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 

Are you an Employee or an Independent Contractor?

The determination as to whether a person is an employee or an independent contractor can be a difficult exercise and a source of uncertainty. The use of contractor / consultants within the IT professional services industry is commonplace.  Ensuring “onside” tax compliance is important as taxpayers have frequently been engaged in disputes with Canada Revenue Agency (CRA) as to the proper nature of a relationship.

The issue of whether an individual would be an employee or independent contractor is a question of fact. There is a “four-in-one” test which has generally been replicated by CRA in their policies. The four factors used in the test are:

• Control – how much control does the taxpayer have over their work?
• Chance of profit / risk of Loss – does the taxpayer have an ability to increase income and is there a risk that the taxpayer could have financial loss?
• Ownership of tools – does the taxpayer provide the tools to complete the contracts?
• Integration – is the taxpayer integrated into the payer corporation?

Based on the “four-in-one” test, the following checklist can assist you in determining if a person is an employee or independent contractor.

1)  Do you, as opposed to the payer, control when, where, and how you do your work? (Consider who determines the hours and place of work, whether the work performed was inspected and / or supervised, whether you report to someone, and whether you fill out a timesheet.)

2)  Are you able to work for other companies without the prior consent of the payer? If yes, do you provide similar services to other companies?

3)  Do you have the power to hire substitutes and assistants to perform the services you provide, without the payer’s knowledge or approval? Are you responsible for their remuneration?

4)  Are you responsible for any losses, expenses, or damages resulting from your activities?

5)  Have you worked for the company for a short period of time? Is there a foreseeable end to the project on which you are working, as opposed to there being a relationship that envisages an identified continuation of work?

6)  Do you provide your own supplies and equipment or reimburse the payer for the use of his or her equipment? Do you pay your own expenses?

7)  Do you use a separate office that is not on the payer’s premises?

8)  Are you ineligible for the rights, privileges, and benefits enjoyed by employees of the payer? (Consider such benefits as pension, disability and life insurance, health and dental insurance, employee stock option plans, and pay for vacation and statutory holidays.)

9)  Are your services supplementary to the payer’s business as opposed to being an integral part of the business?

10)  Do you issue invoices to the payer and receive cheques in payment of the invoices?

11)  When you invoice, do you calculate your fee on a basis consistent with that used by other independent contractors in your industry – for example, on the basis of production, flat fee, or time spent, whichever is the norm?

12)  Are you paid a fixed fee, or is there incentive compensation so that you can profit from sound management in the performance of your task?

13)  If a written contract exists, does it support an independent contractor relationship?

14)  Do you deal at arm’s length with the organization to which you provide services?

Setting up a proper structure and agreements that support the independent contractor status is key to avoiding potential audit / disallowed expenses / additional tax liability, penalties and interest. A review by your tax or legal professional can help you to ensure compliance.

- Jim McConnery, CA, TEP
Partner, Welch LLP

Back Office “Health Check”

As it should be, you are completely focused on building your business. But, have you done a “health check” on your back office lately? Without a strong accounting function, your business will not reach its potential.

Whether you have a dedicated accounting/finance department or you handle your accounting personally (sometimes off the side of your desk), it may make sense to investigate outsourcing all or part of your accounting needs. The following are scenarios where outsourcing may make sense:

• A foreign company with an office in Canada
• A start-up company
• A fast-growing company which has outgrown its existing accounting and finance functions
• A business struggling with payroll preparation
• A business who would rather not worry about the headaches of managing an accounting department and focus on growing the business
• An enterprise that is simply unhappy with its current accounting solution
• An enterprise wanting to streamline and reduce costs

Once you have determined that outsourcing is a potentially attractive option, the next step is to assess which aspects of the accounting/finance function you should carve out. The following is a menu of functions that you could potentially outsource:

• Bookkeeping (onsite or offsite)
• Payroll services (onsite or offsite)
• Cash flow projection and management
• Design, implementation and preparation of Management Reports
• Prepare HST returns and all other regulatory filings
• Support with banking, financing and investor relations
• Assistance with obtaining financing
• Sounding board for strategic planning

Welch can first help you assess whether outsourcing all or part of your accounting/finance function might make sense for your business. If, in fact, outsourcing does make sense, Welch has a proven track record of providing the various functions either on a full-service or piecemeal basis with high quality results and sensible pricing.

We cannot say that we are Doctors; however, we can definitely help you create a healthier back office!

- Kathy Steffan, CA
Principal
Welch LLP

For more information regarding how to do a “Health Check” on you back office, please contact Kathy Steffan at: ksteffan@welchllp.com

Quick Method of Accounting and the Bottom Line of Your Small Business

A doubling of the annual taxable sales threshold applicable for the Quick Method of accounting for GST/HST was announced as part of the March 29, 2012 budget proposals tabled by Federal Finance Minister Jim Flaherty.  This means that more small businesses will have access to this potentially beneficial method of GST/HST reporting effective for reporting periods beginning after 2012.

