Avoiding Capital Gains : Any beyond armchair accountants?

[adamc]

Hi guys, here is the scenario, looking for some advice as we proceed.



I am involved with a group of young professionals (all of which I have known since elementary school, if that makes a difference)

One of the group has placed a deposit on a chunk of land at a new resort development in the BC interior, it is freehold land and we have been discussing the different potential development scenarios (build + sell, build + occupy, build and rent or just hold the land).

Recently capital gains taxes came up, and I have been doing a bit of research in to potential ways to avoid or at least defer those tax payments. I will obviously be seeking professional consultation on the matter, but I thought I would throw the idea out there and see if anyone had any similar experiences.


We have also been debating the pros and cons of forming a holding corporation with equal partnership responsibilities, or having a multi-way personal mortgage with a contract outlining financial requirements and responsibilities from all parties involved.





Any of you done anything like this before, any tips or potential pitfalls would be appreciated.

[Kobe]

Pretty sure capital gains have to be paid, I know in the housing market, Instead of one person owning own large company and paying massive taxes, he may create a couple smaller companies, give it to his sons? Since there is less income coming into the company, less taxes will be paid..


Umm hard to explain...

[icecreamvan]

You might need a bit of elbow grease to fit the definition, but research Small Business Deduction my friend.

[in*10*se]

Originally posted by adamc

Recently capital gains taxes came up, and I have been doing a bit of research in to potential ways to avoid or at least defer those tax payments. I will obviously be seeking professional consultation on the matter, but I thought I would throw the idea out there and see if anyone had any similar experiences.


We have also been debating the pros and cons of forming a holding corporation with equal partnership responsibilities, or having a multi-way personal mortgage with a contract outlining financial requirements and responsibilities from all parties involved.

You really can't avoid capital gains....
you don't pay taxes on the CG until it is realized. (ie. you sell)
If you decide to build and hold/rent/occupy, you will never have to pay capital gains as there is nothing to tax.


Basic Calculation.

buy land @ 100k = Actual Cost Base (ie. cost)

5 years later your land is sold @ $1M.

1,000k
-100k
900k in Capital Gains.

Since I am assuming that this was for investment purposes, you will be taxed on 50% of your capital gains.

Thus 900k x 50% = 450k to be taxed
Assuming you are in the higher tax bracket, ie. both a combined federal and provincial tax of 40%.

You will pay 180k in taxes.


However if you are running a business of buying/selling land, you will no longer qualify for the 50% CG's deduction. Thus the 900k COULD be taxed instead of 450k.



Ummm lets see

incorporating may not be the most affordable option as you will have to file T2-corporate returns (a seperate return from your personal T1 return) It also costs a fair share to incorporate. Also your corporation will have to pay out dividends to the shareholders (ie. you& your friends) in order to distribute the earnings. It will get ugly if your friends have unequal share in the investment as different classes of shares will need to be issued to ensure that the payout is equitable for all parties. (it can be done though)

A partnership i think is sounding like the easiest way and can be distributed equally amongst your friends and is low cost.

Umm when u go consult someone, they'll be able to calculate the best after tax solution. I would say typically the corporation may be the most profitable after tax solution, but the most costly to setup. I would probably think however that it can be done through a partnership without as much hassle and not that big of a headache to setup.

From above the Small business deduction (SBD) is for small businesses that do not generate more than 400k in revenue, that they get a lower tax rate. (approx ~20%)

this is the best i can do with the limited info i have and without getting into too much detail that i'm too tired to post about....

[icecreamvan]

In all your vagueness, I think you're trying to say that your buddy is concerned about paying CG on his transfer of property to the partnership/corporation. In that case, research Section 85 Rollover.

Incorporation keeps the legal ends a lot cleaner and protects you in case the venture sours or your get screwed over. And no, you don't have to exclusively use conventional dividends to pay out the partners. ie. salary or capital dividends.

[ekguy]

wouldn't tax evasion be a risk here depending on some of the ways to avoid paying capital gains...i was under the impression you always have to pay taxes on gains made from selling investments such as property, land, etc....

[icecreamvan]

Originally posted by ekguy
wouldn't tax evasion be a risk here depending on some of the ways to avoid paying capital gains...i was under the impression you always have to pay taxes on gains made from selling investments such as property, land, etc....

No sir, tax deferral is not tax evasion.

[l/l/rX]

re-invest that money into RRSP's. if you can.

[adamc]

I'd like to thank everyone that has responded so far, as you can probably tell I am not 100% certain on which direction we are going to take this..

Right now we know that we want to work together, and collectively have access to some good resources - and there is the potential to create something special and parlay it in to future development.



