The Canada Revenue Agency (CRA), while generally slow to adapt, has also made significant steps to utilize technology which, in my opinion, makes life easier for taxpayers and practitioners.  For sometime now, individuals and corporations have been able to access certain information online through the CRA’s website and their My Account/My Business Account program.  Taxpayers are even able to give their accountants access to view this information.  Not only is a taxpayer or accountant able to view the status of an HST or income tax return, but they can view and download all CRA correspondences online – from Notice of Assessments and Re-assessments to account balances and various tax balances.  As a practitioner, this has made my work life easier since clients often misplace or discard this type of information which I generally need to review.

For the 2012 taxation year, accountants are required to electronically file (efile) the majority of their clients’ corporate and personal income tax returns.  This has been a coup for the CRA since it should drastically reduce the amount of time and personnel they need for processing returns. It will also make it easier for them to flag returns for audit or review that seem inconsistent with prior year returns or that contain amounts which materially deviate from industry norms.  Not all the news is bad though, the time it now takes for a tax return to be assessed has never been quicker; corporate income tax returns are being assessed in 2 to 3 business days and personal income tax returns are taking less than 2 weeks.  This has resulted in taxpayers receiving their refunds much quicker.

Unfortunately mandatory efiling has made life more difficult for accountants since we are often chasing down clients to sign and forward us their T183 Authorization Forms which is a necessary prerequisite prior to us being able to efile their tax return.

Most common forms and slips can be filed electronically with the CRA, including:

• Personal income tax returns
• Corporate income tax returns
• HST returns
• T4 summaries and slips
• T5 summaries and slips
• NR4 summary and slips

However, a number of forms and slips are not permitted to be filed electronically, although I imagine they will likely be next in this evolutionary process. They include:

• T3 Trust Information and Tax Returns
• T1135 Foreign Income Verification Statements
• T1134 Foreign Affiliate Information Returns
• T5013 Partnership Financial Returns

In fact, the Federal Government recently announced its intention to look into the electronic filing of the T1135 forms since they must be mailed along with a taxpayer’s income tax return which makes no sense given the fact that currently the income tax return must be efiled, but these forms cannot.

We live in a world of improving technology, but technology can sometimes be a double-edged sword; it gives us ever increasing access to information and people, yet at the same time it can add to our responsibilities and force us to relearn tasks which were previously routine and second nature.

One thing is certain, technology will keep evolving and we will be forced to adapt if we wish to remain competitive. It appears the CRA understands this too, even if they are moving very slowly.

I’ve recently signed on to speak at a series of conferences being held across Canada and will have the fantastic opportunity to visit Saskatoon, Halifax, Edmonton and St. John’s in May, and then Prince Edward Island in June. I have only been to about half of these places before so getting to see the new cities will be as exciting as getting to interact with driven and curious pharmacists.

My favourite part of any speaking engagement (especially when I talk about understanding your income sheets and balance sheets by breaking it down into useful information – which is often) is getting that new question that no one’s asked before. We all learn and take things in differently which is why I, like many presenters, use a range of media from audio to visual and hands on exercises. So I find it interesting when someone finds a new way of looking at or interpreting the data I’ve been presenting across Canada.

I hope to see you next month at the next pharmacy conference. As a side note, any tips on what a guy can do with a few spare hours in any of the above cities?

1. Create a summary page of the forms and slips you included in your tax package. This summary keeps both sides accountable for information flow and retention and prevents any disagreements.

2. Advise of changes to your personal situation. This can include address changes, the birth of children, marital changes, etc.

3. Open all your envelopes with income tax slips at home so you don’t end up paying your accountant to open envelopes.

4. Do not send a shoe box of random financial forms, this makes for a very inefficient (and likely costly) tax preparation process.

5. Don’t send your accountant junk mail. Separate real tax slips from things like RRSP & TFSA application forms, monthly investment account statements for RRSP and RRIFs, last year’s Efile form and last years actual return. Your accountant also has a copy of last year’s return on their computer so don’t worry about sending that to them either.

6. Summarize total donations and medical expenses. Accountants review all your donation slips to ensure they’re deductible and all medical expenses to ensure they qualify, are deductible and haven’t been counted twice when an insurance plan is in place. However, summarizing the total lets your accountant reconcile your totals with theirs quickly.

