Canada Deposit Insurance Corporation

Be careful where and how you keep your savings.  You may not be as protected as you think.

The Canada Deposit Insurance Corporation (CDIC) is a federal crown corporation established in 1967 for the purpose of protecting deposits held by member financial institutions in case the institution fails. The CDIC was set up two years after the Atlantic Acceptance Corporation Limited collapsed in a fraud that destroyed what the investigating Royal Commission estimated to be between $70 million and $75 million in depositors’ savings. The purpose of the CDIC is to prevent a repetition of such losses. Between 1970 and 1996, 43 financial institutions have failed but depositors’ funds were protected because all the institutions were members of CDIC.  There have been no failures since 1996.

How Does it Work?

The insurance coverage is provided to depositors automatically by the member institution.  There is no need to sign up or pay a premium.  The member institutions pay to insure their own depositors against losses.  Not all financial institutions are members of CDIC, however.  Credit unions and the caisses populaires of Québec and New Brunswick are not members but, because they are provincially chartered, they are covered under provincial insurance plans. For a complete list of CDIC members, visit the CDIC website (www.cdic.ca) and click “Where Are My Savings Insured by CDIC.”  Only deposits at member institutions are insured.

What is Not Covered?

The purpose of the insurance is to insure deposits and not to insure assets held in the hope of gain and to which market or other risks are attached.

   The following are not insured:

• Stocks, stock options and mutual funds because their values move with market forces;
• Government bonds, treasury bills and corporate bonds because their values move with interest rates;
• Foreign currency deposits because their values move with exchange rates;
• GICs and other term deposits with an original date to maturity of more than five years.

What is Covered?

CDIC insures from $1 to $100,000 of eligible deposits payable in Canada, in Canadian dollars.

The following are insured by CDIC:

• savings and chequing accounts, including:
  • personal or business accounts held in one name,
  • joint accounts;
• GICs and other term deposits with original terms to maturity of five years or less;
• money orders, certified cheques, travellers’ cheques and bank drafts issued by CDIC member institutions;
• accounts that hold realty taxes on mortgaged properties;
• debentures issued by CDIC members.

Amounts to be paid out in the event the financial institution fails are calculated based on the amount in the deposit.  For example, suppose you have $700 in a personal account in your own name and $130,000 in a business account held jointly with a business partner.  If the financial institution fails, you will receive $700 from the CDIC for your personal account but you and your business partner together will receive only $100,000. 

If you are a sole proprietor, however, you do not benefit from separate deposit protection since the business is not a separate entity from the sole proprietor.  As a result, the sole proprietor’s business and personal accounts will be added together to determine any recoverable amount.

The $100,000 limit applies to each member institution. Deposits held in the same person’s name at multiple branches of the same member institution would be combined. So, if you have two GICs of $100,000 and $50,000 held in two separate branches of the same bank and that bank failed, you would receive only $100,000 from the CDIC. 

RRSPs and RRIFs

The only parts of RRSPs and RRIFs insured by the CDIC are savings deposits, GICs and term deposits with maturities of five years or less, and debentures issued by CDIC members.  Stocks, mutual funds, corporate or government bonds are not insured.  For example, if you held $5,000 in a savings account and $65,000 in eligible GICs under the umbrella of the RRSP or RRIF, you would receive $70,000 from CDIC if the savings institution failed.  If, however, you had $12,000 in the savings account and $95,000 in eligible GICs, you would receive only $100,000 and not $107,000. If you also had $5,000 in a savings account and $30,000 in eligible GICs outside the RRSP or RRIF, that $35,000 would be insured separately.  In other words, you would recover both the $35,000 held outside and $100,000 of the $107,000 held inside the RRSP or RRIF.

Trust Accounts

Accounts held in trust are insured for up to $100,000 for each beneficiary named in the trust.  The financial institution must have  each beneficiary’s name and address.  Thus, if $350,000 is held in trust for three individuals, each person will be insured for $100,000. The balance of $50,000 will be lost.  The funds deposited into the trust are insured separately from the other funds of the person creating the trust (the settlor). Thus the settlor can hold deposits, eligible GICs and other insurable financial products in personal accounts, while each beneficiary’s  portions of the trust is also insured for up to $100,000.

Property Taxes

Money held in a mortgage tax account to pay the monthly municipal property tax bill is also insured up to $100,000.  Suppose you have two properties such as your home and your cottage,  on both of which you have to pay property taxes and you have a mortgage tax account for each.  If you had $600 in one and $500 in the other, you would recover the $1,100 total if the financial institution failed.

Tax Free Savings Accounts

The introduction of the TFSA in 2009 has created an attractive new savings vehicle that is also eligible for partial coverage by the CDIC.  As with the RRSPs and RRIFs, the TFSA can contain a wide range of assets, not all of which are eligible for CDIC protection.  Only the portion of the TFSA in savings accounts, GICs or other term deposits with original maturities of five years or less, and debentures issued by CDIC member institutions, is insured.  Savings accounts and other eligible investments held outside the TFSA are insured separately.

Be Careful

Give some thought to how you do your banking.  Are your savings and chequing accounts at insured financial institutions?  If your accounts are large, are they at different CDIC institutions?  How is your money allocated? Do you have insurable funds both inside and outside RRSPs, RRIFs and TFSAs? You should ask your investment advisor to provide specifics of what accounts are covered to the maximum $100,000 and the extent of your coverage within that financial institution. Armed with this information the well-informed investor should then speak to a CDIC representative and confirm that the information provided is correct. Then and only then, can you be satisfied that all the necessary steps have been taken to secure your savings and your future.

TAXATION

A GST/HST Exemption

If you expand your business through an acquisition, you do not pay any GST/HST.

To facilitate the growth and expansion of business in Canada, the federal government permits the sale of a business without the purchaser having to pay the GST/HST. This exemption is of enormous importance to small or medium-sized businesses since a requirement to pay GST/HST at the time of purchase or shortly thereafter could have such an enormous impact on operating cash flows that it might impair current activity or put undue pressure on the company’s line of credit.

What is a Business?

This exemption is permitted under Subsection 167 (1) of the Excise Tax Act, which allows the sale of a business or part of it without the sale being subject to GST/HST. Business is broadly defined in Subsection 123 (1) of the Act to include “a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment”. The business must have been either established or acquired by the seller.

To be eligible for the exemption, the purchaser must acquire “ownership, possession or use of all or substantially all the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part of a business”.

The Canada Revenue Agency (CRA) interprets “all or substantially all” as 90% or more.^[1] The effect of this interpretation is to prevent assets being sold off piecemeal without the payment of GST/HST.

What is Property?

The definition of property is very comprehensive and includes both real and personal property, movable and immovable, tangible and intangible. It also includes rights and interests of any kind as well as shares. It does not, however, include money.

Eligibility Tests for Exemption

There are two tests to determine whether the subject of the transaction is a business within the meaning of the Act. The first test is to determine whether the business includes activities that fall within the definition of a business under Subsection 123 (1) referred to above. Assets of such businesses generally include real property, equipment, inventory and intangibles such as goodwill.  The second test is to establish whether the purchaser is acquiring from the vendor at least 90% of the property required to carry on the business. For example, office furniture that is old and worn might not be wanted by the buyer and be excluded from the purchase since the purchaser may already own sufficient office furniture or can easily purchase new furniture from a supplier. Provided the purchaser is buying 90% of the assets reasonably required to carry on the business, the transaction has passed the second test.

Who Can Apply for Exemption?

Once eligibility has been established, it is necessary for the buyer and seller to jointly complete form GST44, “Election Concerning The Acquisition Of A Business Or Part Of A Business” (the “Election”). If this form is filed, the vendor does not need to pay and the purchaser does not need to collect any GST/HST on the transaction. The exemption may apply where the purchaser and vendor are both registrants for GST/HST or where both the purchaser and vendor are not registrants.  The election does not apply, for example, where the vendor is a registrant but the purchaser is not a registrant. A non-registrant is anyone not currently registered whose revenues from taxable sales or services did not exceed $30,000 in the four calendar quarters preceding the transaction quarter ($50,000 in the case of public service bodies).

The Form

Both purchaser and vendor complete the Election indicating the names and business numbers of the purchaser as well as the vendor along with address, telephone number and the names of the contact persons for both the buyer and the seller. A description of the purchased property is required. Since the transaction value is treated as nil for tax purposes, the Election form does not ask for the fair market value.

Submitting the Election

Form GST44 must be filed by the purchaser (if a registrant) on or before the date to file a return for the first reporting period in which GST/HST is normally payable following the purchase. Businesses that file GST/HST electronically should send form GST44 to their designated business tax centre. Before forwarding the form both buyer and seller should maintain copies of the form. It may be advisable for both purchaser and seller to sign four “originals” to allow both buyer and seller to maintain signed copies while sending “originals” to the CRA. Where both the purchaser and vendor are not registrants and are only engaged in exempt activities, the GST 44 Election form does not need to be filed with the CRA but should be completed and kept on file in case of an audit.

Exceptions

As noted above, the Election does not apply to the sale of individual assets from the vendor to a purchaser. These transactions would attract the normal payment/collection of GST/HST. The Election only applies in those situations where the part of a business’s assets that are sold could be considered functionally and physically separate from the whole business. For instance, a company is engaged in landscaping during the summer and snow removal during the winter. Management decides to get out of the snow-removal part of the business and sell the snow-removal equipment and all other assets required to carry on the snow-removal business. If the equipment were sold as a package, the sale should qualify for the Election since the equipment would be considered essential for carrying on the snow-removal business and not just machinery for sale piecemeal to anyone for any purpose.

Seek Professional Advice

Since these transactions are complex, anyone contemplating buying another business should get advice from their lawyer as well as their chartered accountant to ensure the documentation supports the intent of both parties and satisfies the requirements for GST/HST filing and business tax filing at the end of the fiscal year.

Technology

Credit Card Payment by Smartphone

Turn your smartphone or tablet into a powerful, slick, mobile point-of-sale device.

Soon, probably within the next 10 years, payment for services for many owner-managed businesses will be collected using mobile devices instead of traditional payment methods like cash, cheques and dedicated point-of-sale terminals such as the old-fashioned cash register. Instead businesses will use smartphone or tablet devices with attachable hardware that can read a credit card.  With the right app installed, the device is ready to act as a handheld point-of-sale terminal.

Amazing Convenience

Although not fully mainstream yet, there is a tide of mobile credit-card readers and software entering the market that will make scanning credit cards on smartphones and tablets much more common. Imagine the convenience of finishing a job, producing the invoice on-site electronically and immediately receiving payment.  Older devices may not all work with these apps or hardware add-ons; however, recent devices on the major mobile platforms already support mobile-payment processing.

To accept a payment, a compatible app is required that can handle the financial transaction.  Some apps will allow the card number to be keyed in.  This is, however, time consuming, subject to error, and may appear to be less professional.  To overcome this, the business should acquire a physical card-reader attachment that plugs directly into the device.  These readers have a very small footprint, are easy to use and portable.

Compatibility is an Issue

Naturally, as smartphones evolve, more and more manufacturers will offer this capability, but for now the developers have ensured that most recent Apple iOS devices are supported. However, support for Android and BlackBerry devices is also available and  growing, depending on the app vendor.

The smartphone market is quite diverse and developers of these apps and attachments stress that compatibility be confirmed before purchasing a new smartphone. Indeed, some developers have listed not only the compatible smartphones but also the devices where known difficulties have been encountered. Naturally, as the smartphone market matures, mobile payment transactions will be more widely supported.  Hardware requirements for mobile payment apps vary.  GPS and a mid- to large-sized touchscreen for viewing and digital signature capture are, however, common.

What Will it Cost?

You will want to check the fee structure in place for the mobile payment processor you select. Some will offer a standard percentage fee for any transaction regardless of the amount. Other providers vary the fees per transaction based on the credit card brand being used; the higher transaction fees of some cards are passed on to the merchant. When the card will not swipe some, but not all, providers add an additional percentage fee on top of the transaction fee for entering the card information manually. An additional percentage fee is also common on international credit cards issued outside Canada.

Clearing

There will, of course, be some timing issues that those accepting payment this way will have to consider.  The funds will not necessarily be deposited directly into your bank account because they may have to go through a clearing process (two-to-three days for some).  The good news is that, depending on the provider and their application, it will be possible to speed up the process with a link that will process the payment directly to your bank account.  There are a number of security and personal data issues that have to be met before this can happen so be prepared to spend the time and effort required to establish the link.  It would also be astute to avoid surprises by determining those additional charges the financial institution may impose for this service.  It is important to understand the “all in” fees that will be charged for the various supporting processes to mobile transactions (setup fees, monthly fees, per-transaction fees, hardware costs, financial institution fees and other costs) before setting up your business for mobile payment.

 Printing a Receipt

It is also possible to generate either a printed or email receipt. Further, depending on the software, it is possible to print or export a transaction history. Undoubtedly it will not be long before a seamless download to your accounting software will be possible.

 Certainly the dollar value of the transaction will impact the decision whether to accept all payments using this technology.  Businesses may be willing to accept a charge of approximately 2%-3% on a $200 invoice simply because of the difficulty in collecting unpaid amounts and the cost associated with sending out reminders. On larger invoices the same percentage cost of an instant collection may be too heavy a price to pay.  At a hypothetical 3% fee, for example, a $5,000 invoice would cost $150. Management may have to develop dollar guidelines for making payments.

Final Words

The ability to collect payments using a mobile device is not some futurist’s dream; it is a reality now.  At present, the constraints may be availability, device and platform compatibility and potentially higher collection costs.  The benefit of reducing or eliminating the cost involved with paper invoices and the hassle of handling physical cash or cheques, in addition to the convenience both for you and your customers may make the investment worthwhile.

MANAGEMENT

Stability Through Change

Slow, steady change is better for morale and the bottom line.

A major lament of staff and management is that the work environment is constantly changing. Although change is necessary in every facet of a business from the repair shop to the accounting department, it is often felt to be destabilizing, is stressful for the vast majority of employees and may lead to worker fatigue and increased turnover.

Change in a business environment must be orderly and based on policies, procedures and practices.

Consistency Implies Control

Practices must be consistent for the entire workplace. For example, the way expense reports are completed or parts ordered must be standardized throughout the company. This removes the impression that some departments are privileged and simplifies the accounting process. The accounting department becomes more efficient because of the standardized forms and can be confident it is invoicing an approved list of suppliers. Consistency provides employees with a set of known management expectations.

