Today’s Federal Budget proposed no major tax changes but did contain proposals designed to reduce tax leakage and to improve fairness in the tax system.  The following is a summary of the proposals which will have the greatest impact on KNV’s clients.

MEASURES CONCERNING BUSINESSES

Scientific Research and Experimental Development Program

Current legislation allows for support for business research and development in the form of the Scientific Research and Experimental Development Program (“SR&ED”) whereby allowable current and capital expenditures are fully deductible against income and a taxpayer’s qualified expenditure pool is also eligible for an investment tax credit.  There are currently two investment tax credit rates for SR&ED qualified expenditures:  the general rate of 20 per cent and an enhanced rate of 35 per cent for eligible Canadian-controlled private corporations (CCPCs).

Budget 2012 proposes changes to the SR&ED program in four areas: the investment tax credit rate, capital expenditures, overhead expenditures, and contract payments.

The proposed changes to the investment tax credit rate include a reduction of the general 20 per cent SR&ED investment tax credit rate applicable to qualified expenditures to 15 per cent for taxation years ending after 2013.  The enhanced investment tax credit rate of 35 per cent will remain unchanged for CCPCs on the first $3 million of annual qualified SR&ED expenditures.

The budget proposes to eliminate capital expenditures from eligibility for SR&ED deductions and investment tax credits.  The exclusion of capital expenditures will apply to property acquired on or after January 1, 2014.  Eligible contract payments made by a taxpayer will also be excluded, to the extent that the contract payment was made in respect of capital expenditures.

Currently, legislation allows a taxpayer to elect to use a simplified proxy method for calculation of overhead expenditures directly attributable to research and development.  Under the current proxy method, 65 per cent of the total eligible salaries and wages can be included in computing the qualified expenditure pool and investment tax credit.  The budget proposes to reduce the proxy amount by 5 per cent to 60 percent for 2013 with a further reduction to 55 per cent in years thereafter.  The proxy rate will be pro-rated for the number of days included in 2012, 2013, and 2014 in a taxation year.

The budget also proposes an adjustment to the amount of arm’s length SR&ED contract payments allowable with respect to the investment tax credit to eliminate the profit element in the contract.  A rate of 80 per cent of the contract and will be applied to arm’s length SR&ED contracts on or after January 1, 2013.

 Fewer Formalities for Eligible Dividends

Budget 2012 provides a simpler process to designate that a taxable dividend is eligible for the enhanced dividend tax credit.  Rather than requiring the full amount of a dividend to be ‘eligible’, a corporation may designate the eligible portion of a dividend when the dividend is paid.  Also in an effort to improve fairness, the budget provides a mechanism for the CRA to accept late eligible dividend designations that are less than 3 years past due, and that the CRA considers just and equitable in the circumstances.

Thin Capitalization Rules

The thin capitalization rules limit the deductibility of interest expense of a Canadian-resident corporation in circumstances where the amount of debt owing to certain non-residents (and in particular foreign parent companies) exceeds a 2-to-1 debt-to-equity ratio.  The rules are to protect the Canadian tax base from erosion through excessive interest deductions in respect of debt owing to these non-residents.

The budget proposes to improve the integrity and fairness of the thin capitalization rules by:

• Reducing the allowable debt-to-equity ratio from 2-to-1 to 1.5-to-1; for tax years beginning after 2012
• Extending the thin capitalization rules to apply to debts of a partnership in which a Canadian-resident corporation is a member for tax years beginning on or after March 29, 2012
• Treating disallowed interest as dividends for Part XIII withholding tax purposes, and
• Preventing double taxation in circumstances where a Canadian-resident corporation borrows money from its controlled foreign affiliate.

MEASURES CONCERING INDIVIDUALS

Increase in Flexibility of Registered Disability Savings Plans (“RDSP”)

Budget 2012 allows for several new features to the RDSP program.  Included in these changes the budget proposes to increase the annual maximum withdrawal limit for primarily government assisted RDSP’s.  And for parents with an RDSP for their child, the new rules will allow transfers of investment income earned in a Registered Education Savings Plan to a RDSP tax-free in certain circumstances.

Employees Profit Sharing Plans (“EPSP”)

To combat the use of EPSPs by owner-managers to achieve excessive tax benefits from these vehicles, the budget proposals to introduce a special tax payable by specified employees – an employee that owns a significant interest or does not deal at arm’s length with their employer –   on an “excess EPSP amount”.  An “excess EPSP amount” will be the portion of the employer’s EPSP contribution in respect of an employee that exceeds 20 per cent of the employee’s salary received from that employer in the year.  The special tax applied will be the combined federal and provincial top marginal rates – 43.7 per cent in BC. 

