by Michael Cheevers, Partner Wolrige Mahon LLP
Published in  Finance Monthly magazine

Q:  What is the recurring theme you encounter when meeting with clients?

We are quite consistently told, “I just need more money”.  Based on our exprience, “needing more money” is a symptom of some underlying cause.

The reasons for requiring additional working capital are myriad.  Some are positive while others can be indicative of serious underlying issues such as:

• Being awarded a large contract or seeing an unexpected spike in revenue;
• Planning on moving to a new, larger location to accommodate growth or in pursuit of expansion;
• Becoming a victim of fraud;
• Facing a lawsuit or a tax reassessment;
• Experiencing declining profit margins/suffering significant recent losses;
• Having entered into an unprofitable contract (excessive warranty claims, excessive product returns, cost overruns);
• Over expansion;
• Having a large outstanding account receivable;
• Being stuck with obsolete or slow moving inventory;
• Being behind in payments to the tax authority (payroll deductions, sales tax);
• Being unable to make payroll; and
• Being unprepared for a fundamental change in our industry, we must reinvent or liquidate.

How do you approach these scenarios?

Whatever the cause giving rise to the need for more money, the important point is identifying it as a problem or an opportunity.  Often these are two sides of the same coin.

We meet with management, operations, sales and other relevant divisions of the company to gain an understanding of the current situation.

If we discover a problem we decide whether it is a one-off or recurring issue. From there we determine if it can be fixed, what damage has occurred as a result, whether management has the resources available to fix the problem, and whether or not the stakeholders still have faith in the management.

Where there is opportunity we ask; how can we best take advantage of it, and how do we avoid common pitfalls?

Most often management is aware of the issues but may not appreciate exactly how cash flow is being impacted.  Management, dealing with the day to day thrust of operations -the microview- can lose sight of the big picture.  As an independent advisor we bring a fresh perspective and full toolbox.

Your team is comprised of Bankruptcy Trustees; beyond situations of forced liquidation, how are you and your team equipped to handle scenarios such as those we have already discussed?

First and foremost we are designated accountants and Chartered Insolvency and Restructuring Professionals (‘CIRP”). In my case I am also a Chartered Business Valuator and Certified Fraud Examiner. Being Trustees in Bankruptcy is better described as one of the ‘tools’ in our toolbox.

Our preference is to maintian an entity as a going concern; employees with jobs, landlords with tenants, suppliers with customers and shareholders with share value.  Indeed that is not always possible.  However, in all cases we strive to maximize returns for relevant stakeholders.

Our varying professional experience and credentials provide a complementary toolbox of skills which are helpful in solving difficult business issues.  Collectively we have encountered many “lessons learned the hard way” which can be applied to assist businesses in identifying and addressing problems or taking advantage of an opportunity.

What is your approach to restructuring?

There are two broad types of restructuring, informal and formal. The scope of issues present and number of creditors usually determines if an informal or formal restructurng is the practical solution.

If a formal restructuring (statutory driven) is the solution, it is helpful to be proactive and to ensure you have sufficient financial resources to successfully restructure your affairs.  In order to successfully restructure a business, the underlying business must be viable.  Essentially, there must be something worth saving.

The end game of either informal or formal restructuring is to amend the terms of current obligations or seek some form of debt forgiveness.

What Should I Charge for My Services?

Finding your optimum charge-out rate is one of the most important calculations you can make.

What should I charge my clients for my services? Without a properly calculated charge-out rate you will not be able to sell enough services to cover your costs and make a profit. The right charge-out rate is the result of a complex interplay between your costs of production and delivery on the one hand and, on the other, the price your customers are willing to pay given market conditions — primarily competition.

Two key components make up the fundamentals of determing a charge-out rate:
1. What income do you, as an individual, need to earn in order to support your personal life?
2. How many chargeable hours do you anticipate are available for you to work?

How Much Do I Need to Earn?

On the first point, you need to know your personal or family cost of living. For example, your experience has shown that you need at least $60,000 in gross income per year to pay your taxes and have enough left over for shelter, food, clothing, transportation and recreation.

2,000 working hours a year will only yield about 1,400 chargeable hours.

How Much Should I Charge Per Hour?

The second issue is chargeable hours. Let’s start with 365 days a year and do the math from there. Assume for a moment that weekend work (104 days) is out of the question and another 11 days accommodate statutory holidays and illness. This leaves 250 working days. An eight-hour workday gives 2,000 hours available for work in a year. However, this time is not all chargeable. Within that time frame, there are “time costs” such as marketing, public relations, human resources, financial management, technical delays and training courses that must be considered. It is safe to assume that about 30% of the time available for work is not going to be productive. The 2,000 available hours will probably yield only about 1,400 chargeable hours. It would therefore be a mistake to set a $30 rate based on 2,000 hours to earn a $60,000 gross income. In fact, a charge-out rate of $43 per hour for the 1,400 hours is required to generate $60,000.

Estimating the Future

The next step involves good estimating and a spreadsheet. Not only is it necessary to know the cost for supplies, transportation, utilities, office equipment, bookkeeping, training programs, public relations and advertising (to name a few), but it is also essential to determine when income will be generated and costs incurred during the year. This knowledge will enable you to estimate cash flow needs and the potential requirement to borrow working capital that will precipitate loan interest.

Commercially available spreadsheet programs can set up categories and manipulate data to time cash flows for accounts receivable and accounts payable. For most individuals, however, a spreadsheet indicating month-by-month sales and expenses will suffice.

When completing an income and expense budget, be conservative with sales projections and liberal with expenses. Assuming estimated expenses total $80,000, it is apparent that the break-even point (the point at which expenses and revenue are equal) to operate the business is $140,000 ($80,000 + $60,000). Given the 1,400 chargeable hours available, the minimum requirement to keep the doors open is $100 per hour.

Future Needs

In addition to establishing the charge-out rate needed to break even, individuals should also give consideration to capital costs. Assets such as vehicles, computers and other equipment must be replaced. These costs are often missed in the calculation of a charge-out rate because they are not day-to-day costs. If equipment must be replaced every two or three years, a determination of the hourly cost of that equipment should be calculated and factored into the hourly rate charged.

Factor the Future

The future for most businesses is uncertain. For this reason, it is beneficial to ensure that funds are available for a rainy day. In that “breaking even” is a calculation based on current conditions but not the future, charge-out rates should have built-in profit margins. Contemplate a need for a 10%-to-20% profit margin and increase the charge-out rate by that amount. In our example, if the charge-out rate is $120 instead of $100 per hour, the revenue earned on 1,400 hours increases to $168,000 with expenses stagnant at $140,000. This provides a buffer of $28,000 per year.

Beyond the Numbers

Following a process to determine a charge-out rate provides benefits beyond a final number because it:

a)     allows determination of whether the business or marketplace can support your business (If not…why would you invest time, money and emotion into a venture that is going to crash?);

b)     demonstrates a structured approach to a business venture that will be beneficial if financing is required;

c)     provides a chronological projection of the business for a 12-month period to reveal the ups and downs of a business cycle; and

d)     induces an understanding of how workload and financial constraints might impact your personal life by demonstrating when cash and time are required. This knowledge, in turn, will impact not only personal spending habits but also determine when you can take time to enjoy that vacation.

Discuss Your Findings with Your Chartered Accountant

Once you are confident the calculations are representative of prospective business activity, it would be prudent to discuss your findings with an impartial advisor such as your local chartered accountant. With their knowledge of the community, they will undoubtedly be able to review your efforts and raise issues you may not have considered. Further, they can provide additional knowledge concerning GST/HST and income tax specific to your proposal. They may also provide guidance on the legal structure of your venture to minimize or defer taxes payable. This information, combined with your efforts, provides additional fodder essential in making the decision best for you.

Online Purchasing

Caveat emptor is still good advice in the online era.

The world has changed much since caveat emptor, Latin for “let the buyer beware,” was first uttered. Unfortunately, the principle still applies today, even in an online marketplace. While ecommerce has become viable and even mainstream for many companies, it still holds potential risks for individual consumers and businesses. Identity theft is a new risk for those purchasers who reveal too much information to insecure websites, but traditional methods of swindling can still relieve you of your cash.

Consider the following before you purchase online:

• Location. Where is the supplier located? Purchasing from an out-of-province or out-of-country supplier can potentially introduce complications. If you receive goods of inferior quality, shipping costs may make returning the product an unattractive proposition. Even worse, what if you don’t even receive the goods for which you have already paid? Since consumer protection laws may vary from country to country or even province to province, taking the seller to court might not be worth the cost, time and effort required.
• Warranty. Products sold in Canada usually carry a warranty, especially for the Canadian marketplace. Those sold in the United States may not carry a warranty for Canadian consumers. If the product is a “lemon” you are at the mercy of the seller to either repair it or provide a replacement. If the seller refuses, it is at your cost. Before purchasing online, it is always wise to check with the manufacturer to determine whether the product warranty is country-specific or international.

Make Sure Your Online Buying Is Secure

In addition to the aforementioned considerations, there are other areas online purchasers should keep in mind to protect themselves.

• An order placed using a public Wi-Fi network, such as at a local coffee shop, may not be secure or encrypted.
• Your operating system, browser and malware protection should be up to date. Since many downloaded updates include code to patch known vulnerabilities, it is strongly advisable to keep all your devices current. Check your system at least once a week to see whether it has the latest updates. Don’t ignore those notices that tell you an update is available and ask if you want to install it now.
• With the ubiquitous availability of Apps and an expectation of security through the device’s App store, it is easy to become careless about downloading Apps. For example, you may find an App claiming to allow online searching for the location of the stores of a merchant you like. Check out the company’s website before installing or using the App. For all you know, the company does not have an App, or the official App may go by a different name, and a hacker has simply offered a counterfeit App for the unsuspecting to download. By downloading and using the counterfeit, you may be inadvertently providing personal information to an identity thief.
• Look for the padlock icon. The symbol suggests that the website is encrypted via SSL (secure sockets layer) or TLS (transport layer security). The browser should show a padlock icon near the address bar if the site is secure. Notice that the URL of a secured website will begin with “https://” and not “http://”
• Although it has been said a thousand times, it is worth repeating: do not provide credit card numbers over the Internet to any organization, unless your connection is secure, as noted above. Never send your credit card information by email; email is not secure.
• Use available independent organizations to ensure the company you are dealing with is reputable. Your local Chamber of Commerce as well as the Better Business Bureau are useful starting points to discover the reputation of companies. Keep in mind that mere payment of membership dues to these organizations does not always mean a company is an outstanding citizen of commerce. Search blogs or ask your friends or business associates whether they have ever bought from the company.
• Whenever possible, use online payment services that act as a buffer between you and the merchant. To protect their reputation, many payment services monitor transactions with suppliers and merchants for abnormal activity. Using a payment service is not, however, going to protect you from a merchant who ships faulty goods or fails to honour return policies or warranties, but it may prevent unscrupulous individuals from gaining access to your banking or credit card information.
• Most companies want to obtain as much information as possible about their customers and use warranty registration questions as a means of gathering that information. Since we like to comply, we willingly provide serial numbers, model numbers and our name and address as they seem to be a logical requirement for registration. Beyond that, be cautious when providing information, especially when ordering from sources that are not household names. Privacy laws exist to protect you, but they may not always be respected.