7. Summarize capital gains/losses if they’re not provided by your financial advisor. You can either do this yourself in advance of meeting your accountant or engage them to perform this throughout the year so all your capital gains and losses are summarized before March.

8. If your children are in university or college, ensure they download their T2202A tuition forms since students can transfer up to $5,000 of tuition credits to their parents.

9. Don’t just tell your accountant your kids exceed the minimum $500 fitness amount, there’s a good chance the CRA will request these forms to substantiate your claim, so ensure you have invoices and statements from the sports club, dance studio, etc. from the start.

10. Copy your 2011 T776 rental schedule and write the comparable 2012 numbers, excluding depreciation, beside the 2011 totals (or summarize your rental expenses in an excel spreadsheet). This will help you note any obvious discrepancies between the two years and allow you to review before providing the information to your accountant. It also highlights contentious issues such as whether a large rental repair is considered an expense or capital addition.

11. Do the same with your business and self-employment statements – form T2125 or T2032. Provide your accountant with a summary of the income and expenses and list any questions you had while putting the numbers together. Your accountant can then spend time reviewing the numbers and asking questions rather than adding up your receipts.

12. At minimum, record your odometer reading at January 1st and December 31st if you do not keep an automobile log and are claiming car expenses for employment or business. This record will quantify your mileage driven during the year and assist in deciding what percentage of your automobile expenses are deductible over the year.

13. Obtain the T2200 Form from your employer if you are claiming employment expenses and summarize the expenses for the year. The T2200 lets your accountant review what expenses your employer says you incurred or were required to cover.

14. If you purchased a rental property during the year, provide your accountant with the purchase and sale agreement, statement of adjustments, legal fees and appraisal fees. This saves significant time and ensures you get full benefit for all the initial costs you incurred.

15. If you are claiming child care, provide a copy of your nanny’s T4. It’s the same for daycare; provide a receipt that reflects payment for the year.

If you put in the time and effort to complete the steps listed above, your accounting fees will be lower and your accountant will have more time to spend minimizing your tax liability. You will also definitely begin to rank among my favourite clients.

For more tax season tips, check out my daily tax tip tweets on Twitter under the hashtag #blunttaxtip at http://www.twitter.com/bluntbeancountr or https://twitter.com/search/realtime?q=%23blunttaxtip&src=hash.

Let me explain.  There are times that the CRA requires taxpayers (corporations and individuals) to withhold taxes from certain payments made to others – for example, payroll.  When an employer pays an employee his or her gross wage or salary, the employer is required to withhold income taxes, Canada Pension Plan contributions, and sometimes Employment Insurance contributions.  Depending on the employer’s total amounts withheld, it must remit these amounts to the CRA by a certain date.  Another example of when withholdings and remittances are required is when a taxpayer pays certain amounts (i.e. dividends, rents, royalties, interest, etc.) to a non-resident.  In these situations, a taxpayer is required to withhold a percentage of the gross payment, commonly referred to as a “withholding tax”, and remit the amount to the CRA no later than the 15^th of the following month.

The amounts withheld can be remitted to the CRA either on-line, at a financial institution or by way of a cheque mailed to the CRA.  If the remittance is made by way of a cheque, a remittance form must be completed and returned with the payment.  The remittance form is very basic and easy to complete.

As mentioned, in the last 12 months, I have seen the CRA assess a late remitting penalty, claiming that the remittances have been received late even though it was clear that the taxpayer paid the remittances on time.  In each case, the CRA received the remittance amount in a particular month and assumed that the amount related to that month even though the accompanying remittance form indicated otherwise.

In one situation a client withheld and remitted its July employee payroll source deductions in July with a cheque dated August 15^th, the normal due date for these remittances for this particular taxpayer.  The CRA processed the remittances and incorrectly assumed the amounts related to the August payroll even though the remittance form indicated that the amounts related to the July payroll.  When the taxpayer subsequently withheld and remitted its August employee source deductions on September 15^th, the CRA assumed that these were the July remittances (since they already had recorded the August remittances in their system).  As the July remittances were due by August 15^th, the CRA proceeded to apply a late remitting penalty equal to 10% of the amount.  Through no fault of their own, the taxpayer was assessed a late filing penalty even though they had made their remittances on time, even before the required due date.

