Published Articles by Doug Tyce & Barb Carle-Thiesson

Financial Articles

Do you need to make your dollars work harder? We've assembled a collection of articles below to help you gain some insight into how to do just that.

Table of Contents

Corporate

• Benefits of Incorporation
• Shareholders' Agreements - The Highlights
• The CRA Audit
• Highlights of the 2007 Federal Budget
• It's Your Money -- Make Sure You Keep the Lion's Share of It!
• Can a Website Enhance Your Business?
• Five Financing Tips
• Negotiating a New Lease?
• Yearend Planning Tips
• Purchasing Commercial Real Estate
• 10 Critical Small Business Errors
• When to Incorporate?
• Family Members and EI - The Rules
• Tax-Deductible Interest
• Financial Controls

Personal

• Charitable Giving - The Highlights
• Highlights of the 2007 Federal Budget
• Tax Time: Changes for 2006 Returns
• Transfer of Unrealized Capital Losses
• What Attracts "The Taxman" to Your Tax Return?
• 5 Common Tax Mistakes
• Do I Need an Accountant?
• Financial Security - Can You Get There?
• Beware of CRA Penalties

Retirement & Estate

• Planning For Your Financial Independence
• Boosting Retirement Funds
• Retire Abroad - Tax Efficiently!

Trusts

• Why Use an Inter-Vivos Trust?
• Taxation of Dividend Income and Income Trusts
• Family Trusts - How, What, and Why?
• Refreshing Your Family Trust
• Using Family Trusts

Business Vancouver Island, September 2007

Charitable Giving - The Highlights

Written by Barb Carle-Thiesson, FCA, ICD.D

In recent years, the government has provided tax incentives that it hopes will motivate taxpayers so that they will give more consideration to charitable giving. Among the tax incentives they provided are:

• If a taxpayer gifts qualifying securities (such as stocks, bonds, mutual fund shares and other public securities) to a registered charity, the amount of the taxable capital gain that is included in a donor's income has been reduced from the standard 50% to ZERO%.
• The maximum amount of donations that may be claimed in one year is limited to 75% of net income; however, if a taxpayer gifts cultural property or makes donations of ecologically sensitive land, this tax credit is increased to 100% of net income.
• If an individual taxpayer makes a donation through his/her will, he/she can claim donations equal to 100% of net income in the year of death and the immediately preceding year. The ability to claim a tax credit up to 100% of net income provides significant tax and estate-planning opportunities.

For example, if a taxpayer is in the highest tax bracket and makes a $1,000 donation to a registered charity, the after-tax cost of the donation is about $600. If the same taxpayer donates $10,000, the after-tax cost of the donation is approximately $5,675.

In what ways can donations be made to a registered charity? Here are a few ideas:

• Make a gift of cash or publicly listed securities.
• Make a charity a beneficiary in a will.
• Make a charity a beneficiary of a life insurance policy.
• Employ a combination of a charitable gift and a traditional life annuity.
• Employ a charitable remainder trust. This is an inter-vivos trust that provides for immediate tax benefits as well as a charitable distribution that occurs upon the death of the settlor.

There are some occasions where the possibility of making a significant gift should be considered. Among these occasions: the receipt of a significant inheritance; the sale of a private business, where effective tax planning can be employed to reduce the tax bite; or the sale of real estate and/or any other investments that could result in significant capital gains.

If the possibility of making a significant gift exists, it is important that planning for the gift becomes part of a financial plan; we are fortunate that Canadian taxpayers can decide who will become beneficiaries of their estates: either the CRA or a favourite charity. It is important, where charitable gifts could be significant, that the subject is discussed with professional advisors who can provide appropriate financial solutions.

Business Vancouver Island, June 2007

Shareholders’ Agreements - The Highlights

Written by Barb Carle-Thiesson, FCA, ICD.D

If your business has more than one owner, it needs to have an agreement that documents important issues. And if your shareholders' agreement has been gathering dust in your corporate record shelves, take it out and bring it up to date. In fact, you need to make time to do it because it just might save you some big headaches in the future.

Having terminated an unsatisfactory former business relationship, personal experience says that you need to properly document your agreement BEFORE you enter into a business arrangement.

So what should you consider? While not all-inclusive, here are some of the more important issues.

Right of First Refusal

In the event that there is an offer made, make sure that you give yourself enough time to come up with the money and/or to give careful consideration to the deal.

"Shotgun clauses" are commonly used. A shotgun, in simple terms, says that if Party 1 makes an offer to Party 2, Party 2 has a choice: accept the offer, or not. If Party 2 chooses not to accept the offer, he/she is then obligated to purchase Party 1's interest on the same terms and conditions as were originally offered. This is a simple mechanism that can give each party an opportunity to exit and keep the offers as honest as possible.

There are different ways to finance the purchase and sale. The company can buy back the vendor's shares and finance the purchase price with a loan, but the proceeds that are received by the vendor are taxed as dividend income. On the other hand, if the purchase and sale occurs between shareholders and the shares are owned by an individual who meets certain criteria, the sale proceeds could be received tax-free.

Other considerations:

• Will all decisions require unanimous approval even if the shares are not held equally?
• How will you treat unequal shareholders' loan/capital account balances?
• What happens if someone suffers from a long-term disability?
• What will you do if you do not use a shotgun clause?
• How are disputes to be resolved among shareholders?
• What happens in the event of death/incapacity?
• Is life insurance required for funding the purchase of shares in the event of one party's death?

Lastly,

• Don't assume everyone will agree or even be agreeable.
• Do make sure everyone's objectives and visions are compatible.
• Do get some tax advice. It is very important that some tax planning be done early to avoid a major headache after you have made your millions.

Business Vancouver Island, May 2007

The CRA Audit

Written by Barb Carle-Thiesson, FCA, ICD.D

For many people, receiving a letter from the CRA indicating that their business has been selected for audit causes a tremendous amount of anxiety and stress. How are taxpayers selected for audit and what can one expect? Here's a short lesson in the CRA audit.

Each tax return received by the CRA is entered into a computer system allowing the CRA to sort all returns filed based on many different parameters. The groupings created by this system facilitate the selection of returns for audit. Sometimes specific returns are selected from computer-generated lists, and sometimes the CRA compares certain financial information for current and/or previous years against that submitted by similar businesses. Periodically, the CRA will decide to audit a particular segment of businesses, especially if there are concerns of high non-compliance in a particular business on a regional or national basis. Some audits arise based on information gained from other audits, investigations or from tips from other taxpayers.

What happens when selected for audit?

An auditor will contact the taxpayer to arrange a time to start his/her field work. The auditor will review the taxpayer's financial statements, audit reports from previous CRA audits, tax returns, company web sites and any other information at hand prior to visiting the taxpayer. Upon visiting the business premises, he/she will want to examine the accounting records, bank account statements, sales and purchase invoices, expenses and corporate minute books. Well-kept accounting records will keep audit time to a minimum.

After completing their field work, auditors normally issue a letter in which they propose certain adjustments to the tax returns being audited. A taxpayer normally has 30 days to respond to the proposal letter by providing additional information and/or clarification. Once the 30-day period has passed, the auditor will issue a reassessment notice reflecting the changes in taxable income and taxes payable. If there are no proposed adjustments to the return, the auditor will note this at the conclusion of the audit.

Remember, the auditor's role is to determine the correct amount of tax payable, BUT they do make mistakes. If the taxpayer does not agree with the final adjustments, the taxpayer has 90 days after the date of the Notice of Reassessment to file a Notice of Objection to appeal the auditor's adjustments. Just recently, an auditor proposed certain personal income tax and GST adjustments for one of our clients; upon appeal, it was determined that the auditor had erred in his calculations and the taxpayer owed about $1,200 less than what was originally calculated by the auditor!