Final Words

Since the day commerce began, there have always been individuals and organizations bent on taking advantage of the unsuspecting consumer. Internet purchasing has not changed the nature of those who wish to make a fast buck. It has, however, changed the way purchases are made and thereby introduced new ways people and systems can be manipulated. Consumers ordering online must follow safe communication protocols as well as exercise due diligence before making purchases. Ecommerce is generally safe and secure, but, in both the bricks-and-mortar world and online, it never hurts to be cautious. Caveat emptor.

The Perils of Credit Cards

Credit cards are very useful but they can also hurt you.

Do you know all the terms of all your credit cards? Do you really use or even want any of the benefits, such as rewards, travel or cash back for which you are eligible? Have you ever balanced the value of the benefits against the costs of using the card?

Probably not.

Credit card issuers have done their research and designed a range of cards for more finely identified market segments. The appeal to the consumer is in the various types of incentives: travel, rewards or cash back. The incentives vary but the common theme is a consumer benefit of some kind.

Benefits can run from simple offerings such as:

• Earn 2% cash back credits on grocery store purchases;
• Earn up to 1% cash back credits on all other purchases;
• Redeem your cash back credits on flexible terms;
  to the more complex:
• Earn a welcome bonus of 150 AIR MILES^®* reward miles on the first-time use of the card;
• Earn one reward mile for every $15 in card purchases at AIR MILES^®* Sponsors;
• Earn one reward mile for every $20 in purchases charged anywhere else;
• Shop at participating AIR MILES^®* Sponsors across Canada with your BBBB^® AIR MILES^®* Credit Card and your AIR MILES^®* Collector Card, and you can earn reward miles twice;
• Redeem for a wide range of rewards — everything from movie tickets to electronics, travel and more.

More Incentives Mean Higher Potential Cost

But how do the issuers give stuff away yet still make a profit? As a rule, if a credit card issuer offers more rewards, there is usually an annual fee and a higher interest rate on outstanding balances. Canadian business credit cards that offer annual rates as low as 3.25% – 4.50% offer little in the way of incentives. On the other hand, there are American-based credit card companies charging the equivalent of 30% annually on balances.

Convenience

Credit card use has many advantages for both merchants and consumers. They protect merchants against NSF cheques since the card issuer deals with the consumer and the issuer’s quick payment to the merchant provides the merchant with virtually instant cash flow. Cards also provide a convenient loan for the user when cash is low and purchases are necessary. Combine these positives with the fact that credit card purchases effectively offer 20-30 days of interest-free bridge financing to the consumer (if the loan is repaid on time) and the usefulness of credit cards becomes obvious.

Review your business credit cards and add up all the debt.

Credit Cards Can Be a Burden

Why then have credit cards become such a burden not only to the economy of Canada, but also to the average Canadian? The answer is simple: the convenience of credit cards, combined with the rewards and the low minimum monthly payments, is difficult for the consumer to resist. However, as many consumers are discovering, it’s easier to run up balances than pay them down.

So, how does the average small business owner control credit card debt?

The first step is to review the number of credit cards your business uses and add up the debt on each card. Most businesses will be surprised to discover that, although individual card debt is not great, the aggregate is significant.

Review all your credit card statements for each of the last three months and ask yourself:

• Were the cards used for purchases or to obtain cash advances? (Cash advances usually bear the highest interest rate and are calculated from the time of the withdrawal.)
• Was interest paid on any card in the three months?
• Were the cards paid off in full each month or were just the minimum payments made? How long will it take to pay off a balance if only the minimum payment continues to be made? This number can be a frightening reminder of the high cost of this kind of borrowing.

For example, assume a purchase of $2,500 and a minimum payment requirement for the month of 2% or $50 consisting of $37.50 in interest at 18% per annum and $12.50 in repaid principal. After the first payment, you will still owe $2,487.50. The following formula can be used as a rough calculation of how the principal and interest are calculated.

1.     Multiply $2,500 by 18% to get $450, the annualized amount of interest.

2.     Divide $450 by 12 to get $37.50, the monthly amount of interest owed.

3.     Subtract $37.50 from $50 to get $12.50, the amount of principal repayable.

If the minimum-repayment requirement was 2% of the balance due every month, it will take approximately 334 months (just under 28 years) to pay off the $2,500. Interest costs alone will be $5,896.52 for a $2,500 piece of equipment!*

*The above simplified example is given only to illustrate the perils of credit card financing by showing the typical consequences of failing to pay off the full balance by the due date. Because financial institutions differ in their methods of calculation, figures calculated in other ways may vary from those presented. The difference has to do with how the interest is calculated. Some institutions, for example, will calculate the interest on the first-of-month balance and some use the end-of-month balance. It could also be possible that the 18% is compounded daily.

• What are the interest rates charged on the various cards?
• What rewards have accumulated on the various cards in terms of cash back, travel points, etc.? Determine whether the rewards have accumulated sufficiently for you to take advantage of them.
• Have the original “teaser rates” and free membership offers expired and are double digit rates and full membership costs now in effect?

Once you have calculated the reality of your current costs and rewards, eliminate those cards with the highest interest rates and the most incentives. Get a line of credit from your financial institution and pay off the credit cards with the highest balances and the highest interest rates. Then pay off the line of credit as quickly as possible. Structure a repayment schedule for the line of credit and stick to it. But be careful not to get caught in a second minimum-monthly-payment trap created to tempt you by some financial institutions.

Taking Control of Your Credit Card Use

1. 1. Cancel the credit cards that have been paid off.
2. 2. Learn to say NO to all credit card solicitation. Don’t be flattered when someone tells you that you have just been preapproved for a credit card with a $50,000 credit limit.
3. 3. Use only the credit cards that provide few benefits; they probably have a lower interest rate. If you want reward incentives, ensure the rewards earned exceed the cost of the yearly “membership” fee and that the rewards actually benefit you and your business.
4. 4. Pay off the full balance every month. This allows rewards to accumulate but not the interest that will negate the value of the rewards.
5. 5. Put low credit limits on the cards. This will restrict card use and make paying the monthly balance easier.

The Obvious Benefits

It is certainly a good idea to have more than one credit card (i.e., a “spare” for emergencies or in case your primary card is compromised) but use the additional card only as a backup. Use cash or a debit card to fill up the gas tank and make other everyday purchases.

Credit cards are part of our business reality. They make transacting business much easier, provide access to emergency funds, permit tracking and accounting for expenditures and provide 20-30 days of free financing for your business. However, letting credit card balances get out of control can quickly affect cash flow requirements and the bottom line. Use them wisely.

Tax Tips for 2013

It’s not too early to begin planning your tax strategy for 2013.

Automotive

Deductible Allowance Rates

If you have employees who use their own vehicles in your business, the limit on deductible tax-exempt allowances paid by you to your employees in 2013 increased by one cent to 54 cents per kilometre for the first 5,000 kilometres driven and to 48 cents for each additional kilometre as of January 1. The rates in the Yukon, the Northwest Territories and Nunavut are 58 cents and 52 cents respectively.

Taxable Benefit Rates

If you drive a vehicle supplied by your employer, the prescribed rate for determining the taxable benefit of the personal portion of operating expenses paid by your employer for 2013 will increase by one cent to 27 cents per kilometre. For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will increase by one cent to 24 cents per kilometre.

Instalment Payment Dates for 2013

Because income from interest, capital gains or rental properties is usually not taxed sufficiently (if at all) at source to cover the annual tax liability, the Canada Revenue Agency (CRA) wants taxpayers with this kind of income to pay in instalments for balances owing accrued through the tax year. The previous year’s tax return or a notice from the CRA will indicate the instalment amounts. If the payments are not received on time, the CRA will calculate interest charges on the overdue amounts and add them to your reassessment when you file your next income tax return.

Your instalment payment dates for 2013 are March 15, June 15, September 15 and December 15. If a due date falls on a Saturday, Sunday or statutory holiday recognized by the CRA, the payment is considered to have been paid on time if it is received on the next business day. It is worth noting that the CRA will not recognize a letter postmarked on the due date as having been received on that date. Payments sent by mail are only considered to be received and paid to the CRA on the actual date they are received at a CRA office.

Payments made through Internet or telephone banking systems are considered paid on the payment date. Taxfilers should, however, pay attention to bank processing rules. Payments made after 6:00 p.m. on a Friday or a holiday may not be processed until the next working day, for example. To save interest costs, make sure payment is made a couple of business days before the due date. Postdated cheques or preauthorized debits are considered paid the date the transaction is authorized.

If instalment payments were scheduled but the taxpayer dies during the year, the CRA will waive the remaining schedule.

Tax-Free Savings Accounts

A taxpayer can make an annual contribution of $5,500 in after-tax dollars to a Tax-Free Savings Account (TFSA). Withdrawals attract no tax. Some account holders accidentally overcontribute by mistakenly treating the account as a savings or chequing account and withdrawing and then redepositing amounts that in total exceed the allowable annual contribution limit. Overcontributions can be returned to the TFSA without penalty only after the end of the year in which the funds were withdrawn. Another mistake is to contribute a non-qualified investment or make a contribution while the taxpayer is a non-resident. If such a mistake occurs, an RC243 Tax-Free Savings Account (TFSA) Return must be filed along with any taxes owing by June 30 of the year following the year in which the error was made. These areas will not be a problem if a financial institution or investment advisor is consulted before any contribution is made. In the event that an investor is not aware that they have erred, the CRA will use information provided by the issuer of the TFSA and send a notice of reassessment to the taxpayer.

Although there is an annual contribution limit, uncontributed amounts can be carried forward indefinitely. Thus, if the limit for 2013 is $5,500 but no contribution was made in 2012 when the limit was $5,000, the eligible contributable amount for 2013 is $10,500. To find the amount of your eligible TFSA contribution room, go to www.cra.gc.ca/myaccount, www.cra.gc.ca/quickaccess or the Tax Information Phone Service (TIPS). The number to call is 1-800-267-6999.

Capital losses can be carried back for three years.

Capital Gains and Losses

Net capital losses or capital gains are calculated each year by subtracting the lesser of the one from the greater of the other. Half of any net capital gain is included in income. Unused losses can be carried forward indefinitely to reduce future capital gains. The CRA also allows taxpayers to carry unused current-year capital losses back for three years to retroactively reduce capital gains and thereby recover some of the taxes paid on the taxable portion of those gains. For example, an unused capital loss in 2013 could be either carried forward to reduce any future capital gains or carried back and applied against capital gains in 2012, 2011 and/or 2010 to recover income taxes paid on the taxable capital gains in those years. To carry a current-year capital loss back to any or all of the previous three years, complete a Form T1A, Request for Loss Carryback. Use this form and do not file amended returns for the year or years in question. Your chartered accountant will probably have all the information you need to complete the Request.

In addition to capital losses on investments that may be applied against capital gains of previous years, capital losses created in 2013 on listed personal property may also be applied against capital gains from listed personal property of the previous three years and for the next seven years. Note that only listed personal property losses can be applied against listed personal property gains.

