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Matt Carvalho Featured in the Globe and Mail

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Matt Carvalho, Chief Investment Officer at Cardinal Point Wealth Management, was just quoted by the Globe and Mail in a timely article headlined “Direct Indexing Could Bring Enhanced Tax Opportunities to Canadian Investors.” The Globe and Mail sought insight from leading financial professionals including Carvalho, regarding what is known as direct indexing products. These offer investors greater flexibility than mutual funds and ETFS because you are able to harvest losses to minimize taxes – without having to sell your other better-performing holdings. Direct indexing is already available to U.S. investors, regardless of where they live. Now there is increasing industry interest in allowing direct indexing in Canada, as well. Read the full article to learn more, and find out what Carvalho and other financial pros shared regarding how direct indexing may help you with a more customized and potentially more profitable approach to investment and wealth management.

Direct indexing cross border tax

Navigating the Maze of Personal Services Businesses

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Incorporation offers an increasingly popular solution for freelancers and contractors to operate their businesses more efficiently. However, it’s crucial to understand the Canadian tax implications and potential pitfalls associated with the concept of Personal Services Businesses (PSBs) within the context of your incorporation.

cross border business owner

Summary and Takeaways

Many companies today use Canadian freelancers and contractors, but may also expect them to establish themselves as a Personal Services Business (PSB). The process to launch a PSB is streamlined and fast. However, the nature of the working relationship between you and the company you provide services to matters. That’s because if you operate in way that is more similar to independent contractor work versus regular employment, you won’t be eligible to operate as a PBS. But even if you are eligible, before taking that step make sure you fully understand the tax implications of classification as a PSB. Otherwise you may be liable for more taxes than you anticipated.

Key Takeaways

  • The federal corporate income tax rate for PSBs is much higher than the Canadian Controlled Private Corporation (CCPC) tax rate.
  • For example, tax deductions that are usually allowed for eligible business expenses are severely limited for PSBs, and the 13% tax rate reduction available to CCPCs isn’t available to PSBs.
  • Corporate classifications and their respective tax rules can be complicated and difficult to understand − making it challenging to know what is the best decision to make.
  • Experienced guidance from a knowledgeable tax professional is therefore strongly recommended. They can help ensure that your choices fully align with your particular industry and unique business needs and financial goals.

The Rise of Incorporation

Incorporation is trending, especially in industries like IT and transportation, where a growing number of businesses are seeking incorporated contractors. These business often use the term “employer,” even though contractors are required to set up their own corporations. Incorporating a business in Canada can be a swift process, completed within a few hours. However, a critical factor that many contractors tend to overlook is the potential for challenges when they classify their corporation as a Personal Services Business (PSB)

Unveiling the Personal Services Business

A PSB is essentially a corporation established to provide services that resemble traditional employment. The classification itself is not problematic; the challenge lies in understanding the tax implications that accompany it. Despite the growing trend, many contractors and incorporators remain unaware of those implications, leading to misinformed decisions that could prove costly in the long run.

Tax Implications of PSBs

Corporations with PSB status face a unique set of tax implications that can significantly impact their financial outlook.

  • Full Rate Taxable Income: Unlike regular Canadian Controlled Private Corporations (CCPCs), PSBs cannot claim the small business deduction against their PSB income. This means that they are not eligible for the 13% rate reduction at the federal level.
  • Additional Federal Tax: PSBs are subject to an additional 5% federal tax on their PSB income. This elevates the federal corporate income tax rate for these corporations to 33%, making it significantly higher than the regular CCPC tax rate.
  • Limited Deductions: Deductions that are generally allowed for eligible business expenses are severely limited for PSBs. The list of allowable deductions is concise and revolves around salaries, wages, and specific employment-related expenses.

2023 corporate tax rates for PSBs vs CCPCs for comparison:

Tax Rates for PSB Income Tax Rates for a CCPC’s General Income
Federal:
General corporate rate 38% 38%
Federal abatement -10% -10%
General rate reduction Not available for PSB -13%
Additional PSB tax 5% N/A
Total Federal 33% 15%
Provincial tax (Ontario) 11.5% 11.5%
Total Federal + Provincial (Ontario) 44.5% 26.5%

Navigating the PSB Classification

Determining whether or not your corporation falls under the PSB classification can be a complex endeavor, and depends on multiple factors. The key tests to evaluate include:

  1. Specified Shareholder Test: This test examines whether the incorporated employee is also a “specified shareholder” of the corporation. If a related person owns shares in the corporation, even if they are not the employee, the corporation could still be a PSB.
  2. Employee vs. Contractor Relationship: Evaluating whether the relationship between the incorporated employee and the client (employer) resembles an employment or contractor relationship is crucial. If the nature of the relationship leans towards an independent contractor, the corporation may not be classified as a PSB. Please see the Canada Revenue Agency’s RC4110 – Employee or Self-Employed? for insight into the factors to consider in evaluating whether you are an employee or an independent contractor.