Happier Employees

Consistency within a workplace creates a comfort level for staff, management and clients that is just not there in an environment that is constantly changing its methods or organization. Consider the frustration of dealing with constantly changing hours of operation or shift schedules. The absence of stability means the loss of predictability that enables employees to feel more in control of their surroundings and creates the anxiety that accompanies uncertainty.

Increase Productivity

Productivity increases when processes are consistent. If employees are allowed to purchase or download any software application they want or order machinery of their choice, the ability for other employees to interpret information or operate specific machinery might be severely compromised and the company put at risk. The company will not know that employees may need training or licences to work with the new programs or operate the new tools or equipment. Warranties might be violated, training may be missed, essential contracts might be lacking with the result of potential worker injury or lawsuits. Inconsistency in areas such as these creates additional training costs, overlooks the need for backup to take over jobs and could potentially shut down an entire operation if one person quits and no one knows how to complete the task. Consistency, on the other hand, provides staff with the knowledge of the processes, tools and equipment needed to complete the job. Employees can use known tools and methods rather than forcing the company to spend its resources on retraining.

Increased Employee Understanding

Regardless of an employee’s position within a company, there is always a need to update. Management needs to keep current on external factors such as industry trends, changes in legislation, the activities of competitors, economic conditions in the company’s markets, as well as internal factors such as sales numbers, cash flow, staffing and a hundred other issues. Employees at lower levels need to be aware of technology changes, new HR policies, training opportunities to learn higher-level skills, and many other factors that affect their ability to do their jobs and advance their careers. The stress of learning new software procedures, new regulations and new technologies can be both mentally and physically demanding.

Thus, if a company minimizes the number of changes in company policies and procedures or introduces them gradually, employees are more likely to stay focused on their jobs at normal and acceptable stress levels and not become diverted and anxious about their ability to do the re-engineered job and stay employed. Slow and consistent introduction of new policies and procedures allows employees to acclimatize to the new demands and understand management’s expectations. Rather than wrestling with constant in-house changes they fear may affect their performance evaluations, employees can concentrate on productivity, which leads to an enhanced bottom line for the business.

Management’s Role

It may surprise management to know that employees expect and want consistency. Employees need to know their bosses are in the office, stay up to date and show up for work to fulfill their responsibilities. Employees want to feel empowered and not micromanaged through meddling by executives. Management certainly does not want to be seen as constantly interfering in the process but staff does expect management to lead by example, especially when asking workers to be reliable and accountable. Much like an army, a business must be led from “in front”.

Workers expect management to be on top of what is going on, and prepared and available if needed. Management should be there not only in tough situations but also for the good times to celebrate the completion of contracts or congratulate deserving employees for jobs well done. If management shows contempt for the workplace by not showing up, employees will lose energy and be diverted.

Consistency in the standards of a workplace leader is essential. Knowing what the work ethics and value system of the business’s leaders are means that employees know the expectations they have to meet. If for example, management consistently uses only grade A material, the sudden substitution of inferior material may cause employees to worry about the company’s financial stability, and therefore whether their jobs are in jeopardy. Such changes are the kind of thing everybody notices but does not necessarily discuss. Fears become internalized and result in undue stress and loss of efficiency through a deterioration in morale. Management’s consistent concern for quality, on the other hand, could save a company from the erosion of competitive advantage as customers also begin to notice the change.

Consistency is Best

Management should not initiate change for the sake of change but bring on change in a consistent manner for the company’s advantage. Ensuring consistency will provide a more productive workplace, which in turn will reduce employee turnover, increase productivity, establish a happier workplace environment, cut costs and improve the bottom line.

 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.

Federal Finance Minister Jim Flaherty tabled the government’s 2012 Budget in the House of Commons on Thursday, March 29. Leaving aside the government’s re-presentation of its pre-election 2011 Budget, it was the first Budget presented by a majority government in Canada since 2004, and the first by a Conservative majority government in almost twenty years.

Presented in a 498-page document entitled “Economic Action Plan 2012: Jobs, Growth and Long-Term Prosperity,” the Budget will likely be considered to be favorable to businesses, as it includes provisions to increase funding for research and development, improve access to risk capital and extend the hiring tax credit for small businesses. It also focuses on reducing deficits and moving towards a balanced budget through spending restraint rather than increased taxation. Expenditure-reduction proposals include raising the age threshold for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) to 67 from the current 65 (effective in 2023), reducing the total number of federal civil servants by 19,200, or 4.8%, including the elimination of some 12,000 positions, and significantly reducing funding to the CBC (by $27.8 million in 2012-13, or about 10%) and others including Canadian Heritage, the National Film Board and Telefilm Canada.

The Minister said that an improved economic outlook should see a return to a balanced budget after 2014-15, leading to a surplus of $3.4 billion in fiscal 2015-16. The projected deficit for the fiscal year 2011-12 is $24.9 billion, about $8.5 billion lower than in 2010-11. The federal debt to GDP ratio of just under 34% for 2011-12 is expected to grow slightly in 2012-13 and then decline to 28.5% by 2016-17. The Minister also predicted real GDP growth of 2.1% in calendar year 2012, rising to 2.4% in 2013 and for a five-year period thereafter.

Direct program spending by the government is expected to decline over the next four years. Spending reductions and operating efficiencies are expected to result in ongoing savings of about $5.2 billion a year. Notable among the proposed spending provisions were $1 billion to support science and technology development, $500 million to support the growth of innovative start-up companies, $5.2 billion over 11 years to renew the Canadian Coast Guard, and $275 million over three years for First Nations education, including building and renovating schools.

The Budget proposes no new personal or corporate tax rate changes, nor are there any proposed changes to previously promised tax rate reductions. It does, however, contain a wide array of tax and tariff changes, most of them designed to increase revenue by eliminating perceived abuses. Proposed tax and tariff changes are projected to raise some $3.5 billion of new revenue over the next five years. Significant technical changes to taxation rules are discussed in this document.

In a news release, the CICA gave the federal government a “B Plus” rating for the Budget, saying it positions Canada well for the future while providing prudent fiscal management. “Budget measures being introduced are designed to serve the short term while maintaining a vision that embraces the long term,” said Kevin Dancey, FCA, president and CEO of the CICA. “It is encouraging to see the government bringing the books back into balance through expenditure controls rather than tax increases or provincial off-loading.”

The CICA supports the government’s actions to put long-term budgetary expenditures within a sound fiscal framework, including the plan to protect OAS, a proposal to bring public service and MP pension plans more into line with those in the private sector, proposed measures to reduce the red-tape burden on businesses, and the government’s intention to support further improvements to foreign credential recognition.

However, the CICA once again registered concern that the government has not addressed the pivotal issue of tax complexity, which it believes is crucial to easing the regulatory burden placed on Canadian businesses and attracting investment. CICA vice-president Gabe Hayos, FCA said: “Tax complexity must be addressed if Canada is going to establish a competitive environment that sets the stage for sustainable recovery and economic growth. Canada’s tax system must become more competitive, simpler and efficient.”

The CICA also expressed disappointment with proposals related to the Scientific Research and Experimental Development tax credit which will result in more direct government funding of the program. “We hoped to see the tax credit become partially refundable for all businesses,” said Kevin Dancey. “We challenge the notion that government officials are better able to allocate funds to innovation than those on the front lines.”

Overall, Budget-related headlines are likely to focus on the proposed OAS-eligibility changes, downsizing of t­he federal civil service, the CBC budget cuts, and a proposal to increase the allowable duty-free dollar-value of goods purchased while outside of Canada from $50 to $200 for a stay of 24-48 hours and from $400 to $800 for a stay of more than 48 hours. Some prominence will also likely be given, however, to a proposal to save $11 million per year by doing away with the venerable Canadian one-cent piece, or penny. Calling the coin ”currency without currency,” the Finance Minister noted that the present cost of producing a penny is approximately 1.5 cents.

Eligible Dividends: Split–Dividend Designation and Late Designation

Currently, a corporation may designate a taxable dividend to be an “eligible dividend” (eligible for the enhanced dividend tax credit), if it notifies each shareholder in writing at or before the time the dividend is paid. A late designation cannot be filed. Where an excessive eligible dividend designation is made, the corporation may correct the designation by filing a valid election under which the shareholders accept that the excess is a separate taxable dividend, which is “other than eligible”. Failure to so elect will render the corporation liable to a special 20% tax in respect of the amount of the excess.

The Budget proposes to simplify these rules by allowing the corporation to designate, at or before the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. This proposal eliminates the need to pay separate eligible and other than eligible dividends.

In addition, the Budget proposes to allow a late designation of an eligible dividend if the corporation makes the late designation within three years after the designation was required to be made and the Minister considers that it is ‘just and equitable” to allow it.

These measures apply to taxable dividends paid on or after March 29, 2012.

Scientific Research & Experimental Development Program

An Expert Review Panel on Research and Development made a series of recommendations which called for a simplified and more focused approach. The Budget proposes the following changes to the SR & ED tax incentive program to make it simpler, more cost effective and predictable.

• The general 20% SR & ED tax credit rate will be reduced to 15% effective January 1, 2014, prorated for taxation years which straddle this date.
• The enhanced 35% SR & ED tax credit rate for eligible CCPCs will still be eligible on the first $3 million of qualified expenditures annually.
• Effective January 1, 2014, capital expenditures will be excluded for property acquired, and to amounts paid or payable for the use, or the right to use, property, during any period after 2013. This measure will also apply to otherwise eligible contract payments to the extent that the payment is in respect of a capital expenditure.
• The prescribed proxy amount, which is in lieu of itemizing overhead expenditures, will be reduced from 65% to 60% for 2013, and to 55% after 2013, prorated for taxation years which straddle the applicable calendar years.
• With respect to expenditures incurred on or after January 1, 2013, only 80% of payments made to arm’s length contractors will qualify as SR & ED, down from 100%. The intent of this proposal is to parallel the tax rules with respect to payments to non-arm’s length contractors by excluding the profit portion where the contractor is at arm’s length.
• Any capital expenditures included in the SR & ED contracted out will be excluded prior to the reduction to 80%. Consequently, SR & ED contractors will be required to inform the contract payers of these amounts.

Retirement Compensation Arrangements (RCAs)

The government introduced RCAs in the 1980s as a mechanism to allow employers to fund tax-deductible pension payments in excess of the tax-deductible amounts for Registered Pension Plans. An employer can make a tax-deductible payment to an RCA, provided that the payment is considered to be reasonable based on an actuarial calculation. An RCA is basically subject to a 50% tax on the contributions that it receives plus any income that it earns. The tax is refundable when the RCA makes payments to the employee. The refund is equal to the lesser of the RCA’s refundable tax or 50% of the payment. The RCA can also recover the refundable taxes when it realizes a loss by making a special election if the only assets of the RCA consist of cash, debt obligations or listed securities. This would typically occur if the RCA invested in debt of the employer. This situation might entitle the RCA to a refund of all or a portion of its refundable taxes. The existing rules with respect to allowable investments and prohibited advantages are not as restrictive as the rules related to registered plans such as RRSPs, TFSAs etc.

The CRA has been investigating various RCA arrangements over the past number of years and is concerned about what it considers to be inappropriate structures involving RCAs. The Budget proposes to deal with these issues even though the CRA is still pursuing existing arrangements. The proposals are generally prospective.

Refunds of refundable tax

An RCA will still be entitled to a refund of its refundable taxes on a permanent erosion of the value of its assets, including prohibited investments, as discussed below. The Minister will examine the erosion of pre-budget prohibited investments or advantages to determine if a refund is reasonable in the circumstances.

Prohibited investments

A prohibited investment will include assets that are prohibited investments under the TFSA rules or debts of an employer where the employee (along with persons not at arm’s length with the employee) has more than a 10% interest in the employer. The RCA will be subject to a 50% penalty tax on any such investment made on or after Budget day. There are provisions to refund this penalty tax if the prohibited investment is disposed of by the end of the year following the year it was acquired or if the Minister decides that it is “just and equitable” to do so.

Advantages

A similar 50% penalty tax applies to an advantage. This tax will apply where an employee receives an asset at less than fair market value from the RCA, where steps are taken to erode the value of an asset in a manner that entitles the RCA to a refund of the refundable tax (referred to as RCA strips) or where there are non-commercial terms between an RCA and a non-arm’s length debtor which gives an advantage to the RCA.

If an advantage is related to assets acquired before Budget day, transitional rules allow the employee to include the amount of the advantage in income and the RCA to receive the appropriate refund of its refundable tax.

The employee is jointly liable with the RCA for the penalty taxes.

Employee Profit Sharing Plans (EPSPs)

The Budget proposes new rules to deal with excess contributions to EPSPs for “specified employees”. A specified employee is an employee who together with persons not at arm’s length with the employee, has more than a 10% interest in the employer. The excess contribution will be the amount in excess of 120% of the employee’s employment income from that employer, excluding allocations from the EPSP, stock option benefits and normal employment deductions.

The employee will be subject to a special tax on the excess, computed at the combined top federal and provincial (excluding Quebec) marginal income tax rates. If the employee is not a resident of Quebec or another province, the deemed provincial rate is 14%. The employee will exclude the excess amount from income and will not be able to claim any other deductions or credits in respect thereof. In effect, this treatment will be similar to the “kiddie tax”.

The Minister will be authorized to waive or cancel the application of these rules.                                                                                        

Clean Energy Generation Equipment – Accelerated Capital Cost Allowance

The Budget proposes to expand Class 43.2 with respect to waste-fuelled thermal energy equipment and equipment of a district energy system that uses thermal energy provided primarily by eligible waste-fuelled thermal energy equipment. In addition, this CCA class will include equipment that uses the residue of plants, generally produced by the agricultural sector, to generate electricity and heat.

Group Sickness or Accident Insurance Plans

Under the current legislation, employer contributions to a group sickness or accident insurance plan in respect of wage replacement benefits are not taxable benefits. The Budget proposes that contributions made after 2012 will be taxable benefits unless they are in respect of wage replacement benefits payable on a periodic basis. Benefits under the plan are also taxable if they are payable where there is no loss of employment income. If the employer makes a 2013 contribution in 2012 to avoid the application of these rules, the employee will recognize the taxable benefit in 2013.

Life insurance policies

Life insurance policies, as well as providing protection, often have a savings or investment component. The income that a life insurance policy earns is not subject to tax on a current basis if the policy is an “exempt policy”. Furthermore, the income is not taxed when received as a component of a death benefit. This provides an opportunity for taxpayers to avoid taxes using a life insurance policy as an investment vehicle.