Your accountant can certainly assist you through the audit process, so do ask for his/her expert advice.

Business Vancouver Island, April 2007

Highlights of the 2007 Federal Budget

Written by Barb Carle-Thiesson, FCA, ICD.D

Yesterday's budget - good, bad, or indifferent? Here are some of the more common highlights to help you decide.

Personal Tax Changes

A new non-refundable child tax credit starting in 2007 of $2,000 for each child under age 18 at the end of the year. This credit translates to about $310 of tax savings per child in 2007 and will be indexed for inflation. Unused credit amounts may be transferred between spouses.

Starting in 2007, proposed increase to the amounts used in calculating the spousal and wholly-dependent relative credits so that the amounts match the basic personal amount. The increase in the spousal amount for 2007 is worth up to about $209.

Proposed increase to the lifetime capital gains exemption for qualified small business corporation shares and qualified farming/fishing property to $750,000 from the current $500,000 for dispositions of property occurring on or after March 19, 2007.

Proposal to increase the age at which you must convert your RRSPs and Registered Pension Plans to the end of the year you turn age 71, starting in 2007.

Proposal to amend the tax rules to permit "phased retirement", which will allow an employee to receive pension benefits from a defined benefit pension plan and simultaneously accrue further benefits, in certain situations.

Qualified investments for RRSPs and other registered plans are extended after March 18, 2007 to include most investment-grade debt and securities (other than futures contracts) listed on any prescribed stock exchange.

Proposal to eliminate capital gains tax arising from donations of publicly listed securities to private foundations.

Enhanced contribution amounts and Canada Education Savings Grant limits under RESPs and extend eligibility for payments out of RESPs for more part-time programs.

Provide full tax exemption for scholarships and bursaries provided to attend elementary and secondary schools.

Long-haul truck drivers' deduction for meal expenses rises to 80 percent from 50 percent.

Introduce Registered Disability Savings Plans, loosely modeled after RESPs to help parents save for long-term financial security of children with severe disabilities.

Proposal to increase the threshold for paying personal tax instalments if personal taxes payable exceed $3,000 (from the current $1,000), starting in 2008.

Business Tax Changes

Introduction of a 25% non-refundable investment tax credit for businesses that create licensed childcare spaces for employees' children and, potentially, for other children. Maximum credit is $10,000 per child carespace created.

A two-year incentive for investments in manufacturing and processing equipment that allows 50 percent straight-line write-off on new investments.

Corporate tax instalments threshold will increase to $3,000 (from $1,000) for taxation years that begin after 2007.

Small Canadian-controlled private corporations can, in certain circumstances, pay tax instalments quarterly instead of monthly if certain conditions are met.

This brief summary should help you determine if there is any "money" or opportunities in the latest budget for you or for your business.

Business Vancouver Island, February 2007

Tax Time: Changes for 2006 Returns

Written by Doug Tyce, CA

It is time to start gathering information to file personal tax returns for 2006. Most taxpayers have to file their tax returns on or before April 30^th. Late filing penalties are assessed on late-filed returns if a taxpayer owes taxes.

Some tax changes of interest for 2006 are noted below:

Universal Childcare Benefit

Unlike the normal child tax benefit, this new benefit, which was introduced by the government, pays a parent $100 for each child under the age of 6. It must be reported as income by the spouse with the lower income. The bottom line is that this is a taxable benefit.

Capital Gains on Donations

Capital gains on donations of publicly listed securities and ecologically sensitive land are no longer subject to income tax. Not only is the capital gain not subject to tax, but the taxpayer also gets to claim a charitable donation tax credit.

Post-Secondary Education

Students no longer pay tax on scholarships and bursaries as long as they are enrolled in a qualifying post-secondary program at a qualifying institution.

Students are now entitled to a new textbook tax credit. The maximum credit is $65 per month.

Capital Gains on Qualified Fishing Properties

Capital gains resulting from the disposition of qualified fishing property after May 1, 2006 are now eligible for the enhanced capital gains exemption.

Personal Tax Credits

Employees may be eligible to claim a $250 Canada employment tax credit.

Taxpayers may claim a tax credit for the cost of monthly public transit passes paid for after June 30, 2006. The taxpayer may claim the cost of transit passes for themselves, their spouses and dependent children under the age of 19.

Individuals receiving pension income now qualify for an annual $2,000 pension tax credit.

Adoption expenses incurred during the year now qualify for a special tax credit.

New Eligible Dividend Rules

Dividends received from public companies and eligible dividends received from non-public companies in 2006 are now subject to a significantly reduced tax rate. The highest marginal tax rate in BC on these dividends has been reduced from 32% in 2005 to 18% in 2006.

Business Vancouver Island, January 2007

Why Use an Inter-Vivos Trust?

Written by Barb Carle-Thiesson, FCA, ICD.D

Inter-vivos trusts are created while one is alive and not on one's death or through one's will. There are many reasons to establish a trust during one's lifetime; trusts can hold business interests, own property, provide for a disabled child or fund an adult child's post-secondary education.

Why use a trust?

1. Income Splitting

Using a trust can allow a business owner's family to receive funds from a company at an overall much lower rate of tax by allocating income to adult beneficiaries who may enjoy much lower tax rates without permitting them to own the shares directly.

2. Capital Gains Deduction

If the trust owns shares of a qualified small business corporation AND these shares are sold resulting in a capital gain, the capital gain could be allocated among all beneficiaries - including minors - potentially allowing each beneficiary to claim some or all of the $500,000 capital gains deduction.

3. Probate Fees

With BC's probate fees set at 1.4% for every $1,000 of estate value over $50,000, there is certainly an incentive to avoid these fees if possible. If the bulk of your estate is transferred to a trust before death, significant probate fee and death tax savings could result.

4. Succession Planning

The use of a trust can have significant benefits if it is a part of a plan to transfer ownership of your company to your beneficiaries during your lifetime while at the same time paying the least amount of tax. For example, if the company has value, a shareholder could implement an estate freeze by exchanging common shares for voting preferred shares. This exchange would leave the control of the company with the founder while permitting the trust to acquire new common "growth" shares. In the event of the shareholder's death, capital gains taxes will be based on the value of the company at the time of the share exchange.

5. Creditor Proofing

Creditors of the trust's beneficiaries cannot make claims against the business nor the assets of the trust. This protects the trust assets from personal creditors, including former spouses, lawsuits and insurance claims.

There are many kinds of trusts, each of which can be used to accomplish different objectives: fixed-interest trusts, discretionary trusts, spousal trusts, alter-ego, joint-spousal and common-law partner trusts.

Very specific steps must be followed to properly create a trust, and as such, a comprehensive plan must be prepared before a trust is established.

Business Vancouver Island, December 2006

Benefits of Incorporation

Written by Doug Tyce, CA

The most common question asked by most new business owners is, "Should I incorporate my new business?" The answer depends on each individual's particular circumstances. Here are some hey points to consider in making your decision.

1. Income-tax Deferrals

Most small business corporations pay corporate tax of 17.7% on their first $300,000 ($400,000 starting in January 2007) of net business income per year. If a business owner is in the 44% personal tax bracket, then the company will defer taxes of $26 for every $100 of profit retained by the corporation. These funds can be invested or used to retire outstanding corporate debts. For most business owners, the after-tax profits invested in their corporation become their primary source of retirement income.

2. Creditor Protection

Corporations provide limited liability. The business owner's personal assets are only at risk of being lost to creditors to the extent that the owner has made financial contributions to the company and/or they have issued personal guarantees to specific creditors, such as banks.

3. Enhanced Income-splitting Opportunities

Family members, including children, can only receive wages from the company that are reasonable given the duties they perform. Alternatively, family members that are shareholders of the company can be paid any amount of dividends regardless of the value of the duties performed by them. This allows business owners to fully utilize the low marginal tax brackets of all family members. Strategies exist to convert dividends paid to minor children into capital gains so that such dividends are not subject to the "kiddie" tax rules.

