Our blog is where you can view or read about topics of interest. It's where you can find timely tax tips, advice about planning ahead and news about important developments that may affect your personal or business finances.
Beware of Fraud
Karen Blanchard, CA and John Wright, CA, CMC
Over the past year we have become aware of more instances of fraud than we had in the previous five years combined. What we've seen and, what studies have confirmed, is that major fraud is often committed by a senior, trusted individual who has worked in an organization for a long time. Fraud can go undetected for many years, especially if red flags are ignored. We thought it would be prudent to remind clients to be vigilant and to look into suspicious circumstances whenever they occur. So what are some situations that might arouse your suspicions? • Can you think of someone who is reluctant to change their position even when offered a promotion? • Is there someone who is surrounded by people who never challenge them? • Does that person respond negatively when they are challenged? • Is there excessive secrecy in a department and reluctance to provide information when requested? • Does someone have a "less than cordial" relationship with auditors or outside accountants? • Does that person seemed overly stressed for no apparent reason? • Do they have the opportunity to manipulate payroll, expenses, banking transactions or other financial information? What we recommend is that you be vigilant, ask questions and don't be intimidated. Shake things up. Be assertive when reassigning work, reviewing procedures and asking for information. Review your internal controls to ensure they are working. Obtain outside help if you need it. Don't think fraud can't happen to you, because it can happen to anyone.
Change in the Taxation of Personal Services Businesses
John Wright, CA, CMC
Draft legislation was released at the end of October that, if passed, would result in major changes in how personal services businesses are taxed. The tax rate on income earned in these companies would increase by 13% for fiscal years beginning after 2011. The shareholders of personal service businesses are sometimes described as "incorporated employees". If they were not incorporated the shareholder would usually be considered an employee of another organization. Usually the personal services business has a long-term contract with one organization. Personal services businesses are already ineligible for the small business deduction. The draft legislation will also deny them the general rate reduction. On top of that these businesses will continue to be limited in terms of what types of expenses are deductible for tax purposes. They are restricted to those an employee would normally be allowed to deduct. As a result of the proposed changes personal services businesses will generally not be effective from a tax deferral or income splitting perspective after 2011. But contractors are required to be incorporated in order to work with some organizations. Care should be taken to include clauses that are beneficial to the contractor from a taxation point of view. For all of these reasons we recommend that taxpayers who are earning income through incorporated personal services businesses consult with their tax advisors.
Contributions to “Children’s” Tax Free Savings Accounts
We have something else to share with you regarding TFSA's that has to do with parents funding their children's accounts. Some parents are contributing to the TFSA's of their children (who must be 18 or older to have a TFSA). The Canada Revenue Agency has made it clear that the funds must come from the person who holds the TFSA. If you would like to fund your "child's" TFSA contribution, be sure to gift him or her the funds so that they can be transferred from his or her own bank account to the TFSA. We know that this seems like an unnecessary extra step but it is important to follow the rules so that you can be certain that the TFSA will continue to be considered valid by CRA . If it is no longer considered valid then all of the income earned in the account will be considered taxable.
June 23rd deadline for claiming your rebate for municipal campaign contributions
If you made a contribution of $50 or more to one or more candidates for an office on the Council of the City of Ottawa you may be entitled to a rebate. You should have been issued a receipt entitled Receipt - Candidate Campaign Contribution - Rebate Program for the 2010 Municipal Election. The contribution must have been monetary (i.e. not for goods or services rendered) and made by an individual. Here is some information about the rebates that can also be found on the City of Ottawa's website:
How are rebates calculated?
A minimum contribution of $50 is required to be eligible for a rebate. An individual who makes contributions to more than one candidate may apply for a rebate in respect of each contribution (minimum contribution of $50 per candidate) but is not entitled to receive total rebates exceeding the maximum rebate of $187.50.
Contributions of less than $50 will not receive a rebate.