There will be consultations to review the rules concerning the tax status of life insurance and to recalibrate the rules concerning the exempt status of life insurance policies. These new rules will apply to life insurance policies issued after 2012.

Tax Shelter Administrative Changes

The Budget proposes to encourage tax shelter registration and reporting by:

• Modifying the calculation of the penalty applicable to a promoter where a person participates in an unregistered charitable donation tax shelter.
• Introducing a new penalty for a promoter who fails to meet their reporting obligations with respect to the annual information returns.
• Limiting the period for which a tax shelter identification number is valid to one calendar year for applications made on or after March 29, 2012.

Currently, there is a penalty to a promoter of an unregistered charitable donation tax shelter equal to the greater of $500 and 25% of the consideration received. The Budget proposes to increase this penalty to the greater of the amount determined under the existing rules and 25% of the amount asserted by the promoter to be the value of the property that participants in the tax shelter transfer to a donee. This measure will generally apply on Royal Assent.

The current penalty for not filing the annual information return on time is a maximum of $2,500. The Budget proposes an additional penalty if the promoter fails to file an annual information return in response to a demand from the CRA or fails to report in the return an amount paid by a participant in respect of the tax shelter. This additional penalty will be equal to 25% of the consideration received or the greater of 25% of the consideration received and the amount asserted by the promoter to be the value of the property that those participants can transfer to a donee.

This measure will apply to demands by the CRA to file an annual information return made after Royal Assent and to returns filed after Royal Assent.

Registered Disability Savings Plans (RDSPs)

The Budget proposes the following changes to RDSPs:

• Certain family members, such as a spouse, common-law partner or parent, of a disabled individual will be allowed to become the plan holder of a RDSP as agent for an adult individual who might not be able to legally enter into a contract. This measure will ensure that individuals in all provinces and territories who might not be contractually competent and who do not have a legal representative may still benefit from RDSPs. This measure will apply from the date of Royal Assent until the end of 2016.
• There is a current repayment rule which provides that all Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) are required to be repaid if received within ten years of a withdrawal from the RDSP, the termination or deregistration of the RDSP or the RDSP beneficiary ceases to be eligible or dies. The Budget proposes to introduce a proportional repayment rule which would apply as opposed to the current 10-year repayment rule, unless the RDSP beneficiary ceases to be eligible or dies. This proportional repayment rule requires that only $3 of any CDSGs or CDSBs received in the prior ten years be repaid for every $1 withdrawn from an RDSP. Consequently, a small withdrawal from an RDSP would not necessarily require the full repayment of all assistance received in the previous ten years. This measure applies to withdrawals after 2013.
• The current maximum and minimum withdrawals allowed from RDSPs are proposed to be changed in order to provide greater flexibility in making withdrawals and ensure that RDSP assets are used to support the beneficiary during their lifetimes. The maximum annual limit for withdrawals from a primarily government assisted plan (PGAP) is proposed to be increased to the greater of the amount determined by the standard formula and 10% of the fair market value of plan assets at the beginning of the year. The minimum annual withdrawal requirement is proposed to apply to all RDSPs, not just to PGAPs. These measures will apply after 2013.
• To provide greater flexibility for parents who save in a RESP for a child with a severe disability, the Budget proposes to allow the rollover of investment income earned in an RESP to a RDSP, where certain conditions are met, up to the beneficary’s available RDSP contribution room. Consequently, the regular tax on withdrawals from the RESP and the 20% penalty tax, which would otherwise potentially apply to a lump-sum distribution of income from an RESP, would not be payable. However, additional CDSGs cannot be earned as a result of the rollover of this RESP income. The contributions to the RESP will be returned to the RESP subscriber on a tax-free basis and can then be contributed to the RDSP in the future, potentially earning CDSGs. This measure will apply to rollovers of RESP income made after 2013.
• Currently, where a RDSP beneficiary ceases to be eligible for the disability tax credit (DTC), the RDSP is required to be terminated by the end of the following year. This would result in the 10-year repayment rule applying and any remaining assets in the RDSP being paid to the beneficiary. The Budget proposes that a RDSP holder will be able to elect to extend the period during which the plan will remain open for four additional years, where a medical practitioner certifies that the nature of the beneficiary’s condition makes it likely that the beneficiary will be eligible for the DTC in the foreseeable future. This measure will apply to elections made after 2013. There is also a transitional rule which provides that RDSPs will not be required to be terminated until the end of 2014 where the RDSP would have been required to have been terminated prior to 2014 under the current rules.

Overseas Employment Tax Credit (OETC)                                                             

Canadian resident employees can currently qualify for a tax credit equal to the federal tax otherwise payable on 80% of their qualifying foreign employment income, up to a maximum foreign employment income of $100,000. In order to qualify, the employee must be employed outside Canada for more than six consecutive months and be employed in connection with certain natural resource exploration or exploitation, or construction, installation, engineering or agricultural activities.

The Budget proposes to phase out the OETC over four years, commencing with the 2013 taxation year. The 80% factor will be reduced to 60% for 2013, to 40% for 2014, to 20% for 2015 and to zero for 2016. Projects which were committed to in writing before March 29, 2012 will be grandfathered – the 80% factor will still apply for the 2013 to 2015 taxation years. The OETC will be eliminated in 2016 even for such grandfathered projects.

Medical Expense Tax Credit

The Budget proposes to add to the medical expense tax credit after 2011 blood coagulation monitors, along with associated disposable peripherals such as prickling devices, lancets and test strips, for anti-coagulation therapy, when prescribed by a medical practitioner.

Gifts to Foreign Charitable Organizations

Donations made to foreign charities are generally not eligible for tax credits to individuals or deductions to corporations. However a foreign charity which receives a gift from the Canadian government may register as a qualified donee under the Income Tax Act and thus be eligible to issue an official donation receipt to Canadian donors.

The Budget proposes to provide the Minister with the discretion to grant qualified donee status to a foreign charity if the charity pursues disaster relief or urgent humanitarian aid, or its activities are in the national interest of Canada. This measure will apply to applications made by foreign charities on or after the later of January 1, 2013 and Royal Assent.

Charities — Enhancing Transparency and Accountability

Charities are required to operate exclusively for charitable purposes. However, a charity is allowed to engage in political activity provided these activities represent a limited portion of its resources, are non-partisan and are ancillary and incidental to its charitable purposes and activities. There is a concern that some charities may be exceeding these limitations.

The Budget proposes to increase the disclosure required by charities regarding political activities and to provide additional enforcement tools. Where a charity makes a gift to another qualified donee and the purpose of the gift is to support the political activities of the donee, the Budget proposes to consider the gift to be an expenditure made by the charity on political activities.

The Budget also proposes to grant the CRA the authority to suspend for one year the tax-receipting privileges of a charity which exceeds the limitations on political activities.

Lastly, the Budget proposes to allow the CRA to impose similar penalties where a charity provides inaccurate or incomplete information in its annual information return until the charity provides the required information.

These measures will also apply to registered Canadian amateur athletic associations.

Thin capitalization

In broad terms, these rules may restrict the deductibility of interest paid or payable, by a corporation resident in Canada, on debts owing to certain “specified non-resident shareholders” (“SNRS”). (SNRS are shareholders that own shares to which are attached 25% or more of the corporation’s votes or value.) After budget day, the debts in question will include a corporate partner’s share of partnership debts.

Currently, interest is not deductible on the portion of the debt (“tainted debt”) that exceeds 2 times the corporation’s equity. (For this purpose, equity is the aggregate of unconsolidated retained earnings, contributed surplus contributed by a SNRS and the paid-up capital of shares held by SNRS.) The budget proposes to decrease the debt ceiling to 1.5 times equity for taxation years that begin after 2012.

The rules have been extended, indirectly, to partnerships. After budget day, rather than disallow interest to the partnership, which would impact all partners, a corporate partner resident in Canada will be required to include, in income, an amount equal to its share of the interest incurred by the partnership on tainted debt.

After budget day, interest that is not deductible under these rules will be treated as a dividend paid to the non-resident, for withholding tax purposes. In this regard, special provisions will be enacted to avoid double tax; interest included in the “foreign accrual property income” of a foreign affiliate of a Canadian resident corporation will be excluded from the application of the new rules.

Foreign affiliate avoidance             

The Canadian income tax system provides a number of advantages to a Canadian corporation that earns income through a non-resident corporation that qualifies as its “foreign affiliate”. Subject to a business purpose test, where, after Budget day, a non-resident parent of a Canadian corporation transfers the shares of another non-resident corporation to the Canadian corporation in order to avail itself of these advantages and the Canadian corporation transfers property to the foreign parent, the value of the property transferred could be considered to be a dividend for Canadian tax purposes.

Intercompany pricing

If, after Budget day, a Canadian corporation is found to have conferred a benefit on a non-arm’s length non-resident (other than a “controlled foreign affiliate”) by virtue of an intercompany pricing arrangement, the amount of the benefit will be deemed to be a dividend paid for withholding tax purposes. If the non-resident, with the concurrence of the Minister, pays an amount back to the Canadian corporation, the Minister is empowered to reduce the deemed dividend and associated interest to amounts that the Minister considers appropriate.

Windup bump

In certain circumstances, the tax value of non-depreciable capital property held by a newly acquired subsidiary corporation can be stepped-up (or “bumped”) by combining the subsidiary and its parent corporation by way of a windup of the subsidiary or by way of a vertical amalgamation. The government is concerned that the tax value of ineligible property (such as depreciable property, eligible capital property or inventory) can be bumped, indirectly, by transferring it to a partnership formed for this purpose. Because an interest in a partnership is generally non-depreciable capital property, its tax value could then be bumped.

Subject to certain grandfathering rules, the bump to the tax value of a partnership interest may be restricted on windups or vertical amalgamations that occur on or after Budget day. The bump will be denied to the extent that the excess of the FMV of the partnership interest over its tax value is, generally, referable to the portion of that excess that is attributable to depreciable property, eligible capital property or inventory of the partnership.

Sale of partnership interest to non-resident

Section 100 of the Act provides that a taxpayer’s taxable capital gain on the disposition of a partnership interest to a tax exempt entity is increased to include the full unrealized gains inherent in underlying property other than non-depreciable capital property (such as inventory and depreciable property).

Subject to certain grandfathering rules, this treatment is extended to dispositions of partnership interests, after budget day, to non-residents. The new rule does not apply, however, if, immediately before and immediately after the disposition, the partnership uses all of its property in carrying on business through a Canadian permanent establishment.

Partnership waivers

Upon Royal Assent, a partnership will be able to designate a single partner to file a waiver of the three year determination limitation period, on behalf of all partners.

• Subject to certain grandfathering rules, the 10% Mineral Exploration and Development Tax Credit available to corporations in connection with “pre-production mining expenditures” will be reduced and phased out by 2015.
• The mineral exploration tax credit available to flow-through share investors has been extended through March 31, 2013.
• Subject to certain grandfathering rules, the 10% Atlantic Investment Tax Credit for certain oil and gas mining activities will be reduced and phased out by 2015.
• The Budget proposes to extend the Atlantic Investment Tax Credit to certain energy generation and conservation equipment acquired on or after Budget day for use in certain activities.
• The 2011 Budget introduced a “temporary” $1,000 (maximum) credit against the increases, compared to 2010, in employment insurance premiums incurred by certain businesses. This credit has been extended for one year to employers whose employment insurance premiums were $10,000 or less in 2011.

 
GST/HST Streamlined Accounting Thresholds Increased

Effective for reporting periods beginning after 2012, the threshold for determining the eligibility of small businesses and public service bodies to use the Streamlined GST/HST Accounting methods will be doubled. The annual taxable sales threshold applicable for the Quick Method will increase to $400,000 of tax-included sales, from the present $200,000. The annual thresholds for using the Streamlined Input Tax Credit Method and the Prescribed Method for calculating rebates will be $1,000,000 of tax-included sales and $4,000,000 of taxable purchases.

Expanded GST Rebates For Books Given Away By Prescribed Literary Organizations

Where charities and qualifying non-profit literary organizations purchase printed books or audio recordings of books to give away, a rebate will be available for the GST or federal portion of the HST. This rebate will be applicable for purchases and importations after March 29, 2012.

Expanded GST/HST Health-Related Relief

GST/HST exempt status and zero-rating has been expanded to the following health-related supplies made after March 29, 2012 :

• Specified non-dispensing health related services provided by pharmacists will be afforded exempt status. Drug dispensing services continue to qualify for zero-rating.
• Supplies of corrective eyeglasses or contact lenses prescribed by an authorized individual (e.g. an optician) will be zero-rated.
• The zero-rating of certain medical devices prescribed by a medical practitioner will be extended to supplies made on the written order of a registered nurse, physiotherapist or occupational therapist as part of their professional practice.

GST/HST Application on Foreign-Based Rental Vehicles

Effective June 1, 2012, to facilitate access to Canadian tourist destinations, GST/HST will be eliminated or reduced on temporary importations of foreign-based rental vehicles by Canadian residents.

Green Levy On Fuel Inefficient Vehicles

The Ministry of Natural Resources recently changed fuel consumption testing requirements. This Budget adjusts the application of the Green Levy to ensure that these changes do not impact current tax application. This measure will take effect with Royal Assent.

Duty Reductions On Certain Imported Oils

The Budget proposes to eliminate the 5% Most-Favoured-Nation duty rate on certain oils used as production inputs in refining and electricity production, effective for importations after March 29, 2012.

Increased Travellers’ Exemptions

Travellers’ exemptions for goods brought into the country by Canadian residents after May 31, 2012 have been increased as follows:

• For absences of between 24 and 48 hours the duty and tax-free exemption will be increased from $50 to $200.
• For absences of more than 48 hours the duty and tax-free exemption will be $800.

Commercial lawyers generally recommend that any private company with more than one shareholder should have a shareholders’ agreement in place, to address the rights and responsibilities of the shareholders as between themselves and the corporation.

Among other things, the shareholders’ agreement will usually address what is to happen in the event of contingencies such as death, disability, insolvency or bankruptcy of a shareholder; or the marriage dissolution of a shareholder (where the shares of the company may potentially become property of a spouse); or the retirement or termination of employment of a shareholder.  

Each of these situations may require a determination of the value of the relevant shares.   This article is a brief introduction to some of the valuation issues that should be considered in this context.  These include:

Minority discounts

A common source of confusion (or acrimony) relates to minority discounts. Typically, shareholders intend that share transactions between themselves should take place on a pro rata basis, so that a shareholder owning a 20% interest in the company, for example, would likely expect his interest to be worth 20% of the company’s total (or en bloc) value. 