Capital gains deductions and allowable business investment losses may be impacted by cumulative investment expenses such as interest, carrying charges, and rental losses. If these amounts are greater than similar income, including capital gains and dividends, then your deductions from the above amounts will be reduced. Once this data is entered, it shows as accumulated amounts on CRA form T936 Calculation of Cumulative Net Investment Loss.

If circumstances in 2013 promise gains in either investments or listed personal property, it would be wise to discuss the potential gains with your chartered accountant to put a tax strategy in place for the end of the year.

Always Plan Ahead

Minimizing your personal income taxes is no longer a matter of just waiting until the end of the year and filling out the forms. To take full advantage of the expenditures allowed and the deductions available and to avoid paying unnecessary penalties and interest, take a proactive approach that includes maintaining proper up-to-date records and engaging in ongoing consultations with your tax advisors..

Disclaimer:

HOLDING THE LINE ON DEFICIT REDUCTION, AND MAINTAINING THE INTEGRITY OF THE TAX SYSTEM

Like its predecessor, the 2013 federal budget is entitled “Jobs, Growth, and Long-Term Prosperity”. In his eighth budget, finance minister Jim Flaherty has tabled a document focused on balancing the books, targeted spending, and fine-tuning the tax rules.

As it did with last year’s budget, the Canadian Institute of Chartered Accountants (CICA) gives the budget a B+ rating for remaining steadfast to its goal of deficit reduction, while introducing targeted spending to stimulate economic activity.

Despite being challenged by lower-than-expected growth in the Canadian economy, the government says it’s on course to eliminate the deficit and return to balanced budgets by 2015-16. It projects a $25.9 billion deficit for 2012-13, an $18.7 billion deficit in 2013-14, a $6.6 billion deficit for 2014-15, and a surplus of $0.8 billion in 2015-16.

Against this backdrop of deficit reduction, however, the government has introduced several new initiatives to stimulate economic activity and get more Canadians back to work. But even with this commitment to program spending, the deficit will continue to fall because of austerity measures already in place.

The Canada Job Grant program, which received a great deal of pre-budget attention, will provide up to $15,000 per trainee, $5,000 each from the federal and provincial or territorial governments, and $5,000 from the employer. The program is expected to help key industries, like companies in the energy sector, hire the people they need, although it may take up to a year for the federal government to renegotiate existing agreements with the provinces and territories.

The new Building Canada plan pledges more than $47 billion in new infrastructure spending over ten years, starting in 2014-15. This should help restore some of the crumbling infrastructure that is plaguing Canadian cities. What’s more, the initiative makes a link between federal construction and maintenance procurement practices and the hiring of apprentices.

For small businesses, there are a number of welcome changes that will streamline compliance. These include:

• Enhancing CRA’s online enquiries service by allowing small business taxpayers to “go paperless” and rely exclusively on electronic notices stored in the secure My Business portal
• Increasing accountability by introducing “Agent ID”, giving taxpayers access to the names and other identifying details of CRA call centre agents
• Working to expand the use of the Business Number to more governments (e.g.,Winnipeg)
• Introducing a pilot program for pre-approval of SR&ED claims
• Streamlining the approval process for authorization of third parties to conduct business tax matters on their clients’ behalf.

The budget also contains stimulus measures for the manufacturing sector, including:

• A two-year extension of the temporary accelerated capital cost allowance for new investment in machinery and equipment
• Renewal of the Federal Economic Development Agency (FedDev Ontario) for southern Ontario with funding of $920 million over five years
• Investing $200 million over five years in the new Advanced Manufacturing Fund in Ontario
• Streamlining foreign trade zone policies and programs by cutting red tape and improving access

• Extending the Hiring      Credit for Small Business for an additional year

AGGRESSIVE TRANSACTIONS

The government has indicated that, in addition to the audit process, they are attempting to curtail the following aggressive transactions legislatively.

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR & ED) PROGRAM

The Government previously indicated their concerns with respect to the overall effectiveness of the SR & ED program.

The Budget introduces measures to provide the CRA with new resources and administrative tools to better respond to the minority of SR & ED program tax preparers and SR & ED claimants who participate in claims where the risk of non-compliance is perceived to be high and the eligibility for the SR & ED program is unlikely.

One of these measures will require more detailed information about SR & ED program tax preparers and billing arrangements. Where third parties have assisted in preparing the claim, the Business Number of each third party will be required along with the details of the billing arrangements, including whether contingency fees were applicable. Where no third party assisted, the
claimant will be required to certify accordingly.

The Budget proposes that a new penalty of $1,000 be imposed in respect of each SR & ED claim for which the information regarding the SR & ED program tax preparer and billing arrangements is missing, incomplete or inaccurate. Where a third-party SR & ED tax preparer has been engaged, both the claimant and the tax preparer will be jointly and severally liable for the penalty. The penalty applies to claims filed on or after the later of January 1, 2014 and the date on which enacting legislation receives Royal Assent.

SYNTHETIC DISPOSITIONS

Taxpayers have entered into transactions where they receive fair market value (FMV) consideration for a property without actually making a technical disposition for income tax purposes. When they ultimately dispose of the property, their taxable gain is technically computed based on the consideration previously received. These transactions eliminate any gain or loss that would have resulted from the continued ownership of the property. Very often, these transactions will involve the use of a forward sale, put-call arrangements, issue of exchangeable debt and securities borrowing. The Budget refers to these transactions as “synthetic dispositions”.

The Budget proposes to treat these transactions as actual dispositions and reacquisitions at FMV, thereby eliminating the sale deferral opportunity and ensuring that taxpayers will not avoid the “stop-loss” dividend rules under section 112.

These rules will not apply to ordinary hedging transactions, securities lending arrangements or leasing arrangements.

This measure will generally apply to transactions entered into on or after Budget Day.

CHARACTER CONVERSION TRANSACTIONS

Taxpayers have entered into financial arrangements, using derivative contracts, whereby ordinary investment income is converted into capital gains.

Typically, a taxpayer will buy or sell a capital property using a forward agreement. However, the ultimate sale price of the capital property is not based on the property’s performance but upon some other criteria such as ordinary income returns on other portfolio investments.

The Budget proposes to treat the return that is not tied to the performance of the particular property as a separate property and on account of income. This income (loss) will be added to (deducted from) the cost of the particular property.

These rules will apply to derivative forward contracts of more than 180 days.

This measure will generally apply to transactions entered into on or after Budget Day.

LOSS TRADING

The Income Tax Act contains detailed rules which prevent corporations from using tax losses, unused deductions and tax credits (tax attributes) when there is an acquisition of legal control, unless the corporation continues to carry on the same business that created the tax attributes with a view to profit. In these circumstances, the corporation may apply the tax attributes against income from a similar business.

Taxpayers have circumvented these rules by acquiring shares of “loss companies” without acquiring legal control of the company (for example refer to the 1998 Supreme Court case of Duha Printers). The Budget proposes that if a person acquires shares that represent more than 75% of the fair market value of the issued shares, there will be deemed to be an acquisition of control.

This measure generally applies to a corporation whose shares are acquired on, or after, Budget Day.

There are no similar rules for trusts.

The Budget proposes to create an analogous regime for trusts. The new rules will generally apply if there is a change in a “majority-interest beneficiary” and will be similar to the affiliated person rules. These rules should not adversely affect normal changes in family situations including the death of a beneficiary.

EXTENDED REASSESSMENT PERIOD: TAX SHELTERS AND REPORTABLE TRANSACTIONS

The normal reassessment period for most taxpayers is three years after the assessment date of the tax return. Where the information return is filed late, the Budget proposes to extend the reassessment period for a participant in a tax shelter or reportable transaction to three years after the relevant information return is filed.

This measure will apply to taxation years that end on or after Budget Day

TAXES IN DISPUTE AND CHARITABLE DONATION TAX SHELTERS

The Budget proposes to permit the CRA to collect 50% of the disputed amount of tax, interest or penalties with respect to a tax shelter which involves a charitable donation. Previously the CRA was not allowed to collect any of the outstanding amounts, except in the case of “large corporations”, until the dispute was decided by the Tax Court of Canada.

This measure will apply for amounts assessed for the 2013 and subsequent taxation years.

LEVERAGED INSURED ANNUITIES (LIAs)

Taxpayers have entered into the following types of integrated transactions, using their corporations:

• The taxpayer (or a related person) uses funds borrowed from a financial institution to acquire income-earning investments.  Consequently, the related interest cost is tax-deductible.  It is not unusual for the financial institution to capitalize the interest and collect it on the death of the insured individual from the proceeds of the insurance policy referred to below.
• A corporation purchases a life annuity on an individual. Only a portion of the annuity receipts is taxable (i.e., the non-return of capital).
• The corporation purchases an insurance policy on the life of the individual.
• Both the life insurance policy and the annuity are assigned to the lender of the borrowed funds.
• The annuity payments fund the insurance premiums and the bank financing costs.
• The net cost of pure insurance and the borrowing costs are tax-deductible.
• On the individual’s death, the death benefit on the insurance policy (which includes the income earned within the policy) is received tax-free. The cash is used to repay the bank loan and is substantially added to the corporation’s capital dividend account (CDA), which may be paid out tax-free to the estate or its beneficiaries.

The Budget proposes the following changes to LIAs:

• The income earned inside the life insurance policy will no longer be tax-exempt and will be subject to annual accrual based taxation presumably to the owner of the policy.
• The life insurance premiums will not be tax-deductible.
• The death benefit from the life insurance policy will not increase the CDA.
• The annuity will have a deemed fair market value (FMV) equal to the premiums paid. Under the existing rules, the FMV was nil. This new valuation rule will increase the FMV of the corporation on death for the purposes of computing capital gains.

These rules will not apply to LIAs in place prior to Budget Day provided all borrowings were in place prior to Budget Day.

10/8 ARRANGEMENTS

Closely held private corporations have entered into the following types of arrangements, known as “10/8 arrangements”, to create tax deductions and other advantages:

• The corporation acquires a life insurance policy.
• Although the corporation utilizes its cash to pay the life insurance premiums, it borrows, from the insurer, an amount equal to the premiums to earn income.  The lender may agree to capitalize the interest, instead of collecting it.
• The investment return earned within the life insurance policy is tied to the interest rate charged on the loan, so that the investment return is generally 2% less than the borrowing rate. Historically the borrowing rate was 10% and the investment return rate was therefore 8%.
• The life insurance policy is pledged as collateral for the loan.

The tax benefits of this arrangement are:

• The interest cost is tax deductible since the borrowed funds are utilized to earn income.
• The portion of the insurance premiums equal to the net cost of pure insurance is tax deductible.
• The investment income earned inside the insurance policy is not taxable since the policy is an “exempt policy”.
• The death benefit is tax-free and is included in the CDA of the corporation.

The Budget proposes the following changes to the “10/8 Arrangements”, effective for taxation years that end on or after Budget Day, with respect to periods after 2013:

• The interest expense and the life insurance premiums will not be tax-deductible.
• The death benefit will not be added to the CDA.

These rules have no grandfathering provisions. However, there are provisions to unwind these arrangements before 2014.

These rules will not apply to an assigned life insurance policy where the interest paid on the borrowings and earned inside the policy are not linked to each other or the maximum value of the life insurance’s investment account is not determined with reference to the borrowings.