Contributions of $50 to $150 will be rebated at 75 per cent.
Contributions of $151 to $300 will be rebated at 75 per cent of the first $150 and at 50 per cent of the remaining amount.
Contributions exceeding $300 will be rebated $187.50 only (since the maximum amount of rebateable contributions is $300).
NOTE: This means, the absolute TOTAL maximum amount of money rebated will be $187.50 for contributions made to one or several participating candidates.
Deadlines
Rebate cheques will be issued in August 2011 provided you have submitted your rebate application by June 23, 2011 and provided your candidate has complied with all provisions of By-law 2005-505.
If your candidate has extended his/her campaign as a result of a deficit, rebate cheques will be issued in January 2012 regardless of when you have submitted your application(s).
How to apply
Fill out the application form as indicated on the back of the receipt. Rebates are not automatically paid. You must submit your receipt/application to the Elections Office. The application may be delivered in person, or submitted by mail to the address shown on the application form, provided that it is received by the deadline.
Residents who wish to file their application in person may do so at any City of Ottawa Client Service Centre (CSC) or the Elections Office during regular hours of operation. To find out more, read the rebate program FAQs at the link below or contact the city of Ottawa Elections Office.
Bogus CRA Emails Send Recipients to Unsafe Website for Refunds
Some individuals are receiving emails that look like they are from CRA but they are not. The recipients are instructed to follow a link to access a "refund form". The link looks like CRA URL but it takes the user to a website that has been reported as unsafe.
We have copied one of the emails below (without the link) so you can easily identify it should you also receive one.
You may be interested to learn about the Export Market Access grant program, run by the Ontario Chamber of Commerce. Ontario-based small- and medium-sized enterprises with sales in excess of $500,000 and with 5-50 employees are eligible to apply. Eligible activities include market research, marketing tools and direct contacts, such as foreign trade shows and foreign bidding projects. The program will cover up to 50% of eligible costs, with a maximum contribution of $30,000.
Projects must be preapproved before costs are incurred but the application process is quite simple and the turnaround is well less than 30 days.
To learn more about this grant you can go to the Export Market Access page on the Ontario Chamber of Commerce website (occ.on.ca/initiatives/ema/) or you can contact me, Kevin Goheen, for guidance on this and other grant programs.
You may have heard that CRA recently simplified the requirements for keeping track of mileage for the purpose of deducting vehicle costs as a business expense or for calculating the taxable benefits for the personal use of a vehicle.
I'd like to give you an overview of how the simplified method works and also warn you about a possible pitfall. With the simplified method you first need to establish a base year by keeping a logbook for a 12 month period and then calculating the percentage of business use for that year. The base year cannot be earlier than 2009. Then you would select a three month period in the base year as your sample period and calculate its business use percentage. If everything goes according to plan you could keep a log for the three month period only in the next year and perform a calculation based on the business use for each of the three periods.
It's important to know that there are situations where CRA will disallow the simplified method. This will happen when the distances traveled or the business use percentages vary by more than 10% from the base year. So here's the pitfall: What if they are not within 10% of each other? What percentage can you use when that happens? If you are expecting major changes in your business use of a vehicle then it is obvious that you need to keep a logbook for the entire year. But what if an unanticipated change of 15-20% occurs? The answer appears to be that you need a logbook for the entire year! even though you were expecting to rely on a three month period.
We can suggest two ways to get around this issue. If you do not want to keep a log for an entire year unless you have to, then you could make the first quarter of the year your sample period every year even though it may not be the most advantageous for you (if you don't do as much business driving then). That way you would know as soon as the quarter ended if you need to continue maintaining the log for the rest of the year.
Our second suggestion is to make keeping a log as painless as possible for yourself by using something such as the Odotrack. You could add it to your holiday wish list or, as a client of McLarty & Co, ask about preferential pricing. Odotrack is a GPS and web-based system that is easy to use. And it's tax deductible!
