Tax Strategies with John Mendis from McGovern Hurley Tax Advisory Group

In this Snippets episode, Leon sits down with John Mendis, tax partner at McGovern Hurley, to discuss key year-end tax strategies for individuals and business owners. John shares valuable insights on optimizing tax planning, maximizing deductions, and understanding the latest changes in Canadian tax regulations.

While this conversation originally focused on fourth-quarter tax planning for 2024, the insights remain highly relevant beyond the year-end deadline. Whether you’re preparing for your next tax filing, strategizing for the current financial year, or looking to optimize your long-term tax planning, John’s advice can help you stay ahead. Topics include RRSP contributions, tax-free savings accounts, small business deductions, passive income rules, and evolving capital gains tax regulations.

No matter the time of year, smart tax planning is essential. Tune in for expert strategies to minimize liabilities and maximize financial success!

Special thanks to Aird & Berlis for bringing you today's episode of Snippets with Leon Goren.

Transcript

Special thanks to Aird & Berlis for helping us bring you today's P.E.O. Leadership's Snippet Podcast.

Welcome to our Snippets Podcast. I'm Leon Goren, and CEO and President of P.E.O. Leadership, North America's premier peer-to-peer network and leadership advisory firm.

Today, I'm very excited to welcome John Mendis, tax partner at McGovern Hurley. John has extensive experience in tax planning and advisory services, helping businesses navigate the complexities of tax compliance and strategy. McGovern Hurley, a leading mid-market accounting firm, is known for its personalized, hands-on approach, offering a wide range of services, including audit, tax, and advisory solutions.

Today, we're very excited to hear about John's insights and how businesses and individuals can optimize their tax strategies in today's ever-changing financial landscape.

John, welcome to the podcast.

Thank you, Leon, for that wonderful introduction. Very kind of you.

Oh, no, you're more than welcome. Excited to have you here.

So, before we jump into the tax stuff, I always like to hit it off with something personal. I know you a little bit. I've heard you talk about cricket. I know you're passionate about cricket. I know you no longer play cricket. My limited knowledge in cricket is long matches, intense focus.

So, I got to ask you, what position did you play? Like all sports, did it actually influence your career in terms of your focus and your own energy?

Yeah, absolutely, Leon. Obviously, I was very passionate about the game of cricket. And I played the position of a wicketkeeper and a batsman. So, it's similar to, if you look at the baseball side, that's a catcher. That's what it would be.

Now, I know a lot of people say cricket is a very, very long game, but over the years, it has been modernized to a certain extent that it has got, they do have shorter forms of the game now, so you could enjoy maybe three hours. You could finish one game and enjoy it. So, there's absolutely a shorter version as well.

Now, just like any sport, obviously, there's a lot of things that, qualities that you build in terms of especially being collaborative, especially leadership qualities that come from the sport of cricket. And sometimes patience too. Patience is a big thing that the game of cricket also brings, especially in the longer form, as you can imagine, and it does translate into the professional life.

I'm just curious, what's the longest game of cricket played? Or do you know, or just even...

Yeah, I know. I do. I do. It's actually five days. It goes to five days.

Five days.

Straight.

They take a break though, before they go into the game.

Absolutely. There's a lunch break. And because it comes from England, there's a tea break as well.

Oh, fantastic. All right. All right. Let's get onto some more serious stuff here.

So, tax. We're in October today. We're talking, you know, fourth quarter here, coming to the end of 2024. And I was going to, you know, I guess my big question to you is, what do both individuals, and I'm going to focus maybe on small business owners or private companies, what should they be thinking about as we come up to December 31st?

Yeah, absolutely. Great question. Whether you're an individual or you have a private enterprise, a private company in Canada, you have to always think about tax optimization.

When it comes to individuals, now the deductions and things like that are fairly limited, but obviously many folks looking to building their wealth, especially focusing on their registered retirement savings plans, making sure their tax-free savings accounts are used up. And of course, keeping up with all the donation credits, medical expenses, receipts, and everything else you have to kind of look at from each person when it comes to the individual side of things.

So, this is a good time of the year to kind of focus on how much is your income for the year? How much should you contribute to your registered retirement savings plans like the RRSPs? There are new programs for people that want to buy homes. If you want to participate in the home buyers' plans or the first-time home buyers' plans that are there, so you can try to focus and save some of your funds towards that.

That will be something individuals should certainly focus on. And it's always important to keep those receipts, especially if you're doing donations. There are a number of programs, especially in the fall these days in terms of various foundations and charities run lots of programs. And if you're participating in any of that, and if you're contributing to it, it's always a great idea to keep those receipts.

From the private company side, a lot of private owners are focused on the year-end in terms of their tax. Usually, a lot of folks will focus on figuring out what kind of compensation they need to be thinking about. Whether it's going to be dividends or salaries in terms of what amount that they need to distribute to shareholders. If they're going to reinvest in the company, and those kinds of three items are very key for a lot of small business owners towards the end of the year in terms of trying to focus and minimize their taxation.

The compensation piece, dividends versus income, the government's pretty well—have they equalized it now? Or is it like, is one better than the other? I mean, if you have a corp, it probably is better because you can pass money through a corp tax-free.

Absolutely. In Canada, the integration works fairly well, but there's always a little bit of differences in terms of leaving money in the corporation versus personally. But also, it all comes down to each individual's tax bracket as well.

So, there could be savings to be had depending on each person's marginal tax bracket. Sometimes there are multiple shareholders, spouses that would receive reasonable salaries and things like that for performing work for that company that could reduce their taxation. So, you have to look into each person's business affairs and try to figure out what's the most optimal approach.