PERSONAL INCOME TAX MEASURES

PERSONAL TAX CREDIT (DTC)

The Budget proposes to reduce the net federal dividend tax credit available with respect to non-eligible dividends, effective for such dividends paid after 2013. The gross-up will be reduced from 25% to 18% and the corresponding DTC will be increased from 2/3 to 13/18. These changes will increase the maximum federal tax rate on these dividends from 19.6% to 21.2%.

All provinces, other than P.E.I., are currently “over-integrated”, which results in an overall tax savings from paying dividends as opposed to salary out of active business income taxed at the small business rate. This proposal will either reduce or reverse this “over-integration”.

LIFETIME CAPITAL GAINS EXEMPTION

The Budget proposes to increase the capital gains exemption from the current $750,000, by $50,000 to $800,000, effective for the 2014 and subsequent taxation years. In addition, the exemption will be indexed for inflation for taxation years after 2014.

RESTRICTED FARM LOSSES

The 2012 Supreme Court case of Craig allowed a taxpayer to deduct farm losses completely because his chief source of income was considered to be a combination of farming and law.

The Budget proposes that a taxpayer may only deduct farm losses completely against other sources of income if the farming income is the taxpayer’s chief source of income and other sources of income are subordinate. Otherwise, the farming loss will be a restricted farm loss.

The annual restricted farm loss deduction will be increased from a maximum of $15,000 to a maximum of $17,500 ($2,500 plus 1/2 of the next $30,000).

These measures will apply to taxation years ending after Budget Day.

MINERAL EXPLORATION TAX CREDIT

The Budget extends the Mineral Exploration Tax Credit to flow-through agreements entered into before April 1, 2014.

The existing “look-back” rule remains intact. This rule provides a credit for funds raised in a calendar year as long as the funds are spent on eligible exploration by the end the following calendar year.

FIRST-TIME DONOR’S SUPER CREDIT

To encourage charitable giving by new donors, the Budget proposes to introduce an increased federal tax credit for a first-time donor on up to $1,000 of donations. This increased tax credit will add 25% to the current credit. Consequently, for donations of up to $200, there will be a credit of 40%, as opposed to the current 15%, and for donations in excess of $200, there will be a credit of 54%, as opposed to the current 29%. This increased tax credit only applies to cash donations, as opposed to donations in kind.

A first-time donor is an individual (other than a trust), including their spouse or common-law partner, who has not claimed the donation tax credit in any year after 2007. First-time donor couples may share the increased tax credit.

This increased tax credit will be available for donations made on or after the Budget and prior to 2018. In addition, this increased credit may only be claimed in one taxation year.

ADOPTION EXPENSE TAX CREDIT (AETC)

The current AETC is available for qualifying expenses during the period from the time the child is matched with his or her adoptive family and the time that the child begins to permanently reside with the family. The adoptive family may incur significant adoption-related expenses prior to being matched with a child. Consequently, the Budget proposes to commence the eligible period for adoptions finalized after 2012 with the time that an adoptive parent makes an application to register with a provincial ministry responsible for adoption or with a licensed adoption agency. In addition, where an adoption-related application is made to a Canadian court at an earlier time, with that earlier time.

DEDUCTION FOR SAFETY DEPOSIT BOXES

The Budget proposes to eliminate the current deduction for the rental of a safety deposit box, effective for taxation years which begin after the Budget.

LABOUR-SPONSORED VENTURE CAPITAL CORPORATIONS TAX CREDIT (LSVCC)

The Budget proposes to phase out the federal LSVCC. Commencing in 2015, it will be reduced from 15% to 10%, it will be further reduced to 5% in 2016 and to zero after 2016. In addition, an LSVCC cannot be federally registered on or after Budget Day and a provincially registered LSVCC will not be prescribed for purposes of the federal credit unless the application was submitted before Budget Day.

BUSINESS INCOME TAX MEASURES

MANUFACTURING AND PROCESSING (M&P) MACHINERY AND EQUIPMENT:
ACCELERATED CAPITAL COST ALLOWANCE (CCA)

The Budget proposes to extend the current 50% CCA rate for M & P machinery and equipment included in Class 29 by an additional two years so that it will apply for 2014 and 2015, instead of ending after this year. However, the half-year CCA rule which does not generally apply to such assets, will apply to such machinery and equipment acquired in 2014 and 2015.

CLEAN ENERGY GENERATION EQUIPMENT: ACCELERATED CAA

CCA Class 43.2 currently provides for a 50% rate on a declining basis for investment in specified clean energy generation and conservation equipment. The Budget proposes to expand Class 43.2 by making biogas production equipment that uses more types of organic waste eligible. In addition, the range of cleaning and upgrading equipment used to treat eligible gases from waste will be broadened.

This measure will apply to property, which has not been previously used, acquired on or after Budget Day.

RESERVE FOR FUTURE SERVICES

Paragraph 20(1)(m) provides a reserve for amounts received in respect of services to be rendered after the end of the taxation year. The Budget proposes to amend paragraph 20(1)(m) to preclude a reserve where the taxpayer has a future reclamation obligation.

This measure will apply to amounts received on or after Budget Day, other than amounts which are directly attributable to future reclamation costs that were authorized by a government or regulatory authority before Budget Day and that are received under an agreement in writing which was entered into before the Budget Day or before 2018.

ADDITIONAL DEDUCTION FOR CREDIT UNIONS

Credit unions have access to a deduction, in addition to the small business deduction, which provides access to a preferential income tax rate for income which is not eligible for the small business deduction. The Budget proposes to phase out this additional deduction over five calendar years, beginning in 2013. Consequently, the additional deductions permitted will be 80% for 2013, 60% for 2014, 40% for 2015 and 20% for 2016, with no additional deduction permitted for 2017 and subsequent calendar years.

This measure applies to taxation years which end on or after Budget Day, with a proration for the portion of the non-calendar year which is after Budget Day. In addition, this measure will be prorated for all non-calendar taxation years.

ACCELERATED CCA FOR MINING

Certain assets acquired for use in new mines or eligible mine expansions are currently eligible for accelerated CCA in the form of an additional allowance which supplements the regular 25% CCA deduction. The Budget proposes to phase out this additional allowance for mining, other than for bituminous sands and oil shale, for which the phase out will be complete in 2015, over the 2017 to 2020 calendar years as follows: 100% until 2016, 90% for 2017, 80% for 2018, 60% for 2019, 30% for 2020 and zero after 2020.

This measure will generally apply to expenses incurred on or after Budget Day.

MINING EXPENSES

Pre-production mine development expenses are currently treated as Canadian exploration expenses (CEE), subject to a 100% deduction. To align mining expenses with the deductions available in the oil and gas sector, these expenses will now be treated as Canadian development expenses (CDE), subject to a 30% declining balance deduction. The changes will be phased in over 3 calendar years, applying to expenses incurred after Budget Day.

REGISTERED PENSION PLANS (RPPs):
CORRECTING CONTRIBUTION ERRORS

Currently, over-contributions to an RPP can be refunded to plan members or employers if the refund is made to avoid the revocation of the RPP. However, this refund mechanism is not currently available where the RPP contribution limits have not been exceeded and the contribution was made as a result of a reasonable error (e.g., where an employer made a mistake in calculating the members’ or employer’s contribution for a particular year). The CRA can only allow such refunds on a discretionary, case-by-case basis.

The Budget proposes to allow refunds made, in order to correct reasonable errors, without first obtaining the CRA’s approval, as long as the refund is made by December 31 of the following year.

This proposal will apply to RPP contributions made after the later of January 1, 2014 and the date of Royal Assent of the enacting legislation.

INTERNATIONAL

FORM T1135

Section 233.3 generally requires Canadian residents and certain partnerships to disclose their holdings of certain foreign property (notably excluding personal-use property) on Form T1135, where the total cost of such property exceeds $100,000.

Commencing with the 2013 taxation year, the Budget proposes to extend the normal reassessment period by three years if:

• The taxpayer has failed to report the income from such property, and
• Form T1135 was not filed on time or the property was not identified or was incorrectly identified.

Form T1135 will be modified to require the disclosure of more specific information.

The CRA is in the process of developing a system that will allow Form T1135 to be filed electronically.

INTERNATIONAL ELECTRONIC FUNDS TRANSFERS (EFTs)

Beginning in 2015, most financial institutions will be required to report EFTs of $10,000 or more to the CRA.

Measures will be introduced, on Royal Assent, to enable the CRA to obtain information from third parties on a more timely basis.

WHISTLE BLOWER PROGRAM

The CRA plans to introduce a rewards program to induce individuals to report major international non-compliance. The reward will be 15% of federal tax collected in excess of $100,000.

NON-RESIDENT TRUSTS

The Income Tax Act contains provisions that can deem a non-resident trust to be resident in Canada if a Canadian resident contributes property to it. In the Sommerer case, 2012 FCA 207 (discussed below), the court held that a fair market value sale to a trust did not constitute a contribution of property to the trust, in the context of subsection 75(2).

The Budget proposes to treat any transfer or loan of property (including a sale for fair market value consideration) to a non-resident trust to be a contribution to the trust in circumstances where the conditions specified in subsection 75(2) have been violated. Therefore, a fair market value sale to a non-resident trust could cause the trust to be deemed to be resident in Canada. However, the Budget also clarifies that subsection 75(2) will apply only to trusts that are resident in Canada without regard to the deemed residence rules.

The Budget does not deem a fair market value sale to be a contribution for purposes of subsection 75(2).

Subsection 75(2) is violated where a trust receives property from a person (the “tainted person”) and the property can revert to that person or that person can direct a disposition of the property. If violated, subsection 75(2) deems the income, losses, capital gains and capital losses of the trust from the property to be that of the tainted person. Furthermore, if subsection 75(2) has ever been violated, subsection 107(4.1) provides that none of the property of the trust can be rolled out, tax-free, while the tainted person exists, except to the tainted person or to his/her spouse or common-law partner.

These measures will apply to taxation years that end on or after Budget Day.

THIN CAPITALIZATION

The “thin capitalization rules” can deny an interest deduction to Canadian-resident corporations that have borrowed from certain non-resident shareholders or from non-arm’s length persons. The debt in question can be owed by a partnership of which the corporation is a member. Broadly, the deduction is denied on the portion of the debt that exceeds 1.5 times the corporation’s equity.

The Budget proposes to extend the application of the thin capitalization rules to Canadian-resident trusts that have borrowed from certain non-resident beneficiaries (or from non-arm’s length persons) and to non-resident corporations and non-resident trusts that operate in Canada or have elected, pursuant to section 216, to be taxed under Part I on real estate rental income or timber royalties. The thin capitalization rules applicable to these entities will be considerably more complicated than those applying to domestic corporations and will differ in a number of respects.

There is a particularly important aspect of the application of the thin capitalization rules to non-resident corporations and trusts that earn rental income from certain properties in Canada. Where such entities elect to be taxed under Part I on their net rental income rather than being subject to withholding tax on gross rental income, the thin capitalization rules applicable will be those that apply to non-residents, not those that apply to Canadian residents.

These measures generally apply to taxation years that begin after 2013. To be clear, the fact that the debt may have been incurred before Budget Day is not a governing factor.