Common Industry Examples

Transportation Industry: Long-haul trucking is a sector where contractors often find themselves pushed toward incorporation. This practice aims to avoid payroll contributions and other employment-related costs.

IT Sector: The IT industry (i.e., consultants, software developers, programmers, etc.) is another arena where workers are frequently contracted as corporations. This practice is undertaken to avoid traditional employment obligations. However, proper classification is vital, because incorrect categorization can lead to PSB implications.

Tips for Contractors and Incorporators

Navigating the landscape of PSBs can be tricky. Here are some tips to help contractors and incorporators make informed decisions:

  • Seek Expert Advice: Given the complexity of tax laws and classifications, seeking advice from qualified tax professionals is highly recommended. They can provide clarity and guide you through the nuances of PSB status.
  • Consider the Bigger Picture: While the allure of incorporating can be enticing, it’s essential to weigh the potential benefits against the tax implications and restrictions that PSB status involves.
  • Transparency: When entering into contracts, especially in industries with a higher likelihood of PSB classification, maintain transparency with your clients about your corporation’s classification and implications.

Final Thoughts

Incorporating yourself offers undeniable advantages in certain industries (see our blog titled Options for Canadian Business Structures). But it’s essential that you are fully aware of how PSB classification can impact you. By understanding the implications and seeking professional advice, contractors can ensure that they make fully informed decisions that align with their financial goals and industry norms. Please contact Cardinal Point to discuss your unique situation.

Disclaimer: This blog post is for informational purposes only and should not be construed as professional tax advice. Consult a qualified tax professional for personalized guidance based on your specific circumstances.

Devan Legare Featured in Globe and Mail

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The financial insights of Devan Legare, a portfolio manager at Cardinal Point Capital Management who is also a member of the Financial Planning Association of Canada, were recently featured in an article in the Globe and Mail. The important topic was how to manage your CPP in order to maximize the growth of wealth, minimize taxation, and reach your personal financial goals for enhanced quality of life in retirement. Legare recommended paying close attention to two key factors that are often overlooked, namely “child-rearing provisions” and “life maximization. Follow the link below to read the full Globe and Mail article titled “Am I at risk of losing out on CPP?” It reveals smart strategies and experienced insights and explains how to apply them to your own CCP benefits. The article can be viewed below.

Devan Legare Financial Plannerr

Terry Ritchie Featured in “How Cross-Border Clients Can Utilize the U.S. Gift Tax Lifetime Exemption before Rules Change”

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On January 1st, 2026, the existing U.S. lifetime gift tax exemption will drop from U.S. $12.92 million to U.S. $5.49 million. But there is solution-oriented good news. You can still take advantage of the two-year window of time before the rule goes into effect. In addition, there is another exemption that lets you gift up to U.S. $17,000 a year to an individual − without triggering any gift tax − whether you are a U.S. or Canadian taxpayer. You can do this annually, so it can be incorporated into your long-term financial planning as a proactive strategy. In some cases there may be tax reporting requirements or other important considerations, and you have to be careful not to exceed the tax-free cap on financial gifts. But helpful answers and useful strategies for various scenarios are covered in this informative article, “How Cross-Border Clients Can Utilize the U.S. Gift Tax Lifetime Exemption before Rules Change.” The article can be viewed below.

terry ritchie article cross border clients

A Comprehensive Guide to Understanding Property Ownership in U.S. Estate Planning

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Estate planning is a critical aspect of securing your financial legacy, and among its various components, property ownership stands out as a foundational yet often overlooked consideration. Properly aligning asset ownership with your estate plan can make or break your intended objectives. It’s not enough to have a well-crafted estate plan; the way you own your assets and how they are transferred both play a vital role in the successful execution of your wishes. In this guide, we’ll delve into various types of ownership and their implications in estate planning, while considering income tax, gift tax, and estate tax considerations.

estate planning cross border

Summary and Takeaways

The crucial role that property ownership plays in U.S. estate planning is often misunderstood and overlooked – and the type of ownership can significantly affect such things as state and federal taxation, claims from creditors, and whether the property is subject to probate. But there are ways to leverage particular types of ownership, as well as strategic transfers of property to others, in order to minimize future tax liability. The appropriate proactive approaches to estate planning can also help ensure the optimum value for loved ones who are your designated beneficiaries.

