Uncover the nuggets in the financial statements

One of the key elements when moving a business is the capital gains deduction (CGD), he pointed out. “This is the biggest chunk to take for business owners in Canada. In 2022, the maximum CGD deduction is $ 913,000. “It could soon reach a million dollars because of inflation,” the tax expert considers.

The financial statements of the company will be determined to fully benefit from this exemption. Some assets can contaminate the balance and put the owner at risk of losing part of it that he or she can benefit from. Therefore, it is necessary to be extremely vigilant about these assets, advises Alex Blouin.

Two years can be expensive

It is very important to test qualified assets of 50% over the past 24 months, underlined by the specialist. It consists in ensuring that more than half of the assets appearing on the financial balance sheet for the last two years are directly related to the company’s activities.

Therefore, an analysis must be performed to “refine” the financial statements of contagious assets. Permanent life insurance, stock market investments, a financial cushion, a residential property purchased with company profits are some examples of assets that should not appear on financial statements to pass the exam, he mentions. .

“Cleaning needs to take place continuously to ensure eligibility for this exam. Otherwise, the owner may find himself or herself having to perform an emergency cleaning to qualify for the 90% test in assets at the time of sale, ”the tax specialist underlined.

What should you pay attention to when looking for assets that are not eligible for DGC? The financial cushion is one of the nuggets that Alex Blouin tracks in the financial statements of his clients. “Often they store too much money in the company’s account. They use their line of credit for operating expenses so they keep a cushion. However, the excess portion of the money they actually need to run the company is considered, in this context, as a harmful asset, ”Alex Blouin said.

Securing investments

Other elements likely to “contaminate” financial statements within the framework of the DGC include interest -free loans to related persons, or an advance to a shareholder. A loan with interest to a third party can also be considered a harmful asset. Accounts receivable that are not collected, because the debtor is no longer in business, or inventory that has become obsolete, has become unsaleable or no longer available to the company, should also not be included in the financial statements for the purpose of payment. claimed by the DGC, according to Alex Blouin.

Once identified, the contaminated assets can be transferred to a management company, to allow the client to invest in other businesses and collect revenues from the various entities in which the management company holds the assets. part.

For financial planning purposes, transferring investments to the management company also protects assets and secures investments, the tax specialist said.

A phantom asset

Financial statements generally help to assess the growth of a business. However, the financial statements don’t say everything, Alex Blouin said. “The biggest piece is often missing, the good will, consisting of its wisdom and kindness. This is particularly the case for a company created from scratch by its owner or for a service company.

Can these intangible assets be transferred? “You have to be careful, says Alex Blouin, because DGC audits depend on these assets. If it’s not taken into account, the audits will be wrong. However, it’s often the biggest asset of the some companies. It does not appear in the financial statements because the businessman has not bought it, since he built it. It is an invisible asset, a phantom asset. »

One of the ways to be able to attribute value to it is to receive a purchase offer, says the tax expert. During due diligence, the net worth of the company will be calculated to establish fair market value (FMV). It can also be estimated by a business analyst by defining the market.

The trust, a Swiss army knife

One of the advantages of DGC is that it can be multiplied by creating a discretionary family trust. An owner who is the sole shareholder of his or her business may, in the event of a sale or transfer, benefit from a single tax exemption of $ 913,000 in 2022 under the DGE. By setting up the trust prior to the transaction, and by providing, for example, to his wife, his child and himself as beneficiaries, he can triple the deduction.

Amounts are added according to the number of beneficiaries: children, grandchildren, spouse or parent. Unborn children or grandchildren may also be included under certain conditions, allowing for a variety of estate planning options.

In addition, the value of the company’s shares was frozen on the day of creation of the trust, which could be interesting for a future move, underline the specialist. “The trust acts like a Swiss army knife giving more latitude to the tax specialist. »

However, it has some limitations. Its life span is 21 years. At the end of this period, everything in it must be sold to FMV. In addition, assets cannot be transferred from one trust to another, newer, to extend its life.

Depending on these different criteria, Alex Blouin concludes, complete tax planning makes it possible to anticipate different scenarios in order to prepare for the business transition and to ensure that the owner is fully take advantage of the fruits of a life. of hard work.at the time of retirement.

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