Budget 2016

Budget 2016

The Trudeau government finally introduced its first budget this week, and it was arguably the most awaited budget in over a decade. The Liberals had made many promises during their campaign, but during recent weeks they hinted that some would be delayed, some would be modified, and the deficit, originally promised at $10 Billion, had skyrocketed to almost $30 Billion.

There are many infrastructure programs that are initiated or accelerated with this budget, notably dedicated funding to increase the quality of health care, education and infrastructure on First Nations’ Reserves, improvements to mass transit in places like Toronto and Montreal and investment in “Green” technologies across the country. While these are important components of Budget 2016, this examination deals primarily with tax issues that are likely to interest regular readers of this blog.

Families

On a smaller scale, Canadians have been waiting anxiously to learn about the current government’s revamp of the Child Tax Benefit and Universal Child Care Benefit. The campaign promise was to scrap the existing program entirely, make the payments non-taxable and stop “giving money to millionaires”.  The newly-unveiled Canada Child Benefit (CCB) allows for annual payments of up to $6,400 per year per child, for children under the age of six, and payments of up to $5,400 per year per child, for children ages six through eighteen.  As promised these payments will not be taxed and when the family’s combined income exceeds $30,000 the payments will be gradually clawed back so that at a combined income of $190,000 the benefit is entirely eliminated.  Interestingly the clawback is accelerated the more children a family has.  For instance a family with one child and a combined income of $50,000 will lose 7% of their benefit, while a family with a similar income and four children will lose 23% of their benefit.

These changes will come into effect with the July 2016 payment and will be based on the family’s 2015 combined income.

The Family Tax Cut, or income splitting for families, was eliminated as promised. This does not affect a family’s ability to claim this credit for 2015, nor does it affect the ability of seniors to split pensions between spouses going forward.

A bad-news surprise was the reduction in Children’s Fitness and Arts credits by 50% each from $1,000 to $500 and $500 to $250 respectively. This measure affects the 2016 tax year.

Education

Education received mixed treatment under this budget on a local level.

The good news is that teachers are now able to claim tax credits for supplies they purchase personally. This recognizes the long standing situation where teachers are investing in our children out of their own pockets.

The bad news is that as of January 1, 2017 university students will no longer get Education and Textbook credits. These credits were given in addition to tuition credits to recognize that a significant portion of a post-secondary education is made up of non-tuition expenses.  Tax credits will still be given for tuition and any unused Education and Textbook credits that are being carried forward will not expire.

Small Business

The Small Business Tax rate had previously been reduced from 11% to 10.5% and there was a range of speculation on this from a reduction to 9.5% to an increase to 12%. In the end the small business rate remained the same.

The small business rate is available to qualifying small business corporations in Canada on profits of less than $500,000 and there are some specific rules designed to ensure that no one person or group is accessing more than their fair share. These rules were adjusted to close some perceived loopholes, but most taxpayers should not see any changes.

The treatment of goodwill for tax purposes has changed slightly but the changes are more to simplify things and make the treatment more consistent with other capital asset purchases for business than to change the tax policy. These changes will take effect January 1, 2017.

From a tax perspective there wasn’t much in the way of good news in this budget, but then not much was expected. The uncertainty is over and now we can start planning for the next few years.  If you have questions on how the budget changes will affect you and your family please give us a call.

Update on Federal Liberal Tax Plans

This last summer during the federal election Justin Trudeau campaigned on a large number of promises to Canadians and they responded by granting him a majority government with a mandate to make good on his intentions to affect “Real Change”.

One area that got a lot of attention during the election campaign was Mr. Trudeau’s approach to taxation and social benefits. His campaign talked about a middle class tax break, the elimination of the Family Tax Cut, the addition of a new ‘top-tier’ tax bracket for those individuals earning in excess of $200,000 per year, clawing back the contribution room increases on Tax Free Savings Accounts, a review of professional corporations and the small business tax rate, and a revamping of social benefits paid to parents currently running as Child Tax Benefits and the Universal Child Care Benefit.

Campaign platforms from all parties are normally long on rhetoric and promises and short on details so shortly after the election was over I started to receive questions from clients about how and when these measures would be implemented. Obviously it was far too early tell anything for sure other than it was too late in the 2015 taxation year to do anything that would affect the plans that Canadians already had in place for 2015 and we would have to wait until Parliament sat again to find out more details.

On December 7th the Honourable Bill Morneau, Trudeau’s Minister for Finance, sat down with CBC and talked about how some of his plans were shaping up.

Canada Child Payments

Mr. Morneau indicated that the new payment system would replace the existing two systems (Child Tax Benefit and Universal Child Care Benefit), that the payments would be tax-free and that they would start effective July 1, 2016. Historically July 1st each year is when the government has implemented any changes to these programs introduced over the previous year.

Tax Free Savings Accounts

Minister Morneau also reinforced that the Liberal government would keep its promise to roll back annual increases to the TFSA contribution room announced by the Conservatives in 2014. When asked he clarified that the contribution room that has been granted up to this point will not be taken away, but starting in 2016 new room granted would be reduced back down to $5,500 in 2016 and indexed to inflation thereafter.

Tax Rate Adjustments

Mr. Morneau confirmed the government’s intention of reducing the so-called “Middle-class” tax rate of 22% to 20.5% and introducing a new top-tier income tax rate of 33% for those earning more than $20,000 for the 2016 tax year. He was forthright when acknowledging that these measures were no longer seen to be “revenue neutral” as they had been advertised throughout the election. In the aggregate they will cost $1.4 billion more than they will recover in 2016. This would seem to put the overall budget projections of a $10 Billion deficit for each of the current government’s first two years in jeopardy, though when asked Mr. Morneau would neither confirm nor deny this.