Key Takeaways

  • Solely-owned property can be gifted to others during your lifetime, but upon your death the gifts are subject to probate, creditor claims, and taxes.
  • With joint tenancy with the right of survivorship, ownership passes to the surviving joint tenant, bypassing probate, but may be subject to creditor claims.
  • Spouses may use tenancy by the entirety to ensure protection from creditors and that the property passes to the surviving spouse.
  • There are many estate planning options, each with potential pros and cons. It is highly recommended that a qualified estate planner familiar with all the options be consulted to ensure proper planning and desired outcomes.

Overview: The Significance of Asset Ownership

Asset ownership is the cornerstone of estate planning, influencing how property is transferred and the coordination of your estate planning endeavors. It’s crucial for financial planners to comprehend the intricacies of property ownership and its connection to asset transfer. The form of ownership determines how property can be transferred at death and what limitations may apply. Effective estate planning requires harmonizing both asset titling and property transfer strategies.

A financial planner’s understanding of income tax, gift tax, and estate tax implications is critical. Leveraging suitable asset ownership techniques alongside prudent income, gift, and estate tax strategies creates an efficient estate plan aligned with your unique estate objectives.

Sole Ownership: A Simple Approach

Sole ownership is the most straightforward form of property ownership. It grants the owner absolute control over the asset during their lifetime and upon their death – assuming that the necessary estate documents are in place. This type of ownership conveys outright control, allowing for gifts and bequests. However, assets under sole ownership are susceptible to creditor claims, which is an important consideration. Solely owned assets become part of the owner’s gross estate and must undergo probate upon death.

Income Tax Implications
With sole ownership, all income generated from the asset is attributed to the owner and reported on their federal and state income tax return(s).

Gift Tax Implications
An individual can gift solely owned assets to individuals or charities during their lifetime, subject to gift tax rules.

Estate Tax Implications
Upon death, the full fair market value of the asset is included in the owner’s gross estate and is subject to probate. However, probate is bypassed if a “will substitute” is employed. Generally, an asset receives a step-up in basis to its value on the date of the owner’s death, unless the six month alternative valuation date is utilized.

Tenancy in Common: Shared Ownership

Tenancy in common involves co-ownership of the property where tenants own undivided rights. Each tenant possesses a fractional interest, and ownership can be equal or unequal. Tenants in common retain control over their fractional interest and can transfer it as gifts or bequests. However, it might be more challenging to sell or transfer fractional interests.

Income Tax Implications
Income is attributed and taxed based on each individual’s fractional ownership share.

Gift Tax Implications
Converting individual ownership to tenancy in common or making gifts of fractional interests triggers gift tax considerations.

Estate Tax Implications
Upon death, the decedent’s fractional interest in the property held as tenants in common is included in their estate. The fractional share receives a step-up in basis.

Joint Tenancy with Right of Survivorship: Joint Ownership
Joint tenancy with the right of survivorship grants co-owners undivided rights to enjoy the property. Upon a joint tenant’s death, their interest automatically passes to the surviving joint tenants. This type of ownership bypasses probate but may interfere with specific estate planning goals.

Considerations During Lifetime
Joint tenants can sever ownership or transfer their interest, but sales or loans against the property require consent from other joint tenants. Creditors can reach a joint tenant’s interest.

Considerations at Death
Upon death, a joint tenant’s interest passes directly to surviving tenants, bypassing probate. However, it might not align with the decedent’s estate plan. There can also be liquidity challenges for the decedent’s estate.

Joint Tenancy with Right of Survivorship with Spouses

When spouses jointly own property, each spouse’s interest is presumed to be equal, regardless of their contribution. This form of ownership differs from joint ownership between non-spouses.

Income Tax Implications?
Jointly owned asset income is attributed equally for married couples filing jointly.

Gift Tax Implications
Transferring property to joint tenancy between spouses who are U.S. citizens triggers the marital gift tax deduction.

Estate Tax Implications
One-half of the property’s value is included in the decedent spouse’s estate, subject to the marital deduction. Any mortgage on joint property affects estate tax.

Joint Tenancy with Right of Survivorship with Non-Spouses

All joint tenancies, whether between spouses or non-spouses, involve equal ownership among joint tenants.

Income Tax Implications
Income from jointly held property is distributed equally among joint tenants, facilitating income splitting.