Retirement Compensation Arrangements (“RCA”)

The budget proposes to introduce new prohibited investments and advantage rules to prevent abusive transactions in RCAs.  The rules will be based on the existing Tax-Free Savings Account and Registered Retirement Savings Plan (RRSP) rules.  Also, new restrictions on RCA tax refunds will be implemented where RCA property has lost value.

Overseas Employment Tax Credit (“OETC”)

Employees qualifying for the OETC are entitled to a tax credit equal to the federal tax otherwise payable on 80% of their eligible foreign employment income, up to a maximum of $100,000 of foreign employment income.  The budget proposes to phase out the OETC over four years starting in 2013.

Common Cents

The Royal Canadian Mint says it costs 1.6 cents to produce a penny, so by fall it will stop issuing the coins.  The move is expected to save $11 million a year.

Attention All Shoppers

Budget 2012 proposes to increase the traveller’s exemption from duties and taxes to $200 from $50 per returning Canadian who is out of the country for 24 hours or more.  Similarly, the budget proposes to increase the limit to $800 from $400 for travelers who are out of the country for 48 hours or more.  A seven-day exemption amount will no longer exist.  These changes will apply after June 1, 2012 and will bring the legislation into line with what many CRA border agency officers were allowing administratively.

Delay in Eligibility Age for Old Age Security (“OAS”)

Budget 2012 proposes to increase the eligibility age for OAS to 67 from 65.  This measure will be gradually phased in starting in 2023 and will be fully in place by 2029.  Accordingly, this change does not impact people who are 54 or older, as of March 31, 2012.  The budget also proposes to allow an individual to defer collecting their OAS in exchange for a larger annual payment once they begin collecting.

COMMODITY TAX MEASURES

GST/HST Health Measures

Basic health care services are treated as exempt from GST/HST.  Exempt treatment means that suppliers of exempt health care services do not charge GST/HST to patients, but they cannot claim input tax credits to recover the GST/HST paid on their expenses.  In addition, certain medical devices, prescription drugs and certain other drugs used to treat life-threatening conditions are zero-rated.  Zero-rating means that suppliers do not charge purchasers GST/HST on these medical devices and are entitled to claim input tax credits to recover GST/HST paid.

The budget proposes to improve the application of the GST/HST to a number of health care services, drugs and medical devices to reflect the evolving nature of the health care sector:

• Pharmacists’ services – Services rendered for non-dispensing health care services will be exempt from GST/HST (the dispensing of prescription drugs will continue to be zero-rated);
• Corrective eyewear – Corrective eyeglasses or contact lenses supplied by opticians will be zero-rated if certain conditions are met;

Medical and assistive devices – The budget proposes to zero-rate blood coagulation monitoring or metering devices (and associated test strips and reagents), and medical and assistive devices supplied on the written order of a medical practitioner, registered nurse, occupational therapist or physiotherapist.

Doubling GST/HST Streamlined Accounting Thresholds

Many small businesses and public service bodies (PSBs) can simplify GST/HST compliance by electing the Quick or Special Quick Method of accounting respectively to determine the amount of their GST/HST remittance.  Small businesses currently may elect to use the Quick Method if their annual taxable sales (including those of their associates) do not exceed $200,000 (GST/HST included).  For certain businesses, use of these streamlined methods can have a positive impact on cash flow and profitability.

The budget proposes to double the existing streamlined accounting thresholds.  Specifically, the annual taxable sale threshold at or below which eligible businesses can elect to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included taxable sales.  Businesses that are eligible to use the streamlined method under these new thresholds should consider whether electing may have a beneficial impact on their businesses.

THE INFORMATION PROVIDED IN THIS PUBLICATION IS INTENDED FOR GENERAL PURPOSES ONLY.  CARE HAS BEEN TAKEN TO ENSURE THE INFORMATION HEREIN IS ACCURATE; HOWEVER, NO REPRESENTATION IS MADE AS TO THE ACCURACY THEREOF.  THE INFORMATION SHOULD NOT BE RELIED UPON TO REPLACE SPECIFIC PROFESSIONAL ADVICE.

