White Kennedy LLP is pleased to have joined the Canadian Home Builders Association – South Okanagan (“CHBA-SO”). Jon Milligan, CA and Marielle Brule, CA, two of our partners at White Kennedy LLP, were invited to present at CHBA-SO monthly meeting on Wednesday, May 15, 2013 about various tax and accounting issues for member businesses and certain items that are unique to the construction industry. Here’s an overview of our presentation “Accounting for Construction”:
Proprietorship, Partnership, Joint Venture or Corporation?
There are various differences, advantages and disadvantages, costs and benefits, between the common business structures such as proprietorships, partnerships, joint ventures and corporations. For example, Proprietorships and partnerships are easy to start, but your personal assets are exposed to the risks of your business. Corporations cost more to set up, but provide you with limited liability and are taxed at a low rate of 13.5% on the first $500,000 of construction income annually, providing you with much more after-tax cash to purchase business assets and pay down business debts.
Holding companies, and trusts, can protect your profits and separate your operating assets from the investment assets. You may also want to consider a trust. A trust can be used to split income among family members, be used to ensure your company qualifies for the $750,000 tax free capital gain, and multiply the number of people eligible to use the exemption should you have the opportunity to sell the shares of your company one day.
The HST transition back GST & PST
Another significant area affecting the construction trade was the transition back to GST & PST from the now old HST. There is the new 2% PST transition tax one must charge their customers for new construction that was at least 10% completed on April 1, 2013. The transition tax must be charged for sales between April 1, 2013 and March 31, 2015. The builder will be eligible for a rebate of some of the transition tax providing the construction was not more than 90% completed by that date. The amount of the rebate varies with the percent of completion as of April 1, 2013.
Another transition issue is a builders’ inventory on hand as at March 31, 2013. Where inventory is held at March 31, 2013 to be used to construct real property after March 31, 2013, PST will have to be self-assessed on the inventory once used. See page 4 of Notice 2013-003 – Real Property Contractors (http://www.sbr.gov.bc.ca/documents_library/notices/Notice_2013-003.pdf) for further details. If registered for PST, the PST has to be paid using the normal PST return, and the amount is due by the end of the month following the month in which the inventory is used in construction. If not registered, one would use the Casual Remittance Return, form FIN405. A PDF fillable form can be found at: http://www.sbr.gov.bc.ca/documents_library/forms/0405fill.pdf
Holdbacks and Certificates of Completion
The construction industry has special tax rules relating to when one must recognize income for tax purposes. If there are holdbacks receivable or payable, and the lien period has not expired, those receivables can be excluded from income. If the receivables are excluded from income, the payables must also be added back into income. In addition, if the job requires that an architect’s or engineer’s certificate of completion must be issued before payments are to be made, then those receivables can be excluded from income until the certificates are issued. The payables must also be treated similarly. As well, if the contract is for less than two years, the contractor has the option of using the completed contract method of accounting for income for tax purposes. If choosing this method they would not recognize the profits from the job until it is completed. If using this method, any anticipated losses from the job would not be recognized until completion either. However, if the contractor is using the percentage of completion method, then profits and losses are recognized as the job progresses.
We trust that the information presented at the CHBA-SO meeting was useful and informative to the members and encourage any of the members to contact us should they have any questions regarding their accounting and taxes.
– Written by H. Jon Milligan, B.Com., CA.