TREATY SHOPPING

Certain amounts paid by Canadian residents to non-residents are subjected by section 212 to a flat withholding tax of 25%. Some common examples are dividends and trust income. The 25% rate is generally reduced where the recipient is a resident of a country with which Canada has a tax treaty.

A resident of non-treaty country might form an entity in a treaty country to receive the payment, so that less tax is withheld in Canada. The Budget papers indicate that Canada will consult on possible measures to curtail such treaty shopping.

CONSULTATIONS

TAXATION OF CORPORATE GROUPS

Previous Budgets in 2010 and 2012 noted the government’s interest in exploring the issue of whether new rules for the taxation of corporate groups, such as the introduction of a formal system of loss transfers or consolidated reporting, could improve the functioning of the corporate tax system. During the consultations conducted by the government, although businesses favoured these types of enhancements, the Provinces and territories were concerned about the possibility that a new system of corporate taxation could reduce their revenues. In addition, there are concerns that governments could incur significant upfront costs by introducing this new approach. Consequently, the government has determined that moving to a formal system of corporate group taxation is not a priority at this time.

GRADUATED RATE TAXATION OF TRUSTS AND ESTATES

Inter vivos trusts are generally taxed at the highest personal tax rate. However, grandfathered inter vivos trusts, created before June 18, 1971, are subject to the graduated income tax rates for individuals.

Testamentary trusts created on the death of a taxpayer are taxed as individuals, subject to the graduated income tax rates available to individuals. It is a common tax planning technique for individuals to transfer their assets on death to one or more testamentary trusts, each of which is eligible for this treatment.

The government intends to review and consult on whether these trusts should be taxed at the graduated rates.

SALES AND EXCISE TAX MEASURES

GST/HST AND HEALTH CARE SERVICES

The following changes apply to supplies made after Budget Day:

• The Budget proposes to extend the exemption from GST/HST on certain government subsidized or funded homemaker services rendered to an individual in his or her home to include additional services such as bathing, feeding, and assistance with dressing and taking medication.
• To address certain court decisions, the Budget also proposes to clarify that GST/HST applies to reports, examinations and other services that are not performed for the purpose of the protection, maintenance or restoration of the health of a person or for palliative care.

GST/HST PENSION PLAN RULES

The Budget proposes the following changes intended to simplify GST/HST compliance
for employer pension plans:

• For supplies made after Budget Day, an employer participating in a registered pension plan may jointly elect with a pension entity to treat an actual taxable supply by the employer to the pension entity as being made for no consideration where the employer accounts for and remits GST/HST on the deemed taxable supply in respect of that same transaction.
• Under current rules, an employer participating in a registered pension plan must account for and remit GST/HST under the deemed taxable supply rules even where the employer’s involvement in the pension plan is minimal. For fiscal years that begin after Budget Day, full or partial relief from the requirement to account for tax on deemed taxable supplies will be available where the employer’s pension plan-related activities are below certain specified thresholds. The full relief will not be available where the employer elects under the previous measure not to account for tax on actual taxable supplies made in that fiscal year.

GST/HST BUSINESS INFORMATION REQUIREMENT

Effective on Royal Assent, the Budget proposes that the Minister of National Revenue have the authority to withhold GST/HST refund claims until such time as the claimant provides all prescribed business identification information.

GST/HST ON PAID PARKING

The Budget proposes to clarify that certain exemptions available to public sector bodies (PSBs) do not apply to supplies of paid parking provided in the course of a business. Under the GST/HST, a PSB is a municipality, university, public college, school authority, hospital authority, charity, non-profit organization or government.

• The Budget proposes to clarify that, retroactive to the date the GST legislation was first enacted, the exemption applicable to PSBs on supplies of a particular property or service where all or substantially all (90% or more) of the supplies are made for free does not apply to supplies of paid parking made in the course of a business carried on by a PSB.
• The Budget also proposes to clarify that, effective Budget Day, GST/HST exemption from GST/HST does not apply to paid parking supplied in the course of a business carried on by a charity set up or used by a municipality, university, public college, school or hospital to operate a parking facility.

GST/HST TREATMENT OF THE GOVERNOR GENERAL

To simplify compliance for vendors, effective for supplies made after June 30, 2013, the current GST/HST exemption on purchases for the Governor General will end.

EXCISE DUTY RATE ON MANUFACTURED TOBACCO

Effective after Budget Day, the rate of excise duty on manufactured tobacco (e.g., chewing tobacco or fine-cut tobacco used in roll-your-own cigarettes) will increase from $2.8925 to $5.3125 per 50 grams or fraction thereof.

OTHER MEASURES

ELECTRONIC SUPPRESSION OF SALES SOFTWARE SANCTIONS

To combat tax evasion through the use of electronic suppression of sales software (generally referred to as “zapper” software), the Budget proposes new administrative monetary penalties and criminal offences under the Excise Tax Act (i.e., in respect of GST/HST) and the Income Tax Act. These measures will apply on the later of January 14, 2014 and Royal Assent.

ABORIGINAL TAX POLICY

The Budget reiterates the government’s willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments, and its support of direct taxation arrangements between provinces or territories and Aboriginal governments.

CUSTOM TARIFF MEASURES

TARIFF RELIEF FOR CANADIAN CONSUMERS

Effective for imports into Canada on or after April 1, 2013, the Budget proposes to permanently eliminate all tariffs on baby clothes and sports and athletic equipment (excluding bicycles).

MODERNIZING CANADA’S GENERAL PREFERENTIAL TARIFF REGIME FOR
DEVELOPING COUNTRIES

Further to a notice in the Canada Gazette on December 22, 2012, the Budget proposes changes to Canada’s General Preferential Tariff (GPT) regime under the Customs Tariff. Under these changes, 72 higher-income and export-competitive countries, including all G-20 countries, will no longer be eligible for GPT treatment. Amendments will also be made to continue the duty-free importation of textiles and apparel from least developed countries that are produced using textile inputs from current GPT beneficiaries. The changes to the GPT are effective in respect of goods imported into Canada on or after January 1, 2015, and will apply for ten years, until December 31, 2024.

Technology

Apps

Apps can be very useful but be careful when you buy.

Whether you use an iOS, Android, BlackBerry or Windows-based device, the proliferation of applications or apps, for short, (i.e., software designed and optimized for use on mobile devices) can provide significant opportunities to enhance your work and personal life by improving organization and productivity.

There are, in fact, well over one million apps available, spread across the various mobile platforms. While the larger platforms like iOS and Android each have over half a million apps, BlackBerry and Windows Phone still offer plenty of choice with more than 100,000 apps each.

While not all apps are practical or appropriate for personal or business use, there are many that may be very useful. The following categories are but a few you may want to consider as tools to be loaded onto your smartphone. Naturally, you won’t need all of them all of the time, but when you do, they sure are handy.

Business Cards and Contact Management

With hundreds of contacts providing business cards, it’s easy for the cards soon to get misfiled. With a business card scanner app, you simple take a picture of the card and the app puts it into a business-card file. In today’s digital world, not everyone uses or even wants paper business cards anymore; an app that lets you create a digital contact card that can be traded wirelessly is invaluable. Simply tap your phones together to exchange your contact information. (Examples include: Bump for iOS, Android.)

Productivity Suite

If you work on the go, you might want to consider getting a productivity suite that allows you not only to view, but also to edit documents, presentations and spreadsheets. Some productivity apps allow you to sync your documents across multiple devices, including your phone, tablet and main computer. While best for simpler tasks, it might be enough to let you leave your bulky laptop back on your desk! (These apps vary by platform. Examples include:Pages, Numbers and Keynote for iOS.)

File Management

Every platform treats stored data a little bit differently. However, there are many apps available that can help manage the data files your receive from different platforms. This is particularly important on iOS, because files cannot be stored outside an app. A file management app can store almost any kind of file, even if you don’t have an app that can read it on your mobile device (Example: Filer for iOS). Some file management apps also include the ability to sync data to your computer or other devices or share with others. Imagine being able to create a file on your desktop, pull it up later on your tablet to make revisions, then share it with a colleague or client who can make their own changes, regardless of where they are. (Examples include: Dropbox for iOS, Android, BlackBerry, Kindle Fire, PC and Mac.)

Translation

Translating different languages into or from English previously required the services of a professional translator. Translation apps can accept the input of text in one language and output it into another language. While machine translation is not perfect, it can at least quickly convey the concepts and intended meaning when accessing content or communicating with someone in a language different from your own. Some apps may also help you learn basic foreign-language phrases by producing a vocalization of the text. (Examples include: Google Translate.)

Data Usage

Unlike your voice allowance, which is usually measured in minutes, the amount of data included in your plan and the amount of work it can do (i.e., the number of emails, photos, documents, etc. that can be uploaded or downloaded) are much more abstract and can be harder to track. Many wireless carriers offer an app that includes a usage tracker. Third-party apps (i.e., apps offered by companies other than those that make the platforms) may also offer greater customizability and features, including real-time tracking, configurable alerts and even an app-by-app analysis to see which ones are the worst culprits. You may find, for instance, that some apps continuously check for updates in the background. Even if a single update is relatively small, collectively they can quickly add up! Once you get a clear picture of your data usage, you can adjust settings, as needed, to reduce it. (Examples include: My Data Manager, for iOS and Android.)

Weather

Most people will find weather apps a must. While a basic app is often preloaded onto the device, third-party apps may provide more detailed forecasts, links to related news, videos or radar images. If your business involves construction or delivery, for example, knowing the weather hour by hour as well as next week’s forecast for the area where you’re working can save countless dollars by allowing advance planning regarding workload, scheduling, routing of vehicles, supplies required or manpower. (Examples include: WeatherEye [by The Weather Network] for iOS, Android, BlackBerry and Windows Phone.)

QR Code and Barcode Scanners

Barcode and Quick Response (QR) code scanners can be extremely valuable for both personal and business use. Some apps may only support a particular form of code, while others may support a variety; however, the premise is the same, regardless. The camera on the device scans the code, which is then interpreted by the app. A scanned barcode may return search results, such as product details or competitive pricing, while a QR code may provide data or send you directly to a website. QR codes are becoming popular on business cards as a way of quickly importing details from the contact’s website without having to key in anything. No more searching the Internet to find out about the product, the company or the contact information.

Flashlight

It’s so simple, yet so very useful. Every platform has a wide range of flashlight or torch apps that allow convenient control of the screen brightness and/or camera flash. If you’ve ever dropped something under your desk and had to go groping around for it, you’ll wish you had a flashlight app.

Notes and Sketches

Our phones and tablets have in many ways replaced the venerable notepad. You’ll likely find that an app for taking and managing notes will help you keep organized, by assigning things like dates and categories. Similarly, an app that supports at least simple sketches will definitely be useful. Forget the back of the napkin; draw that sketch right on your phone and email it following the meeting.

Automation Apps

In the same way as you may use macros to automate tasks in a spreadsheet, apps are available (particularly for Android) that can customize your settings based on criteria such as time of day, or where you are. Imagine, you leave home in the morning with the WiFi radio automatically turned off to save your battery. If your hands-free device is also off, calls could go to voicemail when you are driving over a certain speed. When you arrive at the office, the WiFi re-enables to reduce your mobile data usage. If you have an offsite meeting during the workday, an autoreply is enabled to let your colleagues and customers know you might not be able to get back to them right away.