4. Tax-free Sale of Business

If planned right, the business can be sold on a tax-free basis by utilizing the small business capital gains deduction of $500,000 per shareholder.

There are many other benefits of operating a business in a corporation, including private health services plans, opting out of the Canada Pension Plan and providing more creditability to your business to name just a few.

The Canada Revenue Agency permits the transfer of a business to a corporation on a tax-deferred basis. These transfers require preparation of special legal documentation and income tax filings.

As the annual administration and accounting for most corporations is usually more complex than that of an unincorporated business, a business should only be incorporated if the benefits of doing so outweigh the associated costs.

Business Vancouver Island, November 2006

It’s Your Money -- Make Sure You Keep the Lion’s Share of It!

Written by Barb Carle-Thiesson, FCA, ICD.D

Unless a business owner is one of those rare individuals who truly lives to work and would do so with our without remuneration, one should remember that they are not only investing their time in their business but also their energy and savings in order to make money and create capital. So are they maximizing the rate of return on their personal investment?

To monitor success, one should step back at least once a year and assess where their business currently sits and where it's going. Here are several important items that should be reviewed to ensure that the return on a business owner's investment is being maximized.

Business considerations

• Are GST/PST recoveries and/or deductions being maximized?
• Are the correct amount of CPP and EI deductions being paid -- and no more?
• Are internal controls effectively protecting the business' assets?
• Is expensive and potentially non-deductible interest and/or penalties being avoided?
• Is financing arranged tax-effectively? Remember, non-deductible interest must be paid with tax paid dollars!

Personal considerations

• How is the owner being paid? Should the current salary/dividend mix be changed?
• Is income splitting with family members being achieved?
• Are RRSP contributions being maximized?
• Is an Individual Pension Plan being used?
• When retired, will retirement income be split between spouses?
• Are loans to family members at prescribed interest rates being made so that they can invest in an effort to generate returns greater than the prescribed interest rate?
• Are there legitimate opportunities for family members to receive reasonable salaries if they contribute to the success of the business?

Ownership considerations

• Would the use of a holding company provide enhanced creditor-proofing? More income splitting opportunities?
• Would a family trust be beneficial?
• Would the $500,000 enhanced capital gains deduction be available if the shares of the business were to be sold? If not, can it be fixed?

One should make sure that their affairs are structured so that their returns are maximized. An annual check-up along these lines will make sure that a business owner is maximizing the return on their investment and that they will get to keep the lion's share of their financial success.

Business Vancouver Island, October 2006

Planning For Your Financial Independence

Written by Doug Tyce, CA

The good news: we are going to live longer than any previous generation. The bad news: we are going to live longer than any previous generation. It's a double-edged sword where saving for retirement could become a significant challenge, both in terms of saving and time for saving.

One's ability to save for retirement is not only a function of the ability to save; it is also a function of the fact that the government is trying to take as much as possible out of one's pay cheque.

Here are some things that should be given serious consideration when embarking on a plan for financial independence.

Have clear objectives

In order to plan for the future, one must start with the end result in mind. Consider the future in terms of what you want to do upon retirement. Does this include traveling, downsizing your home or taking up a hobby? Having given serious thought about what retirement will look like, calculations need to be made to figure out, in today's after-tax dollars, the amount of money that will be needed to finance such retirement plans. Most individuals incorrectly assume that they will be able to live on significantly much less in retirement, be realistic in making assumptions and calculations. Odds are that costs will decrease somewhat but you likely won't want to live the life of a pauper either!

Pay yourself first

A forced savings program will pay dividends in the future and provide an effective and consistent tool for building capital.

Use a corporation wisely

Corporations can, in addition to providing significant income splitting and creditor proofing opportunities, also prove to be powerful retirement vehicles that compare very favourably to RRSPs. Upon retirement, up to $35,000 of capital accumulated inside a corporation may be drawn from the corporation each year by each shareholder in the form of dividends without paying any significant personal income taxes. These funds can be used to bridge business owner's retirement needs through to the maturity of their registered retirement savings plans.

Tax plan

Don't be caught missing tax planning opportunities. If interest must be paid on mortgages and/or lines of credit, make sure non-deductible debt is paid down first. If possible, convert non-deductible debt to deductible debt.

While there may be some mystique in tax planning, make no mistake: there is no mystery in successfully planning for retirement. It takes careful consideration, realistic assumptions and consistent saving and monitoring to get there. Just make sure that the planning is not left until it is too late!

Business Vancouver Island, August 2006

Can a Website Enhance Your Business?

Written by Barb Carle-Thiesson, FCA, ICD.D

Whether your business currently has a website or not, it is worthwhile to consider the following question: "What do you want your website to accomplish?" The type of website that you design needs to have the ability to produce the outcome that you wish to see.

Do you need a website because every other business has one? Or are you looking to generate sales leads? If you are considering creating a website that will provide information only, you have to realize that this type of website is akin to printing another brochure or preparing other marketing materials for distribution to your customers -- it is a necessary investment that you hope will lead to new business.

Do you want to solidify your customer relationships by providing them with 24/7 support and information? Do you want to build/enhance brand awareness? If you want your website to generate MORE business by expanding your existing customer base, you need to be able to project future business growth sufficiently well to justify the required investment in website development.

Or do you want to stream line your business operations by having your customers conduct business online thereby decreasing your company's administrative costs? For example can your customers sign up online for certain products and/or services which will in turn provide administrative relief?

Once you have determined the results that you are looking for, consider if your website needs to be professionally designed, remembering that a website represents your organization. It should --in fact it must - build credibility.

You will want to determine if your target audience actually searches for your products and/or services online so don't be afraid to do some of your own online searching. Look at your competitors' websites and ask your clients and/or customers if they regularly search online. Take notes of the things that you like about other websites.

At the end of the day though, the decision to invest in or upgrade your website must be handled in the same manner as any other investment decision: Can you justify the required investment based on a rock- solid business plan? If the answer is no, you may be better off deferring that fancy website until such time as you can reasonably predict that the necessary enhancements will add value to your business and to its bottom line.

Business Vancouver Island, July 2006

Taxation of Dividend Income and Income Trusts

Written by Doug Tyce, CA

The popularity of income trusts has exploded over the past few years. The reason appears to be the promise of monthly cash distributions of 10% to 15% per annum. These returns are enticing in today's low interest rate environment. The promised returns are great but the real reason why income trust were developed was to eliminate the double taxation built into the Canadian tax system. In doing so, returns to investors from income trusts are generally much higher than those from public companies earning the same level of income.

Income earned by a corporation is first subject to corporate tax and then personal tax when the remaining after tax income is paid out to shareholders. A complex series of rules, which includes the gross up and dividend tax credit system, effectively reduces the personal tax paid on dividend income with a view to integrating the tax system and minimizing double taxation.

These rules work as intended for income earned by small business corporations (SBC) up to the small business limit. Assume a SBC earns $100, pays corporate tax and then distributes the remaining funds to its shareholders. At the highest marginal tax rate the shareholders end up with $56 after all taxes are paid. The overall effective tax rate is 44% which is the same tax rate the shareholders would have paid if the business income had been earned by them directly.

This sounds great but the system does not work for income earned by a SBC in excess of the small business limit nor for income earned by public corporations.

For example, a $100 of income earned by a public company is subject to corporate tax and then personal tax is paid on the dividend distribution. At the highest marginal tax rate the shareholders end up with $46 after all taxes are paid. The effective tax rate is 54%. The double taxation amounts to $10 or about 22%!

