guys, there's Peter there's Rebecca's information.

Feel free to reach out to them. Peter has helped me decipher my mess of paperwork and just organize things for him and George. And their team. So that was awesome. Thank you.