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.
Some Amendments to the Canada Pension Plan
Ross McShane, CGA, CFP, RFP and Sue Fagnan, BCom
There are a number of changes being made to the Canada Pension Plan. Some of the changes are being gradually implemented over several years. The changes are meant to modernize the CPP to take into consideration a number of factors including:
The fact that Canadians are living longer and healthier lives and an increasing number of Canadians are working past the age of 65;and that
Modifications are required to ensure that the CPP is financially sustainable and fair.
Some of the changes may affect when Canadians choose to retire and when they apply for their CPP benefits. For example:
Once fully implemented in 2016, those who choose to start receiving their benefits when they are 60 years old will have their benefits reduced by 36% while those who delay receiving benefits until they are 70 will see their benefits increase by 42%.
There is a new Post-Retirement Benefit (PRB) for Canadians who choose to continue to work while receiving CPP benefits:
Canadians who choose to receive their CPP benefits before they reach 65 and who continue to work must contribute to the Post-Retirement Benefit. This change was effective at the beginning of this year. Those Canadians who delay receiving CPP benefits until they are 65 and continue to work may choose to opt out of the Post-Retirement Benefit. The maximum Post-Retirement Benefit is $288 per year (adjusted for age). The PRB is cumulative and is in addition to the maximum CPP benefit. An additional $288 could be added to your benefits for every additional year you choose to work.
The requirement to either stop working or reduce earnings in order to start receiving CPP benefits has been eliminated; and
An additional year of low earnings can be excluded from the CPP benefit calculation.
Canadians who started receiving their CPP benefits prior to December 31, 2011 will not be affected by these changes as long as they remain out of the workforce. In general, a contributor who delays receiving their CPP pension until age 70 will receive approximately double the annual benefit they would have received if they had started receiving their CPP benefit at 60. If you are in good health with an average life expectancy and the means to delay receiving CPP benefits until age 70, then this may be the best decision for you. You should consider reviewing your financial situation with your financial advisor prior to making any decisions.
HST Quick and Simplified Methods Available to More Companies in 2013
Karen Blanchard, CA
In its efforts to reduce "red tape" for business the federal government has doubled the thresholds for qualifying to use the Quick Method of accounting for HST and the Simplified method for claiming input tax credits.
Currently most small businesses wanting to use the Quick Method can elect to do so if their taxable sales do not exceed $200,000. This threshold is increasing to $400,000 in 2013. The Quick Method allows small businesses to remit HST by applying a special rate to their sales. This way they don't need to keep track of the HST paid on purchases.
Please note that if your business is not already using the Quick Method it must elect to do so. Annual filers must make the election by the first day of their second quarter. If you file HST returns more frequently, you can make an election to use the Quick Method as late as the due date of the month or quarter you started using the Quick Method.
Most small businesses wanting to use the Simplified Input Tax Credit Method can have up to $1 million of taxable sales and $4 million of purchases starting in 2013. Currently the thresholds are $500,000 and $2 million. With the Simplified Method small businesses don't need to keep track of the HST paid on every purchase. Instead they apply a special rate to the total of their taxable purchases.
An election is not required to use the Simplified Method; however, you must start using it at the beginning of an HST reporting period and continue using it for at least one year.
Don’t Forget: The 30% Ontario Tuition Rebate Application Deadline is Saturday, March 31st!
Craig McIntyre, MBA
Now that we've seen that the Ontario budget did not result in any changes to the plans for tuition rebates, we would like to remind you that the 30% Ontario Tuition Rebate application deadline is Saturday, March 31st.
Full-time students at Ontario colleges and universities can still apply for a 30% tuition rebate for the current school term. But the deadline is Saturday!
Full-time students are eligible if:
Their parents' combined gross income is $160,000 or less,
It's been less than 4 years since they left high school, and
Their programs admit students directly from high school.
The rebates available for the current semester are:
$800 for university and college degree students, and
$365 for college diploma and certificate students.