So how have income trusts eliminated this double taxation? Income trusts are not corporations and as such do not pay corporate tax. Investors reports their respective share of the business income as though they earned it directly. At the highest marginal tax rate, an investor will pay tax of $44 on $100 of trust income. This leaves the investor with $56. Double taxation has been eliminated!

In the last federal budget, the government proposed a new system to eliminate this double taxation. Investors have been double taxed for too long. These changes are long overdue!

Business Vancouver Island, April 2006

Transfer of Unrealized Capital Losses

Written by Doug Tyce, CA

Is there a way to transfer unrealized capital losses on investments owned by a spouse over to the other spouse so that the losses can be used to offset the second spouse's capital gains? This is a common scenario because many investors are still holding hi-tech stocks that dropped drastically in value in the late 1990s and have never recovered.

Here is a tax planning tip that relies on very complex tax rules which if followed will allow the unrealized capital losses to be transferred.

Let's assume that the husband owns shares of a public company which would create a large unrealized capital loss if he were to sell them. His wife has owned shares of a Canadian bank for a number of years which are now worth considerably more than she paid to purchase them.

The wife could purchase her husband's loss shares by giving him a personal cheque equal to the fair market value of the shares. She must use her own personal funds to make this purchase.

This sale would ordinarily result in her husband reporting a capital loss on his personal tax return however this loss is considered to be a superficial loss as it arose from a sale between spouses. Superficial losses are denied for tax purposes and in this case, the amount of the denied loss is added to the cost of shares purchased by the wife. So the total cost of the loss shares for the wife would be equal to the amount she paid her husband for the shares plus his denied loss. She can then sell the shares on the open market and realize a capital loss which can be used to offset capital gains on the sale of other securities owned by her.

In order for the appropriate series of tax rules to apply to this transaction, the husband must make a special election in his personal tax return so that subsection 73(1) of the Income Tax Act does not apply to this transaction. If this election is NOT made, the unrealized capital loss will not be transferred.

This plan relies on very specific sections of the Income Tax Act and anyone wishing to use this strategy should seek the advice of their professional accountant.

Business Vancouver Island, February 2006

Five Financing Tips

Written by Barb Carle-Thiesson, FCA, ICD.D

Here's a list of five simple financing tips that could save you money.

1. Choose Short Terms for Personal Loans

Short-term loans and/or personal lines of credit should be used to finance personal debts. The interest rate charged on such loans is significantly less than that paid on credit cards. If extra cash becomes available, you will be able to pay down these types of personal loans without incurring costly prepayment penalties attached to longer-term loans.

2. Convert Personal Debt to Business Debt

Consider converting personal debts such as a home mortgage or an auto loan into a tax deductible business/investment loan. Significant cash savings can be achieved when investment and/or business funds are used to repay personal debt. When a non-tax deductible house mortgage is converted into a tax deductible business or investment loan, substantial savings arise as the house mortgage will be repaid with significantly cheaper after-tax dollars. There are a number of debt conversion strategies available to accomplish this.

3. Don't Lock in Business Loans

Locking in a business loan means paying interest at a fixed rate for a fixed period of time. Although, locked in loans provide comfort to the borrower, a significant interest rate premium is paid for such comfort. Consider lower rate loans which calculate interest at a floating interest rate. These loans provide the lowest interest rate and the opportunity to repay any amount of the loan at any time without penalty. These loans usually provide the option of locking in the interest rate at any time if needed.

4. Comparison Shop

Even if you have been dealing with the same bank for a number of years and you have a great relationship with your banker, you should comparison shop when renewing or negotiating a new loan. Don't let your loyalty to your bank cost you money. You will be offered a better deal if you push a little or when s/he knows that another bank is eager to provide financing. However, don't underestimate the value of an established relationship for a half percent savings.

5. Get a Proposal Letter

Always request financing proposals in writing. A bank proposal letter will outline in detail the loan terms.

If bargaining with bankers seems like a daunting challenge, your financial advisor can do it for you. An experienced advisor knows how to handle bank negotiations and is not afraid to bargain hard on your behalf.

Business Vancouver Island, January 2006

What Attracts "The Taxman" to Your Tax Return?

Written by Doug Tyce, CA

Did you ever wonder which items on your personal tax return might cause the Taxman to want to review your tax return? There are a number of items that could and do attract CRA's attention and for which you will want to ensure that you have sufficient documentation so that you have nothing to worry about.

Capital gains and losses

Since 1971 when the Income Tax Act changed, CRA has reviewed the reporting of capital gains and losses to ensure that they are properly reported and that they are calculated correctly. Two areas of interest have been noted by CRA recently.

Capital gains that are denominated in a foreign currency. Not only are you required to report the actual gain from holding the property but you are also required to report the foreign exchange component of your resulting capital gain or loss. Remember to use the foreign exchange rates that were in effect on the date of purchase as well as on the date of sale and not the average exchange rate that existed for the year when calculating your eventual capital gain/loss.

And recently CRA has expressed interest in the calculation of capital gains and losses on the sale of income trusts given that each distribution from an income trust includes both an income component and a return of capital ("ROC") component. The ROC is shown separately on the T3 slip that reports the income distributed for the year. The ROC reduces the original cost of the investment and hence increases the resulting capital gain on sale. CRA wants to make sure that the ROC is handled correctly; provided it is, you have nothing to worry about.

Foreign tax credits

Canadian taxpayers who pay taxes in a foreign country can claim the taxes paid as a reduction of their Canadian income taxes on a dollar-for-dollar basis. As a result, CRA has recently reviewed many of these claims to ensure that taxpayers have appropriate documentation, such as foreign tax returns, to support these claims.

Alberta residency

CRA believes -- and maybe correctly -- that most of us would love to be resident in Alberta on December 31st of each year to take advantage of Alberta's top marginal tax rate of 39%, which is a whopping 5% less than BC's top tax rate of 44%. So if you think that merely being in the province over Christmas is sufficient to allow you to file this way, CRA thinks not. Residency is substantiated by CRA by looking at where you have your most "significant residential ties" -- meaning where your home is located, where your family resides and where your medical plan and golf or curling club memberships rest.

Interest paid and related carrying charges

CRA does not want taxpayers to claim deductions for personal and living expenses. So if you use your line of credit to invest, you must be able to prove that the funds were withdrawn for investment purposes and not for home renovations. An easy rule of thumb: use one line of credit for investing ONLY and another for personal purposes.

Donations

Past "buy low, donate high" donation schemes did little to warm CRA's heart -- if it had one. Indeed, past plans saw some taxpayers donating property for fair market values that greatly exceeded their cost. As a result, new legislation was introduced that limits the receipt amount if the donation was for property donated within three years of its acquisition. Be wary of new schemes that purport not to be affected by these rules.

To be forewarned is to be armed. These few tips might just keep you out of the taxman's sights for another year!

Business Vancouver Island, December 2005

Negotiating a New Lease?

Written by Barb Carle-Thiesson, FCA, ICD.D

As discussed in our September column, a business owner is almost always financially further ahead over the long-term if the business owns its own premises. However, for many reasons, purchasing business premises is just not an option for many business owners and consequently these business must negotiate leases.

Here are just a few tips that should be kept in mind when negotiating a lease:

• Start shopping early for a new location. This should be done no later than a year before your current premises lease is up for renewal.
• Learn what other tenants and neighbours have to say about the property. You could gain valuable insights this way.
• Do your homework and READ THE LEASE. Remember that about 90% of the lease agreement contains landlord remedies in the event of tenant defaults; only about 10% of the lease agreement deals with items that the tenant is responsible for. Determine if you will be paying triple-net costs and how your triple-net contribution will be calculated. If you are leasing a multi-tenant property, you may want to ensure that the lease grants you exclusivity for your product and/or service. Determine the optimal lease term and renewal options for your business by talking to your financial advisor because there are income tax considerations of which you need to be aware prior to signing the lease agreement.
• Keep your deal close to your chest and don't offer the deal to the landlord without asking questions to ensure that you get at least the same deal as other tenants.
• Create competition for your tenancy. Be prepared to walk away if necessary to get the deal that you want.
• Measure your space. You may be paying for more space you are actually leasing!
• Don't let agents who work for the property owner represent you in the negotiation. You need someone who is wholly and solely on your side.
• If all else fails, don't be afraid to find someone to help you negotiate your position.