In each of the situations I encountered, all it took was (albeit a lengthy) call to the CRA and the penalties and interest were reversed.  The moral of the story is to ensure that you check your Statements of Account carefully.  If you are assessed with a late remitting penalty when you believe you have indeed made your remittances on time, be sure to investigate or have your accountant follow up with the CRA.

Like most small and medium size businesses, we have purchased a number of desktops over time that are currently networked together using the latest available software. Printers and scanners are shared amongst employees and, in theory, information/data can be shared amongst all of the users in the company.

To keep costs down, most small businesses don’t hire a full time IT employee to deal with problems as they arise and make sure that the computer networking system is working well. That’s why there are independent IT consultants who help businesses deal with computer and network problems – yet this is precisely where things seem to have broken down for us.

I notice that often when one problem is fixed, another is created as a result. Other issues seem are assigned a patchwork fix with no real long term plan to ensure that the company’s computing continues (or begins) to work well beyond the next quick fix.

Is Cloud Computing the Answer?

Our computer network issues led me to consider cloud computing as the answer. Why not effectively outsource the entire IT department? Got a problem? The solution is accessible through the cloud, not just the local machine that experienced the breakdown.

I was also swayed by the added bonus of increased security. Privacy issues are, well, no longer an issue. All of your clients’ confidential data is now locked away in the cloud, not on hard drives in desktop computers or laptops that can be lost or stolen. As a result of these factors, we officially made the move to cloud computing in December of 2012 – I’ll let you know how it goes!

Hiring the Right Advisors

The owners of these businesses are rightfully focused on running the business and leave all tax, finance and accounting matters to their advisors, however, what happens when the advisors they hire are not looking out for their best interests? It’s important to put together a plan of attack early on so that your advisors can focus on their competencies and you can focus on running your business.

Bookkeeping

Bookkeeping is an important aspect of any business and one that needs to be done correctly and in a timely manner so that owners and “high level” advisors can make educated, proactive decisions. If the bookkeeping is only done annually, or not at all, financial decisions will either be made late or not all. As a result, it’s important to hire a bookkeeper you can work with on a day-to-day or weekly basis who will look after all of your business’ daily compliance matters such as payroll, HST and income tax, amongst others.

Tax Planning

Corporate and personal tax planning should be discussed with your advisor early on; when left for the end of the year or the following year, it is often too late to take advantage of valuable tax minimization strategies and savings. I recommend setting up a meeting with your financial advisor early in the first quarter of the calendar year to discuss dividend vs. salary mix, capitalization of the business, and personal living needs. If all of this is discussed early on, it can make a significant difference on the after tax income of both the owner(s) and the corporation.

On the whole, keep your advisors informed of all of the transactions you enter into that are out of the ordinary, as typically there will be some tax or legal implication that you should expect and plan to minimize.

Gifts and Awards

The Canada Revenue Agency (CRA) has an administrative policy that exempts certain non-cash gifts and awards in some cases:

• Employees can receive up to $500 in non-cash gifts or awards annually.
• Employees can receive a further non-cash award up to $500 in recognition of long-service once every five years.
• The CRA’s policy also states that “items of small or trivial value will not be considered a taxable benefit” and are not included in calculating the $500 limit.  For example:  coffee or tea, T-shirts with employer’s logos, mugs, plaques or trophies.

It is interesting to note that an employee can receive both the $500 gift/award and the $500 long-service award in the same year without having any taxable benefit.

Of course, there are restrictions.  Cash or near-cash gifts and awards are always taxable to the employee.  Near-cash is defined as an item that can be easily converted into cash such as gift cards and certificates, securities, gold nuggets, etc.  Furthermore, if you are giving a non-cash gift, it must be for the right reasons.  The CRA’s Rules for Gifts and Awards states that “A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding or birth of a child.”  Moreover, the CRA says that a non-taxable award has to be in “recognition of an employee’s overall contribution to the workplace, not recognition of job performance.” Such awards should be based on defined criteria, have a nomination process and have a limited number of recipients.