However, the term “fair market value” has a generally accepted meaning and – unless otherwise agreed between the parties – it requires a minority discount to be applied to reduce the value of such shares below their pro rata value.  This discount is to recognize the disadvantages of owning less than a controlling interest in a company (and, in this context, it is important to note that even 50% is less than a controlling interest.)  If the shareholders intend there to be no minority discount on transactions between themselves, the shareholders’ agreement must explicitly say so.

Formula approach vs. formal valuation 

Smaller companies, in order to minimize costs, sometimes define fair market value for purposes of the shareholders’ agreement using a simplified formula, rather than having a formal valuation of the company prepared at the time of a triggering event.  Such formulas may be earnings-based, such as using a multiple of earnings, cash flow, revenue or EBITDA; or asset-based, such as using the book value or appraised value of the net assets, plus a factor for goodwill (which might also be a multiple of earnings or revenue).

This type of approach requires some caution.  For example, such formulas are geared to the value of the going concern operations of the business, but what if the company has also built up assets that are surplus to the requirements of the operations?  Such assets could include undistributed cash, excess real estate, or even the hidden asset of underutilized borrowing capability.  How are such “redundant assets” to be treated in the formula? 

Conversely, the company may be exposed to contingent liabilities that are not yet reflected in the financial statements (other than perhaps as a note).  How are such contingencies to be treated in the formula?

To the extent that a formula will determine value by applying an agreed-upon multiple to some measure of earning power, are such earnings to be based on the latest year’s results (which may be better or worse than normal), or on an average of recent years (which may conceal on important trend, upwards or downwards), and are projected future results to be considered?  Will the earnings be normalized to address factors such as non-recurring items, or to recognize that shareholder remuneration and perks may be above or below market compensation?

At the very least, if a formula approach is to be used, it is prudent not to over-simplify.  Time spent identifying key issues, and attempting to address them in the formula, will help forestall difficulties later.  Consideration should also be given to having a formal valuation of the company prepared from time to time, to check whether the adopted formula is still appropriate.  As the company grows and the numbers become larger, however, the value of the shares may be simply too significant to leave to simplified rules of thumb.

Strategic buyers: 

Consideration should also be given to whether the value of the company is to be determined on a stand-alone basis, or whether it should recognize the possibility of sale to so-called special interest buyers who may be willing to pay a premium in anticipation of post-acquisition synergies.  Because such additional value, if any, depends on the unique circumstances of each potential buyer (not to mention the relative negotiating strength of the parties in an actual sale transaction), this factor is commonly excluded.  However, in deciding the appropriate approach, consideration should be given to the characteristics of the company’s industry; the universe of potential buyers; and possibly the other business interests of the shareholders.

*  *  *  *

At Wolrige Mahon LLP, we are not lawyers and we do not undertake the drafting of shareholders’ agreements.  However, we work with clients and their solicitors to assist in addressing the valuation and related issues that arise in framing the shareholders’ agreement. 

This article is intended as an introductory overview of certain issues only, and is not a substitute for professional advice based on the facts of each situation

On February 17, 2012, the provincial government announced transitional rules that will apply to new home sales straddling the anticipated April 1, 2013 return to the provincial sales tax system. The announcement removes the uncertainty that new home buyers faced and provides for rules that are comprehensive, fair and leave little room for manipulation. These newly announced rules are subject to the approval of the Legislature of British Columbia.

Transitioning to the Previous PST System

The B.C. portion of the HST will continue to apply before April 1, 2013.

The B.C. portion of the HST will no longer apply to newly built homes where construction begins on or after April 1, 2013. Builders will then be required to pay 7% PST on their building materials. It is estimated that about 2% of the sales price of a new home will be embedded PST.

During the transition phase, buyers may be eligible for enhanced rebates:

1. Buyers may be subject to a transition tax;
2. Builders could qualify for a B.C. transition rebate
3. Builders will face new certification requirements;
4. Buyers and builders may face double straddling transactions; and
5. Builders will have new disclosure requirements.

Buyers Benefit:  Enhanced Rebates

In recognition of the high cost of real estate in Metro Vancouver, the threshold for the B.C. new housing rebate increases from $ 525,000 to $ 850,000, only where HST is payable on after April 1, 2012 and before March 31, 2013. Eligible purchasers will be entitled to a rebate of 71.43% of the provincial component of HST paid up to a maximum of $ 42,500, an increase from the previous maximum of $ 26,250. The B.C. new rental housing rebate will also be enhanced with similar measures.

Builders will be required to pay or credit the enhanced portion of the rebate to the purchaser where they have agreed to pay or credit the existing B.C. new housing rebate.

Buyers Pay:  New B.C. Transition Tax

Buyers will be responsible for a 2% transition tax on certain sales of newly constructed or renovated housing. The transition tax will apply where:

• HST does not apply to the sale (and GST applies);
• The construction or substantial renovation of the new housing is 10% or more complete on April 1, 2013; and
• Ownership or possession of the new housing transfers or there is a deemed self-supply before April 1, 2015.

Builders:  New B.C. Transition Rebate

Builders will be eligible for a B.C. transition rebate on sales of newly constructed or substantially renovated housing that will be subject to the B.C. transition tax. The amount of the rebate depends upon the percentage of completion on April 1, 2013 and is based on the consideration for the property or fair market value in the case of a self-supply.

Builders:  New Builder Certification Requirements

In order to qualify for the new B.C. transition rebate, builders are required to certify the amount of PST paid on building materials that were incorporated after April 1, 2013 into newly constructed or substantially renovated housing. Builders will be required to keep receipts for audit purposes.

Buyers and Builders:  Double Straddling Transactions

Special transitional rules will apply to sales of new housing where a written agreement of purchase and sale was entered into on or before November 18, 2009 OR the housing construction began before July 1, 2010 (the HST start date in B.C.) AND for which ownership and possession transfer after March 31, 2013 (the HST end date in B.C.).

Builders:  New Disclosure Requirements

Written agreements of purchase and sale of newly constructed or substantially renovated housing may be unclear about the taxes and rebates that are included in the sale price stated in the agreement, especially with the impending transition back to the PST.

Accordingly, builders will be required to make certain disclosures to both purchasers and to the CRA, for written agreements of purchase and sale with different requirements for agreements entered into on or before February 17, 2012 and for agreements entered into after February 17, 2012.

Penalties

B.C. will impose penalties for failure to comply with the new disclosure requirements.

1. Where a builder fails to fully and accurately disclose the required information, a penalty of up to 1% of the home price, up to a maximum of $ 10,000 per home; and
2. A more severe penalty of to up to 4% of the home price, up to a maximum of $ 40,000 per home where there are false statements or circumstances amounting to gross negligence.

We Can Help

Wolrige Mahon has both the experience and expertise to help you identify potential strategies to ensure a smooth transition to the PST.  Please contact Gary Chow at gchow@wolrigemahon.com for help.

I Hate Paying Income Tax

Penalties for income tax evasion can range from heavy fines to imprisonment.

Who doesn’t hate paying their income tax? However, most Canadian taxpayers, including owner-managers, understand that paying their fair share of income tax is simply the price of living in Canada with its many benefits. It is not surprising that those who do pay their share of income taxes are justifiably outraged by those who do not pay, especially if it appears they are able to get away with it.

Tax avoidance, or minimization, is the skillful use of the tax laws to minimize the amount of tax owed. Tax evasion, on the other hand, may be defined as failing to report taxes owed, reporting inaccurately or using some illegal means such as fraud to reduce the taxes owed under the tax laws.

The Cost to Taxpayers

The cost of delinquency to the people of Canada is enormous. Tax Justice Network, a London-based independent organization created in 2003 to monitor tax systems around the world for fairness and transparency, claims the people of Canada lose about $81 billion annually through tax evasion. That’s four times what we spend on defence and almost one third of what we spend on healthcare every year.

In fact, tax evasion is taken so seriously by the Canada Revenue Agency that it has a “Newsroom” www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng where it uses court records to publish press releases announcing convictions for tax evasion. The CRA does this “to maintain confidence in the integrity of the self-assessment system, and to increase compliance with the law through the deterrent effect of such publicity”.

The Cost to Delinquents

Punishment for tax evasion can be a fine, jail time or both. Convicted tax evaders must pay the full amount of taxes owing plus interest and any civil penalties assessed by the CRA. Failure to file a tax return can lead to a fine of between $1,000 and $25,000 and as much as 12 months in jail. Making a false or misleading statement on the tax return or wilfully evading paying taxes can bring a fine of between 50% and 200% of the amount of tax owed and a two-year prison term.

Rogues Gallery

The following examples from the 2011 “rogues gallery” is only a small sampling of the kind of violations prosecuted by the CRA.

1. Failure to Comply with a Court Order

In June 2011, the Ontario Court of Justice found a taxpayer guilty of eight counts of failing to comply with a court order to file outstanding personal income taxes for the years 2000 through 2007 inclusive. The taxpayer was fined $8,000 and ordered by the courts to file the outstanding returns.

The taxpayer could easily have avoided the fine and possible additional penalties by meeting CRA’s request to file. When returns are outstanding, the CRA’s policy is to ask the taxpayer to file the missing returns. If the taxpayer ignores the request and fails to file, the CRA then serves a notice demanding the returns be filed. In this case it is apparent that the taxpayer did not comply and therefore charges were laid.

2. Tax Preparers Sentenced

Tax preparers themselves are not immune to scrutiny by the CRA. In July 2011, the courts found a tax preparer guilty on 134 counts of tax evasion under the Income Tax Act and four counts under the Tax Rebate Discounting Act. According to court records the tax preparer claimed or obtained $393,504 in false income tax refunds by filing fraudulent returns for 134 clients. Not only did the tax preparer have to repay the total amount of tax evaded, he had to pay a fine of $393,504 (100% of the evaded amount) plus an additional $2,000 on the four counts under the Tax Rebate Discounting Act. He was also sentenced to house arrest for two years less a day. The preparer was allowed to pay the fine in installments over five years. Failure to comply will result in a jail term in excess of two years.

The courts also found three other persons party to the scheme. Their sentences were as follows:

1. Nine months in jail and a $286,000 fine
2. Three months in jail, six months’ probation and a $36,000 fine
3. Three months in jail and a $36,000 fine.

 CRA investigations tie up personnel, clog the courts and cost taxpayers money.

3. Electrical Contractor Fined

An electrical contracting company was convicted of one count of evading GST and one count of income tax evasion. The company had claimed $379,705 in non-business expenses between 2004 and 2006 as well as construction expenses associated with building two cottages for company directors. Input tax credits for GST of $24,007 related to the cottage expenses were also claimed as business expenses. The company was fined $165,822, an amount equal to 200% of the total amount evaded and given one year to pay.

4. Inflated Business Expenses

For the years 2005 through 2007, a taxpayer failed to offset credit notes against purchases, claimed invoices twice, indicated that personal expenses were business expenses and claimed expenses for which receipts or other documents were not available. The cost to this taxpayer was more than $49,000 after charges of tax evasion were upheld by the courts. The $49,000 fine represented 80% of the federal tax evaded. In addition, the taxpayer will have to pay the taxes owed plus any interest or penalties assessed.

5. False Invoicing Scheme Costly for All Involved

Three business associates cooked up a false invoicing scheme in which, over a two-year period, invoices from Company A billed Company B for costs associated with building a personal residence for Company B’s owner. Company B was then able to reduce the corporate income by $165,000. As well, the owner of Company B failed to report the benefit received from payment of the construction cost. This resulted in tax evasion approximating $45,000. The courts fined not only Company A and Company B but also the principals involved in the scheme. The total amount fined exceeded $105,000. As well, the companies and principals were ordered to repay the taxes owing along with interest and penalties.

If You Think You Might Not Be in Compliance

Chartered accountants deal with the CRA on a regular basis and find that in the normal course of business the CRA is fair when dealing with professionals and their client base. The CRA, like most businesses, would prefer that taxpayers meet their obligations voluntarily because investigations resulting in settlements tie up personnel, clog the courts and, of course, cost taxpayers money. This is why the CRA suggests that taxpayers who have inadvertently failed to report all of their income from prior years may be able to avoid such penalties and potential jail time if they comply before any action is taken by the CRA.

If you think you may not be in full compliance with current tax legislation, ask your chartered accountant about the Voluntary Disclosure Program or visit the CRA website ww.cra.gc.ca/voluntarydisclosures.

Ethical Behaviour

A strong corporate ethic has effects deep into the stakeholder community.

Owner-managed businesses are under increasing pressure to ensure that their conduct as corporate citizens and the conduct of their employees as private citizens meet certain standards of ethical behaviour. It is all too easy for owner-managers to forget, however, that even though their business is run behind closed doors, the stakeholder community that buys its goods and services and on which it depends for employees, suppliers and financing have expectations about how it and its employees should behave.

Unfortunately it is only when an employee steps outside the unwritten but publicly assumed framework of expectations does the owner-manager or the employee understand that an ethical standard has been breached.

Business behaviour that may raise ethical eyebrows among stakeholders includes:

• Toleration of swearing, bullying, sexism or sexual harassment
• Bypassing environmental protocols, safety standards or employment standards
• Hiring practices based not upon qualification but gender, nationality or race
• Remuneration based on subjective evaluations rather than performance measurement
• Advancement based not upon evaluation but favouritism
• A reward system based strictly upon closing the deal rather than satisfying client needs
• An attitude that employees are there to be exploited rather than developed and rewarded
• An attitude of indifference to the law and employee safety and welfare

Business Ethics

Business ethics may be defined as codes of principles and values that govern decisions and actions within an organization.

Corporations large enough to have an HR department may have a written mission statement and code of ethics; smaller businesses may just assume a code of some sort to be an unwritten part of the corporate culture. As the age, gender, ethnic, educational and other factors in the employee mix change with the company’s growth, however, owner-managers may find it necessary to create a coded business ethic for all employees. A Google search of business ethics turns up about 20 million results, a measure of the extent of debate around this issue. Obviously, no magic formula exists to create a company ethic. There are, however, two approaches to corporate ethical behaviour that should be part of any in-house debate.

Approach 1

Owner-managed businesses answer the same question posed by their larger counterparts: “Is the purpose of our business solely to make profit for the shareholders or are we responsible as well to the greater good of our broader stakeholder community?” When shareholders (owners) instil in management a philosophy that their only purpose is to provide a return to the shareholders, concerns for employees, third-parties such as suppliers, customers or society in general, may go out the window. This bottom-line approach can lead to money-saving methods that reduce workplace safety, jeopardize product safety, or endanger the community.