Be Careful When You Buy an App

It is advisable to purchase apps directly from the store for your platform, such as the iOS App Store, Android Google Play, BlackBerry App World and Windows Phone Store. Apps in these stores have generally been tested prior to being certified for sale. Third-party app stores have also become popular. However, the apps in these stores may not have been tested and could present a security concern. Only buy apps you find useful. Certainly it is fair to download “free apps”, but many free apps do not incorporate the full range of features found in the purchased version and may include advertising. It is worth the price to have applications that are updated as needed to ensure maximum efficiency.

It’s Worth the Effort

To fully appreciate the applications available for your smartphone requires an investment of time browsing through the thousands of applications that are offered. Fortunately, the applications are categorized by topics to eliminate the games, gadgets and links that proliferate on all the sites. Locating an app and discovering that it performs as advertised and provides you, the user, with useful information or practical application is certainly worth the effort.

Deductions 2012

Knowing your eligible deductions and tax credits can keep you from overpaying your income taxes.

It is no secret that the best way to keep your income taxes to a minimum is to know which tax deductions and tax credits are available to you. It’s up to you to know this. Canada Revenue Agency is under no obligation to inform you of any eligible deductions or credits you may have overlooked in your filing. Unfortunately, determining what deductions and credits you can use and their amounts is often a matter of interpretation. So, the period between now and the April 30 filing date for personal income taxes is an opportunity to talk with your accountant about what benefits are available for tax year 2012 and what you can do to set yourself up to benefit from deductions and credits in the future.

Definitions: Tax Deductions and Tax Credits

A tax deduction is an amount that can be subtracted from gross income to give you the taxable income that determines your tax rate. A tax credit, on the other hand, is an amount subtracted from the dollar amount of tax calculated by applying your tax rate to your taxable income. A tax credit is actually more valuable than a deduction because it reduces the tax payable dollar for dollar. A deduction only reduces the percentage tax rate applicable to your taxable income.

Union Dues

Many individuals forget to provide their tax advisor with receipts for union dues paid. Union dues can add up to large amounts, especially if an employee has belonged to a number of unions over the same year.

Annual dues that should be claimed include:

• dues for membership in a trade union;
• dues for membership in an association of public servants;
• professional board dues required under provincial or territorial law;
• malpractice liability insurance premiums or professional membership dues required to maintain the taxpayer’s professional status;
• parity or advisory committee dues required under provincial or territorial law.

Public Transit

Canada Revenue Agency allows employees who commute to and from work a deductible expense for passes allowing unlimited travel within Canada on “local” buses, streetcars, subways, commuter trains or buses, and local ferries. One-way tickets are not considered deductible as they do not provide unlimited travel. However, deductions are available for travel passes of at least five days’ duration if the taxpayer purchases passes for at least 20 days in a 28 day period. An electronic payment card that provides a receipt creates an allowable deduction if at least 32 one-way trips are made within a continuous 31-day period.

Children’s Arts and Fitness Amounts

Two areas frequently misunderstood by many taxpayers are the Children’s Arts Amount and the Children’s Fitness Amount. Each program allows a claim of up to $500 per child under age 16 (under 18 if the child is eligible for the disability amount) for fees paid in the calendar year. Many taxpayers believe the $500 is a direct deduction from earned income, which is not true. These fees are tax credits. Both the fitness and the arts amounts are subjected to a federal tax credit of 15%; therefore, the actual reduction against income tax is $75 (i.e., 15% of $500). Depending on the province of residence, additional provincial deductions may be available.

There are situations in which the fitness/arts amount may be commingled with child care cost. If it is not possible to differentiate between the two, the child care amount must be claimed first. Residual amounts up to $500 are then claimed as a fitness or arts amount.

Moving Expenses

The costs of moving is an area often overlooked by taxpayers. Deductions for eligible moving expenses are incurred when a taxpayer moves and establishes a new home at least 40 kilometres closer to the place of new employment, business or educational institution.

Deductible expenses include:

• transportation and storage costs (such as packing, hauling, moving, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• travel expenses such as vehicle expenses, meals, and accommodation incurred to move to the new residence;
• living expenses for up to a maximum of 15 days for meals and temporary accommodation near the old and the new residence for the taxpayer and members of their household;
• lease cancellation costs for the former residence;
• other costs such as change of address, change of address on legal documents; replacement of drivers licences, utility disconnect and hookup costs and the cost of maintaining the old residence to a maximum of $5,000 for interest, property taxes, insurance, as well as heat and other utility expenses. (If you were renting the previous residence, these costs cannot be deducted.);
• costs associated with selling the old residence. Advertising, legal fees, real estate commissions and early mortgage payout are the major expenditures allowed. Legal fees, transfer fees, or the registration cost for the new residence are also deductible.

The cost of moving is expensive so be sure to save all the receipts and maintain adequate documentation to establish the distance moved, the dates of the move and all other details concerning the purchase and sale of the old and new residences. This is a tax deduction worth using.

Carrying Charges and Interest Expenses

Those who earn income from investments are entitled to deduct carrying charges and interest paid to earn income from investments such as the following:

• management fees (RRSP/RRIF administration fees are not allowed);
• safety deposit box cost;
• interest paid on money borrowed for investment purposes as long as the investment is for the purpose of earning investment income in the form of interest or dividends. If the interest cost is incurred to create capital gains, the interest is not a deductible expense;
• if interest was paid on an insurance policy to earn income, the interest is deductible as long as the insurer completes, before the tax return is due, form T2210 Verification of Policy Loan Interest by the Insurer;
• interest charged for investments within a Tax Free Savings Account (TFSA) or a Registered Disability Savings Plan is not deductible.

Always Use a Qualified Tax Preparer

Please note that this article highlights only a few of the many, many tax deductions and credits available to taxpayers. It is always prudent to have a qualified tax preparer complete your return. Using a qualified tax preparer allows for a full review of your current financial circumstances and the possibility of discovering deductions or credits for which you did not know you were eligible.

That is Interesting

A rise in interest rates can significantly affect the corporate and personal income of owner-managers.

Canada’s present economic situation is rather good compared to that of many other countries, but our finance minister keeps reminding Canadians about the high amount of household debt Canadians carry.

Statistics Canada reports that in the third quarter of 2012 household debt was 164.6% of disposable income (i.e., the amount of money left for spending and saving after paying income taxes) compared with 163.3% in the second quarter. In other words, Canadian families now owe an average of over $1.64 for every dollar of disposable income. This is definitely a high number; however, owner-managers and self-employed individuals should not panic since, at the moment, the Bank of Canada does not seem to be moving toward higher interest rates.

“What If?”

Nevertheless, it may be time for owner-managers to take a closer look at not only their business debt but also their household debt and ask themselves a few “what if” questions as to what would happen to their financial situation if interest rates were to rise a quarter point, a half point, a full point or even more.

The fact that all entrepreneurs may be vulnerable to interest-rate increases can be demonstrated by the following scenario. For the sake of simplicity, we have assumed a December 31 year-end and that the owner does not have deductions.

Assume the following as the financial condition of a single (unattached) Ontario owner-manager (these numbers may vary according to the tax software used and/or rounding):

1. $300,000 mortgage at 3% per annum, a 25-year term and monthly principal and interest payments;
2. $250,000 business loan at 4% per annum, a 10-year term and monthly principal and interest payments;
3. $27,842 ($8,852 in interest and $18,990 in repaid principal) in the first year to service the $250,000 loan;
4. $31,930 ($15,570 in interest and $16,360 in repaid principal) in cash flow needed to service the loan after an increase to 7% from 3% in the interest rate;
5. $70,000 in pre-tax earned personal income;
6. $54,909 in disposable income after deducting $15,091 ($70,000-$15,091) in personal income taxes at source (with a contribution to the Canada Pension Plan);
7. $39,225 in discretionary income after deducting $15,684 in mortgage payments in the first year of the 3% mortgage; and
8. $31,556 in discretionary income after deducting $23,353 in mortgage payments made after an increase to 7% in the mortgage interest rate.

If Interest Rates Rise

An increase in the business loan rate to 7% from 4% would increase the first year’s working capital needed to service the loan from $27,842 ($8,852 in interest and $18,990 in repaid principal) to $31,930 ($15,570 in interest and $16,360 in repaid principal), an increase of $4,088 or $340 per month. The jump to 7% from 4% would increase the amount of interest paid by 76% ($8,852 to $15,570) while the amount of principal repaid would actually decline by 14% ($18,990 to $16,360) [see items 3 and 4 above].

The three-percentage-point jump in mortgage interest rates would reduce the owner’s discretionary income by $7,669 ($39,225 to $31,556) [see items 7 and 8 above] or 20%.

Impact of Higher Interest Rates

In isolation, the increases in interest rates do not appear significant, but there are other factors that come into play that owner-managers must also consider:

• If the taxpayer wishes to maintain a disposable income of $39,225, there will be a need to increase the remuneration paid by the corporation to the owner-manager. This, in turn, means the corporation must either cut back on other expenses to maintain the profit level experienced when interest rates were lower or increase sales to make up for the additional cost associated with interest rate increases.
• If the business cannot boost profit either through increased sales or lower operating and administration costs, the owner-manager will have to be satisfied with less disposable income after taxes and less discretionary income after mortgage payments.
• Increases in interest rates will bring changes in cash flow as well. If interest rates go up, more cash will be needed to service the loan. If the owner-manager needs more funds to sustain a standard of living, there will be an additional drain on cash as payroll amounts increase.
• Exacerbating the entire process will be clients and suppliers who will also find themselves squeezed by higher interest rates. Clients may delay payments by 30 days or more, and suppliers will be requesting prompt payment, reducing your credit limit or demanding cash on delivery. An even worse scenario would see some clients or suppliers declaring bankruptcy or simply going out of business.

Formulate a Plan

Owner-managers are especially vulnerable to changes in interest rates because changes impact both their business and lifestyle. Although it is unlikely the Bank of Canada will raise interest rates by 300 basis points (4% to 7%) overnight, owner-managers would do well to examine both business and personal debt to determine the impact any increase in interest rates could have on the future of their company and their personal lives. Once this information is distilled, consider formulating a plan with your chartered accountant to reduce debt to a level that will permit sufficient cash flow and pre-tax company profits, as well as a level of personal remuneration, sufficient to maintain your lifestyle.

Moneysaver

Someone Stole My…

Careless personal habits can cause costly losses of information.