Social Events

Regarding social events for employees, employers can deduct 100% of meal and entertainment expenses for employees if it is a special event such as a holiday party and all staff from one location are invited.  Note that you are limited to six of these events per year.  The extravagance of such a party should be considered from an employee taxation perspective.  The CRA’s stated policy goes on to say that “if you provide a free party or other social event to all your employees and the cost is $100 per person or less, we do not consider it to be a taxable benefit. … If the cost of the party is greater than $100 per person, the entire amount … is a taxable benefit.”

All of this being said, it’s beneficial to both the employer and employees to stay within the restrictions when providing these employment perks.

Mitt Romney tried to explain this concept, commonly referred to as the “Laffer curve” by economists, to Barrack Obama in their recent televised presidential debate. Over the past decade, in both the United States and Canada – the statistics have revealed that a reduction in tax rates actually leads to an increase in tax revenues. This may seem counterintuitive and it is certainly not without controversy (as a side note, I think this would be a good correlation theory for Steven D. Levitt and Stephen J. Dubner, the guys behind Freakonomics and SuperFreakonomics, to investigate). People often cite the fact that there are other factors at play here, which there likely are. However, it appears that at least in some circumstances a reduction in tax rates has led to an increase in tax revenues. After George W. Bush introduced tax rate cuts, the top 5% of taxpayers went on to pay $1.28 trillion more in federal income taxes than they did under the previous president’s tenure. In addition, the share of income tax paid by the top 1%, the top 5% and the top 10% of income earners all went up. Similar increases in tax revenues as a percentage of Gross Domestic Product occurred when Regan slashed the personal tax rate in the US in the 1980s, when Ireland decreased their corporate tax rates between 1985 and 2004, and when Russia implemented a flat tax in 2001. Not to mention the recent increase in Canadian corporate tax revenues, despite the decrease in the Canadian corporate income tax rate.

Why does this happen? Well, there are a few explanations. Some people suggest that as tax rates decrease, a country becomes more attractive for foreign investors. Foreign investment and capital creates a larger tax base, i.e. more people and corporations to pay tax, which leads to higher overall tax revenues. Another theory is that when taxpayers pay less tax, they have more money to spend. If both individuals and corporations spend more, this benefits the economy, businesses earn more profit, and more profit leads to more tax revenues paid and collected. The last theory suggests that taxpayers are more likely to declare all of their income when taxes are lower. When tax rates are higher, some taxpayers feel that the risk of not declaring and paying taxes on all of their income is less than the benefit of following the law and paying the additional tax upfront. When tax rates are lowered, the risk-benefit analysis shifts and taxpayers are less inclined to cheat the taxman.

These explanations make the French government’s recent proposal to tax the super rich at a higher rate all the more perplexing. France is considering taxing individuals who make more than 1 million Euros at a rate of 75%! Talk about creating a disincentive for wealthy individuals to remain a tax resident of France. With movement particularly easy within the European Union, a taxation policy, especially one as drastic as this one, we will likely see a mass exodus of capital leaving France and headed to more tax-friendly EU countries.

It will be interesting to see whether this new tax policy in France will have the desired effect, i.e. increase tax revenues for the government, or whether history will repeat itself and the government’s tax revenues will decrease or, at best, remain the same.

Once it has been decided to (at least) consider retirement, I get the request, “Please value my business so I know what it is worth and the price I will get”.  The words value, worth and price tend to be used interchangeably as though they have the same meaning, but they are quite different in the context of selling your business.

The word “value” is used in the mathematical and theoretical context.  A business valuator (typically with a CBV designation) estimates the expected future profits and cash flows of a business.  Depending on the business, other factors might be considered (in the CA business, annual revenue, not income, is a large determining factor).  To determine an appropriate multiple to apply to cash flows or income, a required rate of return is estimated (usually 5 – 7%).  Once the multiple is established, it is multiplied by either or both the cash flow and profits to determine the value of goodwill. From there, the value of the shares or the assets can be determined.  Whew!  There are a lot of financial estimates about the future and theoretical assumptions involved in coming up with the estimate of value.