Do you have to provide a personal guarantee? Certainly, most of us would balk at having to do so, but if the landlord has invested in significant leasehold improvements, maybe you should provide a declining balance personal guarantee (i.e. one that diminishes over the term of the lease).

Finally, find out what's been happening to the property in recent times. If a number of tenants have recently moved out, you may be in a position to negotiate a better deal!

Business Vancouver Island, November 2005

Yearend Planning Tips

Written by Doug Tyce, CA

Although another year has come and is almost gone, there is still time to use some simple yearend tax planning tips to reduce income taxes.

Acquire Equipment

If a business plans to invest in new equipment, consider doing so before the end of the fiscal year. Why? If the newly-acquired assets are put to use by the business prior to the end of the year, the business can claim depreciation now rather than waiting for the following year to do so.

Sell Investments

Consider selling investments having unrealized losses before the end of the fiscal year. The capital losses will be used to offset capital gains realized earlier in the year. Unused capital losses may be carried back to any of the three prior tax years to recover capital gains taxes paid in those years.

Sell Equipment

Unlike the tax treatment of losses associated with investments, losses on the sale of depreciable assets are only deductible if there are no further assets remaining in the class. However, consider selling these assets AFTER the end of a fiscal year so that an additional year of depreciation can be claimed and the income taxes on assets sold for a gain can be deferred for a year.

Bonuses

A common strategy to reduce corporate taxes is to have the corporation declare a yearend bonus. If the corporation's fiscal yearend date falls in a different calendar year from the date that the bonus is actually paid, then there is an opportunity to reduce personal tax on the bonus.

Dividends

Corporations that pay refundable income taxes on investment income are entitled to a refund of those taxes when the company pays dividends to its shareholders. The refund is calculated at $1 for each $3 of dividends paid.

Tax-Free Dividends

If the corporation has reported capital gains, the non-taxable half of those capital gains can be paid TAX-FREE to shareholders if certain forms are filed with CRA.

While these ideas have been presented briefly, the rules may be more complicated than presented. These are just a few of the many yearend tax planning opportunities available to business owners.

Business Vancouver Island, October 2005

Family Trusts - How, What, and Why?

Written by Barb Carle-Thiesson, FCA, ICD.D

Trust talk has been familiar conversation in BC for years although not many people fully understand trusts. Here's a short course.

Trusts were established years ago to preserve assets for future generations and to avoid/address tax problems, domestic problems or both as follows:

• Delay transfer of assets to children/grandchildren until they are more mature by creating a trust to hold the property until a specified age is achieved.
• Protect property from transferring to non-family members in the event of a bankruptcy or marriage breakdown. The intended beneficiaries can benefit from the trust assets but will have no control; only the trustee(s) can make decisions in respect of the trust property.
• Protect property from transferring to a spendthrift beneficiary. The trustee(s) can have wide powers over the trust property, including the ability to make interest-free loans to the survivors.
• Protect one's assets in the event of one's incapacity. One could consider transferring personal assets to a trust so that in the event of incapacity, the trustee(s) could make decisions about personal assets instead of leaving them to a government agency or a court.

There are several kinds of trusts.

• Fixed-interest Trusts: These trusts require that trust income and/or capital to be provided to a specific beneficiary; the trustee(s) have no discretional powers. This type of trust is often used in a will where the surviving spouse is a second wife who is to receive all of the trust income annually but on his/her death, the estate is distributed among all of the children of the first-to-die.
• Discretionary Trusts: Income and/or capital is distributed at the trustee's discretion. This type of trust allows the trustee to tailor income and/or capital distributions as the needs of particular beneficiaries arise. It also permits the beneficiaries the choice of having the income taxed in the trust for passing along to the next generation. It does not normally permit a particular beneficiary to an entitlement from the trust. Finally, discretionary trusts are very flexible in regards to the duration of the trust and the eventual disposition of the trust assets.
• Spousal Trust: If a deceased leaves property in trust for the benefit of his/her surviving spouse, significant tax advantages can arise such as the deferral of capital gains on transfers to the trust.
• Alter Ego, Joint Spousal and Common-law Partner Trusts: If certain conditions are met - i.e. the settler must be at least 65 years of age - property can be transferred to the trust tax-free. Where the property does not revert to the estate on the settlor's death, the value of the trust assets is excluded for probate purposes.

There are many kinds of trusts and their use is driven by different factors, not the least of which is income-splitting.

Business Vancouver Island, September 2005

Purchasing Commercial Real Estate

Written by Doug Tyce, CA

The age-old question: To lease or to purchase? History has proven time and time again that in the long run you are always further ahead if you purchase. Given today's low interest rate environment, the purchase option makes even more sense. Commercial real estate can be a very profitable investment, especially if the property is owned by the tenant.

Let's look at the following typical example.

A business is leasing 2,000 square feet at $2,000 per month plus triple net. This equates to $12 per foot plus triple net costs. "Plus triple net" means that in addition to the base rent, the tenant must also pay its proportionate share of the property taxes, hydro, water and general repairs and maintenance, to name the most common types of triple net costs.

Generally, a 2,000 square-foot commercial property generating $24,000 a year in gross rental income will be worth somewhere between $240,000 and $260,000.

If the property is purchased for $250,000, assuming it is 100% financed at prime plus 2%, the building will be paid for in 17 years. The tenant's monthly lease payment has been converted into a mortgage payment. While 17 years may sound like a long time, it is not because most businesses are around for much longer.

The cost of leasing for 17 years, assuming no inflation, is $408,000! Given the option, I would prefer to own the property debt-free after 17 years rather than the landlord owning the property debt-free! What is a $250,000 building going to be worth in 17 years? Double? Triple? Regardless of the property's future value, the property owner will be further ahead.

Can a business afford to purchase its premises? How can it not? Coming up with the 25 to 40% down-payment is usually the difficult part for most new businesses as they are often under-capitalized. In spite of this, there are many creative ways to fund the down-payment such as using second mortgages, RRSP funds or lines of credit. If these options don't work, then consider taking on a partner. There are many investors available to assist business owners in purchasing commercial real estate. Owning half of the property is better than not owning it at all. Partnerships usually include a provision allowing the business owner to buy out the other partner after a few years.

There are many innovative ways to structure the purchase of a commercial property. The wealth created from owning commercial real estate can be a huge boost to one's retirement plan. Business owners should be building wealth for themselves rather than building empires for landlords!

Business Vancouver Island, August 2005

5 Common Tax Mistakes

Written by Barb Carle-Thiesson, FCA, ICD.D

What is the best investment that you can make? Saving every penny from the tax collector at CRA. And how best to do that? Be armed with the right information. Here are just a few tips on how to invest wisely and save taxes.

Fund Switches

From a tax perspective, switches between mutual funds within the same family of funds are generally treated as if units of one fund were sold so that the investor can acquire units in another fund. These transactions result in capital gains and/or losses. There are exceptions to this rule, but they are few and far between.

Income Attribution

There are rules in the Income Tax Act that deem income and/or capital gains to be earned by the transferor of property, especially if one transfers property to a spouse or child in an effort to split income. These income attribution rules can nullify the income-splitting plan and cause the parent transferor to report the income and/or capital gains, when the plan was to have the spouse or child report the income.

