Dalton McGuinty and the 2% Surtax

So, under pressure from the NDP, Dalton McGuinty has added a 2% surtax to taxpayers that have income in excess of $500k…but is it really a 2% increase?

No, it’s not.

There is already in place a 56% surtax on high rate Ontario tax. By increasing the standard top rate from 11.16% to 13.16% (the publicized 2% increase) the net effect is actually to increase the  rate by 3.12% (2% x 1.56). Combined with the top federal rate of 29%, it now means that the highest personal tax rate in Ontario will come very close to 50%! The last time we saw tax rates that high, Bob Rae was the premier – and we know what happened to the economy when he was in charge.

This is not good tax policy when the government should be creating jobs not punishing the successful entrepreneurs.

- Don Scott, FCA
Director of Tax Services
Welch LLP

Other business-related incentive tidbits in the federal budget outside of the SR&ED changes

While the federal budget of last week contained widely anticipated changes to the Scientific Research and Experimental Development (SR&ED) tax credit, it also contained many other aspects of funding and incentives to encourage innovation and commercialization:

• $400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.
• $110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program.
• Western Innovation Program
• $ 14 million over two years to double the Industrial Research and Development Internship (IRDI) program.
• $12 million per year to make the Business-Led Networks of Centres of Excellence program permanent.
• $500 million over five years, starting in 2014–15, to the Canada Foundation for Innovation to support advanced research infrastructure.
• $105 million over two years to support forestry innovation and market development.
• $95 million over three years, starting in 2013–14, and $40 million per year thereafter to make the Canadian Innovation Commercialization Program permanent and to add a military procurement component.

To read Terry’s full article about these changes, please click here.

- Terry Lavineway
Director of Business Incentives
Welch LLP 

Ontario 2012 Budget – Perspectives on Business Incentives

The Ontario 2012 budget was released March 27, 2012. The general theme of the budget is getting efficiency out of the prior investments and government spending and cultivating the growth presumably inspired by previous stimulus budgets. This focus on efficiency carries through to existing programs and business-specific incentives, specifically with regards to research and development incentives and Apprenticeship Training Tax Credits (ATTC). Aside from these two areas, the budget was quiet with regards to specific tax credits and discretionary funding programs for businesses.

The budget references the federal activity regarding the effectiveness of encouraging innovation and R&D in Canada, specifically the Scientific Research and Experimental Development (SR&ED) tax credit program. The Ontario budget indicates that Ontario agrees there are inefficiencies when it comes to the effectiveness of R&D tax credits and cites better efficiency required for provincial-federal collaboration with respect to R&D incentives.

Ontario is not proposing any changes at this time to the provincial R&D tax credits (Ontario Innovation Tax Credit, Ontario Research and Development Tax Credit or Ontario Business Research Institute). Certainly there is recognition that any changes introduced by the federal government to the SR&ED program will directly impact businesses Ontario. And Ontario will need to adjust and respond accordingly.

To read the full article, please click here.

Further insights on the broader Ontario budget can be found at www.welchllp.com.

- Terry Lavineway
Director of Business Incentives
Welch LLP 

Very Few Tax Measures in the Ontario Budget

Finance Minister Dwight Duncan yesterday delivered Ontario’s 2012 Budget. The Budget is projecting a deficit of $15.3 billion in 2011-12, $1 billion lower than projected a year ago, and decreasing to $15.2 billion in 2012-13. The 2010 Budget put forward a plan to cut the deficit in half within five years and to eliminate it in eight years. The government remains on track to meet the fiscal targets outlined in the 2010 Budget beyond 2012-13. This includes steadily declining deficits and a return to a balanced budget by 2017-18.

There are very few tax related measures included in the Budget. There were no changes to personal tax rates or tax credits. However, there was a significant change with respect to corporate tax rates. The “big business” general corporate income tax rate is currently 11.5 per cent. It was to be reduced to 11 per cent July 1, 2012 and to 10 per cent July 1, 2013. The Budget proposes to temporarily freeze the rate at 11.5 per cent until such time as the budget is balanced. There was no change to the “small business” corporate tax rate which remains at 4.5%.

I question the wisdom of the provincial government’s move to postpone the previously promised corporate tax rate reductions. Businesses have relied on the benefit of the tax rate reductions in their planning for the next few years. As such, the rate freeze can really be seen as a rate increase; the tax expense for a business will be higher than what was projected by that business. In what should be a primary goal of the government – to stimulate the economy and get the unemployed back to work – does it really make sense to increase the cost of doing business in Ontario?

For a more detailed review of the Ontario 2012 Budget, click on the link on our website: http://www.welchllp.com/publications/news/Provincial_Budget_March_27__2012.pdf

- Don Scott, FCA
Director of Tax Services
Welch LLP 

Welch LLP’s new downtown Toronto office

I recently read an article that quoted a PWC Survey (Cities of Opportunity) wherein they found Toronto to be the second best city in the world for economic opportunities, second only to New York City. I was very excited to read this as we’re launching our Toronto office July 2011.

I was particularly interested to see the high ranking in the areas of “positive entrepreneurial environment” and the “ease of starting a business”. This represents two major focus areas of our practice: providing the expertise required of today’s established entrepreneurs, as well as the budding entrepreneur.  

We are very aware of the first class professional advisors already in Toronto. However, we are confident that we can make an impact on the SME market with our full range of client services.

