How Safe are your Savings?

In Canada, we have a wide variety of alternatives for accumulating money for retirement from personal savings accounts or Guaranteed Investment Certificates to thousands of stocks, mutual funds and other more sophisticated investments. With the recent uncertainties in the business world, most of us are wondering about the long term security of our retirement funds.

Since 1967, Canada Deposit Insurance Corporation (CDIC)-a federal Crown Corporation, has covered any losses experienced by depositors’ with its member financial institutions.  Insurance premiums are paid by these companies to provide this security to their customers. For a complete list of CDIC members, visit their website (www.cdic.ca).

What is covered?  $1 to $100,000 of eligible deposits payable in Canada,  in Canadian dollars

• Savings and chequing accounts
• GICs and other term deposits with terms of 5 years or less
• Money orders, certified cheques, travellers’ cheques/bank drafts issued by CDIC institutions
• Accounts that hold realty taxes on mortgaged properties
• Debentures issued by CDIC members

What is not covered?  Stocks, stock options and mutual funds

• 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 a maturity of more than five years

Critical Fact  This limitation is $100,000 per financial institution however protection is held separately for more than one category of account

CDIC insures eligible deposits up to the $100,000 held separately for each of the following ; savings held in one name, in joint deposits or in trust,  in RRSP, in RRIFs, in TFSAs and money held for paying realty taxes on mortgaged properties.

It is important to 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 financial institutions? Speak with your advisors to determine what accounts are covered and the extent of your coverage within that financial institution.

Marie Northey, CA

Partner (Campbellford Office)

RRSP vs. TFSA

The one fundamental that all investment advisors can agree on is for you to save your money.  The grey area starts when deciding on which saving vehicles to use: your tax free savings account (“TFSA”) or retirement savings plan (‘RRSP”).

The key differences between your TFSA and RRSP are as follows:

• TFSA contributions are not tax deductible;
• Withdrawals from your TFSA are not taxable, including income/gains earned on the investment;
• The maximum annual contribution to your TFSA is $5,000 whereas your RRSP limit is 18% of your earned income up $22,970 for 2012;
• TFSA does not have a maturity date whereby you have to start withdrawing; and
• TFSA withdrawals can be re-contributed in the following calendar year.

Some of key considerations when deciding between your TFSA and RRSP are as follows:

• Your current vs. future marginal tax rate – If you are currently in a lower tax bracket you are not getting the full tax benefit of a RRSP in the year meaning it may make sense to contribute some of your money to a TFSA.  As your income level rises and tax savings become more a priority, a RRSP may be the answer.
• Receiving benefits – Certain benefits are calculated based on your level of income (e.g. Old age security, child tax benefits etc.).  RRSP withdrawals are included in this income calculation whereas TFSA withdrawals are not.
• Investment plan – If you are saving for the short-tem, a TFSA offers more flexibility in terms of withdrawing funds.

If you are now officially confused, you are in the majority.  Let Welch LLP help advise you on the savings strategy that best suits you.

- Mathew Irwin, CA
Partner
Welch LLP 

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