As new electronic devices are developed and our ability to send so many types of information increases, security becomes increasingly important. The need for owner-managers to be constantly on the move, however, can lead to casual and careless handling of electronic devices, such as smartphones, that carry important business information. Mobility plus familiar habits can lead to the following mistakes:

• leaving a purse or briefcase unattended just for a moment at a restaurant or retail store;
• forgetting a jacket or purse on the door of a bathroom stall or placing items on the floor of a stall in which the walls do not extend to the floor;
• hanging a jacket with a wallet or leaving a purse on the back of an office door and leaving the office to go down the hall;
• placing briefcases, purses, or computers in the back seat of a vehicle and forgetting about them;
• leaving the vehicle unlocked;
• keeping a paper record of your security access codes in your wallet or briefcase;
• failing to place briefcases or other office documents in the trunk of a vehicle;
• leaving a briefcase or purse on the top of the vehicle while loading the trunk with purchases;
• leaving vehicle keys easily accessible whether at the local restaurant or at the office. With today’s smart keys it takes just a moment for a thief to go to the parking lot and find your vehicle;
• leaving purses, briefcases, or wallets easily accessible at workstations;
• propping doors open to avoid having to use pass cards or enter passwords;
• signing blank cheques for employees when they need supplies;
• hesitating to question “visitors” who show up at reception unannounced to visit “X”. Thieves can take “X’s” name from the company website or even a parking-spot name plate and use it to gain access to the office and pilfer laptops or other valuables;
• failing to lock up or secure laptops to the desk when leaving the office for lunch or at the end of the work day;
• failure to properly shield the keypad when keying in an access code at an ATM or when making a debit or credit card purchase. Thieves have been known to memorize the debit card numbers while shoppers made their purchases. The thief follows the mark and if the opportunity presents itself, lifts the wallet from the victim’s purse or jacket. Once the pickpocket has the card, it is simply a matter of using it at a few stores or at the nearest bank machine;
• failing to adequately protect wallets from bump-and-grab techniques. The professional pickpocket chooses a target who has accidently shown cash or valuables stored in easily accessible back pockets, purses or backpacks. A partner distracts the target by spilling mustard or ketchup on them or colliding with them while the pickpocket lifts the item and the two of them disappear — all in a few seconds;
• carrying valuables in fanny packs or waist packs. In a crowded subway or store it takes but a second to cut through the belt of a distracted individual and make off with the item. (There are products in the marketplace that have incorporated ultra-thin stainless steel wires that run through the belt portion of these packs that will make it almost impossible to cut through the belt.);

• exposing new credit cards and even an enhanced driver’s licence or passport can put you at risk of a new type of identity theft. Newer credit cards are now using Radio Frequency Identification (RFID) chips. These “smart cards” simply need to be waved in front of a reader. Most of us are, by now, familiar with the tap-and-go app that allows you to pay for purchases by waving a smartphone in front of a reader. You can tell if any of your credit or debit cards have this feature. Visa has a )))) wave imprinted on its cards, MasterCard has a “payWave” icon and American Express has an “expresspay” icon. An inexpensive smart card reader purchased online can steal your credit card information if the thief can get close enough to your purse or wallet. Under normal circumstances the possibility of “stealing” the information is slim because extremely close contact is required; however, if the card is exposed, there is a possibility that your data could be compromised. If you want to be on the safe side, purchase a RFID blocking sleeve.

Reduce Opportunities for Loss

The probability of personal items being stolen increases when opportunity avails itself.  Taking the time to review your personal habits to reduce the risk will reduce the number of opportunities thieves try to exploit, reduce the probability of loss and thereby reduce the worry and stress that comes with losing pertinent personal or business information.

Disclaimer:

BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

BUSINESS MATTERS is prepared bimonthly by The Canadian Institute of Chartered Accountants for the clients of its members.

Richard Fulcher, CA – Author; Patricia Adamson, M.A., M.I.St. – CICA Editor.

KILLIAN 

DOUG has been promoted to partner of the Wolrige Mahon Corporate Finance group, having joined the firm in 2005. Prior to joining Worlige Mahon Doug served as an associate partner in a New Zealand Chartered Accounting practice. He specializes in transaction advisory, valuation, capital sourcing, financial management, and planning and represents businesses in a broad range of sectors, including, retail, manufacturing, and oil and gas. Doug has a BBS. Accounting Major from Massey University and holds Chartered Accounting designations in both New Zealand and Canada.

Technology

Three Dimensional Thinking

3D printing may have significant value for the future of your business.

Just when you have finally figured out all the functions on the photocopier or become familiar with AutoCAD or Photoshop, along comes the new benchmark in creativity – 3D printing. Now, let’s not confuse 3D printing with 3D movies, holograms or those terrible “3D” postcards of Elvis.

What is 3D Printing?

3D printing is actually a process whereby a digital design can be used to make a three-dimensional object. In the past, machining (subtractive manufacturing) was the most common manufacturing method: unwanted material was removed as a solid block of material was cut or drilled to shape the desired object. In contrast, 3D printing is an additive manufacturing process that starts with nothing and builds the product by “printing” or depositing layers of material to the specifications shown on the digital design. Materials range from thermoplastics and polymers to ceramics, glass and metals, depending on the technology used, although systems that work with glass and metal directly are considerably more expensive.

The printing process uses three-dimensional models created using CAD (computer assisted design) or 3D animation software. A 3D printer converts the 3D model into a series of thin cross-sections which it then “prints” layer by layer using a nozzle and melted material such as plastic or resin. More advanced systems have the ability to insert colour into the model and print 3D text, graphics or logos directly onto the model. The machines operate using existing operating systems but require special software to be installed. Some commercial machines have a reasonable footprint ranging from the size of a bar fridge to that of a bedroom dresser. Open-source projects have created smaller desktop-sized models, more like a home laser printer in size; however, these tend to require some assembly and soldering.

The Cost

As with so many new innovations, the initial buy-in cost has been too high for most entrepreneurs. Now, however, prices are coming down and one can expect to see more and more of these machines available for everyday use in owner-managed businesses. As with a paper printer, the cost is heavily influenced by output, speed and other features. Low-cost 3D printers that create solid objects, albeit not in great quantities or necessarily large, can start in the $1,000 range. However, machines that can create larger objects, use more complex materials or are faster can cost up to $250,000.

3D printing can replicate hard-to-find replacement parts.

Who Needs 3D Printers Anyway?

If you think that these applications are not for your business, consider:

• Prototypes can be designed that provide exact size and feel for determining the ergonomics of proposed handheld objects such as cell phones, keypads, game consoles, etc., to determine whether required components will fit and how they must be engineered.
• Imagine the instructional and educational benefits that come with 3D printing of model buildings. 3D products could then be used to visualize how the placement or design of a building would be affected by winds, pedestrian or vehicular traffic when placed amidst existing structures.
• Making moulds or patterns for casting within your own building allows greater control of the overall development process and provides the ability to experiment with changes without the cost and delays associated when using a third party.
• Imagine being able to reproduce a synthetic hand, foot or ear, whether to assist in prosthetics or to reproduce life-size body parts to determine how any wearing apparel from hats to shoes would fit.
• Just think how great it would be to be able to replicate an old headlight cowling for a vintage automobile or any other hard-to-find replacement part for older equipment.
• Those involved in landscaping will be able to take data from a geographic information system (GIS) and create 3D cityscape models for presentation to clients so they can see how changes will impact existing structures or geographic features.
• 3D viewing of advertising will be the wave of the future as more and more clients will want real life models or hand-outs to provide to their potential customers. Perhaps the days of two-dimensional advertising will slowly fade away just as printed photographs have been replaced by electronic imagery.
• 3D printers represent the natural evolution of technology. Consider that at one time musicians had to attend studios to lay down tracks for an album at a cost of thousands of dollars while today’s musicians can save and mix tracks on their personal computer and then distribute their music by selling it online or burning their own CDs/DVDs.

Final Words

Whether or not your business needs to own its own 3D printer will be a matter of the type of business you are in and the service or product prototypes you may wish to produce in-house. One thing is for certain though: at some time in the near future all businesses will be impacted by 3D printing, just as they were by the availability and accessibility of paper-based printing. Perhaps it’s time for you to determine the advantages and opportunities 3D thinking may have for your business, its productivity and its future.

It’s That Time Again

Make sure you can find all the documents supporting income and expense claims for your personal income tax filing.

Yes, it’s already time to start reviewing the past 11 months of 2012 to prepare your personal income tax return for 2012. There are hundreds of areas to consider but here are a few situations that affect the owner-manager.

Ensure All Source Documents Are Available

Owner-managers should take a business-like approach to their personal returns. Many factors go together to determine the amount of income tax payable, for example, personal exemptions, investment tax credits, pension deductions, new home buyer credit, Canada employment amount, etc. The list is extensive, but the bottom line is that you want to benefit from all potential deductions and tax credits. This is where your chartered accountant can help you. Just ensure that you keep all relevant documents throughout the year so you are well prepared when your income tax filing is due. Incomplete documentation may create needless expense when your CA has to bring the missing documents to your attention and you have to spend time looking for them. Should a CRA audit find expense claims unsupported by original documents, it may disallow the claims and charge you interest on reassessment. The more information you can provide to your chartered accountant, the more likely any available tax savings will be maximized.

Claims Amounts

Claims calculations are based on either earned income (income from employment or self-employment) or net income (income after the deduction of employment, property and business losses). Earned income determines the claims for child care and RRSP contributions; amounts claimed for medical expenses, HST/GST and the amount of money withheld in the clawback from any Old Age Security payments are all based on net income.

Review Investment Portfolio

Look at any investments held outside your RRSP to determine whether you should be realizing any capital gain or loss. Selling investments with market values less than the adjusted cost base (original purchase price plus broker’s fees) will create a capital loss while selling investments for more than their adjusted cost base will create a capital gain. Capital gains and any capital losses that can be used to reduce them affect your taxable income and thus may influence how much remuneration you might want to draw down from your company.

In order to decide whether to create a usable capital loss or take a taxable capital gain into income, you need to have a closer look at the size of this year’s capital gains and your previous year’s personal income tax return. If, for instance, you have taken capital gains for 2012 greater than your capital losses for the year, selling the losers may be advisable to reduce the tax impact of the capital gains. If, in addition, you have capital loss carry forwards from previous years, this might be the time to use them.

Deferred Remuneration

Businesses often defer compensation calculations at the end of their fiscal year. A business can create the expense and the obligation to pay bonuses in 2012, but employees do not have to record the income until it is actually received. Thus, even if a business year end was September 30, the business could record the expense in the fiscal year ended at that date, and the employee could record the bonus income in the calendar year following. (The company must pay the bonus within 180 days of the fiscal year end or it will not be able to declare the bonus as an expense.)

Owner-managers should carefully review the deferred compensation arrangements from the previous fiscal year to determine any deferred remuneration in the current year. Consider the impact deferred compensation may have on the current calendar year’s income. Also, consider this calendar year’s remuneration in conjunction with any bonus deferrals that occurred in the company’s last fiscal year.

 RRSP Contributions

As an owner-manager, you may wish to use RRSP contributions to control personal taxable income. You should review the RRSP section of the tax return compiled by your CA and the Notice of Assessment sent by the CRA after last year’s filing. Knowing specifically the amount of the eligible RRSP contribution will provide you with information that will avoid over contributions and will allow you to determine optimum remuneration that should be paid to maximize RRSP contributions while minimizing your personal tax liability. The maximum RRSP contribution for the 2012 calendar year is $22,970. Unused contributions accumulated since 1991 can be added to the eligible 2012 amount. Accumulated unused contributions may enable owner-managers to pay themselves larger bonuses and, at the same time, offset the increase in taxable income created by the bonus.

