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

2012 Federal Budget Review

Finance Minister Jim Flaherty yesterday presented the federal government’s 2012 Budget. 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.

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.

Overall, Budget-related headlines are likely to focus on the proposed Old Age Security eligibility changes (raising the age limit from 65 to 67 starting in 2023), downsizing of t­he federal civil service, 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 penny. Calling the penny a ”currency without currency,” the Finance Minister noted that the present cost of producing a penny is approximately 1.6 cents. Of course, I have to ask – a penny for your thoughts…..?

- Don Scott, FCA
Director of Tax Services
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 

Split your Income – Save Tax!

Prescribed rate loans are a great tool for family income splitting. By virtue of our graduated tax rates, a family group will save tax if income is shifted from a high rate taxpayer to one or more family members that are in lower tax brackets. For example, a parent in Ontario that is in the top tax bracket and earns $10,000 of interest income will pay approximately $4,600 of tax on the income. If the income was instead earned by a child, without other income, he or she would pay no tax on the income. If the child had $20,000 of other income, then the $10,000 of interest income would attract approximately $2,300 of tax. The annual tax savings via the strategy will depend on the income shifted and the relative tax rates to the parent and child.

So far so good, except that if the parent gifts or loans the underlying investment funds to a child or spouse, then the income earned on the funds will attribute back to the parent. For this reason we must have a plan to avoid the application of the attribution rules. A prescribed rate loan is such a plan – attribution does not apply if the funds are loaned and interest is paid at a rate equal to or greater than the prescribed rate. The good news is that the current prescribed rate is 1%. Further good news is that the 1% will continue to apply in the future even if the prescribed rate increases in future periods.

Welch LLP assists clients in implementing prescribed rate loan arrangements. In many circumstances we use family trusts as part of the plan which leads to added flexibility. The link directs you to an article that provides more insight.

http://www.welchllp.com/publications/1f6f403e7423afbcc4f67a72611954be/Income_Splitting.pdf

- Jim McConnery, CA, TEP
Partner, Welch LLP

2012 Predictions

With 2011 in the “books”, what can we expect in 2012? Hopefully some stability will return to the economy, but, I would not count on it. With my financial bias in mind here are a few predictions:

1. Access to capital, particularly early stage companies that present the most risk and biggest opportunity, will continue to be a challenge. However, 2012 will be a transition year where new sources of capital will emerge and renewed interest in investing. 2013 and 2014 are the years where we will see funding flowing.
2. M&A activity will be steady or increase as companies with strong balance sheets struggling to grow revenue capitalize on the challenges mid market companies have to compete in the global economy. The acquisitions of mid market companies will provide liquidity to investors that will fuel the flow of funds beyond 2012.
3. Government rationalization of spending will put pressure on government incentives resulting in changes in 2012 that will impact 2013 and beyond. Lobby now for those incentives you believe should continue.
4. US accounting standard setters will agree to not adopt International Financial Reporting Standards and continue to maintain their own set of accounting standards.
5. The Canadian accounting professions will merge into one Canadian accredited accounting designation.

Pricing pressures will continue in 2012 as companies focus on protecting their bottom lines. To compete effectively, goods and services will need to be priced competitively and offer tangible benefits.

- Bryan Haralovich, CA, CPA (Illinois)
Assurance Partner
Welch LLP 

Joint Ventures/Co-Tenancies – Impact of New Partnership Accrual Rules

As you are all aware, corporate partners of a partnership with a different fiscal reporting period than that of the partnership are now required to report income allocations from the partnership by way of a form of accrual basis. This has caused CRA to review a long standing administrative policy related to how income is reported by a member/co-tenant of a joint venture/co-tenancy. This administrative policy has allowed joint ventures/co-tenancies to report on the assumption that it has its own fiscal period (which is, technically, incorrect since a joint venture or co-tenancy is not a separate legal entity). If the administrative policy was to continue, the issue was whether or not the new partnership accrual rules would apply to joint ventures/co-tenancies.

CRA has now issued a technical interpretation on this issue applicable for the first fiscal reporting period of the particular member/co-tenant of a joint venture/co-tenancy that ends after March 22, 2011.