 Approach 2

An organization shows the flip side of “profit at any cost” when shareholders instill in management the requirement to consider the needs of all stakeholders within the influence of the company. Stakeholders are not just the shareholders; they include everyone who derives value from the survival of the business: employees, suppliers, customers and all those other small businesses such as the local grocery, clothing or appliance store, or even the movie theatre that survive on the personal spending of employees.

The scope and breadth of influence, of course, depends upon the size of the community and the ownership of the business. A small retail store owned by generations of the same family may be willing to allow political posters in its window at election time because the owner wants to be part of the debate over local issues.

On the other hand, a national franchise with stores coast to coast may not want its name to appear associated with any issue and therefore prohibits local franchisees from displaying anything concerning the community. The national franchise’s inaction creates pockets of silence and excludes itself from the very community upon which it depends for its business. Is its behaviour ethical or merely self-serving?

In a world constantly influenced by social media, owner-managers must be aware that any action within their sphere of influence may have a butterfly effect upon local, regional and federal governments, the community and its residents. For this reason, owner-managers and their employees may wish to consider whether any action or inaction may be perceived as ethical or unethical.

Businesses and the stakeholder community in which they operate have a symbiotic relationship: the business needs the support of the community and the community needs the business for its prosperity. When a business is perceived as unethical all community members suffer. The challenge for owner-managers and employees is to consider the potential ethical consequences of their actions.

Four Questions

Perhaps if employees asked themselves these four questions before making decisions, incidences of unethical behaviour would be fewer:

1. Is my decision based upon my knowledge of the truth?
2. Will my decision be fair and respectful of all stakeholders?
3. Will my decision add to the goodwill my company enjoys in the community?
4. Would I be ashamed if my decision became public knowledge?

As much as we detest written procedures, a written code of ethics raises to consciousness what employees used to take for granted. It is the framework any business needs to show all employees what is expected of them by the company and by the law. Without formalized procedures a business could discover it has not performed the due diligence required to protect third parties from unethical acts committed by the business and its representatives.

A World without Madoff

If rules and regulations could control human conduct and prevent unethical behaviour, the Quebec-based Earl Jones and the USA-based “Bernie” Madoff ponzi schemes might never have happened. In the final analysis, corporate ethical behaviour must reflect the ethical values of stakeholders in order to be acceptable. It is the owner-manager’s job to ensure the ethical behaviour of all within the business meets or exceeds the expectation of this community.

Scan it Anywhere

Scanning is no longer confined to the desktop.

There are times in any business when you’re out of the office and away from your scanner but you still need to make a digital copy of a paper document or business card. When you’re at the office, chances are you have either a standard desktop scanner or multi-function printer (which typically includes a scanner and copier function) to handle such tasks. However, when you’re away from your desk at a meeting or a tradeshow, you probably don’t have your desktop scanner or a bulky photocopier available. In a pinch, a camera might do, but that’s probably not your most elegant option.

There’s an App for That

For occasional mobile scanning needs, having the right applications available on your smartphone or tablet device is essential. A small investment in apps suitable to your business and work habits will help to make the large investment you have already made in mobile devices pay off. You may need a few different types of apps to handle each situation. Since there are multiple mobile platforms, each with its own unique selection of apps, the following list includes the types of applications you may find useful along with the typical price range. Many apps are available for free or a nominal cost.

A Simple Photo Editor: ($0 -$5) After you’ve taken a picture of something with the camera on your device, having an application that will let you crop, make minor changes and save as a new file is extremely useful.

Text Recognition: ($0 – $5) Equally as useful as a photo editor is an app that can do Optical Character Recognition (OCR), that is, convert an image into text. Such an app will allow you to start editing your document right on the spot without having to wait until you get back to the office.

QR Code Scanner: ($0+) This app allows you to capture those square digital “barcodes” that you’ve probably noticed popping up everywhere. QR codes can contain many kinds of data, but are commonly used to store and convey contact information and website addresses. Businesses are starting to print QR codes on business cards. A single snap of a QR code is enough for you to capture someone’s entire contact information and automatically add it to your smartphone’s contact book.

Productivity Suite: ($0 – $30) Although productivity apps are not directly used for “mobile scanning,” having a word processor, spreadsheet and presentation editor on your mobile device will allow you to immediately use the information you’ve scanned or images you’ve captured and start making changes on the spot.

Portable Document Scanner

If you find yourself scanning many documents while you’re out of the office, you have another option in addition to your trusty smartphone. There are now products on the market that will scan most documents on the spot without the necessity of connecting to a computer. These devices are so portable that the user can hold it in one hand and literally feed the document into the scanner with the other. Although not all products have the same features, they are all designed to convert paper-based documents into a digital format.

For about $200 you can purchase a discreet portable document scanner that can scan documents, photos and business cards on the spot, without the need for a computer attached. Most portable scanners allow you to connect to a Mac or Windows computer to download previously scanned documents, either via a USB cable or wirelessly via Bluetooth. The battery is usually sufficient to scan about 100 documents per charge. While lightweight and portable, these scanners have the disadvantage of being a separate device that must be carried around in addition to your laptop and briefcase, and still require a computer to make use of what has been scanned.

Save Time, Save Money

Any business that wishes to work more efficiently, reduce or eliminate inaccuracies and move toward a paperless environment should consider portable scanning options, either through smartphone apps or a portable scanner to meet its mobile office needs.

Everyone Wins

Co-operation, thrift and efficiency are the best ways to keep a small business going.

Owner-managed businesses rely on their employees to meet the demands of customers. Indeed a driving force for many owner-managers is ensuring that sufficient business is in place to provide employment for both themselves and all their employees. Any employer will tell you their most painful task is informing employees with whom they have worked with for years that they must be laid off.

Since there is no guarantee the clients or job of today will be available tomorrow, owner-managers and employees working together to maintain company profitability is the best way to ensure continuous work. The cost-saving models of large corporations are not available to smaller businesses where management and employees must work together to maintain profitability.

Here are a few areas in business where owner-managers and coworkers can save money and thereby benefit the bottom line.

Use Time Wisely

“Time is money,” Ben Franklin said. Use time efficiently and do not fritter it away:

• Be on time every day.
• Start working at a predetermined time rather than arriving at the work location on time and then spending 15 minutes getting ready to work.
• Put in a full day’s work. If possible arrange car repairs or dental appointments on your days off or at the end of the business day.
• Stick to the scheduled break and lunch times. Stay within the time limit.
• Determine whether overtime is really necessary. Overtime slowly eats at mental acuity and physical endurance and over the long term may actually reduce efficiency.
• Purchase a coffee maker and make coffee at the office.
• Educate family and friends to limit their calls, texts or emails to emergencies.

Information is Power

Keep your coworkers and the boss informed of what is happening on your project. Getting the job done on time is important, especially if the company you work for does not get paid until the job is done. If the company doesn’t receive payment, additional strain placed upon the cash flow may necessitate a bank loan to make payroll.

Train Backup

If only one person is trained to drive the front-end loader and that person is not there, productivity stops. Without productivity the job doesn’t get done and no one gets paid.

If the billings or payroll clerk is not available, an entire operation could shut down. Writing NSF cheques, or failing to pay bills, employee tax deductions, HST and other withholding taxes will cost interest and penalties.

Manage Office Utilities

We all are aware of the high cost of utilities in our home, but often do not give a second thought to the cost of utilities at the office or plant. Shut off lights in washrooms, kitchenettes, storage areas or shop areas when you leave. Turn down the heat or air conditioning before long weekends.

Communications

Communication has become a high cost for most businesses. When out of the office consider whether it is necessary to answer every call or respond immediately. Before leaving your communication zone on business, consider whether the company should consider a “roaming” package to keep costs down. Take care of communication devices. Lost, stolen or damaged equipment cost the company money.

Consider using communication platforms such as SKYPE to reduce the cost of long distance charges or to replace face-to-face meetings with video conferencing.

Company Vehicles

There are a number of ways of reducing the cost of operating company vehicles.

1. Obey all traffic rules to avoid fines and an increase in vehicle insurance.
2. Reduce additional fuel cost by not idling, speeding or making jackrabbit starts.
3. Reduce excess wear and tear by staying within its performance criteria.
4. Maintain and log proper maintenance schedules to ensure warranties are not violated.
5. Transport more than one person to a jobsite.
6. Plan shopping or pickups to avoid duplication or backtracking from the worksite to the local supplier.

Protect Your Data

The downtime from lost data is always expensive. Follow existing backup procedures. Establish a system whereby Day One work is backed up on Disk One, Day Two work is backed up on Disk Two and Day Three work is backed up on Disk Three, etc. On Day Four backup on Disk One and follow the routine. This should ensure your data is never more than one day behind if the systems crash. At least once a week, backup all files and locate them offsite whether using a “Cloud” facility, an external hard drive or a local offsite server.

Ensure that a master password and specific authorization for all key sites is available to key personnel. This will allow access to data in the event an employee is absent or terminated.

Client and personnel confidentiality are essential to avoid possible legal action. Employees should be instructed to encrypt all data sent via Internet.

Travel Expenses

Travel expenses can mount up. The incentive-points earned for staying at specific hotels or eating at certain dining establishments may bias us to spend more than we would spend if we were paying for the trip for our own personal pleasure. Certainly it is important to portray an image to our clients, but, at what cost to the business?

Payables and Receivables

Maintain constant vigilance over receivables and payables. Do not overextend credit to clients; constantly follow up on receivables. Pay payables on time to ensure your suppliers will continue to grant credit and not force the business to increase an existing line of credit. Employees and owner-managers should always be vigilant for changes in delivery times or payment times that may be a sign of a troubled supplier or customer.

Promote the Business

We all need to promote the business. Participation in community events creates positive images for the company that may be more effective and less expensive than advertising.

Many employees feel it is not their job to get business. Nothing could be further from the truth. Promoting the business you work for provides work for the company. If you have a potential client, mention it to the owner-manager. Even a small job could lead to something bigger or a long-term contract.

Everyone from owner-managers to employees would like to say with certainty that 2012 will be a banner year. Although no one can predict what the future holds, working together to reduce unnecessary expenditures and promote the business is definitely a process that is a money saver.

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.

Darren W. Gibson

Gurpreet Sandhu

Darren has been providing audit, accounting, advisory and tax services to owner managed businesses over the past 15 years.  Darren’s experience ranges from small businesses to large entitites operating across Canada and in foreign jurisdictions.

Over the past 11 years Gurpreet has provided audit, accounting, advisory and tax services to private enterprises.  His experience includes clientele involved in entertainment and new media, not for profit, construction and research and development.

It is with sincere sadness that Wolrige Mahon LLP announces the passing of Alan Wolrige, retired partner and dear friend.

Al co-founded Wolrige Mahon in 1961 with Ken Mahon and contributed immeasurably to the growth and success of the firm.  Al maintained strong relationships with clients as a trusted advisor, and was a mentor to many young chartered accountants who worked in the firm.

Al enjoyed his golf and was a long time member and former president of the Shaughnessy Golf & Country Club.

Al was a caring and devoted husband to Barbara, his wife of 55 years, who pre-deceased him in 2008.

We extend our sincere condolences to his family: children Jeffrey (Linda) and Anne (Craig) Rowland; grandchildren Chris, Sarah, Jamie, Ross, and Jonathan; sisters Joan (Jack) Laidman, Helen (Bill) Weatherall and Elizabeth Wolrige.

TECHNOLOGY

Is Cloud Computing Pie in the Sky?

Computing may be moving off premises and becoming a utility.

Cloud computing is not quite here yet but its simplicity from the user’s point of view makes it very attractive.  Nevertheless, there are significant legal and technical problems primarily of security and privacy that need to be resolved before cloud computing can come into universal use. 

What Exactly is Cloud Computing?

The central idea behind cloud computing is that data will no longer be stored on the hard drives of the office servers, desktop computers or laptops but offsite on a network of servers accessed through the Internet for a fee.  (The word “cloud” comes from the use in the IT industry of the simple image of a cloud to represent complex telephone networks or the Internet itself.) 

Types of Service

The cloud model could offer several types of service. For example, Software as a Service (SaaS) would let you load a single application onto your home or office computer that would allow you to log into a web-based server hosting the programs you need such as word processing, accounting, data base, storage, games, etc.  Platform as a Service (PaaS) would let you design your own application which would run on the service provider’s infrastructure and be delivered to users via the Internet. There would be many other services available to manage security, spam, email, and so on.

Pay Per Use

As currently conceived, the comparable business model of cloud computing is that of the utility industry.  Instead of having a generator in your basement producing power for all the needs of your home or business, you access the energy grid and draw off the amount of energy you need on a pay-for-use basis. 

Middleware

Through a process called server virtualization, a special kind of software known as middleware would maximize server capacity utilization.  Middleware can divide the capacity of individual servers into virtual environments so that each physical server functions as multiple servers.  The result is greater server efficiency because less capacity is wasted, as happens now.   The dedicated servers making up the cloud computing system would have all the applications society would need for work or play.

The host system would be owned by a company that would charge you some type of fee for providing your customized service.  

Benefits

The primary benefit is that your infrastructure, training and licensing costs will be substantially reduced or even eliminated. Hardware costs would be reduced because there would be no need to buy and house increasingly powerful computers as your business grows.  The programs formerly run by your in-house IT system would now be on the cloud network servers.  The space currently occupied by servers and storage devices would now be freed up for more productive uses. If you are currently renting space to house your servers, that expense would be gone.  Increased capacity would also be available on the host’s servers as needed. Server virtualization on the cloud system would ensure you are not paying for overcapacity as you might be doing now with your in-house system.  All you need is a basic computer, cloud-enabled appliance (e.g., television), mobile phone or tablet device capable of running the external server’s interface software which might be as simple as a web browser. 

Server Security

Time-consuming decisions about buying and complying with expensive software licences will be a thing of the past.  You will no longer have to worry about who is and who is not covered by your existing software user licences.  With cloud computing, you will no longer require licences; the company will have access to the programs it needs on a fee-for-service model. 

Easy Access

The cloud servers would be accessible from anywhere on the planet through the Internet.  But you will not have to worry that sensitive company information might be compromised if a USB or laptop is lost by an employee on a business trip; all the information would be on the server and not on the hard drive of the laptop. 

Reduced IT Staff

With software managed by the offsite server company and only basic computers required onsite, the expense of in-house IT personnel will be substantially reduced.  Fewer IT personnel will be required by your business and those who will be needed will cost less because they will not need the training now required to run complex in-house systems.  The good IT jobs will be with the server companies.