For the first full year (starting this September) the rebate amounts available will be $1,600 and $730.
Applications for students currently receiving financial help from the Ontario Student Assistance Program (OSAP) are automatic. Students who don't receive OSAP funds will need this information to apply for the 30% rebate:
Their social insurance number,
Their parents' social insurance numbers, and
The amounts appearing on line 150 of their parents 2010 personal tax returns.
Applications can be prepared online. Students and parents need to sign the printed forms and then mail or fax the forms to the Student Financial Assistance Branch.
Here's our synopsis of two of the items the federal budget made significant changes to.
Unfortunately the federal budget has significantly impacted two programs that have been providing many of our clients with considerable tax savings. On the positive side corporate tax rates for small business will remain as low as any in the G8 group of countries and companies engaged in research and development will have access to more grants and venture capital.
New restrictions on the Employee Profit Sharing Plans (EPSP's) will make these plans much less valuable as ways to spread income amongst family members with lower tax rates. Starting on March 29, 2012 payments received from profit sharing plans are limited to 20% of an employee's salary if the employee is a significant shareholder or does not deal at arm's length with the company. If the 20% is exceeded then the excess bonus amount is taxable at the highest federal and provincial tax rates. On top of that deductions and credits cannot be claimed against the excess amount. As a result EPSP's will no longer have the desired effect on the total tax paid by a family.
The federal government is shifting its funding of research and development from indirect support in the form of tax deductions and investment tax credits to direct grants from programs such as the Industrial Research Assistance Program (IRAP). Effective January 1, 2013, only 80% of arm's length contract payments will be eligible for SR&ED tax credits instead of the current 100%. Beginning in 2014, more substantial changes to the SR&ED program become effective. These include the elimination of capital expenditures' eligibility for SR&ED credits and a reduction in the proxy rate for overhead expenses used by small businesses. Research endeavours that require significant investments in machinery or equipment will be affected the most because capital expenditures will no longer be eligible for the credit. Many smaller businesses now estimate overhead expenses as 65% of direct labour costs. This proxy percentage is being reduced to 55% as of January 1, 2014. The enhanced investment tax credit rate applicable to small and medium-sized businesses remains unchanged at 35% but the general investment tax credit rate will be reduced from 20% to 15% in 2014.
To make things easier for companies engaged in R&D projects the government plans to improve its online self-assessment tool and the objection process.
Start-ups and small and medium-sized companies engaged in research and development should find it easier to obtain funds directly from the federal government. It will be doubling the money available through the National Research Council's IRAP with an increase of $110 million. On top of allocating $400 million for venture capital funds, the federal government will also increase the Business Development Bank 's venture capital funding by $100 million. Other funds will support areas such as applied research, the commercialization of innovation, R&D internships, expanding market opportunities and centres of excellence.
As we all know stock markets have been more or less flat for the last 5 years and interest rates are at all time lows. These factors have left many investors pondering their options and their ability to retire as planned. Now is the time to focus on controlling what you can - such as the fees that you are paying for investment services. Do you know how much you are paying to have your portfolio managed? Many clients are unaware of their costs because the fees are hidden inside their mutual funds. This lack of transparency is an issue that the regulators are working to address. In the meantime it's investor beware. The average annual fee on a balanced portfolio of mutual funds is usually in the 2 -2.25% range. If you want to know how much of a fee you are paying you may need to read the mutual fund's prospectus, search for it online or ask your advisor.
I recently reviewed a couple's $1.3 million mutual fund portfolio and found that their average fee was over 2% - a whopping $27,000 - each and every year. The couple was not aware of it because investment companies are not required to produce statements for fees that are not tax deductible. By shopping around, the clients were able to lower their cost by 1% per year for an annual savings of $13,000! On top of that the fees are tax deductible because they moved away from mutual funds to our discretionary money management service. With returns as low as they are these days, saving 1% in fees can significantly improve your net returns and improve your odds of retiring according to plan.
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.