Sarena Hansel, Staff Accountant, KNV Chartered Accountants LLP

Every night watching the news, we’re reminded of the tough economic times we live in – blue-chip corporations are struggling to stay afloat and entire nations are hovering on the brink of bankruptcy. In this turbulent environment, consumers are quick to jump ship at the promise of a better deal. How can your company assure its customers that they are getting the best value for their money? Delivering exceptional customer service is a sure-fire, low-cost strategy to stay ahead of the pack and retain a loyal clientele.

A boom for business
Simply providing a service to your clients is no longer enough. When you deliver exceptional customer service, you are showing your clients that they are important to you, and this in itself can be a real boon for your business. After all, why would they look elsewhere if you have met their individual needs and have proven to them that they are valued and understood?

By establishing a positive working relationship with your customers, they may turn to you for additional support and services. Or they may call upon your support more often, increasing your revenue potential.

A satisfied customer is also more likely to become an advocate for your business. Your company’s care and commitment will spread by word of mouth, helping to attract new customers. Your customer base will strengthen and grow – without you needing to spend a single dollar on advertising!

Happy customers also make for happy staff. Your employees will feel greater pride in the work they do, and will be more motivated to exceed expectations; ultimately creating an even better customer experience.

It’s all about attitude
So how can your company reap the rewards of exceptional customer service? The starting point is attitude. If you view each customer as an integral component of your business, your actions will reflect that attitude. By focusing on each customer’s individual needs, you will be providing a service that is both valued and valuable to your customer.

Business owners are often distracted by the bottom line. Employees are often distracted by the clock. Remind yourself daily that every customer is vital to your business and you will reap the rewards of exceptional customer service:  engaged employees and a satisfied, loyal and growing customer base.

Chris Schaufele, CA, KNV Chartered Accountants LLP

Over the last twelve months, the Canadian dollar has fluctuated by more than 10 percent due to a highly volatile global economy, and particularly the European market. It seems like every time good economic news is released by the European Central Bank, the dollar has climbed higher; whereas bad news is matched by a decline in currency values.

Profitability has been equally volatile, and a number of Canadian companies have begun to consider ways to manage their foreign currency risk. While this practice may be surprisingly simple, many small companies fail to do it. Here are a number of examples of how Canadian companies can effectively eliminate, if not significantly reduce, their exposure to foreign exchange risk.

Natural Hedging
A natural hedge helps to reduce the spread between receipts and payments in a foreign currency. We’ll use the example of a Canadian company doing business in the United States to explain how it works. In this scenario, let’s assume the company makes a $100 USD sale on day one when the exchange rate is 1.01, the Canadian equivalent of $101. However, at collection 30 days later, the exchange rate has dropped to 0.95 and the $100 USD collected is only worth $95 Canadian – a loss of $6. To counteract this, the company opens a line of credit (LOC) in US funds and maintains the LOC balance at the same amount of the foreign accounts receivable balance at all times. Using this natural hedge strategy, all sales are immediately converted to Canadian funds as they are recorded, and subsequent collections are offset to the LOC in US currency. Ultimately, the only cost of this strategy to the Canadian company is the interest paid on the LOC and most, if not all, foreign currency risk is mitigated.

Cash Flow Management
Effective cash flow management can help you mitigate foreign currency risk by reducing the time between collecting on sales or making payments on purchases. Because the likelihood of exchanges rates fluctuating significantly within a very short period of time is relatively low, collecting and making payments promptly can help protect your assets from a change in currency value. Although this type of strategy does offer some protection from foreign currency fluctuations, the company would still have some risk exposure.

Forward Contracts
Forward contracts allow a company to “lock in” the exchange rate at which it will buy and sell foreign currency into the future. This gives you the option to take advantage of attractive exchange rates up to one year in advance. Forward contracts are typically easy to enter into and have no purchase price; however, they do require the company to buy or sell foreign currency in a fixed quantity on a future date. These contracts can typically be terminated, but doing so may result in a penalty to the company.

Currency Options
Options are another popular tool for companies to lock in future exchange rates. They differ from forward contracts in that they give the company an option, but not an obligation, to buy or sell currency on a future date at a set price. Because of this flexibility, these tools typically carry an upfront cost to the company. Options can be particularly useful if your company is bidding on foreign contracts, where the payment or collection of foreign funds is not guaranteed.

Choosing the right strategy to reduce your foreign exchange risk depends on your business’ operations and needs. Please contact us so that we can determine the best approach for you.