In summary, it appears that CRA is cancelling the administrative policy and it will now be required that all members/co-tenants of a joint venture/co-tenancy will be required to report their share of the revenue/expenses/income of the joint venture/co-tenancy based upon their own fiscal reporting period. There is relief (similar to the new partnership rules) only with respect to claiming a reserve and bringing in 2011 extra income over the next five years. This will apply both to corporate and individual members/co-tenants of a joint venture/co-tenancy. This will obviously require accounting/production of financial information for each reporting period for each member/co-tenant of each joint venture/co-tenancy.

- Don Scott, CA
Tax Partner
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

Sens record icy due to lack of leadership

The present state of the Ottawa Senators provides a good opportunity to compare leadership and management. Like many other Ottawa  residents, I am a keen observer of our professional hockey team. I have no inside knowledge of the workings of the team or the current relationship amongst management and leadership. However, I do note that it is a common theme, amongst commentators, that there appears to be a lack of leadership.  I suspect they are referring to “on ice” leadership, however, I think they need to look a little further up the chain of command.

The team is at a point in time where leadership may be more critical than management.  What is the leadership group’s plan to get this franchise back to a state of long term health and success (assuming success is judged by the performance on the ice)?  Who is the leadership group that is responsible for this task?

I am certain this is all being addressed right now at the highest levels and should result in a plan for the next three to five years. Now is the time for leadership to set a road map for success and let the stake holders know what the route is. Trusted leadership is necessary to instil confidence in the organization and its management team.

From a management perspective, I think the assets of this team have been mismanaged over the last few years resulting in the current lack of talent. To a certain extent this is a natural process and you cannot plan to always be at the top of the standings though there are teams who seem to be capable of sustaining a high level of competitiveness year in and year out).

The management team needs to be supplied with the road map and assume the responsibility to fulfill the goals of leadership.  As the plan produces positive results leadership may take a back seat to management once again. At that time the role of management may become more critical.

-  Micheal Burch, CA, CFP
Managing Partner
Welch LLP

How Much “Leader” Do We Really Need?

I wonder if we are misjudging the importance of leadership in the performance of everyday tasks.

“Leadership” seems to be all the rage these days  - everyone is talking about “building future leaders.” Who the heck are all these future leaders going to lead? I am, rightly or wrongly, coming to the conclusion that this leadership thing is currently over hyped .

There is no question in my mind that people want to be a part of something that is greater

than what they can create on their own. With this in mind it may be important for one person to emerge as a decision maker/take charge individual who can motivate the entire group and provide a sense of direction. However, in the grand scheme of our everyday work lives this motivating factor is not generally required. In fact if it is, we may need to reconsider the quality of the work force we are employing.

Having said that, management, on the other hand, is the skill required to control the process and ensure we are all pulling in the right direction. Management provides the frame work in which our individual tasks combine to create the expected results. Management provides the data necessary to evaluate the processes and keep us on course. Management is the ongoing monitoring and tinkering that is required at all times.

As noted in my previous comment there will be times when leadership is required in an organization/group. This leadership can be provided by one or more people at different levels in the enterprise. At certain critical times this leadership absolutely must come from someone with both the authority and the skills to make a difference and motivate the entire organization.  When this happens, hopefully, this individual will be at the top of the chain of command.

– Micheal Burch, CA, CFP
Manager Parter
Welch LLP

Leadership vs Management – it’s all about direction

I have been following a string of discussions on a Leadership Group on Linked In (“Leadership Think Tank”). Much to my benefit someone has posed the question “What is the difference between Management and Leadership?” What I have been able to glean from this forum is:  If people are not following you, then you are managing. If people are successfully completing their day to day tasks and simply look to you to assist in the performance of these tasks, then you are managing. If, on the other hand, people are looking to you to provide motivation and direction, then you are probably leading.

When people need to get somewhere specifically or figuratively and they are uncertain of the path they will look to a leader. The leader will be the one they most believe will get them to where they need to go.

You can successfully manage without leading, especially in good times. However, the time may arise when, as a group, a new direction is required. It often takes a leader to step up in this situation and lead the way.

I will continue to follow this discussion. I also welcome your thoughts.

- Micheal Burch, CA, CFP
Managing Partner, Welch LLP