Changing Ownership of Your Account

Tax implications will arise if the ownership of an investment account is changed, which includes simply changing an account into joint name registration with a child, spouse or parent. CRA deems such changes to be dispositions for income tax purposes which could create unanticipated gains, losses and/or income taxes. Always be aware of the income-tax consequences of transfers and/or gifts of property.

Understanding Trust Accounts

Setting up "in-trust" accounts for children means that ownership of the assets has been transferred to the children, and that the property cannot revert back to the contributor; otherwise, any investment income and capital gains earned on the assets would be attributed back to the parent instead of being taxed to the child. Setting up an "in-trust" account correctly will reduce the risk of an unintended outcome in the event of a CRA review.

Don't Prepare Your Own Tax Return

The tax rules are complex and a more-than-basic awareness of the tax rules is required if one is to minimize taxes and keep more of their hard-earned income. As the saying goes "a little knowledge can be dangerous", and there is a lot at stake when it comes to income taxes. Remember, it is fool-hardy to undertake complex income tax transactions without seeking professional advice. The consequences could be very significant.

These few tips could save big dollars in the future, so be well-armed with the right information before straying unprepared into transactions that could result in unintended income tax consequences.

Business Vancouver Island, July 2005

Refreshing Your Family Trust

Written by Doug Tyce, CA

How old is your family trust? Although many family trusts and corporate structures were considered leading-edge at the time they were set up, it may be time to review their effectiveness.

When the use of family trusts for income-splitting was first introduced, the business owner was usually named as trustee and the business owner's spouse and children were appointed as trust beneficiaries. In many instances, because the business owner was not a beneficiary of the family trust (the trust), the business owner was issued a portion of the participating shares of the corporation with the remainder of the participating shares being issued to the trust.

In order to split income without dividends being paid to the business owner, these structures required the payment of stock dividends followed by share redemptions. In most cases, the business owner's stock dividend shares were not redeemed as doing so would have created dividend income that would have been taxed at the highest marginal tax rate. Therefore, most business owner's who have trusts that were set up in 1998 or earlier may have accumulated a large number of unredeemed stock dividend shares.

Why is holding unredeemed stock dividend shares an issue? When the retained earnings of the corporation is significantly less than the value of unredeemed stock dividend shares, the corporation may not have the financial capability to redeem the outstanding shares. It is not uncommon for a business owner utilizing one of these old structures to hold well in excess of $100,000 of unredeemed stock dividend shares. In many cases, we have seen the business owner holding more than $300,000 of unredeemed shares!

As a result, CRA may challenge continued income-splitting with the trust. This could result in future dividends being considered invalid, hence preventing income-splitting with the trust for a number of years.

Continued use of this structure will just add to the number and value of unredeemed stock dividend shares and increase the risk that this structure will not provide the expected income tax savings.

To solve this problem, today's trusts are designed to be much more flexible. New trusts contain provisions allowing the trustee to appoint additional beneficiaries, including the business owner and/or a holding company. Today, trusts usually own 100% of the participating shares of the corporation, which means that the trust can receive dividends directly.

This simplifies the process of splitting income with the trust as it eliminates the necessity to use stock dividends, and also eliminates the continued accumulation of unredeemed stock dividend shares by the business owner.

Tax strategies are just like technology; it may be time to upgrade.

Business Vancouver Island, June 2005

10 Critical Small Business Errors

Written by Barb Carle-Thiesson, FCA, ICD.D

Misunderstanding customers, giving up early, and a lack of a marketing plan are three of the traps that could bring your small business to its knees. Read on for the rest.

1. Marrying an idea and then hanging on to it for too long - change is good, new ideas drive successful entrepreneurs. Don't be afraid to try something new; it may bring success.

2. Misunderstanding customers - know what they want both now and in the future, and learn how to help them even if their needs can't be met today. Businesses must anticipate and meet their customers' changing preferences or risk loosing customers to competitors.

3. No marketing plan - a good marketing plan is effective, efficient and is presented consistently. It can create the exact attention a business needs to showcase its strengths in front of the people and the businesses that need its products/services.

4. Underestimating cash flow requirements - even though the world may beat a path to a better mousetrap, it is also quite likely that it won't get there as quickly as one might expect. A business must know its cash-flow requirements to sustain its business until the world catches up!

5. Not understanding employees - staff need patience, persistence and mentoring. If staff morale and productivity are kept high, profits should see a positive result. Remember, managing staff as well as coaching and mentoring them is one of the toughest challenges for a successful business!

6. Know reality - although many are likely, one must work and pay bills in "reality".

7. No sales plan - without a lot of luck, businesses cannot be successful unless they can realistically project where their sales will come from. Successful businesses have a sales plan allowing them to plan their growth and financial success.

8. Doing it alone - a business owner can't do all the work AND grow the business at the same time. Don't be afraid to hire the right personnel to do the work. A business is only as good as its employees.

9. Find a mentor - business owners need one or more trusted friends and/or advisors that can be used as a sounding board for new ideas. Reviewing the business plan, assessing results and getting objective advice is critical to the success of any business.

10. Giving up - if a business is going to fail, don't hang on, get it over with quickly and learn from the errors. Armed with new knowledge, try again. Remember, many entrepreneurs failed one or more times before success graced them!

Business Vancouver Island, May 2005

Boosting Retirement Funds

Written by Doug Tyce, CA

When you first considered incorporating, it was likely motivated by the ability to pay taxes at a lower rate, the ability to split income with family members, to potentially sell your business tax-free and/or for creditor-proofing purposes. But there is another reason to incorporate: the company can become a very powerful retirement vehicle by taking advantage of income tax deferrals. Let's use an example to illustrate just how powerful a corporation can be.

Assume the annual net business income is $150,000 and that $60,000 of after-tax income is required to fund living expenses. As an unincorporated business, a business owner will pay personal income tax of about $53,000 on this net business income. This leaves about $60,000 to fund living expenses and about $37,000 for investing each year.

Now, if the business were incorporated, the tax situation would look like this:

Net business income $150,000
Owner salary (85,000)
Corporate taxable income $65,000
Corporate tax @ 17.5% (11,400)
Corporate cash retention $53,600

Owner salary $85,000
Personal tax (25,000)
Personal cash retention $60,000

The CASH ADVANTAGE OF INCORPORATING is $16,600 per year because the company will have $53,600 available each year to invest, whereas the unincorporated business owner will only have $37,000 available to invest each year. The cash advantage represents the personal income taxes deferred by investing all cash savings in the corporation. In essence, the corporation can invest funds that would otherwise be sent to CRA as personal income taxes.

If this cash advantage of incorporating is invested in the company at 4% for ten years, it will accumulate to $207,000. This retirement plan boost would not exist if the business were not incorporated.

These funds can be withdrawn upon retirement and prior to cashing in RRSP investments. If planned properly, a business owner can withdraw from the company, upon retirement, approximately $31,000 per year on a tax-free basis. The longer RRSPs are left intact, the more significant the benefits are from tax-free compounding. RRSPs should only be cashed in once the investment assets of the corporation are depleted.

Incorporating is a great tool that can provide a nice boost to retirement income.

Business Vancouver Island, April 2005

Using Family Trusts

Written by Barb Carle-Thiesson, FCA, ICD.D

Family trusts are created while one is alive and not on one's death or through one's will. There are many reasons to establish a family trust during one's lifetime: trusts can hold business interests, own property, provide for a disabled child or fund and adult child's post-secondary education.

Why use a family trust?

1. Income Splitting

Using a trust can allow a business owner's family to receive funds from a company at an overall much lower rate of tax by allocating income to adult beneficiaries who may enjoy much lower tax rates without permitting them to own the shares directly.

2. Capital Gains Deduction

If the trust owns shares of a qualified small business corporation AND these shares are sold resulting in a capital gain, the capital gain could be allocated among all beneficiaries - including minors - potentially allowing each beneficiary to claim some or all of the $500,000 capital gains deduction.