Some people may not realize that the Quick Method of accounting for GST/HST can actually contribute to the bottom line of a small business. GST/HST registrants who elect to use the Quick Method collect GST/HST as usual but remit a reduced amount of the tax collected. In exchange, the registrant forgoes claiming input tax credits (ITC) unless the ITCs are in respect of capital assets acquired for use in the course of the registrant’s commercial activities. Therefore, the Quick method can be a source of income for businesses that incur a small amount of taxable expenses since there would be very few ITCs to forgo.

To illustrate, we can use the example of a consultant in Ontario, Paul Jones, who has elected to use the Quick Method of accounting with respect to the 2011 calendar year. We will assume the following facts;

• Taxable fees for the year – $175,000
• HST at 13% collected on fees – $22,750
• Taxable expenses incurred – $5,000
• HST at 13% incurred on expenses – $650

Based on the Quick Method of Accounting for GST/HST with respect to a service business located in Ontario whose revenue is derived at least 90% from sources within Ontario, the remittance rate is 8.8% of tax-included sales.

Furthermore, each year, GST/HST registrants who are on the Quick Method are entitled to a bonus 1% reduction in the remittance rate which is applicable to the first $30,000 of tax-included revenue for the year.

Therefore, Mr. Jones’ remittance for 2011 will be calculated as follows:

• GST/HST included revenues – $197,750
• Amount owing on first $30,000 of GST/HST included revenue ($30,000 x 7.8%) = $2,340
• Amount owing on balance (($197,750 – $30,000) x 8.8%) = $14,762

Total GST/HST to be remitted = $17,102If Mr. Jones would not have made the election, his remittance for 2011 would be as follows:

• GST/HST collected minus GST/HST paid.
• $22,750 – $650 = $22,100

In this scenario, Mr. Jones realized a pretax profit of ($22,100 – $17,102) $4,998 by electing to use the Quick Method of accounting for GST/HST.

The Quick Method is not available for everyone. For example, accountants, lawyers, bookkeepers and financial consultants are among those not permitted to use it.

This is the first time we have seen an increase in the threshold amounts since the GST came into force on January 1, 1991. Therefore, it’s not surprising that the government found it necessary to double the limit to $400,000 of GST/HST included sales.

Other streamlined accounting methods have also seen their limits doubled. For example, the thresholds for the Streamlined Input Tax Credit Method and the Prescribed Method for calculating rebates are now $1,000,000 of tax-included sales and $4,000,000 of taxable purchases.

- Mona Tessier, CA, CA.IT
Senior Manager
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 

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

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 

It Was a Great Plan, But Did You Follow Through?

Most of you reading this will either have been involved, or know someone who has been involved, in some form of corporate or family tax planning scenario.  These scenarios often include a transfer of shares to a holding corporation, creation of a family trust and the addition of family members as shareholders of a corporation in order to minimize the tax liability of the family group as a whole.

This type of planning, when done properly, can be invaluable to the individual and family; saving significant amounts of tax.  For example, a sole shareholder with a family of four (spouse and two children) could reorganize their company allowing for the family group as a whole to receive up to $3,000,000 tax free (this is dependent on the corporation being considered a qualified small business corporation and other factors that are far too onerous for this type of communication).  If the sole shareholder did not enter into the aforementioned reorganization, they would have received a maximum of $750,000 tax free.  Clearly this planning is of value, but so is the post-transaction planning and often this planning is forgotten.

Let’s assume that an appropriate plan was put in place and a rollover transaction, similar to that mentioned above, occurred resulting in a new holding company with common shares owned by the family trust and fixed value, redeemable preferred shares owned by the sole shareholder.  This is the time for post transaction planning. I will cover two popular tax savings plans below that are often overlooked and can result in higher overall taxes to the family group.

The first is the use of the fixed-value, redeemable shares. Quite often in situations like this, the original shareholder will need cash throughout the years and this will normally be provided via dividends (as dividends are more tax favourable than salaries are in most situations).  If you are planning appropriately, the dividend will be paid by redeeming a portion of the preferred shares received during the reorganization in order to reduce the future tax liability of the family group.    If this type of planning didn’t occur, the sole shareholder would pay tax on the dividends now and his estate would be liable for tax on the shares at the time of his passing.  By redeeming the shares we have reduced the tax liability of the estate.

The second method involves the use of the trust and children who reach the age of majority during the year.  Often these children will be attending university or college; not earning significant incomes.  As a result, they have access to the lower graduated tax rates and can receive dividends on an almost tax free basis.  In Ontario, an unmarried individual can receive ineligible dividends of $39,435 ($38,160 in 2011) and have no tax liability.  Of note, you will still need to pay $450 in Ontario health premiums.

Assuming that the sole shareholder is in the highest tax bracket, they would pay $12,844 in tax on the same $39,435 representing a tax savings of $12,394.  If there are two children in this situation the overall family savings is $24,788.

Considering the significant potential tax savings from post-transaction planning, it is unfortunate that it is often overlooked once the initial transaction has been completed.  With the right guidance this can be put into place and maintained regularly in an efficient manner.  If you find yourself in a situation where your tax service provider is not planning for you, maybe now is the time to consider a switch.

Joshua Smith, CA

SR&ED Tax Manager

For more information, contact Joshua Smith by e-mail at: jsmith@welchllp.com or by phone at: 613.236.9191.