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.

Personal Services Business Changes

Many taxpayers providing services through a corporation have recently been subject to review by the CRA to determine whether the corporation’s activity constitutes a personal services business (PSB) – in effect, whether in the absence of the PSB corporation the individual would be considered an employee of the recipient of the services.  A finding that the corporation is carrying on a PSB results in the denial of many types of expenses, as well as the denial of eligibility of the corporation’s income for the small business limit deduction.  As a result, the corporation is taxed at the highest corporate tax rate.

However, even where a PSB has been found to exist, some taxpayers have been able to achieve tax advantages.  To the extent an individual did not require the after-tax funds earned by the corporation, a tax deferral of approximately 18% could still be achieved as compared to a situation where the individual earned the income personally.  In addition, the use of a PSB corporation provided a structure for splitting income with family members in some cases.

Recently proposed changes to the taxation of PSB income have effectively eliminated these advantages.  As a result of these proposed changes, PSB income will be subject to a tax rate that is approximately 13% higher than prior to the proposed changes.

As a result, anyone carrying on activity through a corporation that could be subject to a PSB challenge by CRA should consider the strength of their facts.  Likewise, anyone considering a new venture that could be considered a PSB activity may want to reconsider.  A finding that a PSB exists will not simply result in the denial of the small business deduction limit, but will now ultimately result in double-taxation.

- Zoran Vranjkovic, CA
Tax Manager
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

Burlington SR&ED Practitioners’ Conference held January 11, 2012

It is unfortunate that there wasn’t more new information introduced at the 15^th annual practitioners’ conference held in Burlington on January 11, 2012.  The most informative portion was at the very beginning when the new Director General of SR&ED, Ms. Susan Betts, discussed the top five SR&ED concerns from claimants and CRA.

The top five concerns of claimants were as follows:
1) CRA staff (specifically RTAs) not qualified to determine eligibility of claims
2) The narrowing of eligibility criteria
3) The increased complexity of forms and processes surrounding SR&ED claims
4) The amount of supporting documents required to prove a claim
5) Lack of consistency as to claim eligibility

The top five concerns of the CRA were as follows:
1) Personal attacks against CRA staff
2) Incomplete claims
3) Cost to claimants of hiring professional firms on a success fee basis
4) The increasing amount of aggressive and unfounded claims
5) Withdrawal of claims when audit requested by CRA

The new Director General then provided some analysis of the two lists.  She stated that she had reviewed the qualifications of the CRA staff and was confident that they were capable and qualified to determine the eligibility of claims.

Ms. Betts indicated that the 2^nd concern of claimants is not actually a narrowing of eligibility criteria but a clarification and definition of what is eligible. She further stated that this clarification is required in order to deal with the claimant concern of inconsistency and the CRA concerns regarding incomplete and aggressive claims.

Ms. Betts noted that the SR&ED program was set up to fund claimant research and development and that, in her opinion, the money being paid to practitioners on a success fee basis was not in line with the program’s intention.

Looking to the future, Ms. Betts indicated that CRA may look at third party penalties in order to deal with the concerns it has regarding incomplete, aggressive and withdrawn claims.  In my opinion, if the CRA were to apply these penalties in appropriate cases it would decrease the compliance time of CRA staff and in theory decrease the time it takes for a legitimate claimant to receive their refunds.

It was a surprise to many that there was little mention of the Jenkins report and no mention of the potential changes stemming from it. When we look at the facts, however, this makes sense as it is the Ministry of Finance that will make the changes. CRA will, of course, need to apply and monitor the changes but they are unlikely to know with any certainty what or when these changes will occur.

At the end of the conference, the lack of new information was disappointing. However, it was nice to talk to CRA advisors and other practitioners; the majority of whom were confident in the fact that the SR&ED program was going to change. After all, Prime Minister Harper stated early on that he would take the suggestions of the Jenkins report very seriously.

The only questions left now is how much the SR&ED program will change and when the changes will begin?

Joshua Smith, CA

SR&ED Tax Manager

For more information about SR&ED tax credits, contact Joshua Smith by e-mail at: jsmith@welchllp.com or by phone at: 613.236.9191.

Be Proactive – Earn More SR&ED Tax Credits

Why be a reactive Scientific Research and Experimental Development (SR&ED) claimant when you can be proactive SR&ED claimant?  By reactive SR&ED claimant, I mean a business that waits until after year end to write and collect all information to complete a valid SR&ED claim.

In these cases, the business often doesn’t know if any of the projects they have worked on throughout the year would qualify for SR&ED credits.  It is at the end of the year that they start to discuss potential advancements they have seen and the obstacles they had to overcome. All of this of course relies on the memory of employees and management, and as we all know, memory can be faulty.

This is why I urge all businesses to take a proactive approach to the collection, documentation and writing of SR&ED claims.  There are a couple of ways to instigate a proactive approach; one approach would be to analyze every new project to determine if there are any potential technological advancements.  Another approach is to have a periodic meeting between employees, management and any other influencers to determine if any technological advancements or obstacles have arisen.  These meetings could be held quarterly, monthly or weekly depending on the type of business.

The meetings do not need to be lengthy or highly detailed. The idea is to capture new advancements or obstacles that are occurring in the workplace and determine whether or not they could be considered an eligible SR&ED project.  After the meetings, it would be ideal that an individual involved with a particular advancement or obstacle provides further documentation of the work to date.

There are numerous benefits to proactive documentation including:

• Higher quality information (not relying on memory)
• Capture of more SR&ED projects
• Capture of more cost related to the projects
• Better documentation available if a CRA review is requested
• Ability to direct funds to qualifying projects
• Earlier completion of the technical report allowing for earlier filing

I know it is not always possible to document everything proactively but with a little bit of training, organization and effort any business could adopt a proactive system that would hopefully provide a more efficient and larger SR&ED claim.

Joshua Smith, CA

SR&ED Tax Manager

For more information about SR&ED tax credits, contact Joshua Smith by e-mail at: jsmith@welchllp.com or by phone at: 613.236.9191.