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Were Your Tuition Credits Completely Used Up from Your School Years? Healthcare professionals in Canada can incorporate their practice to take benefit of certain tax
The Dreadful Shareholder Debt Balance and how SDG, Chartered Professional Accountant Saved a Medical Doctor from Tax Troubles
Introduction:
Navigating the complexities of Canadian corporate tax regulations can be challenging, especially for professionals who juggle a demanding career with managing their business affairs. One of the most common issues that professionals face is the misuse of corporate funds for personal expenses, leading to tax complications. The following case study highlights how SDG Chartered Professional Accountant, assisted a medical doctor in resolving a significant shareholder debt issue caused by improperly handling corporate finances through his medical professional corporation.
Problem: Shareholder Debt
When the doctor approached SDG Chartered Professional Accountant, we conducted a thorough review of his financial situation. Our analysis revealed that the large “Due from Shareholder” balance posed a serious risk of triggering a CRA Audit, potentially resulting in severe penalties and financial loss.
If audited under Subsection 15(2) of the Income Tax Act, the doctor would have faced substantial penalties. The outstanding balance would be treated as income, subjecting him to personal income tax at the highest marginal rate. Additionally, interest and penalties could be imposed on unpaid taxes, further exacerbating the financial impact.
To quantify the potential savings, let’s assume the due from the shareholder account was $200,000. If taxed as income at the top marginal rate of approximately 53% in Ontario, the doctor would owe $106,000 in taxes. Including potential penalties and interest for late payments, the total liability could easily exceed $130,000.
Recognizing the urgency and gravity of the situation, we developed a comprehensive plan to address the issue effectively and efficiently. Our goal was to clear the shareholder loan balance while ensuring compliance with tax laws and preventing any adverse tax consequences.
Analysis:
The client, a successful medical doctor, had changed accounting firms twice in the past two years, seeking effective financial management for his practice. Unfortunately, previous accountants failed to address a critical issue: the client was using his medical professional corporation to pay for personal expenses and mortgages. This led to a substantial “Due from Shareholder” balance, which had grown into a six-figure liability.
The issue arose because the previous accountants did not take into account Subsection 15(2) of the Income Tax Act. This provision is designed to prevent the tax-free distribution of corporate funds to shareholders via loans or other transactions. Under this rule, the principal amount of such a loan or debt is included in the shareholder’s income, leading to significant tax implications if not handled properly.
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Solution:
The solution proved to be highly effective. By converting the shareholder loan into declared income, we eliminated the tax risk and potential penalties associated with the outstanding balance. The client, relieved of the financial and legal burden, was extremely satisfied with the outcome.
In this case, the doctor saved over $130,000 in taxes, penalties, and interest by addressing the shareholder loan issue proactively. The swift resolution not only safeguarded the client’s finances but also restored his confidence in his accounting and financial management. The doctor was able to focus on his practice without the looming threat of tax complications, knowing that his financial affairs were now in capable hands.
Results:
To resolve the issue, we implemented a strategy to issue a T5 dividend slip, effectively treating the shareholder loan as a dividend. This approach allowed us to clear the “Due from Shareholder” balance by declaring the funds as income for the client, thereby aligning with tax regulations and avoiding potential CRA scrutiny.
By strategically managing the financial transactions and maintaining transparency with the CRA, we successfully mitigated the risk of an audit. Our proactive approach ensured that all necessary documentation was accurately prepared and filed, demonstrating compliance with tax laws.
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BOOK AN APPOINMENTConclusion:
This case study illustrates the importance of having knowledgeable and proactive accountants to manage complex financial issues and ensure compliance with tax regulations. At SDG, Chartered Professional Accountant, we pride ourselves on our ability to navigate challenging financial situations and provide our clients with the peace of mind they deserve.
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA, CGA, MBA
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