3. Probate Fees

With BC's probate fees set at 1.4% for every $1,000 of estate value over $50,000, there is certainly an incentive to avoid these fees if possible. If the bulk of your estate is transferred to a trust before death, significant probate fee and death tax savings could result.

4. Succession Planning

The use of a trust can have significant benefits if it is a part of a plan to transfer ownership of your company to your beneficiaries during your lifetime while at the same time paying the least amount of tax. For example, if the company has value, a shareholder could implement an estate freeze by exchanging common shares for voting preferred shares. This exchange would leave the control of the company with the founder while permitting the trust to acquire new common "growth" shares. In the event of the shareholder's death, capital gains taxes will be based on the value of the company at the time of the share exchange.

5. Creditor Proofing

Creditors of the trust's beneficiaries cannot make claims against the business nor the assets of the trust. This protects the trust assets from personal creditors, including former spouses, lawsuits and insurance claims.

Very specific steps must be followed to properly create a trust, and as such, a comprehensive plan must be prepared before a trust is established.

Business Vancouver Island, March 2005

Do I Need an Accountant?

Written by Doug Tyce, CA

"March Madness" fits college basketball as well as the lead up to Canadian income tax deadlines. So the question becomes: "Are the services of a chartered accountant necessary to sort through the paperwork and prepare a tax return - or not?"

If the forms simply need to be completed, then the answer is "no" as "do-it-yourself" tax programs are readily available at your local computer store, plus CRA will provide useful information through a helpline at 1-800-959-8281 and through their website.

So what's the difference between completing a tax return and using the services of a chartered accountant? A chartered accountant will not only complete the tax return, but will ask questions so that tax deductions and tax credits are maximized. He/she may also identify tax breaks not claimed in prior years and amend earlier tax returns if necessary. Finally, the most valuable advice a chartered accountant can provide is the short- and long-term strategies for reducing taxes.

But for this year, some often over-looked tax deductions and tax credits are outlined below:

Business Owners/Salespeople/Employees

Claim maximum deductions for automobile, home office and promotional expenses.

Incorporated Businesses

Are owner/managers reporting too much or too little income on their personal tax returns?

Childcare Costs

In addition to daycare and nanny costs, payments to babysitters, registration fees for day and overnight camps, and before-and-after-school care all qualify as eligible childcare expenses.

Medical Expenses

Family medical expenses may be claimed as a tax credit by either parent and include extended health and dental insurance premiums, renovations to make homes wheelchair accessible, and travel/meal costs incurred while travelling out of town for medical treatment.

Other

In some cases, up to $5,000 of student's unused tuition and education tax credits can be transferred to parents. Deduct interest paid on Canada student loans and investment loans. Consider saving RRSP deductions for higher income years. Split investment income between spouses. Claim disability tax credits (if applicable) as well as caregiver and infirm dependant tax credits for those taking care of elderly parents. If a move occurred and the criteria are met, deduct moving expenses.

And if a deduction is missed in an earlier year, it may not be too late to request an adjustment. Why pay more tax than you have to!

Business Vancouver Island, February 2005

Retire Abroad - Tax Efficiently!

Written by Barb Carle-Thiesson, FCA, ICD.D

Middle-income Canadians retiring in Canada can expect to pay tax on their retirement income at the supposedly reasonable rate of 30-35% on every dollar over $35,000. However, those retirees who want to spend more that six months of every year in another country - say Mexico - cannot only enjoy a warmer climate and culture, but achieve significant tax breaks on their retirement income at the same time.

Briefly, here's how.

Cease Canadian Residency

To opt out of the Canadian-tax system, a taxpayer must cease Canadian residency and commence residency somewhere else. How one ceases residency depends on ones circumstances, but it will include severing all residential and social ties with Canada by:

1. either selling your residence or leasing it to others;
2. cancelling provincial health coverage;
3. cancelling social club memberships;
4. cancelling automobile registrations;
5. purchasing or leasing a home in Mexico; and
6. establishing an independent health care policy;

It is important that a file, which can be provided to CRA, be maintained documenting actions taken in support of severing these ties.

Because non-residents of Canada are permitted to keep certain Canadian bank accounts and investment portfolios, each bank and/or financial advisor must be advised to designate all such accounts as non-resident accounts. Of course, copies of these letters should be added to the file of non-resident documents.

Tax Efficient Retirement Income

Conversion of RRSPs into RRIFs means that periodic pension payments received by non-residents are taxed at a 15% withholding tax which is less than the 25% withholding rate applied to lump-sum withdrawals from RRSPs by non-residents.

Upon becoming non-resident, all government and private pensions, interest and dividend payments to non-residents are subject to a 15% withholding tax.

Capital gains earned on Canadian portfolio investments held by non-residents are not subject to Canadian tax.

Voila – one's Canadian tax liability on retirement income has been significantly reduced.

Other Related Issues

Prior to ceasing Canadian residency, one must examine existing life insurance and critical illness insurance policies as well as independent health care insurance.

It should be noted that ceasing Canadian residency could potentially trigger departure taxes on investment assets that have increased in value. The cost of such taxes must be considered before ceasing Canadian residency.

Remember, cessation of residency is not the same as giving up Canadian citizenship. And when you are ready to return to Canada, you should be well experienced in how to set up residential ties.

Business Vancouver Island, January 2005

Financial Security - Can You Get There?

Written by Doug Tyce, CA

A new year provides and opportunity to review your financial goals. Financial goals can be translated into financial success by following some simple but very important guidelines.

Life Enriches Your Means

The only sure way to create wealth is to live beneath your means. People often make the mistake of over-extending themselves in an attempt to maintain a certain lifestyle that is beyond their means.

Follow the 10% Rule

The goal is to accumulate an investment portfolio that will sustain you comfortably through retirement. How do you get there? Live on 90% of your personal after-tax income and save ATLEAST 10% each month. Unless you plan to either marry into or inherit money, you will never accumulate enough money for your retirement without following this savings plan.

Don't Take Unnecessary Investment Risk

"Too good to be true" rates of return sound good but along with such returns come significant risks. Can you afford to loose your hard-earned savings? Do you really have to earn such high rates of return to achieve your financial goals?

Hold the Credit Card Trap

Although credit cards are convenient, they can also be dangerous financial traps. Make it your personal policy to either pay cash for your purchases or to pay off your credit card each month.

Control Your Wants

Don't buy things that cost more than you expect. Don't mortgage your future by living beyond your income. The key: discipline.

Be Aware of the Taxman

Instead of asking yourself if an expense will save taxes, consider also asking if the item is a worthwhile cost or investment. If you want to lower your taxes, make sure you know how the various sources of income are taxed. Some income is even tax-free!

Start Your Retirement Planning Early

Time is on your side the earlier you start. Take advantage of tax-deferred retirement savings plans such as RRSPs and IPPs.

Protect Your Family

Review your insurance coverage periodically, including life and disability coverage. Have a will and renew it periodically as the years pass. Do you have a living will? Use competent estate planners to assist you.

Sometimes it's hard to follow these "rules", but if they are kept in focus, your financial well-being will improve.

Business Vancouver Island, December 2004

Beware of CRA Penalties

Written by Barb Carle-Thiesson, FCA, ICD.D

At one time, taxpayers were vaguely aware of the penalties that the Canadian Revenue Agency (CRA) levies, but as penalties have now become firmly entrenched in the Income Tax Act, especially for repeat offenders, it is time to pay attention. In a nutshell, here are the penalties.

Late Filing

If a tax return is late-filed and there are taxes owing, CRA charges a late-filing penalty of 5% of the taxes outstanding PLUS 1% per month that a tax return remains unfiled. Maximum penalty: 17%.

