Sent: Monday, November 28, 2005 3:32 PM
To: taxman at centa.com
Subject: RE: Adv of Professional Corp.
Hi David
How can you put your prof-corp. "on hold" without paying out the retained
earnings ? -
Thx RXXXXXXX
-------------------------
david ingram replies:
Simply stop using it (the Corp) for the length of time it takes to make your
mortgage deductible.
Operate as John Doe or James Smith or Bob Jones, etc. When you have moved
enough money to make the mortgage deductible, resurrect the professional
corporation.
I was in a prominent professional accounting corporation the other day. The
"company" advertises professional tax consulting, etc and "all" their
clients seem to be incorporated. I asked the first two principals I met if
their own mortgages were deductible and they looked at me as if I was nuts.
"How can I make my mortgage deductible?" was their question. DUH!!!
The first thing anyone dealing with a lawyer or an accountant or a mortgage
broker is: "IS YOUR OWN MORTGAGE INTEREST TAX DEDUCTIBLE?" If their answer
is no, or they have "that" look in their eye, you need a new consultant,
accountant, lawyer, broker, etc.
I am sitting here on Prospect Road with the snow poring down and a 50 foot
stylized Xmas tree lit up in the front yard. Son Mitchell put it up this
afternoon. I and the kids are just about to go for a midnight cruise in the
Jeep Grand Wagoneer with four stud snow tires on the wheels. Have to go to
Phoenix next week to pick up another Grand Wagoneer I just bought on eBay.
And Fred and I are limiting my appearances at the seminars and the Sunday
program. Once a week on Sunday and once a week on Thursday night takes an
enormous amount of time and really screws up weekends. From now on I will
only be on the radio show the last Sunday of the month and Do the Thursday
night seminar on the following Thursday. That will give me time to play
with the kids and leave the program open for Fred to bring in other guests.
Fred will still be doing the Thursday Night seminars and this is the last
one I will be doing for a while.
Every Thursday Evening, Fred Snyder of Dundee Wealth Management conducts one
of 17 different financial seminars in the boardroom of his office
Time: 7:00 to 9:30 PM
Date: Every Thursday evening
Place 1764 West Seventh
Vancouver (corner of Burrard)
Phone (604) 731-8900 to register
No cost - no obligation
Topics always cover mortgage interest as a deduction
other topics - getting the mortgage, estate planning, critical care
insurance, income taxation, differences between stocks and bonds, and
usually the most innovative HELOC mortgage offered in Canada from Manulife
Bank
If you are starting in downtown Vancouver and do not want to go home first,
one of the excellent THAI HOUSE restaurants is in the same building and
makes a nice start to the evening. In fact, if it is your first seminar,
Fred will buy you dinner if you show up at 6 PM and have reserved first with
his office.
I, david ingram, will only be at the Thursday night following the last
Sunday of a month to cover mortgage interest as a deduction and give the
class an adding test.
-----Original Message-----
From: taxman at centa.com [mailto:taxman at centa.com]
Sent: Monday, November 28, 2005 1:40 AM
My_question_is: Canadian-specific
Subject: Adv of Professional Corp.
Expert: taxman at centa.com
Date: Tuesday November 22, 2005
Time: 04:45 PM -0800
QUESTION:
Dear Mr. Ingram,
I've read your Nov 2001 newsletter (along with several e-mail answers) and
you have consistently maintained that one should "kill" their professional
corporation in order to utilize the "cash flow dam" method of the Smith
Manoeuvre.
However, there is seems to be an equally simple way to use the exact same
strategy using a corporation and avoid "killing" it. Many professionals are
incorporated in order to tax defer profits at the small business rate. As
such they have accumulated funds in their company and so it may make no
sense to "kill" the company and pay-out the retained earnings (potential big
tax hit). If there are retained earnings, then the company has to stay alive
and legal/accounting fees will have to be paid anyway.
Consider the following:
1. Professional Corp. sets up 2 bank accounts
2. All revenue is deposited into A/C #1 on and all expenses are paid from AC
#2
3. Shareholder borrows from personal LOC and lends to AC #2 as a
shareholders loan. Interest on LOC is tax deductible since loan can be shown
to clearly pay for operating expenses
4. Company re-pays the shareholders loan from AC #1 which he/she then uses
to pay down mortgage
This is pretty simple to set-up and is no more complicated than the Nov 2001
set-up. Furthermore, if there are multiple shareholders (e.g. husband/wife)
in different income tax brackets, the corporation provides the flexibility
as to which shareholders can contribute towards expenses and thus deduct the
LOC interest. This could be done for example if husband own 100% of class A
shares & wife 100% of class B shares.
In conclusion, simple bookkeeping can ensure that incorporated professionals
can still enjoy tax deferral/small business taxation and still effectively
employ the cash dam strategy in order to make their mortgages tax deductible
without "killing" their professional corporations. Do you agree ?
-------------------------------------------------
david ingram replies:
Nope! Unfortunately, Bulletin IT-533 specifically wipes it out.
Read it at: http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf
You will find that it is very specific. If you borrow money for a specific
investment (loan to your corporation), when the investment is repaid or
sold, the results must be specifically used to pay back that loan or the
interest is not deductible.
Read the disappearing source rules in paragraph 19 of the bulletin and
section 20.1 of the act.
Although in the normal flow of a business, the disappearing source rules are
ignored because of commingling of funds, in your case, you are setting up
specific accounts to prove when the money goes in and by the same accounts
PROVING that the loan has been repaid by the business.
I do not think it would fly and unfortunately, if you tried it and then were
turned down, the tax and interest would be very punitive as there would
likely be three year's worth at that time..
Answers to this and other similar questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am a regular
guest on Fred Snyder of Dundee Wealth Managers' LIVE talk show called "ITS
YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the internet
at
www.600AM.com <http://www.600am.com/>
Call (604) 280-0600 to have your question answered. BC listeners can also
call 1-866-778-0600.
Callers to the show and questioners on this board can also attend the
Thursday Night seminars on finance and making your Canadian Mortgage
Interest deductible.
And for those in the Vancouver area, Fred is running an infomercial for 1/2
hour every night in October on Channel 10 television at "groooaaannnn" 1 AM
in the morning. It has a couple of useful concepts in it that can be
recorded to really get the idea.
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
Home office at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 10 PM 7 days a week (please do not fax or phone
outside of those hours as this is a home office)
email to taxman at centa.com <mailto:taxman at centa.com>
www.centa.com <http://www.centa.com/> www.david-ingram.com
<http://www.david-ingram.com/>
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