Concerns

Cloud computing could, in effect, double your security risk: once in-house and once at the remote servers.   When servers are located in-house as they are now, you know where the data is stored and can access it and maintain it physically.  You can design an authentication system of user names and passwords to control access to your own servers.  This can be supplemented with an authorization system which allows users to access only the applications and data needed for their particular job.

In the cloud system, on the other hand, you as the client do not know where the vendor’s servers are physically located and who has access to them. They may even be located in a jurisdiction outside Canada where privacy and security laws are not as tight as they are here. You also do not know the effectiveness of the vendor’s security system.  In other words, you do not have complete control over the storage and use of your own data, yet current privacy legislation makes you responsible for the security of your clients’ personal information. 

The best that can be said at this time is that you will still need in-house security at your end but the server companies will need to develop a level of security that will give their clients confidence that they are not in violation of Canadian law.  It is obviously in the server companies’ best interests to do so since they depend on the trust of their clients to keep themselves in business.

Where Are We Going?

Computer systems are becoming so complex that new ways of organizing the relationship between system and user is inevitable.  The number of computing devices in use and the complexity of each new device are both increasing rapidly and putting pressure on the architecture of existing systems.  Cloud computing as a utility is not yet a sure thing but it is looming larger and larger as a potential solution.

TAXATION

Year-End Tax Issues

Check your portfolio; you may not have to pay as much capital gains tax as you thought.

As the year end approaches owner-managers can find themselves faced with difficult choices in order to keep the tax liabilities of their businesses, themselves and their families to a minimum.  Three important areas are capital losses, pre-tax remuneration vs. dividends and RRSP contributions.

Capital Losses

If you have an investment portfolio outside your TFSA, RRSP or RRIF, you should review it with your investment advisor to see whether you could reduce your capital gains by taking some capital losses before the end of the year. Since capital losses can be carried forward from prior years to offset gains in the current year, review your last tax return with your Chartered Accountant to see whether any capital losses are available.  Keep in mind that any sales to create capital losses must be made at least three trading days before the final settlement date of December 31 in any given year. 

For 2011, because of the way the holidays fall, the last day to sell a stock may be December 23.  Check with your broker to make sure.  Further, if you sell the losing stock to get the benefit of the capital loss but would like to repurchase it to retain a position in the company, you must wait 30 days or you will not be able to claim the capital loss (the superficial loss rule). The capital loss would also be denied if your spouse were to acquire the stock either from you or on the market within that 30-day period and continue to hold it at the end of that period.

Next Year’s Capital Losses

Investors who realize capital gains (net of capital losses) in 2011 but have no losses carried forward will pay tax on the capital gains.  However, because capital losses can be carried back three years, capital losses generated in 2012, 2013 and 2014 can be used to recover taxes paid on the capital gains incurred in 2011.  Just in case you are thinking of selling a security at a loss in order to create a usable capital loss then repurchasing under your RRSP umbrella, remember the superficial loss rule will still apply.

Pre-Tax Remuneration vs. Dividends

Salaries and bonuses to owner-managers or family-member employees should be considered as a way of reducing corporate taxes.  Your Chartered Accountant can determine how additional remuneration to family members will impact the collective tax liability of the family. Your Chartered Accountant may also be able to time the payment of remuneration to reduce the corporate taxes paid while deferring the personal income tax liability to the following year.

Payment of cash dividends is another option. Cash dividends are paid out of retained earnings, i.e., after the corporate income tax has been paid, and attract a lower income tax rate than remuneration, which is deducted  in computing corporate income and therefore before the calculation of the corporate tax liability. 

The choice between cash dividends or remuneration can become contentious where tax rates vary among family members and where not all family members are shareholders. Taking dividends rather than salary, for example, will impact CPP and future RRSP contributions. Thus, it is advisable to be aware of the impact on each family member and to obtain shareholder consensus on the preferred means of remuneration.  

Although dividends may be declared any time in the year, they are not taxable until they are actually paid.  Any plan to defer payment to a later calendar year should be discussed with your Chartered Accountant as it impacts the corporation as well as the individuals receiving the dividends.

RRSP Contributions

Owner-managers who decide to give themselves or family members a raise to reduce corporate taxes, may put themselves in a higher income tax bracket. Then, the only means of reducing personal taxable income may be to contribute to an RRSP.  For 2011, the RRSP limit is $22,450.

Keep in mind that, if you have not yet made the maximum contribution (the lesser of $22,450 or 18% of 2010 earned income minus any pension adjustment) for the 2011 calendar year, you have until February 29, 2012, to do so. The cash realized from a dividend or salary deferral from 2011 received in 2012 can therefore be used to top up your 2011 contribution.

The On-Time Payment Rules for Taxes

There is some confusion as to what constitutes paying on time. Some payments are considered to have been made only when received by the CRA; other payments are considered to have been made when mailed.

For clarification, section 248(7) of the Income Tax Act reads:

For the purposes of this Act,
(a) anything (other than a remittance or payment described in paragraph 248 (7) (b)) sent by first class mail or its equivalent shall be deemed to have been received by the person to whom it was sent on the day it was mailed; and

(b) the remittance or payment of an amount

            (i) deducted or withheld, or

            (ii) payable by a corporation,

as required by this Act or a regulation shall be deemed to have been made on the day on which it is received by the Receiver General.

Payments at Financial Institutions

Payments for HST, income or withholding taxes made at any financial institution belonging to the Canadian Payments Association will be accepted on the day they are processed. A payment made at an Automated Teller Machine (ATM) must be processed the same day to be considered paid on the payment date. Payments will be late if they are made after public banking hours since many financial institutions do not process the data until the following day. Payments made Friday after closing are usually not processed until the following Monday.

If, however, the due date falls on a Saturday, Sunday or public holiday, the payment will be considered “on-time” if the funds are processed by the financial institution or received by CRA on the next business day.  For example, if the deadline is Saturday, April 30, and the return is mailed on April 30 but not received by CRA until Monday, May 2, it is considered to have been received on time.  If, however, a payment required by Tuesday, April 30, is mailed on April 30 and not received until Wednesday, May 1, it is considered late. 

Seek Advice from Your CA

Addressing capital-gains-and-loss issues, salaries, pre-tax remuneration or dividends, and RRSP contributions with your Chartered Accountant before year end should be foremost on the minds of owner-managers at this time of year.  Some ways of reducing tax liability may be time sensitive and require a review of available options with shareholders and family members.  

A Guide for Start-Ups

When starting your own business, be cautious.

The last 30 years have seen some tough times: 20% interest rates in the early 80s, recession in the early 90s, and a near collapse of the financial system in 2008.   Those who survived financially will probably make it through the current economic struggle because they have learned how to keep going regardless of what the economy throws at them. Those dreaming about starting their own businesses should consider the following precautions.

Temper Your Expectations

Start-up businesses have high expectations that can sometimes outstrip reality.  Customers and clients need time to find you and get to know your business.  New businesses may have a “grand opening” to create public awareness. Sometimes, opening prices are below normalized mark-up prices and people flock to the location to take advantage of savings. Start-up entrepreneurs should not hinge their expectations  on crowds of “cherry pickers” who take the best you have to offer and then do not return when your prices go back to normal. 

Do Not Over-Extend Yourself

Start-ups often overestimate their ability to produce or deliver products. It is better to be up front with your clients that you cannot meet their deadline and negotiate a mutually satisfactory timeline, rather than disappoint when you fail to meet expectations. Keep in mind that when you set a deadline your clients will be making their plans according to your promise. 

Arrange Advance Financing

Many start-ups underestimate the working capital required to get the business off the ground. Creating sales can require unexpectedly high amounts of working capital. Unfortunately, it is all too easy to overestimate sales and the speed with which receivables will become cash. This miscalculation leads to underestimating the time required for a business to generate sufficient funds to be self-financing.  

In today’s economic environment it is hard to tell when a small business may become profitable.  Some small online-business bloggers boast of being profitable almost immediately because of the low cost of getting into an online business. More conventional businesses with bricks-and-mortar locations and the associated costs may take a year or even two just to break even. Thus the entrepreneur should project operating cash needs for HST remittance, loan repayment, rent, inventory, utilities, wages, and vehicles and, of course, personal income needs for at least a year. The entrepreneur must also recognize that in addition to everyday working capital needs there will be capital expenditures for computers, cash registers, equipment, leasehold improvements, and vehicles, of which will drain working capital.  Most financial institutions will assist you with capital loans, revolving lines of credit and credit cards.  

Obtain a Deposit

Collecting funds after the job is completed can be tough.  Clients may not want to pay or may delay payment for two or three months.  These delays may cause problems with HST remittance. HST is recorded when the sale is booked and must be remitted regardless of whether the funds have been collected. 

Requesting a deposit before a job begins has several advantages. First, a deposit indicates the client is committed. Second, a deposit is not considered to be a sale and therefore remittance of HST is not required. Finally, if the client delays payment after the sale the deposit should be sufficient to cover the HST and provide some working capital.

Control Expenditures

Good cash management requires that you should anticipate the best and worst circumstances that are likely to occur over the next fiscal year. As owner-manager you know you must pay rent, utilities, suppliers and employees each month. Rent and utilities are essential to staying in business. Staff, vehicle expenses and inventory are major costs over which you have some control and can be projected with some accuracy. It is important to isolate those areas where cash flow needs are variable. Your findings may indicate that you should lay off staff and do the work yourself, drive your own delivery vehicle rather than use a courier or arrange for on-time delivery of inventory rather than stock the shelves.

Project Your Needs

Optimism is what buoys entrepreneurs but reality can sink them. Start-ups often purchase goods or hire employees in excess of requirements. Consider inventory and staffing an essential part of your projections.  Better to have shelves that need replenishing and a skeleton staff that is always busy than shelves full of unsold products and excess staff that drain cash reserves.

Stay the Course

When business is slow self-doubt will creep into any owner-manager. The temptation will then arise to branch out into areas only marginally related to the core business or areas of expertise identified in your original business plan. Such acts of desperation confuse clients and damage your brand. Energy squandered on these distractions is energy taken away from maintaining the quality of your product or service which now risks becoming substandard. If your business plan was sound in the first place and you have rational belief in your ability to succeed, maintain focus on your strengths. This does not mean you should not look into branching out into other areas but always ensure that the new area does not take away from your strengths.

Adopt a Mentor

We all need someone to guide us in making business choices. Start-up entrepreneurs should not be hesitant to approach experienced owner-managers in their community. Not only do these individuals possess knowledge and experience that takes years to acquire but they may also connect to networks of people who may be able to offer guidance. Joining a local business association may also be helpful.

Statistics Tell the Story

Ninety-eight per cent of businesses in Canada have fewer than 100 employees but employ 48% of the private-sector labour force and create just over 30% of Canada’s GDP. About 21 per cent of small businesses produce goods and 79 per cent produce services. Chances are self-employment will be in the future for many. Cautious optimism is the essential ingredient of survival.

MANAGEMENT

The Show Must Go On

When travelling, keep your presentation material with you at all times.

Travelling to meet a client, set up a training course or establish a new business presents the risk of lost luggage and equipment at any time of year. But the greater volume of travellers and longer wait times during the winter holiday season increase the possibility of loss and the embarrassment of not having what you need when you have to make your presentation to your client.

Develop a Habit

Be proactive.  Making a list prevents you from leaving things on your desk or kitchen table. Put items in the same place in your briefcase every time you travel. When finished with an item, return it immediately to its usual place. This applies whether you are reviewing material on the plane, in a taxi or at your hotel.

Good use-and-return habits will reduce the possibility of items being misplaced. Work with only one item at a time. Using your laptop while talking on your cell phone only increases the likelihood that something will go amiss.

Always in Your Possession

Course material or presentation material should never be checked in as luggage.

Never leave any luggage at the bar or on a seat to go for coffee or to the washroom. Asking a stranger to “watch this for a moment” is a leap of faith as that person may be waiting for the very opportunity you have just provided.

When the cab driver grabs your luggage do not give him your laptop or anything else important. Carry them with you in the cab. Before you pay the driver, check for your wallet, handbag, cell phone, laptop, briefcase and, of course, your suitcase. 

Victims of Theft are Victims of Trust

Hotel Bellhop:  Don’t let the bellhop carry course material or your laptop.

Hotel Room Security:  Any time the room is empty there is a chance something could be stolen. Cleaning staff often prop open the door while changing linen and have no way of knowing whether a person entering the room is you. Leaving your laptop or smart phone unattended can be risky. Check valuable items at the front desk.

Hotel Room Safe:  Your room safe may seem secure but often is not. Hotel security needs a master password to open all safes in case of emergency. They often use the manufacturer’s original password. An easy-to-remember number such as “0000” is a common manufacturer’s set-up password.

Airport Security: The airport security process momentarily separates you from your carry-on luggage, wallet, keys, handbag, camera and other small but valuable items. A conveyor belt moves your luggage, etc., through an X-ray scanner while you walk through the metal detector.  As you are being delayed at the metal detector, it is easy to lose sight of your luggage sitting for a few moments at the end of the conveyor belt.  A thief could easily pick up your things and be quickly lost in the crowd. In a large terminal the possibility of finding the thief is remote. It pays to observe the individuals in front of you and what they place onto the conveyor belt. Always be aware of where your belongings are. As you pick them up review what you placed in the basket on the other side of the scanner.

Convention Meeting Room:  Meeting rooms in hotels or convention centres offer little security. Computers and other presentation devices can be easily stolen because participants do not know each other and simply assume the perpetrator is there for the event. Those producing the show should have security personnel in the room during breaks and mealtimes.

Take a Minute to Review

Regardless of precautions, needed material can still disappear. The following checklist may help ensure that your presentation is successful. 

1. If the material is in digital format, carry backup on a memory device. Keep one on your person and place another in your carry-on luggage. If the data is sensitive, install password protection.
2. Develop your material with commonly used software. If there is a malfunction, you can probably revive the data on your host computer. Know your host operating system. If your host is an older version of Excel, for instance, and your data is produced on the latest version, it is possible the host system will not accept conversion.
3. Install communication software that can access your office computer in case your laptop malfunctions or is stolen.
4. Carry the communication CD in your personal luggage. You can load it onto another computer and access data. 
5. Store passwords on your PDA and on paper. Just carry them separately! 
6. If hardcopy is required, plan to have it sent a week before the event. Make arrangements with the recipient to contact you when the material has arrived. If revisions are necessary, they can be added after you arrive. Participants will accept two or three pages of revisions but will not be so forgiving if none of the material is available.

