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 

Changes to SR&ED Tax Credit in 2012 Federal Budget – Are they impactful and meaningful?

The Scientific Research and Experimental Development (SR&ED) program was one of the long-anticipated and highly debated areas expected to be addressed in the 2012 Federal budget. Politically, the government needed to show they were listening to their taxpayers over a number of recent years given the amount of consultations, the amount of press and discussion about the SR&ED program and, certainly, Innovation Canada: A Call to Action (also known as the Jenkins Report).

The biggest change introduced relates to the tax credit rate available to SR&ED claimants who are not Canadian Controlled Private Corporations (CCPC’s). The tax credit rate for non-CCPC’s will decrease from 20% to 15%. This is a significant reduction. The government’s view is that the reduction of the corporate income tax rate since 2007 along with the corporate tax restructuring of non-CCPC’s has resulted in growing pools of unused tax credits; these corporations are not generating enough taxable income in Canada to make use of all the SR&ED investment tax credits that they are generating. Therefore, the government reasons that they can reduce the rate from 20% to 15% without much impact. While this may be true in many cases, there are definitely large taxpayers in Canada who will be significantly impacted by this reduction.  Only time will tell how this change will impact the amount of R&D performed in Canada by multi-national corporations or even medium-sized corporations who do not qualify for the CCPC enhanced rate.

The other changes proposed are categorized as follows:

1. Simplifying the tax credit base
2. Increasing the cost effectiveness of the program
3. Enhancing Predictability

I further discuss these points in an article that can be found here.

- Terry Lavineway
Director of Business Incentives
Welch LLP 

Research and Development Tax Credits – Not just for IT companies

When I first started in my position as R&D Tax Manager I was often surprised at the number of companies who did not know they qualified for Scientific Research and Experimental Development Tax Credits (SR&ED).  Now, I have come of the opinion that there are three reasons for this: lack of knowledge, lack of information and fear.

Lack of Knowledge

The first, lack of knowledge, results from the fact business owners/managers are often too occupied running the business to spend time gathering additional information that may or may not apply to them. To compensate for this lack of time, companies often look to their service providers for assistance.

The problem with this is that an accountant will not know if a company is performing SR&ED unless they have detailed knowledge of the companies operations. For example, unless the owner/manager has informed the accountant that the company has been making adjustments to its manufacturing line in an effort to increase efficiency, the accountant will not know.

Lack of Information

The second, lack of information, is a result of the poor marketing strategies and material produced by the government in the past. I give the CRA credit for their recent news releases and ad campaigns aimed at increasing public knowledge of the SR&ED program as well as some of their new manuals that are somewhat easier to read and understand.

Unfortunately, the majority of the material available is too technical for most people, and it’s not the easiest to find if you don’t know where to look. If you are interested, a good place to start is the SR&ED portion of the CRA website.

Fear

Now we come to the third reason, fear. Anybody who has dealt with SR&ED claims for any length of time will tell you that there is a high probability that you will get audited on the initial claim and after this you can look forward to an audit about every 5 years or so, depending on how well the first audit went.

This creates a lot of fear as most owners don’t want the government coming in and looking through their books in detail.  The truth about these audits is that if you have qualifying SR&ED there is nothing to fear; the auditor will come to your business or simply discuss issues over the phone to determine if you are, in fact, doing what you say you are doing.

Once they have determined that you are performing qualified SR&ED they will most likely pass your file onto a financial reviewer who may give you a call if they are curious about calculations or expenses claimed in the SR&ED portion of your return.  At the end, if you have filed appropriately you will have no adjustments to your claim and will realize that there was nothing to fear at all.

I said at the beginning that SR&ED is not just for IT companies anymore.  The following is a list of the types of companies who have had successful SR&ED claims in the past:

• Wine manufacturer
• Bathtub manufacturer
• Brewery
• Commercial fan manufacturer
• Sand and gravel companies
• Environmental solutions
• Trailer manufacturer
• Tortilla chip producer
• Race seat designer
• Plastic food container manufacturer

I hope now you will go do a little research or contact us to see if you qualify for this lucrative tax credit.