Gift Tax Implications
Converting individual ownership to joint ownership triggers taxable gifts.

Estate Tax Implications
The Internal Revenue Code states that the value of a decedent’s gross estate shall include the entire value of the property that the decedent held at the time of their death, with two exceptions:

  1. The joint property holder (survivor) contributed to the purchase of the property
  2. The decedent and the remaining joint property holder(s) received the property by inheritance or gift

This means that the entire fair market value of the property will be included in the first decedent’s estate, unless it can be proved that the surviving owner contributed to the purchase of the asset. This is known as the Contribution Rule, which applies only to property owned jointly with non-spouses’ right to survivorship. 

Tenancy by the Entirety: Spousal Co-Ownership

Tenancy by the entirety applies exclusively to spouses, offering protection from creditors’ claims. Tenancy by the entirety is similar to joint tenancy. It ensures the right of survivorship between spouses with respect to income, gift, and estate tax considerations. When one spouse dies, the property owned as tenants by the entirety automatically passes to the surviving spouse. One-half of the value will be included in the decedent’s gross estate, subject to a marital deduction in the decedent’s estate. The surviving spouse will receive a step-up in basis on one-half of the value of the property. 

However, unlike a joint tenancy with the right of survivorship, while both spouses are alive and married to each other one spouse cannot terminate a tenancy by the entirety without the consent from the other spouse. The advantage of this type of ownership is that the creditors of one spouse cannot attach the other spouse’s interest in the property. This is in contrast to joint tenancy with the right of survivorship, where a creditor of one owner can attach the debtor’s interest in the property. Although a lien can be attached to property held as tenants by the entirety, a creditor cannot force liquidation of the property, and any claim against the property can only be satisfied when the property is sold.

Life Estates and Remainder Interests: Split Ownership
Split ownership divides the property into a life estate (temporary ownership during the lifetime) and a remainder interest (ownership after the life estate ends).

Life Tenant’s Interest
Life tenants retain usage rights and responsibilities for the property. The remainder interest is protected from creditors.

Remainder Beneficiary’s Interest
Remainder beneficiaries have vested ownership but can’t claim full ownership until the life tenant’s death.

Income Tax Implications
Life tenants report income from the asset, while remainder beneficiaries report income upon receiving property.

Gift Tax Implications
Gifts involving life estates and remainder interests entail taxable gifts. The annual exclusion can be used to offset the value of the taxable gift for the life tenant However, the annual exclusion will not be available to offset the gift of the remainder interest, because a remainder interest is a future interest in the trust.

Estate Tax Implications
If someone creates a life estate for themselves, and they retain the right to the property until death, the fair market value of the property will be included in their gross estate at death. The remainderman will receive a full step-up in basis of the property upon the life tenant’s death.

If someone instead receives a life estate and they do not have any control over the disposition of the asset at their death, the value of the life estate would not be included in the life tenant’s gross estate at death. The remainderman will still receive a full step-up in basis of the property at the life tenant’s death.

Ownership Type How Passed at Death? Included in Probate? Included in Gross Estate? Qualifies for Marital Deduction? Beneficiary Cost Basis

Sole ownership

Will/intestacy

Yes – 100%, unless designated beneficiary

Yes – 100% of FMV

If passed to a qualifying spouse

FMV at death or Alternative Valuation Date

Tenants in common

Will/intestacy

Yes – % owned, unless designated beneficiary

Yes – % of FMV owned

If passed to a qualifying spouse

% of FMV at death or Alternative Valuation Date

Joint with spouse

Operation of law

No

Yes – 50% of FMV

50% of FMV

50% of FMV at death or Alternative Valuation Date + Beneficiary’s basis

Joint with non-spouse

Operation of law

No

Yes – 100% of FMV (unless can prove the other joint tenant contributed)

No

% of FMV at death or Alternative Valuation Date + Beneficiary’s basis

Tenants by the entirety

Operation of law

No

Yes – 50% of FMV

50% of FMV

50% of FMV at death or Alternative Valuation Date + Beneficiary’s basis

Create a life estate

Automatically to the remainder beneficiary

No

Yes – 100% of FMV

If passed to a qualifying spouse

FMV to the remainder beneficiary

Receive a life estate

Automatically to the remainder beneficiary

No

No

No

FMV to the remainder beneficiary

Navigating the various options of property ownership is essential in creating an effective estate plan. Each form brings distinct tax considerations and implications that can significantly impact your financial legacy. To make more informed decisions, consult with your financial planner at Cardinal Point and estate planning professionals who can guide you toward strategies that best align with your particular goals.