Income Splitting

Owner-managers have a unique opportunity to reduce individual income tax liability by paying family members reasonable salaries for working in the business. Assume that an owner-manager takes $80,000 per year from the business, has no other deductions, has dependent 16-year-old twins and a spouse without income. The basic tax for an Ontario resident in this situation approximates $16,215 (using 2011 tax tables).

If, however, each child earns $6,000 working at the company, the spouse earns $30,000 and the owner-manager earns $38,000, even though the family income remains at $80,000, the taxable liability as a family unit is reduced to an approximated $8,129.

You must view income splitting in the context of total income from all taxable sources. Income splitting that creates income in the hands of some other family member could affect the size of certain government payments and the tax rate paid on withdrawals from RRSPs. Income splitting will also impact other tax credits and deduction limits that may be allowed.

Deductions and Calculations That Are Often Missed

The CRA allows two kinds of allowance for employee-owned vehicles used in an employer’s business. The flat-rate allowance is a fixed amount not related to the number of kilometres driven. This kind of allowance is a taxable benefit in the hands of the employee. Because this allowance is a taxable benefit, it is also pensionable and insurable and creates a deduction for CPP, EI and income tax. The company is allowed to deduct the reimbursement as an expense.

The second kind of allowance recognized by the CRA is a per-kilometre rate for the distances driven on company business. For 2012 the rate was 53¢ per kilometre for the first 5,000 kilometres driven and 47¢ per kilometre thereafter. For those employed in the Northwest Territories, Yukon and Nunavut, add an additional 4¢ per kilometre to the rates provided. It is important to keep track of your GST/HST amounts in order to calculate your Input Tax Credits (ITCs). ITCs can be claimed by the employer on the GST/HST included on the receipts submitted by the employee for reimbursement of expenses incurred by the employee for mileage driven on company business. It is easy to lose track of the ITCs through careless bookkeeping.

Your Future Is Now

Prepare the transition to a RRIF well ahead of time.

During your working life the federal government allows you several ways to accumulate tax-deferred money for your retirement. In the end, however, the government wants to recover at least some of the taxes you didn’t pay on the earned income that built the funds. If you have a Registered Pension Plan (RPP) at your place of work, you will pay income tax on the monthly benefits paid after you retire. If you have a Deferred Profit Sharing Plan (DFSP), you will pay tax on your withdrawals. If you have a Registered Retirement Savings Plan (RRSP), you must ultimately create a Registered Retirement Income Fund (RRIF) from which you must withdraw taxable amounts according to a schedule. You can also create or add to a RRIF from your DFSP and your RPP if they allow lump-sum withdrawals. These withdrawals can be made tax free if the funds are rolled over into a RRIF.

If you are considering retirement within the next five years, the following may help in determining your financial strategies. The focus here is on the rollover of the RRSP.

• There is no minimum age for setting up a RRIF. It must, however, be set up no later than the end of the calendar year in which you turn 71. You can also make your last eligible contribution in that same year. You convert the RRSP to a RRIF by asking your financial institution to fill out the forms and make the registration for you. When that is done, the balance of the RRSP is simply rolled over into the RRIF. Compulsory withdrawals from the RRIF begin the following year. Funds remaining in the RRIF continue to be tax sheltered until withdrawn.
• Once a RRIF is established, additional contributions cannot be made.
• Withdrawals are made according to a schedule established by the Canada Revenue Agency (CRA). You do not have to use your own age as the basis for the calculation of the withdrawal rates, however. For instance, if you are 71 and your spouse is 66, you can choose your spouse’s birth year. Since early withdrawals are made at a lower rate, it is advantageous to use the spouse’s birth year. If you are going to use the age of a younger spouse, you must inform the financial institution before the first withdrawal; you cannot make a change after that.

A younger base age may allow the older spouse not only to reduce taxable income but also     to  avoid the clawback of Old Age Security that begins when   total annual income exceeds a threshold  amount set by Service Canada. For 2012 this amount is $69,562.

• A RRIF can hold the same types of investments as your RRSP. Your non-cash RRSP holdings can be transferred to the RRIF “in kind”, i.e., without converting them to cash.

Any withdrawal above the minimum is subject to withholding tax.

• If you withdraw more than the scheduled minimum, your financial institution will withhold a portion of the excess and remit it to Ottawa on your behalf as income tax. The amount of tax levied on the excess amount is:
  • 10% on the first $5,000 (Quebec 21%);
  • 20% on any amount between $5,000 and $15,000 (Quebec 26%);
  • 30% on any amount above $15,000 (Quebec 31%).
• To provide an idea of how the minimum withdrawal looks on paper, imagine that you turn 71 in 2012, roll your $100,000 RRSP into your RRIF and start withdrawing in 2013. Over the next five years the value of the RRIF is reduced to $69,071.

And so it continues until age 94 when the withdrawal rate reaches 20%, where it remains for the rest of your life.

• Upon the death of the RRIF holder (referred to by the CRA as “the annuitant”), the balance of the RRIF may be transferred to a qualified beneficiary for their own RRSP or RRIF, or for the beneficiary to purchase an eligible annuity. There are no tax consequences as long as the appropriate CRA forms are completed indicating a direct transfer of the funds by the financial institution managing the RRIF for the deceased. Transfers to an RRSP are only allowed if the qualified beneficiary is 71 years of age or under. If the beneficiary is older than 71, the transfer must be made to a RRIF or annuity.
• Your RRIF may be self-directed if you are not interested in having investment advisors handle your funds. Naturally the RRIF must be held at a bank, credit union, trust, or insurance company that will register the plan with the CRA, administer the distribution, and handle the transactions of buying and selling investments. You cannot hold RRIF investments in your own name.

Continued Tax-Free Savings

Of the amount withdrawn from the RRIF, $5,000 can be moved into a Tax-Free Savings Account (TFSA) annually where it is once again sheltered from income tax. Funds can be withdrawn from a TFSA account without paying income tax.

Review Sources of Income Before Retirement

No one can determine how long they will live, the income they will need for retirement or the rate of return on investment over the long term. On the other hand, no one wants to outlive their money. To get some idea of reasonable expectations in these areas:

• review your RRIF portfolio at least annually;
• determine the minimum withdrawal level required each year;
• estimate the rate of return based on the last five years of your RRSP;
• establish other sources of income; and
• discuss the income tax impact with your chartered accountant.

Once the capital gains and near-term rate-of-return prospects have been estimated, your financial advisor along with your chartered accountant will be able to assist you in defining the funds that will be available to meet living expenses. Evaluating the available funds and calculating living expenses will tell you whether you will need to continue to earn income in your retirement years.

Before You Say Yes, Understand The Risk

Family members must understand the responsibilities and risks associated with becoming directors of a family-owned corporation.

Know What You’re Getting Into

Incorporation of an owner-managed business requires shareholders to elect a board of directors to assist in managing the affairs of the company. The owner-manager will almost certainly be elected as well as a member of their family. In many instances family members allow themselves to be elected director simply because they want to help keep family control of the business. Unfortunately, all too often these family members have little business experience and only a minimal understanding of the onerous responsibility and contingent risk that the position of director carries with it.

Excerpts from the Canada Business Corporations Act (R.S.C. 1985, c. C-44) are typical of regulations in the provincial Corporations Acts in that they indicate the overall substance of responsibility of a director:

Be Aware of Personal Liability

Perhaps the most important area for inexperienced directors of an owner-managed business is Section 122. For instance, directors may be held accountable if they fail to ensure that a corporation maintains proper books and records or fails to file required forms or make payment to regulatory authorities (all of which would be done by a reasonable and prudent individual).

It may come as a surprise to many that directors can be held personally liable for breaches of duty in such areas as mismanagement of corporate assets, financial losses, wrongful dismissal, employee discrimination or failure to address environmental issues for which the company could reasonably be held responsible.

The legal cost of a director’s defence when named in a statement of claim against the company may be advanced or reimbursed by the corporation as long as it is determined that the director:

The federal Act provides that the company can carry insurance to protect the director against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity.

 Insurance

The role of director in a company, regardless of its size or province of incorporation places a burden of responsibility that most owner-managers are not aware of. It is incumbent upon directors to be aware of:

• the risk of negligence and the potential liability of all directors or other officers of the corporation;
• the need to insist that they are provided with all pertinent information they require to oversee the operations of the corporation;
• the statutes and regulations that the company is obligated to follow;
• the financial condition of the corporation at all times;
• the need to avoid any conflict of interest. A director should have no task outside their responsibility as director that could interfere with their responsibility to the company;
• the need for rules and guidelines within the corporation to ensure confidentiality of not only all corporate documentation but all information concerning employees;
• the need to document the information used and the process of how major decisions were arrived at;
• the need to use corporate legal counsel in contentious situations to demonstrate that due care and diligence were exercised before the decision was made;
• their obligation to understand the operations of the corporation and to participate and communicate with management on all matters of corporate significance regardless of whether a director agrees or disagrees with the activities of management.

Get Legal Advice

The ownership and the directors and officers of family-owned businesses are usually one and the same. As such there is minimal risk of disgruntled shareholders taking the directors to task. However, outside entities, whether regulatory bodies or third parties, may not be so obliging. When family members are directors the corporation may have trouble convincing authorities that objectivity, confidentiality and corporate governance are not tainted by non-arm’s length relationships among family members. If you are invited to become a director of a corporation owned by members of your family, get legal advice before agreeing to stand for election. In the long run, it is in the best interests of both you and the company to meet with your lawyer and discuss the best means of protecting the business and the family from both corporate and personal loss.

Disclaimer:

BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

BUSINESS MATTERS is prepared bimonthly by The Canadian Institute of Chartered Accountants for the clients of its members.

Richard Fulcher, CA – Author; Patricia Adamson, M.A., M.I.St. – CICA Editor.

An owner-manager’s sudden illness or tragic accident can be devastating to the business. Being prepared for the unexpected long-term absence of the owner-manager means having a plan.An owner-manager’s sudden illness or tragic accident can be devastating to the business. Being prepared for the unexpected long-term absence of the owner-manager means having a plan.An owner-manager’s sudden illness or tragic accident can be devastating to the business. Being prepared for the unexpected long-term absence of the owner-manager means having a plan.

Losing sight of the most basic issues can cause trouble to the bottom line.Owner-managers are a special breed. They have tenacity, optimism and a strong belief in their own ability to succeed. Success, however, is the result of making the right decisions day after day.

Losing sight of the most basic issues can cause trouble to the bottom line.Owner-managers are a special breed. They have tenacity, optimism and a strong belief in their own ability to succeed. Success, however, is the result of making the right decisions day after day.

If your personal investment portfolio holds assets purchased before 1994, make sure you still have a record of the purchase price. Holding the same assets in a personal investment portfolio for more than 15 years is unusual given all the factors that change asset values over time. If your personal investment portfolio holds assets purchased before 1994, make sure you still have a record of the purchase price. Holding the same assets in a personal investment portfolio for more than 15 years is unusual given all the factors that change asset values over time. If your personal investment portfolio holds assets purchased before 1994, make sure you still have a record of the purchase price. Holding the same assets in a personal investment portfolio for more than 15 years is unusual given all the factors that change asset values over time.