GST/HST and Fundraising Activities

Charities and other not-for-profit organizations (NPO’s) rely on fundraising to generate significant dollars towards their annual operating budgets.  Often, the application of GST/HST to these events is overlooked or improperly executed.  Risks involve not collecting GST/HST on taxable revenue sources and/or over claiming input tax credits (ITC’s) for GST/HST paid on expenses related to tax-exempt fundraising activities.

Fundraising could include admissions to events like concerts, dinners or golf tournaments as well as the sale of goods, like chocolate bars, or rain barrels.  Determining whether you should be collecting GST/HST on your revenues depends first and foremost on whether you are a registered charity.  GST/HST legislation provides a broader range of exemptions for fund raising events carried on by a charity than for other NPO’s.

A charity hosting a golf tournament, for example, would not have to charge GST/HST on the admission as long as the charity is able to issue a charitable donation receipt in respect of at least a portion of the admission proceeds.  If the admission to the event is exempt of GST/HST, then the charity will not be able to claim ITC’s in respect of GST/HST paid on the underlying expenses, although partial rebates may be available.  The admission price to a concert hosted by an organization that is not a registered charity will, however, likely be taxable with ITC’s available in respect of GST/HST paid on underlying expenses.

The sale by a charity of used goods, or goods being sold on a “break even” basis, as well as the sale of goods that were donated to the charity will be exempt of GST/HST.  The sale of new goods being sold at a profit, that were not donated to the charity will be taxable, as will the sale of most goods sold by other not-for-profit organizations unless, among other factors, the selling price is less than $5, and all the salespersons are volunteers.

Compliance with the GST/HST legislation in this area can be very complex.  Our indirect tax group is glad to help you review the application of the law to your specific situation.

Garth Steele, 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

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

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.

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.