Murphy’s Law

It would be nice to disprove Murphy’s Law, “If anything can go wrong, it will”.  You can reduce the chances of Murphy’s Law derailing your presentation by adhering to good planning habits and ensuring that appropriate contingency plans are in place.

  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.

Congratulations Mike!

Keith G. Collins Memorial Award

Keith G. Collins FCIRP, served as the President of CAIRP (then known as the Canadian Insolvency Association), from 1980 – 1981.  He died in 2006 at the age of 71.  Keith was a gentleman and a professional.  He was respected within the profession and the community for his integrity, courtesy and commitment.  Both the Canadian Association of Insolvency and Restructuring Professionals and the Institute of Chartered Accountants recognized his contributions by awarding him fellowships, their highest honour.
Keith was a role model and CAIRP wished to recognize and to remember Keith as an example whom others in the profession, or aspiring to join the profession, should emulate.  To that end, in 2007, CAIRP created the Keith G. Collins Memorial Award.

Criteria:
This award will be presented periodically to members of the Association who have held their CIRP for a minimum of 5 years and are pursuing their careers in insolvency and restructuring. Worthy recipients will have demonstrated they are following in the footsteps of Keith G. Collins.  The award will recognize that they have chosen the right path, and remind us of the qualities that our profession wishes to be associated with the Chartered Insolvency and Restructuring Professional (CIRP) mark.  Worthy candidates must demonstrate the characteristics of integrity, courtesy, professionalism, respect on the part of their peers, respect towards others, unpretentiousness, commitment to the profession, willingness to share knowledge and community service.

The Finance Minister described the Budget as “the next phase of Canada’s economic
action plan” and one that “supports job creation and continues to lay the foundation for sustainable economic growth.” He stated that Canada has been able to “act boldly and effectively” to protect jobs and minimize the impact of the global recession on Canadians. “Canada has posted the strongest employment growth in the G-7 since mid-2009, and more Canadians are working today than before the recession,” he said.
Most commentators characterized the Budget as a pre-election document aimed at
demonstrating the government’s ongoing fiscal prudence and ”stay the course” approach to spending restraint and long-term deficit reduction. It predicted declining deficits from fiscal 2009 – 10 through 2013 – 14, leading to an essentially balanced budget in 2014 – 15 and a budget surplus in 2015 – 16.
The Budget does not propose any new taxes for individuals, and it reflects the
government’s continuing commitment to previously announced corporate tax reductions. Nor does it propose any major new programs of spending initiatives — in fact it proposes a comprehensive review of government program spending aimed at increasing efficiency and effectiveness. It does, however, propose numerous tax and non-tax benefits to both individuals and businesses that could be interpreted as “pre-election goodies.” In addition, the political posturing may obscure the fact that the Budget proposes significant technical changes intended to eliminate tax loopholes.
In a news release, the CICA said it gave the government a “B plus” grade on the Budget. “This Budget charts a course that will help Canada be competitive in attracting investment while establishing a fiscal framework that sets the stage for sustainable recovery and economic growth,” said Bruce Flexman, Chair of the CICA’s Tax Policy Committee.
The CICA welcomed a number of positive business-related proposals in the Budget,
including a two-year extension of the accelerated capital cost allowance rate for
investment in manufacturing or processing machinery or equipment, and the provision of a temporary hiring credit for small businesses. However, Flexman said the Budget did not rate an “A” grade because it failed to address the need to reduce the complexity of Canada’s tax system. “This is another important factor in attracting investment,” Flexman said. “The system must eventually be simplified in order to lessen the burden of compliance and reduce complexity.”
Proposed benefits for individuals under the Budget include an enhancement of the
Guaranteed Income Supplement (GIS) for low-income seniors; a new Family Caregiver Tax Credit; a new Children’s Art Tax Credit; and a one-year extension of the ecoEnergy Retrofit – Homes Program, at an estimated cost of some $870 million over the next two years. Also, doctors and nurses who practice in rural areas will be forgiven substantial student loans, while volunteer firefighters who perform at least 200 hours of service will receive additional tax credits.

Significant proposed spending initiatives include about $100 million over two years for R&D relating to clean energy and energy efficiency; $228 million over three years to repair federal bridges in Montreal; $150 million for an all-seasons road between Inuvik and Tuktoyaktuk; $148 million over five years for various public works infrastructure projects across Canada; $80 million over three years to help small businesses adopt information and communications technologies in collaboration with colleges; and a variety of initiatives and programs related to the environment, clean air and climate change. Forestry, agriculture and the “digital economy” also benefit from new spending proposals, including $100 million over five years to improve food inspection capacity, $60 million over two years to help forestry companies innovate, and $100 million per year to the Canadian Media Fund to create digital content across multiple platforms.
Significant tax-related and other proposals are discussed below.

CORPORATE PARTNERSHIPS

Partnerships with less than six partners were previously not required to file Partnership Information Returns (T5013 Returns). Partnerships that exceed certain asset or revenue and expense thresholds, have one partner that is a corporation, or have a partnership as a partner must now file T5013 Returns. These previously-announced changes increase the visibility of partnerships. The Budget adds another significant change.
Where even one partner of a partnership is an individual, other than a testamentary trust, the partnership’s fiscal year-end must be December 31. This 1995 measure prevents individuals from deferring income earned by the partnership to the subsequent calendar year. A partner corporation that is a professional corporation is also required to have a December 31 year-end. A corporate partnership still had deferral opportunities.

The rules will now apply to each corporate partner that alone, or together with all affiliated (as defined) and related (as defined) persons was entitled to more than 10% of the partnership’s income (or assets in the case of a wind-up) at the end of the last partnership year-end that ended in the corporation’s fiscal period. Such affiliated and related persons do not have to be corporations.

The new rules will apply to corporate fiscal periods that end after Budget Day. To be clear, if a corporation has a March 23, 2011 or later year-end, the new rules will apply.

Where a partnership of corporations is established, it is common to set the year-end of the partnership on a date that is after the year-ends of the corporate partners. For example, if the corporate partners have March 31 year-ends, the partnership would generally be given an April 30 year-end in order to defer 11 months of income. This deferral opportunity will no longer be available. Henceforth, each corporate partner will be required to include stub period income in its current fiscal period rather than in the subsequent period. The following example provides a broad overview of the new rules for the aforementioned corporate partners. The new rules apply to all corporate partners (other than professional corporations) even if other members of the partnership are individuals or professional corporations.

Before the Budget, each corporate partner would have included in its March 31, 2011
income, only its share of the partnership’s April 30, 2010 income. Subject to the
transitional rules described below, the Budget will require an additional income inclusion equal to 11/12ths of that April 30, 2010 income. This approach is referred to as the formulaic approach. This stub period inclusion is then deducted in arriving at the partner’s.

March 31, 2012 income and a new income inclusion equal to 11/12ths of the April 30, 2011 income is added to the March 31, 2012 income.
A corporate partner can elect to include a lesser amount of stub period income if it
estimates that the pro-rated portion of the actual April 30, 2011 income will be lower. There does not appear to be a rule that requires a corporation to use the formulaic or estimated approach consistently from year to year. In all circumstances, the corporation deducts the income inclusion in the following year.
If it is subsequently determined that the formulaic inclusion is greater than the estimated inclusion, the corporation must include an additional income inclusion in its March 31, 2012 fiscal period, which additional inclusion will include an interest component. If the shortfall is greater than 25% of the lesser of the estimated inclusion or the formulaic inclusion, the additional inclusion will include a penalty equal to 50% of the amount that exceeds such 25%.
The requirement to suddenly include 23 months of income in March 31, 2011 can be
burdensome. Therefore, a transitional reserve is available to allow the stub period income to be brought into income over five years. The maximum reserve in the first fiscal period is 100%. The maximum reserves available in subsequent fiscal periods are 85%, 65%, 45%, 25% and 0%.
Partnerships all of the members of which are corporations other than professional
corporations, will be allowed a one-time election to change the partnership year-end if it desired to align the year-end of the partnership with that of one or more of its partners. The transitional relief described above will apply if this election is made.
There are numerous other technical rules to review. These will include provisions that deal with, for example, partnerships that have other partnerships as members, situations involving a first year corporate partner where no partnership year-end falls within the partner’s fiscal period, partnerships with resource expenses, and where more than one partnership year-end falls within one corporate fiscal period.

STOP LOSS RULES

There are stop-loss rules which reduce the capital loss on the redemption of shares by the amount of dividends received. There are circumstances where a corporation can receive a tax-free intercorporate dividend and realize a capital loss on a redemption of shares even though there is no economic loss on the redemption. The Budget limits the situations in which this may apply. The new rules will not apply to private corporations that receive redemption proceeds on other private corporation shares.

ACCELERATED CAPITAL COST ALLOWANCE (CCA)

MANUFACTURING AND PROCESSING (M&P) EQUIPMENT
M&P equipment acquired before 2012 included in Class 29, is eligible for a 50% straightline CCA rate, subject to the half year rule. The Budget has extended Class 29 treatment to eligible M&P equipment acquired before 2014. Eligible M&P equipment acquired after 2013 will be included in Class 43, which is subject to a 30% declining balance CCA rate.

CLEAN ENERGY GENERATION EQUIPMENT

Eligible clean energy generation and conservation equipment, included in Class 43.2, is subject to a 50% declining balance CCA rate. The Budget expands Class 43.2 to include equipment that generates or conserves energy by using a renewable energy source (such as wind or solar), using fuels from waste, or making efficient use of fossil fuels.

QUALIFYING ENVIRONMENTAL TRUSTS (QETs)

Regulators may require an operator of a mine, quarry or waste disposal site to pre-fund, by means of a trust, the costs of reclaiming or restoring a site. This is done by way of a QET. Future reclamation costs relating to pipeline abandonment will now be eligible for QETs.
The Budget will expand the eligible investments for QETs for 2012 and subsequent
taxation years for trusts created after 2011. The Budget will also change the tax rate
applicable to QETs from the top personal rate to the corporate rate generally applicable to the 2012 and subsequent taxation years.

EMPLOYEE PROFIT SHARING PLANS (EPSPs)

The government is undertaking a review of EPSPs and will have consultations to ensure that EPSPs are being used appropriately and the tax rules are also appropriate.

DONATIONS

Over the past number of years, the government has significantly expanded the opportunity for Canadians to make tax-deductible charitable contributions. Along with this enhanced opportunity, there have been a number of issues which the government feels have impacted the “regulatory regime” and “fairness” of the current system. The Budget has proposed a number of changes to deal with these issues.

QUALIFIED DONEES

A qualified donee is a person eligible to issue a tax-deductible receipt and will include registered Canadian amateur athletic associations (the rules for these organizations have been expanded to generally conform with other charitable entities), municipalities and certain municipal public bodies in Canada, housing corporations which exclusively provide low-cost housing for the aged, universities outside Canada, the student bodies of which ordinarily includes students of Canada, and certain charitable organizations outside Canada. Each qualified donee now is required to be included on a publicly available list maintained by the Canada Revenue Agency (CRA).
If a qualified donee does not comply with the following requirements, the CRA may
suspend receipting privileges, revoke qualified donee status or assess monetary penalties:
Official receipts
A receipt must be in accordance with the rules set out in the Income Tax Act and
its regulations.
Books and records
A qualified donee must maintain proper books and records.
Good governance
The Minister of National Revenue may review the status of any director, trustee,
officer or any person who controls or manages the operations of a charity. If any
such individual is determined to have been found guilty of a criminal offence or to
have been involved in other specified inappropriate activities, whether involving
the charity concerned or another organization, the Minister may require the
organization to take remedial action or risk revocation of its registration, including
its authority to issue donation receipts.

RETURNED GIFTS

Where a qualified donee returns a gift with a value greater than $50 to a donor, the donee will be required to issue a revised receipt and the donor’s original tax return will be reassessed accordingly.
Specific provisions will determine other tax consequences depending on whether or not the original “gift” is considered to have been a gift.

GIFTS OF NON-QUALIFYING SECURITIES (NQS)

A taxpayer is not able to claim a charitable donation of a NQS (e.g., shares of or debt
obligations issued by the taxpayer or a person that is not at arm’s length from the taxpayer) unless the donee disposes of the security within five years after the date of the gift. The amount of the donation is deemed to have been made in the year of the disposition, for an amount not exceeding the proceeds realized by the donee.

GRANTING OF OPTIONS TO QUALIFIED DONEES

Prior to the Budget, a qualified donee could issue a receipt equal to the value of an option to acquire property of the donor that the donor granted to the donee. The donee must now acquire the property in order to issue a receipt.

DONATIONS OF PUBLICLY LISTED FLOW-THROUGH SHARES

The current legislation provides that when a taxpayer makes a gift of publicly listed shares, the taxpayer will receive a donation receipt equal to the value of the shares and will not be required to include any resultant capital gain in the computation of income. In the case of a donation of publicly traded flow-through shares, the tax cost of the shares is often reduced to nil by virtue of the flow-through of deductions and credits. Therefore, the resultant capital gain, which is equal to the value of the share, is not taxed under the existing rules. The combination of the flow-through deduction and the elimination of the capital gain significantly reduce the after-tax cost of the donation. The Budget proposes that only the capital gain in excess of the original cost of the flow-through share will be exempt from tax.
The rules will apply to flow through shares issued pursuant to an agreement entered into after Budget Day.
An anti-avoidance rule will apply to the donation of property acquired on a rollover.

CHILDREN’S ARTS TAX CREDIT

For 2011 and subsequent taxation years, a Children’s Arts Tax Credit was introduced to provide a 15% non-refundable credit, based on an amount of up to $500 of eligible expenses per child paid in a year. An eligible expense includes artistic, cultural, recreational or development activities. However, in order to avoid duplication of claims, expenses which are eligible for purposes of the Child Care Expense Deduction, the Children’s Fitness Tax Credit or the Medical Expense Tax Credit will not be eligible for this tax credit. In addition, registration or membership fees will not be eligible to the extent that they are paid for the rental or purchase of equipment for exclusive personal use, or for travel, meals and accommodation.
The credit will be available for the enrolment of a child, who is under 16 years of age at the beginning of the year, in an eligible program. A credit will also be available for a child who is eligible for the Disability Tax Credit and who is under 18 years of age at the beginning of the year. The credit may be claimed on an additional $500 disability supplement amount when a minimum of $100 is paid in eligible expenses.
An eligible program will be either a weekly program lasting a minimum of eight
consecutive weeks or, in the case of children’s camps, a program lasting a minimum of five consecutive days. The full cost of the child’s membership in an organization will be eligible for the credit if more than 50% of the activities offered by the organization include a significant amount of eligible activities. In addition, where the participant in the program can select from various activities, the full cost will eligible for the credit if either more than 50% of the activities offered include a significant amount of eligible activities or more than 50% of the available program time is devoted to eligible activities.
The credit can be claimed by either parent, or can be shared between the parents.

