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.
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.
Export Market Access Grants (up to $30,000)
Kevin Goheen, PhD, PEng
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.
Nathalie Pichard, CGA
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!
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.
Reminder to Obtain Independent Financial Advice
Doug McLarty, FCA and Ross McShane, CGA, CFP
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.
Doug McLarty, FCA
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.
Special EI Benefits for the Self Employed
Nathalie Pichard, CGA
As of the beginning of this year the self-employed can elect to participate in the federal Employment Insurance program for special benefits. The special benefits that will become available to participating self-employed individuals are: • Maternity • Parental • Sickness, and • Compassionate care.
Maternity benefits are available to birth mothers for a maximum of 15 weeks.
Parental benefits are available to biological or adoptive parents for 35 weeks while they care for a newborn or a newly adopted child.
If someone is sick, injured or quarantined they can be covered by EI insurance for a maximum of 15 weeks.
6 weeks is available to someone who needs to be away from work to care or support a family member who is seriously ill with a significant risk of death.
In order for a self-employed person to make a claim he/she will have to have been participating in the program for at least one year. In addition they will need to have earned at least $6,000 in self-employed earnings in the preceding calendar year.
One advantage for the self-employed is that they will not be required to pay the employer portion of premiums, only the portion normally paid by employees.
Once a self-employed individual makes a claim they will be required to pay EI premiums as long as they are self-employed. Anyone who has not made a claim can opt out of the program at the end of any tax year.
Québec residents who are self-employed are already eligible for maternity and parental benefits through a provincial program. They are eligible for reduced rates if they are interested in participating in the federal program for sickness and compassionate care.
Kevin Goheen, PhD, PEng
Grants of $50,000 for up to 100% of internal labour costs plus items like patent application costs
The National Research Council has run the Industrial Research Assistance Program (IRAP) for a number of years. Companies which are eligible for SR&ED credits have also received IRAP funding, but IRAP reduces the amount of the SR&ED credits. However, IRAP’s new Small Project Accelerated Review Process may offer companies the ability to get support from both programs. This program can fund up to $50,000 and covers up to 100% of internal labour costs (with 65% overhead added), 75% of external contractor costs and 75% of total costs. The most important change is that the IRAP covers a wide variety of activities beyond those eligible for SR&ED. These would include patent application costs, financial restructuring, competitive market intelligence studies and many other activities. A company can ask IRAP to fund these activities which complement the SR&ED eligible activities, thus still allowing the full financial advantage of each program.
Principal Residences Tax Exemption
Doug McLarty, FCA
What qualifies for the principal residence tax exemption and how the exemption works
The principal residence tax exemption is an issue that we are frequently asked questions about. Often we’re asked about what qualifies and how the exemption works.
Generally any habitation qualifies. It can be a house, a cottage, a mobile home or even a houseboat. Plus about an acre and a quarter of land. More land might qualify depending on the circumstances.
This is how the exemption works:
If you own only one residence and you’ve ordinarily lived in it at least part of every year since you bought it, a capital gain will be exempt from taxation.
Another common situation is when two residences are owned by a couple, say a condo and a cottage. When they sell the cottage they will need to estimate the capital gain on the other residence as well so that they designate the residence with the higher appreciation in value as their principal residence. If the gain will be higher on the cottage and it was ordinarily inhabited on a regular basis every year then they can deem the cottage as their principal residence and be exempt from paying taxes on its capital gain.
But if they had previously sold a house, say before they bought the condo, and the house had been claimed as the principal residence, then only the increase in value of the cottage since the housewas sold would be exempt.
If a residence was owned prior to 1982 the situation is more complicated because before 1982 both spouses could designate a residence as a principal residence; in effect a couple could have two principal residences at any point in time.
Here are a few more situations where you should obtain some professional advice:
If there will be a change in use, such as converting an income-producing property to a principal residence;
If a couple is separating or divorcing; and
If you are purchasing a residence such a vacation home and you have children over the age of 18 you may wish to explore some tax planning opportunities.
We hope you’ve found this discussion about principal residences useful.
Tax Free Savings Accounts
Doug McLarty, FCA
You’ve probably been seeing a number of ads and articles about Tax Free Savings Accounts. That’s a good thing because most Canadians should have one.
This blog entry outlines why Tax Free Savings Accounts are beneficial and how they work.
The main reason for putting savings in a TFSA is that they are an easy way to earn tax-free investment income. Once you open a TFSA you can deposit up to $5,000 each year. Any interest, dividend or capital gains you earn can be withdrawn at any time and you won’t have to pay tax on this investment income. That’s why they are called Tax Free Savings Accounts.
When you deposit money to a TFSA you won’t deduct your deposit from your income on your tax return like you do with a RRSP contribution. But when you withdraw money, whether it is the money you deposited or the income it earned, you won’t need to report it on your tax return as taxable income. Also, after you withdraw money you can re-deposit it in the next calendar year (plus the $5,000 for that year).
Some other things you might like to know about TFSA’s:
You don’t need $5,000 to start a TFSA.
You can start it any time after January 1st 2009 if you are 18 years old or older.
You can contribute to your spouse’s TFSA without any tax ramifications to you.