I have done a small amount of researching in to the pros and cons of the different business structures available (LP, LLC etc) and I think despite all the hassle involved with an LLC - taking minutes of meetings, etc, etc, etc. it is probably how we are going to set it up.


The guy that is doing the majority of the footwork in BC is a friend of mine, and holds a business degree from a good school, I am just trying to fill the gaps in my understanding of ventures like these, so that I might come to the table without putting my foot in my mouth (not that it would damage the relationship, but still)..



Essentially we have

1) a chunk of land with a deposit on it
2) 5 guys with good jobs that want to participate
3) Valuable contacts in different trades that would allow us to construct a home on the land at below typical market costs.


I'll leave it at that for now and just try to read the responses, if you have any advice that you wish to impart privately, please don't hesitate to PM me.

[icecreamvan]

My advice: Ask a professional when you get serious about this.

[adamc]

Yeah I have access to my personal accountant, and my partner married in to a wealthy family that has some pretty excellent people on retainer.


I just wanted to gather as much free advice as possible, and then narrow down my options before going to the professionals.

[rage2]

Originally posted by icecreamvan
You might need a bit of elbow grease to fit the definition, but research Small Business Deduction my friend.

haha someone that knows what they're talking about .

If you setup a shell corporation that qualifies as a small business, selling the shares of that company will qualify for $500,000 tax free per person. Pretty sure it was 500k.

You do have to do this early though, setup a shell company, have everyone buy in at MARKET VALUE. That's the most important part, because if you put a value of $0.01 a share but yet the company is worth $1.00 a share, you'll get in trouble.

The tax deductions was designed for farmers to encourage farming, but lots of companies fall under the small business guidelines.

[rage2]

Here's the form for it:

http://www.cra-arc.gc.ca/E/pbg/tf/t657/t657-06e.pdf

edit - It's been bumped up to $750k for this year!

http://www.taxtips.ca/smallbusiness/...sdeduction.htm

And ya, get an accountant's help in setting it up for you. This is a heavily audited deduction, so if CRA doesn't believe you qualify for the deduction, you're in a lot of trouble.

[FishPoo]

Originally posted by rage2
Here's the form for it:

http://www.cra-arc.gc.ca/E/pbg/tf/t657/t657-06e.pdf

edit - It's been bumped up to $750k for this year!

http://www.taxtips.ca/smallbusiness/...sdeduction.htm

And ya, get an accountant's help in setting it up for you. This is a heavily audited deduction, so if CRA doesn't believe you qualify for the deduction, you're in a lot of trouble.

Yea, the thing they'll get you on is whether you qualify for the small business deduction and whether you are carrying on an active business.

[Mckenzie]

I think it mainly depends on what you want to do with it:

Flip it= Cap. gains
Flip it after rolling it inside a corp= cap gains taxed at investment income rate (much higher than regular rate- just under 50%). Not eligible for SBD
Develop the land and sell units of a development- active business income eligible for SBD

Build and rent= income
Build and rent after incorporating= active business income eligible for SBD
Build and occupy= capital gain when sold

This property can be rolled into a corp. using the Sec. 85 rollover. This is a very technical subject that is beyond the scope of most qualified accountants (ie- see a tax specialist for this).

[2000impreza]

Originally posted by rage2

haha someone that knows what they're talking about .

If you setup a shell corporation that qualifies as a small business, selling the shares of that company will qualify for $500,000 tax free per person. Pretty sure it was 500k.

You do have to do this early though, setup a shell company, have everyone buy in at MARKET VALUE. That's the most important part, because if you put a value of $0.01 a share but yet the company is worth $1.00 a share, you'll get in trouble.

The tax deductions was designed for farmers to encourage farming, but lots of companies fall under the small business guidelines.

The life time capital gain exemption would work if the land in question was used for business activities and given that the assets are owned by a SBC and qualify for this exemption. In this situation the land was nothing more than an investment with no business income provided. The CRA would most likely disallow this transactions. From my experience even most rental properties get disallowed from using this exemption.

Unless this is a fishing or farm property you're probably out of luck with the lifetime capital gains exemption.

There are ways to minimize taxes in situations like this however you should go seek advice from your accountant. If they don't know than you should probably go find another accountant.

[2000impreza]

Originally posted by Kobe
Pretty sure capital gains have to be paid, I know in the housing market, Instead of one person owning own large company and paying massive taxes, he may create a couple smaller companies, give it to his sons? Since there is less income coming into the company, less taxes will be paid..


Umm hard to explain...

This would be considered arms length...

http://www.cra-arc.gc.ca/E/pub/tp/it419r2/README.html