- Josh Smith, CA
SR&ED Manager
Welch LLP

 

Thinking about becoming a Non-Resident of Canada? The process is complex

I got a call from a contact one day who he told me that he had become non-resident of Canada. He had been told at a party that becoming non-resident was very fashionable and beneficial from a tax perspective.

He owned a home outside of Canada and annually spent a fair amount of time out of the country. He completed the Canada Revenue Agency’s form NR73 to request a residency determination. The form gathers detailed information about an individual’s connections and ties to Canada. Based on a review of the information, the CRA provides an opinion as to whether or not, based on the information disclosed, the person has become non-resident.

Based on the individual’s fact pattern the CRA confirmed that he had become non-resident of Canada. The individual was quite pleased on the basis that he would no longer be subject to Canadian tax. However, the individual did not fully understand the implications of becoming non-resident of Canada.

At the point in time when an individual becomes non-resident, subject to some exceptions, he or she is deemed to have disposed of all property owned at fair market value. This may lead to gains which are subject to tax. This was an unpleasant surprise to my contact.

Further, the individual was the shareholder of a corporation which ceased to be a Canadian-controlled private corporation. This had an impact of the corporation’s tax rate and access to R&D tax credits.

Word to the wise — becoming non-resident is a complex process. You should proactively get advice in the event that you are contemplating becoming non-resident.

- Jim McConnery, CA, TEP
Partner, Welch LLP

Incorporating Business Income Can Save You Money.

Ongoing reductions to corporate rate rates applicable to business income are creating an incentive for self-employed workers to incorporate. The combined federal and Ontario small business rate applicable to business income in 2010 is 16%. Therefore, a corporation that earns $100,000 of business income will pay corporate tax of $16,000. If this same income was earned by an individual in Ontario, the level of tax would be approximately $28,000.

It is important to note that the after-tax corporate income – $84,000 in the example above – is not available for personal use. The corporate dollars may be extracted as a dividend, however personal tax would apply in connection with the dividend.

A key opportunity arises if the corporate dollars can be retained in the corporation – personal tax may be deferred for many years. The corporate dollars may be used to save for retirement or to invest in business activities. To the extent that you have life insurance needs, a corporation may provide for a more effective means of funding premiums.

Finally, many of our clients will include family members as shareholders of their corporation. Dividends may be paid to family members in lower tax brackets to benefitting from income splitting opportunities.

- Jim McConnery, CA, TEP
Partner, Welch LLP

Potential CRA Trouble for Incorporated Independent Contractors

There has been an interesting development regarding incorporated independent contractors and the impact of the personal services business (PSB) rules.

In very general terms, a PSB arises where a corporation’s business is the provision of services, and the owner of the business could be considered an employee of the client receiving the services if it weren’t for the corporation being used to provide those services.

If your business is labeled as a PSB, your corporation will no longer benefit from small business tax rates and many expense deductions, meaning your company will pay more in income tax.

Since 2009, when the CRA began looking more closely at the PSB issue, incorporated independent consultants (especially in the tech sector and those who find clients through placement agencies) who are audited by the CRA are often ruled to be PSBs.

Because this can have massive consequences to your cash flow, if you are an incorporated independent consultant and think the CRA could rule that your company carries on a PSB, we recommend you get the Welch Tax Group involved as soon as you are contacted by the CRA.

We can assist you in filling out the CRA’s questionnaire and be present in the discussions that will follow. With our help, you can resolve the issue at the audit level instead of being forced to file an appeal with the CRA.

A parliamentary standing committee has determined that the the CRA’s current application of PSB tax rules can penalize incorporated independent contractors unfairly, and recommends that the government make appropriate changes to the rules to reflect the realities of the modern labour market..

We hope the government will follow these recommendations, but in the mean time we will work hard to make sure you get what is fair as an incorporated independent contractor.

You probably wouldn’t meet a prosecutor without your lawyer present, so don’t get involved with the CRA without your accountant there for support.

Don Scott, FCA
Director of Taxation
Welch LLP