“Worth” relates to the individual.  How much is this company worth to me?  How much is it worth to a prospective buyer?  Every company will be worth a different amount to different people.  I have seen companies that were at or near bankruptcy sell to a buyer who turned it around to make a lot of money.  The company was worth nothing to the original owner but a lot to the buyer.  In the context of your business, the company is worth not just the profitability of the company but also the ongoing remuneration taken by the owner.  If a company makes $100,000 per year and the owner manager takes $150,000 as a salary, the owner manager will have to replace $250,000.  If the $150,000 was used for personal lifestyle and the $100,000 was used for savings, how long will it be before the savings are used up?  Will the individual outlive his/her retirement savings?  On a financial basis, you should ensure that the assets, after the sale of your business, will be sufficient to last for the rest of your life.  If not, maybe you should put off retirement for a year or two.

“Price” relates to the amount that will be paid at a point in time.  I read about a $2 bill that sold for $20,000.  I certainly won’t be the one to make such an offer, however, if you happen to be in the right place at the right time in business, the theoretical value takes a back seat to personal preference and “I’ve got to have this company”.

Plan for the future:

1. Meet with your investment advisor to determine your retirement needs.
2. Plan with your accountant and tax advisor to minimize current, future and estate tax.
3. Meet with a CBV (chartered business valuator) to estimate the value of your business.
4. Make sure each of your advisors is aware of the information provided by the others.  A consolidated plan from all your advisors will be the most effective.

What’s your business worth?  I say: your future financial freedom.

• If you take an early CPP pension at age 60, rather than waiting to 65, your monthly payments will be cut by 36% (vs 30% in the past).
• If you delay taking your CPP pension to age 70, your monthly payments will be 42% higher (vs 36% higher in the past).
• If you are under 65 and continue to work while receiving your CPP pension, then you and your employer will have to make CPP contributions. However, these contributions will increase your future retirement benefits.
• If you are aged 65 to 70 and continue to work while receiving your CPP pension, then you have the choice to contribute to CPP to increase your future retirement benefits.
• Under the old rules you had to stop working to collect early CPP.  Now you can receive CPP pension without any work interruption.

The decision as to whether to take early CPP has always been somewhat controversial.  The goal of the new rules is to keep older workers in the workforce longer by enhancing the payout for those who receive their CPP later vs earlier, but one’s decision should still be based on personal circumstances.

If you knew that you were going to die at age 65, you would definitely start collecting your CPP pension at age 60 and get 5 years pension in hand.  Conversely, if you were sure that you would live well into your 90s, you would certainly wait until age 70 to collect a pension that is 42% higher than if you started receiving it at age 65.

A mathematical rule of thumb is that age 75 is the break-even point. If you don’t expect to make it to age 75 then start collecting it early; otherwise, take your CPP pension at age 65, unless you are highly confident of reaching well into your 90s. However, there are a few other factors to consider before making the final decision:

• Have you maximized your CPP entitlement by contributing over your working life?  From an overview perspective, if you have not contributed for at least 40 years from the age of 18 then you won’t get the maximum CPP pension.  Consider obtaining your CPP Statement of Contributions report by contacting Service Canada.
• What tax bracket do you expect to be in from aged 60 and later?
• If you take an early CPP Pension, and if you don’t really need the money, contribute to room in your TFSA, RRSP or other investments to provide a future nest egg.
• Consider if taking the CPP Pension will increase your exposure to the Old Age Security clawback (commencing at $67,668 net income in 2011).
• As a business owner, you are responsible for paying both the employee and employer portion of CPP. In 2012, the maximum contribution will be $4,613.40 ($2,306.70 for each of the company and the employee). However, you are only required to remit CPP payments if you draw a salary. If you were to pay yourself with dividends, you would not be required to pay the $4,613 in CPP premiums. In addition, dividends are taxed at a lower personal rate than a salary at the top marginal rate resulting in further personal tax savings. There may be overall corporate/personal integrated tax and employer health tax savings by paying dividends vs salary.  However, there are some consequences to paying yourself with dividends rather than a salary:

1. RRSP contribution room is calculated based on ‘earned income’ which does not include dividends. Therefore, if you would like to continue contributing to your RRSP and you do not have any contribution room from prior years, you may want to continue drawing a salary.
2. The amount of CPP you will receive is based on the amount you pay into the plan. So, if you stop drawing a salary and no longer remit CPP payments, you may receive smaller pension payments upon retirement.

Each situation is different, and to make an informed decision it is important to consider your retirement goals and current savings as well as your current CPP situation. For a thorough analysis, please contact your Cunningham partner.