We look forward to hooking up with all our associates, clients and friends in the Toronto area and working with them to help integrate our new office into the Toronto scene.

-  Micheal Burch, CA, CFP
Managing Partner
Welch LLP

Give your life insurance, not your life, to your work

While the decision as to the best way of owning a life insurance policy will depend on the specifics of each situation, it is generally accepted that there may be certain advantages to a corporate-owned life insurance policy, such as tax-efficiency in funding annual premiums and as an opportunity to reduce tax upon one’s death.  However, if you own your own insurance policy, transferring the policy to your corporation may provide additional advantages.

$200,000, Tax Free 

Consider the example of Bob, a 55 year old individual who owns a corporation, but personally owns a Term 100 life insurance policy with a death benefit of $1 million.  Assume that based on Bob’s age, health, life expectancy and specific terms of the policy, the fair market value of the life insurance policy is $200,000.  However, being a Term 100 policy, it is likely that the policy has a cash surrender value of nil.

Bob may transfer the life insurance policy to his corporation for proceeds of $200,000 (i.e., its fair market value).  The corporation may pay this amount in cash or may issue a note payable for that amount.  However, for tax purposes, Bob will be deemed to have sold the policy for proceeds equal to the policy’s cash surrender value of nil.  As a result, there will be no taxable income resulting to Bob from this transfer, but he will be able to withdraw $200,000 from his corporation on a tax-free basis.

Prior to undertaking this type of planning, it is important to consider the type of life insurance policy involved, the specific terms of the policy and which corporation the policy should be transferred to.  It is also important that the fair market value of the policy is supported by an actuarial valuation.  Lastly, the beneficiary of the policy should be changed to the corporation after the transfer.

- Zoran Vranjkovic, CA
Manager, Ottawa Tax Group
Welch LLP

Changes on the Horizon of Not-for-Profit Tax Landscape

Non-profit organizations, or NPOs, are always jumping through hoops to satisfy donors, clients, and the Government of Canada – and it looks like that isn’t going to change any time soon. NPOs will have three new things to consider while wrapping up their 2010 finances this fall.

• HST and Place of Supply

By now, your organization has had some time to get used to the HST in B.C. and Ontario, but if you haven’t placed or received any orders from out of province, you may not be familiar with the new place of supply rules. While before tax was placed based on where the contract was negotiated (usually the location of the NPO’s head office), with the new rules the place of supply is considered to be the billing address of the member.
If you do business mostly in one province, not much will change, but you’re working across Canada, you have to be careful to charge the correct tax, and be prepared for taxed to vary.

• Incorporation

If your NPO is currently incorporated under the Canada Corporations Act, draft legislation may mean you will have apply for corporate status under the proposed Canada Not-for-Profit Corporations Act. If this legislation comes into play, it may mean your financial statements will have to be audited, even if that is not a requirement currently.

• New Accounting Standards

New standards have been proposed for NPOs, and if they are adopted they will apply to all fiscal years beginning on or after Jan. 1, 2012. These standards will require private sector NPOs to adopt IFRS or new NPO standards, while government controlled NPOs will be forced to adopt public sector standards.

Working for NPOs means there is never a slow moment, so it might be a good idea to speak with your accountant, who can get you up to speed on these issues quickly. If you’re currently in the market for an accountant, contact one of the professionals at Welch LLP to set up an appointment.

Five things you should know about Ontario’s HST

As Ontarians, we celebrated Canada Day by paying more for things like Internet Services and Hotel rooms thanks to the new HST. For the past couple of months, we’ve grumbled about having to pay more for vitamins and celebrated when we saved on tickets to a hockey game, but mostly, there has been a lot head scratching as people try to figure out what the HST really means for Ontario.

Here are five things everyone should know about Ontario’s HST:

• Ontario is not the first province to harmonize their provincial tax with GST

New Brunswick, Nova Scotia and Newfoundland all have their own variations of the HST, and Quebec did something similar by turning their sales tax into a value-added tax like the HST.

• HST turns our provincial sales tax into a value-added tax, which can save businesses (and consumers) money

The 8% ORST, or PST (provincial sales tax), was a tax businesses could not recover even when they paid PST on business equipment like computers and infrastructure. With HST, businesses can recover the entire 13% of tax paid, instead of the 5% GST they recovered before. The thought is that if businesses are saving money, so will the consumer.

• Small businesses will no longer be compensated for collect PST

Small businesses who were registered vendors used to receive $1,500 annually as compensation for collecting PST. These payments will stop, but businesses with revenues less than $2 million will get a onetime payment of $1000.

• HST affects more consumer goods than did PST

Though the HST could mean lower prices (because it’s a value-added tax), many things that were once taxed at 5% will now be taxed at 13%. For example, before July 1^st gym memberships were taxed at 5%, but the HST means taxes rise to 13%. It will save you money on some things – tax on movie tickets dropped from 15% to 13% – but in general consumers will be taxed more.

• The HST isn’t all bad

No one wants to pay more, and we all tend to grumble when we’re paying more in tax, but many people argue the HST will drive business to Canada and is a sign of our maturing tax system. Don’t believe me? Check out this article!

You could spend hours trying to figure out what the HST means for your household budget, but at least now you’re grounded in some of the basics.

For more info, check out this in depth article on the HST