Repeat Offender

CRA has upped the ante if a taxpayer receives a demand to file a tax return and the taxpayer has also been assessed late-filing penalties in any of the three preceding taxation years. The penalty for a repeat offence: 10% of the outstanding taxes PLUS 2% per month that a tax return remains unfiled. Maximum penalty: 50%

Unreported Income

If a taxpayer fails to report income in a year, and then fails to report income in a subsequent year, CRA will assess a 10% penalty on the second instance. These penalties often occur when taxpayers perpetually neglect to report investment income earned on mutual funds and lump-sum RRSP withdrawals.

Other Penalties

There are penalties for failing to remit tax instalments, for failing to provide social insurance or business identification numbers, and for failing to file other types of CRA returns (such as T4s) on time.

Gross Negligence

If a taxpayer knowingly, or in circumstances amounting to gross negligence, makes false statements or omits information from a tax return, CRA can impose a penalty of 50% of the tax owed.

Voluntary Disclosure

Taxpayers who owe taxes, but have either never filed tax returns or omitted income when they filed, can eliminate the penalties imposed by CRA if they make a voluntary disclosure of the taxes owed. To do so, taxpayers must file voluntarily and not as a result of a CRA audit or request. If the missing information is provided to CRA, CRA will assess the taxes due, with interest of course, but will not impose penalties.

Since penalties are cumulative and punitive, it is imperative that they are avoided at all costs.

Business Vancouver Island, November 2004

When to Incorporate?

Written by Doug Tyce, CA

The most common question asked by most budding entrepreneurs is, "Should I incorporate my new business?" The answer depends on each individual's particular circumstances. Here are some key points to consider in making your decision.

Creditor Protection

Corporations provide limited liability. The shareholder's personal assets are only at risk of being lost to creditors to the extent that the shareholders have made financial contributions to the company and/or they have issued personal guarantees to specific creditors, such as banks.

Income-tax Deferrals

Most corporations pay corporate tax of 18% on their first $250,000 of net income per year. If a business owner is in the 45% personal tax bracket, then the company will defer taxes of $27 for every $100 of profit retained by the corporation. These funds can be invested or used to retire outstanding corporate debts. For most business owners, the after-tax profits invested in their corporation become their primary source of retirement income.

Enhanced Income-splitting Opportunities

Family members, including children, can only receive wages from the company that are reasonable given the duties they perform. Alternatively, family members that are shareholders of the company can be paid any amount of dividends regardless of the value of the duties performed by them. This allows business owners to fully utilize the low marginal tax brackets of all family members. Strategies exist to convert dividends paid to minor children into capital gains so that such dividends are not subject to the "kiddie" tax rules.

Tax-free Sale of Business

If planned right, the business can be sold on a tax-free basis by utilizing the small business capital gains deduction of $500,000 per shareholder.

There are many other benefits of operating a business in a corporation, including private health services plans, opting out of the Canada Pension Plan and providing more creditability to your business to name just a few.

The Canada Revenue Agency permits the transfer of a business to a corporation on a tax-deferred basis. These transfers require preparation of special legal documentation and income tax filings.

As the annual administration and accounting for most corporations is usually more complex than that of an unincorporated business, a business should only be incorporated if the benefits of doing so outweigh the associated costs.

Business Vancouver Island, October 2004

Family Members and EI - The Rules

Written by Barb Carle-Thiesson, FCA, ICD.D

If you employ family members in your business and you think that they will be able to collect EI if you lay them off, it's time to think again.

Canada Revenue Agency ("CRA") has created guidelines to help employers determine if an employee's income is subject to EI. If an employee controls more than 40% of the voting shares of a corporation, EI should not be deducted and therefore the employee will not be entitled to receive EI benefits if terminated. If an employee is related by blood, marriage or adoption to the controlling shareholders, the employee's income may or may not be subject to EI.

The question of whether an employee, who is related to the controlling shareholder, is employed in insurable employment depends on the facts of the situation. In general terms, if the related employee works under the same terms and conditions as an unrelated employee, the employment is insurable. For example, a daughter working as a receptionist in the family business would normally qualify as long as her terms and conditions are similar to what they would be for an unrelated employee. A typical example of an uninsurable position occurs when a spouse is paid a salary to perform duties in excess of the amount that would be paid to an unrelated employee.

Failure to remit EI premiums for employees who have EI insurable earnings is not an option. Although we often see cases where business owners are deducting EI premiums for family members who do not hold insurable positions, we also see many situations where family members have EI earnings and EI is not withheld. This type of oversight can become costly if identified by CRA during random payroll audits.

Even though the guide indicates that employees must own more than 40% of the shares of a company to be EI exempt, we have requested and received favourable EI exempt rulings where shareholders have owned only 33 1/3% of a company.

If you want certainty regarding the EI status of an employee, you can request a ruling from CRA. But be forewarned, rulings take a fair amount of time. If it turns out that you have paid EI in error, both the employee and the employer can request EI refunds for the last four years. This could potentially generate premium refunds in excess of $8,000.

Business Vancouver Island, September 2004

Tax-Deductible Interest

Written by Doug Tyce, CA

Are you paying interest that is not a tax deduction? It's surprising how many taxpayers are not taking advantage of the interest deductibility rules.

I recently had the opportunity to meet with a prospective client to review his personal and corporate financial statements. During the interview, the business owner indicated how disappointed he was that he could not claim a tax deduction for the interest he was paying on his home mortgage.

After a few questions, I determined that he in fact should be claiming annual tax deductions for his mortgage interest. Eight years ago, this business owner borrowed $200,000 against his home to capitalize his new business. I immediately sent a letter to CRA requesting that his personal tax returns be amended to allow this interest expense deduction. A couple of months later, the new client received a $25,000 tax refund.

If a shareholder borrows funds to lend to a corporation for little or no interest, you can claim a personal tax deduction for the interest paid on the borrowed funds as long as the company uses the funds to earn income and the company reports the loan as a shareholder's loan.

It must be established that the company could not have borrowed the funds on the same terms as the shareholder, even if it was secured by a shareholder's guarantee.

Interest may also be claimed as a tax deduction if it can be clearly established that the borrowed funds were used for earning income from real estate, and stocks and bonds, to name just a few types of investments.

Did you know that you can continue to deduct interest on loans even if you no longer own the asset originally purchased. This situation arises when you sell the investment at a loss. Sound familiar? It's occurred to individuals in recent years with respect to leaky condo rental properties and "hot" stock tips.

Interest on your home mortgage, line of credit, margin account and automobile loan are all potential sources of tax-deductible interest. Even if interest is not currently tax deductible, strategies are available that will convert interest into tax-deductible interest.

Business Vancouver Island, August 2004

Financial Controls

Written by Barb Carle-Thiesson, FCA, ICD.D

Given the recent circumstances of RBC Royal Bank and their "processing disruptions," business owners and managers should be very concerned about those controls that are critical to their businesses and that ensure the accuracy and confidentiality of financial information. For example, are your clients being over or under billed? Are your records secure?

It is absolutely essential in today's environment that you ensure that your business is protected by virus protection software, proper backup and data storage procedures, proper network security, passwords, controlled access to your facilities and finally by a disaster recovery plan in the unlikely event that all of the controls fail at one time.

Several years ago a technologically advanced local business lost a significant portion of its historical client data when the firm's computer server failed. It was only when the firm tried to restore the backup that it became evident that the backup system was not functioning properly. The costs to recreate the lost data were significant!

Your business needs controls that will ensure that its financial records and financial information are accurate, complete and protected according to your business' privacy code to reduce the risk of an unplanned business interruption such as RBC just experienced. Additionally, proper business controls will ensure that your financial information is secured against unauthorized access.

Don't be an example of a business where controls are established only after a loss has been suffered.

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