If you deposit less than $5,000 in one year then you can add the amount you didn’t deposit to your $5,000 limit for the next year.
You can use your TFSA to save for whatever you want: a car, a house, a renovation; or a once-in-a-lifetime vacation.
In my opinion, if you're saving any money for any reason at all you should seriously consider opening a TFSA.
Some Quick SR&ED Tips
Kevin Goheen, PhD, PEng
This blog entry provides two quick tips regarding SR&ED claims.
The first one has to do with broadband lines and access equipment.
Remember to include the leasing costs of broadband lines and access equipment in your SR&ED claim. The amount that can be claimed will depend upon whether it is: used All or Substantially All (ASA; > 90%) for SRED; it is Shared Use Equipment (SUE 50% < x < 90%); or neither.
The second tip has to do with Ontario Investment Tax Credits.
Companies in Ontario should remember to also claim the Ontario Investment Tax Credit while they are claiming their federal SR&ED credits. Failure to do so will be expensive, as CRA will automatically assume that the company has applied for this the previous year and will include this in the next year’s federal SR&ED submission as “Government Assistance”, thus reducing the current year’s claim. McLarty & Co’s SR&ED team provides its clients with documentation templates that assist in the claim and audit process. To learn about the latest administrative changes to the SR&ED program please contact Kevin Goheen.
2009 Federal Budget Highlights
Doug McLarty, FCA
This blog entry highlights a few of the changes that were announced in the 2009 federal budget on January 27th.
First I should note that there were no new corporate rate reductions announced. However our finance minister did confirm that the government plans to make Canada more competitive by becoming the country with the lowest corporate tax rates among the major industrialized economies. As previously announced the general corporate tax rate is still scheduled to decrease from 19% to 15% by 2012.
The good news for small business was a $100,000 increase in the small business tax deduction. The annual business limit for Canadian-controlled private corporations eligible for the reduced small business tax rate increased from $400,000 to $500,000. This change is effective January 1, 2009 and is pro-rated for fiscal years straddling this date.
Consistent with the small business deduction change was the announcement that the phase-out range for investment tax credits for scientific research and experimental development is increasing by $100,000 so that the phase-out range is no longer $400,000 to $700,000 but $500,000 to $800,000.
More good news for manufacturers was that the temporary increase in the capital cost allowance rate for manufacturing and processing equipment to a 50% straight–line rate has been extended for eligible assets acquired in 2010 and 2011.
For eligible new computers and system software acquired in Canada after January 27, 2009 and before February 2011, a CCA rate of 100% applies with no half –year rule. That means that businesses can deduct 100% of most computer costs if they are incurred before February 2011.
There were also some changes on the administrative side. The government has increased the number of companies and situations where returns must be filed electronically (e-filed). Now all corporations with annual gross revenues over $1 million will be required to e-file their income tax returns. Additionally, tax information returns that include over 50 items (instead of 500) must be e-filed after 2009. So if your company has 51 T4’s to file next year you will need to do it electronically. To encourage everyone to follow the new rules, the budget also introduced a penalty for filing in an incorrect format.
There was some good news for individual taxpayers who own a home that is due for a renovation.
For 2009 a new, non-refundable temporary tax credit will be available to homeowners for improvements to a principal residence. The credit will apply to expenditures between $1,000 and $10,000, incurred for work acquired after January 27, 2009 and before February 2010. This credit can generate tax savings of up to $1,300 for homeowners.
Those are some of the 2009 budget highlights for businesses and individuals.
The New SR&ED T661 Form
Kevin Goheen, PhD, PEng
This blog entry is about the Canada Revenue Agency’s new version of the T661 form.
Every SR&ED claim involving a taxpayer’s fiscal year which ends on or after January 1st, 2009 MUST use this revised T661.
There are two significant changes in the new T661.
CRA has demanded substantive changes from taxpayers with regards to “Evidence…(the taxpayers) have to support (their) claim” which they have generated WHILE the SR&ED was in progress, in that it must be declared to belong to one of 12 categories.
These documents must prove:
the technological advancement sought;
the technological obstacles;
the work done;
the start and end dates; and
the employees or contractors involved.
CRA has indicated which types of documents support which types of filing requirements e.g. records of trial runs cannot substantiate technological obstacles.
As a result, contemporaneous creation of correct project documentation is crucial.
Another major change is the elimination of free format technical descriptions. Instead, projects must be described in two or three text boxes, with severe word limits on each section. In our opinion, this word limit does not allow taxpayers to either describe the business context of their SR&ED projects nor describe the systematic aspects of complicated projects involving manufacturing trials or complicated software development cycles.
We anticipate that as a result, many more technical reviews will be performed, as CRA seeks further information about the projects. As a result, the prudent way for taxpayers to proceed is to write their technical descriptions as was done in previous years, then cut, paste and edit the appropriate material into the new T661, but retain their original technical description, as it will be useful information to give to the CRA technical reviewer.
McLarty & Co’s SR&ED team provides its clients with documentation templates that assist in the claim and audit process. To learn about the latest administrative changes to the SR&ED program, please contact Kevin Goheen.