VOLUNTEER FIREFIGHTERS TAX CREDIT

For 2011 and subsequent taxation years, a Volunteer Firefighters Tax Credit was
introduced to provide a 15% non-refundable credit based on a flat amount of $3,000. A volunteer firefighter will qualify for this credit if they perform at least 200 hours of volunteer firefighting services in a taxation year for one or more fire departments. Eligible volunteer firefighting services consist primarily of responding to and being on call for firefighting, attending meetings held by the fire department and participating in required training. However, such eligible services do not include firefighting services provided to the fire department otherwise than as a volunteer.
In order to claim this credit, written certification must be obtained from the chief or
delegated official of the fire department in order to confirm the number of eligible
volunteer firefighting hours. This written certification must be provided to CRA when requested.
A volunteer firefighter who claims this credit will not be eligible for the existing tax
exemption of up to $1,000 for honoraria paid by a government, municipality or public authority in respect of firefighting duties. In addition, such payments must be reported to the CRA as part of the annual reporting of remuneration paid.

FAMILY CAREGIVER TAX CREDIT

For 2012 and subsequent taxation years, a Family Caregiver Tax Credit was introduced to provide a 15% non-refundable credit, based on a flat amount of $2,000. This credit will assist caregivers of dependants with a mental or physical infirmity, including spouses, common-law partners and minor children. Caregivers will be able to claim an enhanced amount for an infirm dependant under one of the existing dependency-related credits. Consequently, this enhancement would apply to one of the following credits: Spousal or Common-Law Partner Credit, Child Tax Credit, Eligible Dependant Credit, Caregiver Credit or Infirm Dependant Credit.
A dependant who is a minor will be considered to be infirm only if he or she is likely to be dependant on others for significantly more assistance when compared generally to persons of the same age for a long a continuous period of indefinite duration. This test will apply to dependants who are under age 18 at the end of the year and who are claimed for purposes of the Child Tax Credit or the Eligible Dependant Credit.

The threshold at which the Infirm Dependant Credit begins to be phased out will be
increased so that the enhanced amount is fully phased out at the same income level as the 2012 enhanced Spousal or Common-Law Partner Credit. The $2,000 Family Caregiver Tax Credit amount will be indexed for 2013 and subsequent taxation years to account for inflation.

MEDICAL EXPENSE TAX CREDIT FOR OTHER DEPENDANTS

Individuals may generally claim a Medical Expense Tax Credit in respect of eligible
expenses paid for themselves , their spouse or common-law partner or their children under age 18. Caregivers may also claim this credit for a dependant relative if the caregiver pays their medical or disability-related expenses. A dependant for this purpose includes a child under age 18 or older, a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew who is dependant on the individual for support.
Currently, the maximum claim by a caregiver for such a dependant is limited to $10,000 for a year. The Budget proposes to remove this $10,000 maximum for 2011 and subsequent taxation years.

CHILD TAX CREDIT ELIGIBILITY

The annual claim for the Child Tax Credit is currently limited to one individual in respect of the same domestic establishment. Consequently, where two or more families share a home, only one individual is entitled to claim the Child Tax Credit. The Budget proposes to eliminate this restriction for 2011 and subsequent taxation years. Consequently, the sharing of a home would no longer restrict otherwise eligible parents from claiming this credit.

TUITION TAX CREDIT — EXAMINATION FEES

For 2011 and subsequent taxation years, amounts eligible for the Tuition Tax Credit will include fees paid to an educational institution, professional association or provincial ministry to take an examination that is required to obtain a professional status or to be licensed or certified in order to practice a profession or trade in Canada. Ancillary fees and charges, such as examination material used during the examination and certain prerequisite study materials, will also be eligible for the credit. However, eligible ancillary fees and charges will not include the cost for travel, parking or equipment. Also, fees in respect of examinations taken in order to begin study in a profession or field, such as a medical college admission test, will not qualify.
The total of tuition and examination fees paid to the institution or association must exceed $100 to be eligible.

EDUCATION TAX MEASURES — STUDY ABROAD

A Tuition Tax Credit is currently available to a Canadian student in full-time attendance at a university outside Canada to the extent that the tuition fees are paid in respect of a course of at least 13 consecutive weeks. The Education Tax Credit and the Textbook Tax Credit are also subject to this rule. In addition, a Canadian student can currently receive educational assistance payments (“EAPs”) from an RESP for enrolment in such a program.
The Budget proposes to reduce the minimum course duration requirement to three
consecutive weeks, from 13 consecutive weeks, for purposes of claiming the Tuition,
Education and Textbook credits. In addition, for EAP purposes, the minimum course duration is proposed to be reduced to three consecutive weeks when the student is enrolled at a university in a full-time course.

RESPs — ASSET SHARING AMONG SIBLINGS

For 2011 and subsequent taxation years, the Budget proposes to allow for transfers
between individual RESPs for siblings, without tax penalties and without triggering the repayment of Canada Education Savings Grants, provided the beneficiary of the plan receiving the transfer of assets had not attained age 21 when the plan was opened. This Budget proposal will provide subscribers of separate individual plans with the same flexibility to allocate assets among siblings as currently exists for subscribers of family plans.

REGISTERED DISABILITY SAVINGS PLANS (RDSPs)

- SHORTENED LIFE EXPECTANCY

The current RDSP tax rules require the repayment of all Canada Disability Savings Grants and Canada Disability Savings Bonds received in the 10 years prior to a withdrawal or termination of the plan. However, subject to specified limits and certain conditions, the Budget proposes to allow RDSP beneficiaries with a life expectancy of five years or less to withdraw more of their RDSP savings by permitting annual withdrawals without triggering the 10 year repayment rule.
In order to utilize this proposal, the holder of the RDSP must elect in prescribed from and submit the election with the medical certification completed by the medical doctor to the RDSP issuer. A plan holder will also be permitted to reverse this election in the future.
This proposal will apply after 2010 to withdrawals made after the enacting legislation receives Royal Assent.

RRSPs — ANTI AVOIDANCE RULES

The Budget proposes to enhance the current RRSP anti-avoidance rules to address
concerns regarding the use of RRSPs in tax planning schemes, including “RRSP strips”, by introducing rules similar to the anti-avoidance rules which currently apply to Tax-Free Savings Accounts (TFSAs). This proposal deals with the advantage rules, the prohibited investment rules and the non-qualified investment rules.

The current RRSP advantage rules will be expanded to apply a tax on the annuitant equal to the fair market value of the advantage, or in the case of a debt, the amount of the debt. The proposed RRSP advantage rules will include benefits derived from transactions which would not have occurred in a regular open market between arm’s length parties. In addition, these advantage rules will apply to payments made to an RRSP on account of or in lieu of payments for services.
A special tax of 50% of the fair market value of a “prohibited investment” will apply to an RRSP annuitant. A prohibited investment, based closely on the TFSA rules, will generally include debt of the RRSP holder and investments in entities in which the RRSP holder, or non-arm’s length person, has a significant interest, which is generally considered to be 10% or more. In addition, income, including capital gains, earned from such prohibited investments will be treated as an advantage and therefore subject to the 100% tax.
A special tax on the annuitant of 50% of the fair market value of a non-qualified
investment will replace the current income inclusion and 1% per month penalty tax. This special tax will apply at the time that a non-qualified investment is acquired by the RRSP or at the time the investment becomes non-qualified. This tax will be refundable to the annuitant if the RRSP disposes of the investment by the end of year following the year in which the tax applied.
The Minister of National Revenue will have the authority to waive or cancel all or part of the tax with respect to all of the above proposed anti-avoidance rules if the Minister considers it just and equitable to do so in the circumstances.
These new anti-avoidance rules will generally apply to transactions occurring, and
investments acquired, after March 22, 2011. Investment income generated after March 22, 2011 on previously acquired investments will be considered to be a transaction occurring after March 22, 2011.

INDIVIDUAL PENSION PLANS (IPPs)

The Budget has proposed two new measures with respect to IPPs. The first proposal will require annual minimum withdrawal amounts, similar to the current rules for RRIFs, once a plan member reaches age 72. In addition, contributions to an IPP which relate to past years of employment will have to be funded first out of a plan member’s existing RRSP assets or by reducing the individual’s accumulated RRSP contribution room before new deductible contributions for past service may be made.
These new measures will apply to a defined benefit Registered Pension Plan with three of fewer members if at least once member is related to an employer which participates under the pension plan. In addition, these new measures may apply to a designated plan, where at least 50% of the total pension adjustments of plan members in a year belong to individuals who are “connected” to the employer or who are highly compensated employees. A designated plan will be subject to these measures if it is reasonable to conclude that the rights of one or more members under the plan exist primarily to avoid this new definition.
The minimum withdrawal rules will apply to the 2012 and subsequent taxation years. For those IPP members who reached age 72 in 2011 or earlier, the required withdrawals will commence in 2012. For those IPP members who reach age 72 after 2011, the required withdrawals will commence in the year they reach age 72.

The Budget proposal with respect to past service contributions will apply to such
contributions made after March 22, 2011, unless the past service was credited to an IPP member before March 22, 2011 under the terms of an IPP submitted for registration on or before March 22, 2011.

“KIDDIE TAX” ON CAPITAL GAINS

The tax on split income (the “kiddie tax”) applies to certain income received by a minor child with a parent resident in Canada. Split income currently includes taxable dividends received in respect of unlisted shares of Canadian and foreign corporations and partnership or trust income derived from providing property or services to a business carried on by a person related to the minor child. However, split income does not currently apply to capital gains realized by the minor child.

The Budget has proposed a measure to extend the kiddie tax to capital gains realized as a result of income-splitting techniques which have been developed to avoid such tax. One such income-splitting plan generally works as follows:

• A family trust, with a minor child as an income beneficiary, subscribes for common shares in the parent’s corporation (Parentco).

• Parentco pays a stock dividend on these common shares to the trust. The stock dividend consists of preference shares with a high fair market value, but low paid-up capital (PUC) and adjusted cost base. The taxable amount of this dividend is equal to the low PUC of the preference shares.

• The trust sells the preference shares to the parent at fair market value and realizes a capital gain. This capital gain is paid to the minor child. Consequently, the trust has no net income for tax purposes and the minor child is taxed on the capital gain. In addition, the child may potentially be able to utilize their capital gains exemption with respect to this capital gain.

• The parent sells the preference shares of Parentco to his or her holding company for a promissory note. Consequently, the parent is able to access corporate funds on a taxfree basis in order to pay for the preference share purchase.

As a result of the kiddie tax not currently applying to capital gains, the minor child is
subject to tax on the capital gain at his or her marginal tax rate rather than the maximum personal rate. The Budget proposes to extend the kiddie tax to capital gains realized by a minor from a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on the shares would have been subject to the kiddie tax. Such capital gains will be treated as dividends, included in the minor’s split income and subject to the kiddie tax. In addition, because the gains are treated as dividends, they will not qualify for the capital gains exemption. This proposal will apply to capital gains realized after March 22, 2011.

MINERAL EXPLORATION TAX CREDIT

Flow-through shares allow companies to renounce or “flow through” tax expenses
associated with their Canadian exploration activities to investors, who can deduct the expenses. The Mineral Exploration Tax Credit provides an additional incentive to individuals who invest in flow-through shares. The credit is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. This credit was scheduled to expire at the end of 2011.

The Budget proposes to extend this credit to flow-through share agreements entered into on or before March 31, 2012. Under the existing “look-back” rule, funds raised with the credit in the first three months of 2012 can be spent on eligible exploration until the end of 2013.

CANADA CHILD TAX BENEFIT (CCTB)

The CCTB is a non-taxable amount paid monthly to assist eligible families with the cost of raising children under age 18. Under the existing rules, an individual is not required to notify the Minister of National Revenue of a change in marital status. The Budget proposes to require an individual who receives the CCTB to notify the Minister of National Revenue of a change in marital status before the end of the month following the month in which the change in status occurs. Any applicable revised entitlement will be effective in the first month following the month of the change of status.
This measure will apply to marital status changes which occur after June, 2011.

ADVANCE PAYMENT AMOUNTS

Amounts can currently be issued as advance payments once per year to an individual in lieu of monthly payments for the purposes of the CCTB, and in lieu of quarterly payments for the purposes of the GST/HST credit. These advance payments are made when each monthly CCTB amount is expected to be less than $10 and when each quarterly GST/HST credit entitlement is expected to be less than $25.
The Budget proposes to increase the advance payment threshold for the CCTB to $20 per month and for the GST/HST credit to $50 per quarter in order to enhance administrative efficiency.

CHILDREN’S SPECIAL ALLOWANCES ACT

The Budget proposes to amend the Children’s Special Allowances Act and its regulations to provide for the payment of a special allowance to a child protection agency in respect of a child who is a former Crown ward when the child is placed in the custody of a legal guardian, tutor or similar individual and the agency provides financial assistance for the maintenance of that child. This measure will apply to special allowances payable for months after December, 2011.

CUSTOMS TARIFF MEASURES

SIMPLIFICATION FOR BUSINESS

In this Budget the government is continuing its efforts to facilitate trade by business
through further simplification of the Customs Tariff.

These improvements will include:

• Reduction of administrative burden by business particularly as it relates to
• classification of imported goods
• Restructure the customs tariff to make tariff treatments applicable to imports more
• transparent
• Updates to the Customs Tariff to remove expired or redundant provisions.

LOW VALUE IMPORTS

Imports of $500 or less arriving by post or courier will now be subject to the generic Most-Favoured-Nation tariff rates currently used for goods imported by travellers. Tariff rates of 0%, 8% or 20% will apply depending on the description of the good being imported. This measure is expected to have a minimal impact on tariff revenues but will increase the Canada Border Service Agency’s efficiency when dealing with such imports.

EXPANDING AND FACILITATING TRADE

The government is continuing its ambitious free trade agenda to provide new and diverse opportunities to Canadian companies. At the present time Canada has in place free trade agreements with eight countries. Negotiations are currently underway involving trade opportunities with 50 other countries including India and the European Union.

EXCISE TAX ACT MEASURES

This Budget introduces the measures to provide for GST/HST relief on the purchase of poppies and wreaths by Royal Canadian Legion branches and their Dominion or
Provincial Command. The tax will be recovered by way of rebate and will apply to
purchases after 2009.