And you're absolutely right. Sometimes leaving the company versus taking it out may not have a difference, but it really depends on the amount. For example, last year, there was an introduction on the passive income rates that would reduce your small business deduction.

Now, what that is in Canada—when you run a small business, up to the first $500,000 of profit in the province of Ontario, for example, you're paying 12.2% tax. But if you save too much funds in the corporation, that passive income, and if the passive income exceeds $150,000, your small business deduction could be removed such that your tax rate goes from 12% to 26.5%. So when you take that into account, perhaps it might be better to take a salary or a dividend and move the funds out of the corporation. So you have a number of things to consider based on the fact pattern of that taxpayer.

Yeah, I think also I remember seeing—maybe the audience knows this too—that small business deduction is basically applicable to all your companies that you control, essentially, right? It's got to be shared, which means if you're holding it in old codes and you're getting passive income, it's still hitting your SPD.

That is correct. Absolutely. All the companies you're controlling or related to a company and that related individuals controlling that company, you have to share the small business deduction. And that's fairly complex too. A lot of planning goes into that to optimize that as well, to ensure that you can continue to use it. And if not, what are the other planning options you might have to consider as well?

So I got another question. You and I didn't talk about this, but EVs—electric vehicles—and the half-year rules coming up to December. The federal government was nice enough to introduce all these tax little incentives. What I find is a lot of people don't know about them, but maybe just give us the generalities.

Like if you're thinking of adding a vehicle, maybe you're a salesperson, or maybe it's a company car. Does it make sense now to do it closer to the end of the year? Are the subsidies disappearing?

Yeah, absolutely. Whether it's electric vehicles or otherwise, it's generally easier when it's towards the end of the year, just because there's usually taxable benefit components when it comes to the use of your vehicles.

When it's closer towards the end of the year, people probably could justify more kilometers for business use and things like that. And then you only have it for a component of the year where you could get a larger deduction. So that's where that theory comes from that, oh, perhaps it's better to get a vehicle towards the end of the year.

And of course, when it comes to zero-emission vehicles and the electric vehicle side of it, the depreciation rates are obviously higher than gas-powered vehicles. And it keeps increasing as well in terms of the amount you can deduct for capital costs of an electric vehicle, for example. Yeah, it's just maybe something people want to consider.

You see a lot of stuff. What are some of the pitfalls or things that people are missing here when you look and review these files?

Yeah, absolutely. In terms of optimization strategies, it's often about thinking of the exit plans as well. A lot of people are retiring these days, especially business owners. In Canada, there is something called a lifetime capital gains exemption.

A lot of the time, people assume that it's automatic. If you're selling your business, they think it is automatic, but it's not. There are a number of tax rules designed to stop you from claiming this. So on an annual basis, you have to ensure when you're looking at your company that your company continues to qualify.

One of the tests of this lifetime capital gains exemption is that throughout the last 24 months, you have to be running an active business. If you have a large amount of passive investments and things like that in your corporation, you could be ineligible for this exemption. And this exemption is worth quite a bit.

As you know, capital gain rates have increased as well. In the province of Ontario, for example, the capital gain rates at the highest marginal rates have gone from 27% to just over 35%. And the lifetime capital gains exemption is proposed to be increased to $1.2 million. That could yield just over $400,000 in tax savings per shareholder if you were to sell the company above the $1.2 million.

So keeping the company "pure," as I may say, is something that a lot of business owners tend to focus on in terms of their tax optimization and thinking of their exit.

Makes a lot of sense. You know, you talked about the proposal, and this will be our last topic here, but the proposal—everybody's been talking about capital gains. You and I quickly chatted about it earlier. What surprised me is that it still needs to pass legislation.

And as we all know today, things are quite unstable in the political environment. We don't know if we're going into an election. There is a chance this doesn't get passed if an election is called. I didn’t realize that. And we're back to the original capital gains.

That is correct. The capital gain inclusions are proposed to be increased by the federal government. But because of the turmoil and the uncertainties at the federal level right now, there's a possibility an early election could be called. There’s also a possibility that some of the parties could vote against the bill that would be introduced.

The law needs to be introduced in the House of Commons, pass through the Senate, and receive royal assent to become law. So there is a lot of uncertainty surrounding this.

But the Canada Revenue Agency has said that you have to assume that the rates will go through, and they are planning in terms of updating their forms and schedules to account for this tax rate increase. But there’s a good possibility that if it’s not introduced, it may not get passed.

That does not mean that if a different government comes in, they won’t introduce it again. They certainly could. But it seems like under the current political landscape, if the Conservatives were to come to power, they don’t seem to support this capital gain inclusion rate increase.

I always think once you start getting revenue from something, if you’re the government, it’s certainly hard to give up that revenue. So anyway, fingers crossed. We’ll see what happens on that.

John, a pleasure. Thank you so much for sharing some of those insights. Well, you know where to find John. Just look up McGovern Hurley.

If you've got some tax questions before the end of the year, filings are usually not due until April 30th on the personal side. Corporate filings, of course, change depending on your fiscal year-end. But I’m sure you can give John a call.

If you’re interested in our live webcast, The Way Forward Live, or any other snippets, please take a moment and visit us at peo-leadership.com. On our site, you’ll find various previous recorded webcasts, which include guests such as Morgan Housel, Professor Janet Stein, Harvard’s Rosabeth Kanter, Michael Beer, and Rob Chesson—the list goes on.

Thank you for joining us today. We look forward to seeing you again shortly. All the best.

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