COMMON CENTS CONSTRUCTION
Structures and Strategies to Maximize Income and Minimize Tax
By Bo Mocherniak
All Canadian businesses should take advantage of corporate structures and tax strategies that maximize income and minimize tax, but those in the construction industry can add a number of unique opportunities to the list. If you’re a growing company, then now might be the time to start exploring some of the strategies that companies can use to reduce taxes and preserve wealth.
Joint ventures (JV) are often used for real estate construction projects. Managed effectively, they pool resources and talents to achieve more than each participant could do on their own. Benefits include access to more financial capital, shared risk, access to new markets, more equipment, new suppliers, and increased buying power.
In order to give your joint venture the best chance of success, be sure you have a clearly articulated business strategy. Be honest about your strengths and weaknesses, and make sure the other joint venturers share a similar strategy and commitment to collaboration.
Partnerships are another great way to combine the resources of two or more separate parties, while at the same time allowing each partner the flexibility to plan for the taxation of their ownership portion. For example, it’s normal to see business losses generated in the initial years of operations. Rather than having the losses trapped within a corporation with multiple shareholders, losses within a partnership can be allocated out to the corporate partners. Then, based on their proportionate ownership, they can use their share of the loss from the partnership to offset existing gains in their own corporation. With the right planning, these losses can also be transferred elsewhere within a multi-corporate structure.
Another distinct advantage of a partnership is the ability to defer tax upon selling (or rolling) land inventory into the partnership. By rolling the land into a partnership, they can defer tax on the inherent gain that would otherwise have to be realized if the land inventory was transferred into a corporation. When completing such transactions, it’s important to always consider deed transfer tax.
Multiplying the small business deduction (SBD)
The small business deduction is an incentive to help companies grow. When it works, successful construction companies eventually see their income increase beyond the small business deduction limit, the federal limit is $500,000 and most provinces also have a $500,000 small business limit. When this happens, there is planning that can be done to create corporate structures that can allow for multiple small business deductions. As a bonus, some of these will also help creditor-proof company assets and can introduce income-splitting with other family members.
Asset re-classification to maximize capital cost allowances (CCA)
How you classify costs and assets can impact how you’re taxed. If you have significant capital asset additions, consider how you’re acquisitions are grouped into the various Capital Cost Allowance (CCA) classes. For example, a building might be broken down into several classes with various CCA write-off rates: Class 1 (building: 4%), Class 6 (fence, shed: 10%), Class 8 (furniture and certain equipment: 20%), Class 10 (generator: 10%), Class 17 (paving: 8%). Certain equipment can also be re-classified for maximum tax savings. Earth moving equipment, contractor’s moveable equipment and Manufacturing and Processing equipment can all be considered for Capital Asset Review. You might also want to look at how your vehicles are classified. For example, a pickup truck used in operations might qualify for CCA on the full cost base, whereas an extended cab truck used by an executive might be subject to limitations.
In a slightly more complicated example, we tell clients who are constructing a new building (or making additions to existing buildings) to consider corporate structures that allow many of the additions to the building to be treated as leasehold improvements (Class 13). This plan caries a bit more risk, but essentially involves the formation of two companies: one that owns the land and builds the shell of the building, and another that carries on the business operations and incurs leasehold improvements to the building. The operations side of the business can then write off leaseholds over an accelerated period of time, generating tax savings.
These are just a few of the ways you can take advantage of opportunities to reduce taxes. Some of these can get a bit complicated, and you definitely want to make sure they’re done right. Talk to your accountant to see if any of these strategies might work for you.
With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP. He can be reached at email@example.com.