Melissa Brunner, CA, KNV Chartered Accountants LLP

If your business reaches a point where outside financing is needed to fund your expansion plans, there are several issues to consider. When it comes to significant assets like new equipment and/or property, you may want to consider whether to buy or lease. Your decision should be based on careful consideration of the following factors:

• Useful life of the asset
• Potential re-sale value of the asset
• Available government grants
• Possible dealer incentives
• Financing rates
• Bank financing vs. private financing
• State of the economy

In the current depressed economy, there may be opportunities to purchase equipment at bargain prices, and many equipment dealers are offering sales incentives and low finance rates that make buying an attractive choice. There are also several government programs available to assist expanding businesses, including environmental rebates, low interest loans and tax credits. Ultimately, the decision to lease or buy will depend on your business’ unique needs and a calculation of the net present value of each opportunity.

Of course, funding your expansion – whether it be through bank debt, private debt, leasing or other means – brings with it increased business risk, which will have its own considerations. You may also face additional reporting requirements associated with the type of financing: for example, if your expansion is financed by a bank, you may need to supply a review engagement or interim statements. If your expansion is financed by a lease, additional accounting and/or tax work may be required.

One final consideration is the HST; if an asset is purchased today, a full credit will be available for the HST paid. On the other hand, if the asset is leased, the HST input tax credits will not be fully available when the tax is abolished on April 1, 2013.

We can help structure your expansion plans cost-effectively to help you realize your goals. Contact us today to start planning for your future.

Tanya Milojkovic, CA, KNV Chartered Accountants LLP

Giving gifts of stock to a Canadian registered charity or other qualified organizations not only benefit the charitable organizations, but can also provide a tax advantage for you as the donor.

In gifting stocks to a charitable organization, the donor is disposing of those stocks. Generally, disposing stocks results in a capital gain or capital loss at 50 per cent of its value on the date of the disposal. However, the Canadian government has made donating listed securities an attractive option for taxpayers. Since 2006, the rate of taxation on capital gains triggered from a qualified donation of listed securities is zero (down from a rate of 25 per cent prior to 2006). So where a disposition of stock would normally result in capital gains tax on 50 per cent of the gained value, a donation of stock does not result in any capital gains tax.

Gifting securities can also be advantageous if you are planning to sell the securities at a gain and subsequently donate the proceeds of the sale to a charitable organization within a short period of time. By donating the value of the securities sold directly to the organization, you avoid incurring capital gains tax.

Here is an example to show how this works in practice:

It is important to note that this tax treatment only qualifies for gifts of listed securities, which are shares, debt obligations or stock options listed on a designated stock exchange, mutual fund stocks or units, and debt obligations such as government savings bonds.

If you are interested in gifting stocks or securities to reduce your tax obligations, please contact us to discuss your options.

Zuhair Ladha, B.Comm, CA, Tax Manager, Kingston Ross Pasnak LLP, Edmonton, AB, DFK Affiliate Firm

If you are between the ages of 65 and 71, it might be time to start thinking about converting your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF). Canadian income tax rules dictate that an RRSP must be converted into an RRIF by December 31 of the year in which the taxpayer turns 71. If you fail to make the conversion, the entire balance in a given RRSP will become taxable on that year’s tax return.

With an RRIF, you are required to withdraw a minimum annual amount, which is considered eligible pension income for the purposes of determining your eligibility for the $2,000 pension credit. The annual minimum amount is calculated by a formula based upon both your age at the time of the withdrawal and the available funds in the RRIF.

You may want to consider converting a portion of your RRSPs into an RRIF ahead of the deadline. If you are between the ages of 65 and 71, this could be a viable option for you provided you have no other eligible pension income available during that period of time. Making the conversion gives taxpayers the benefit of qualifying for the $2,000 pension credit as early as the age of 65 since the RRIF allows you to generate eligible pension income earlier than the otherwise pre-determined age of 71.In addition, if the taxpayer is married or common-law, the pension can be split between spouses so that each is able to claim pension tax credits of $2,000. If the spouse is taxed at lower rates, pension splitting has the added benefit of lowering income taxes by shifting up to half of the pension income to the lower income spouse.

Pension splitting between spouses does not involve any transfer of funds between the individuals. The pension income on the taxpayer’s tax return is reduced by allocating a portion of it to the spouse. Tax rules mandate that this type of transfer be formally agreed to by both spouses, which you indicate by completing a Joint Election for Pension Splitting form. The completed form must submitted to the Canada Revenue Agency each year that you and your spouse split the pension income reported on your tax returns.

We can help you to prepare for the conversion of your RRSP to an RRIF. Contact us today for these and other strategies to preserve your retirement income.