December 10 2010
Update on Tax Free Savings Accounts
Last year we posted a blog on Tax Free Savings Accounts, or TFSAs, to explain how they worked and why you should have one.
This year we would like to update you on two items related to TFSAs.
One item relates to naming a beneficiary or a successor account holder for your TFSA. Many financial institutions did not have a form ready for the first wave of TFSAs. You should ask your financial institution if they have a signed form on file for you. If they don't then you should obtain a form and complete it so that the TFSA can be transferred to your spouse or adult child without any tax ramifications. If you do not name a successor account holder or beneficiary then the TFSA will lose its tax-exempt status when you die.
The other item relates to the 72,000 letters CRA sent to taxpayers who over-contributed to their TFSAs in 2009. CRA is prepared to show leniency for 2009 because it was the first year for TFSAs and many people who over-contributed did not do it intentionally. For example, they may have over-contributed because they did not realize that withdrawals do not increase TFSA room until the next tax year. So they might have withdrawn $3,000 in 2009 and then replaced the $3,000 later that year instead of waiting until 2010.
If you received a letter about an over-contribution you need to respond to the letter with an explanation; otherwise you will be subject to a penalty plus interest charges of 1% for each month of your over-contribution. If you have already received a TFSA Notice of Assessment that includes an over-contribution, please be sure to contact us about filing a Notice of Objection so that we can request that the penalties and interest be reversed. There is a time limit for filing Notices of Objection so it is important that you inform us about your TFSA Assessment sooner rather than later.
This blog dicusses the importance of seeking independent advice before making a major financial commitment. If you are about to sign a major insurance policy, purchase a significant asset or make a large investment in a company or personal portfolio, please consult us beforehand. We've recently advised clients contemplating substantial insurance policies and private investments. The clients appreciated our objective, no-strings-attached analysis of the possible ramifications of these investments. Sometimes there are tax consequences that need to be considered. There could be impacts on your retirement, financial and/or estate plans. Sometimes it is helpful to have someone knowledgeable assisting in analyzing the amount of risk involved. Of course that someone does not have to be from McLarty & Co. We would rather you obtained the assistance of another independent finance professional than obtain no advice at all. We want you to know that we are here if you need us. We care about your financial health. We don't want to see you do anything that would impair it. Instead we want to help you to improve it.
This blog entry is about a tax-saving & deferral vehicle that is sometimes overlooked in will planning called testamentary trusts. The topic of today’s discussion is the type of trust that is created after death according to the deceased’s will.
Testamentary trusts are taxed differently than other trusts. All trusts are taxed as individuals, not as corporations, with some exceptions. For example, many refundable tax credits are not available to trusts. Fortunately the dividend tax credit and the donation tax credit are available to trusts.
What’s especially good about testamentary trusts compared to other trusts is that they are taxed at the graduated tax rates. Other trusts are all taxed at the highest tax rate.
So if you establish multiple testamentary trusts then your estate can benefit from the lower tax rates with each trust. Depending on the income the trust earns, tax savings of up to $17,500 per year per trust is possible. You can create a trust for each beneficiary. It might be possible to create trusts for combinations of beneficiaries as well. So if you have two heirs the maximum number of trusts might be two or three: one for each beneficiary; and possibly one trust for both beneficiaries.
Another way that testamentary trusts are different from other trusts is that they can have any year-end, not just December 31st. By having a year-end early in the calendar, tax can be deferred for the better part of a year.
Another tax benefit is that testamentary trusts do not need to make installment payments.
There are many reasons for creating testamentary trusts in addition to the potential tax savings. You might want to preserve capital for your children from an earlier marriage. Or you might want to use trusts if someone is incapable of handling their financial affairs for any number of reasons such as age, illness or addiction. Setting up a trust for charity is another option. Or you might want your capital to be distributed to your heirs gradually.
All of these are good reasons for considering the use of testamentary trusts in estate planning.