Not mentioned by Mr. Morneau during the interview is that this tax break benefits everyone who makes between $45,000 and $222,000 and not just the “middle-class”. A taxpayer making $195,000 will save approximately $680 (1.5% of their income between approximately $45,000 and $90,000) where a taxpayer who only makes $60,000 will save approximately $225. A couple each making $40,000, or around $20/hour, will see no savings at all, but presumably they will benefit more from the new Canada Child Credit.

With the introduction of the new 33% Federal Tax bracket we now have ten separate tax brackets in British Columbia (the province having its own full set of brackets that does not coincide with the federal set). The top British Columbia bracket is 16.8% which means that British Columbians in the new top bracket will be facing a marginal tax rate of 49.8%.

The Justin Trudeau Liberals seem to be very intent on living up to the promises they made to Canadians which is encouraging to hear, though how much this will ultimately cost still remains unclear. There are many promises left to address and I suspect we will see more of these small informational interviews as we near the spring and Mr. Morneau’s first budget address.

Double Dipping Can Lead to a Big Tax Bill

I’m seeing more and more people who are reaching the point where they’ve maxed out on their pensions and are quite happy to ‘retire’ from their career, but they’re not quite ready to be done working yet.

For many one option is that they can enjoy the fruits of decades of work by starting to draw on their pension but continue to pad their nest egg by working, or “Double Dipping”.  This post-retirement employment can take many forms; it can be part time or full time, it can be in a brand new field, or the field in which you’ve worked your whole life (sometimes even with the same employer).

Overall this can be a pretty effective retirement transition strategy, but it does come with a significant tax risk.

When an employer is calculating how much tax to withhold from your regular paycheque they use a calculation based on the assumption that the income you’re receiving from them is the only income you have.  Which is all well and good, but the pension is doing the same thing, at the exact same time.

Obviously they’re both wrong, but the one who has the potential to end up dealing with the consequences is you.

Think of the problem like this:

You’ve worked 30 years in a well-paying job and have a $55,000 pension.  You go back to work for the same employer on a part-time, as-needed basis.  You earn about $25,000 while working.

The pension fund is managed by a trustee – not the employer – and is unaware you’ve gone back to work and so they deduct approximately $10,000 believing you have a full set of personal tax credits for them to use and maxed out in the 29.7% personal tax bracket.

The employer deducts about $2,600 from your pay, because the software that they are using tells them that you have a full set of personal tax credits available for them to use and that you’ve maxed out in the 20% personal tax bracket.

Now the bad news – CRA sees that you’ve made $80,000 (all together) and that you’ve got ONE set of personal tax credits (not one for the pension and one for the employer) and they send you a bill for almost $5,000 in additional tax because the pension and the employer combined didn’t withhold enough at source.  This is a very unpleasant surprise at tax time – and one that can be avoided with just a little planning.

If you’re in this situation you should talk to your payroll department and ensure they understand your other sources of income and ask to fill out a TD1 – Personal Tax Credit Return form.  On the back you can indicate to your employer that someone else has taken into account your personal tax credits and that they shouldn’t double count them, and you can ask the employer to take off additional tax so that your April bill isn’t quite so large.

How much additional tax should they take off?  That’s a great question, but a very individual one – one I would be happy to talk to you about!

It’s a Question of Balance

Tax minimization is a legitimate and integral part of a business strategy, but it’s just one piece of a very large puzzle.  No one wants to pay more taxes than they have to, but business owners have to be careful to balance that objective with other parts of their business strategy.

Sometimes tax minimization can lead to some very “imaginative” thought processes (“My dog is a ‘guard dog’ – can I write off my dog food and vet bills?”) in hopes that at the end of the day you have little or no taxable income.  But this can have adverse consequences as well – and not just the obvious ones from CRA.

Showing no income on either your personal tax return for a proprietorship or on a corporate return for an incorporated business can make that business very unattractive for investors and lenders who are typically looking for positive cash flow before investing their money.

Before making decisions in your business strategy it’s important to consider how it affects the other components of your overall strategy: finance, target market, supply chain management, inventory management, location, product lines and yes, even tax.

If you have questions about creating an integrated strategy and how all the pieces fit together based on your specific situation call or email to set up an appointment – 250-941-3444 or jerad@jeradlangille.ca

Active vs. Passive Marketing

I was talking to a prospective client a couple of weeks ago and we were discussing the different options available for setting up a business – proprietorships, partnerships and corporations. 

There’s lots of information online about these options, and that’s not what this article is about – this is about growing your business!

When we talked about partnerships we talked about the different ways of organizing them: percentage based, simple office sharing arrangements, and Eat What You Kill systems.  Obviously that’s not the legal description of the structure, but basically it means that the profit from the work that you drum up belongs to you after you pay your share of the expenses.  You go out and get it, and the profits belong to you, plain and simple.

So this got me thinking about this turn of phrase “Eat What You Kill”.  It’s an obvious hunting metaphor, but maybe there’s a little bit more to it than what can be seen on the surface.  Now, I’m not a hunter, but if you think about it there are basically two ways in which you can acquire meat from the wild:  you can trap it, or you can go out and actively chase it down.

The same is true for business.

Trapping is a more passive activity.  You travel along a predetermined route that your prey is known to frequent to set out the traps and then you wait for your prey to be attracted to the bait you left.  Over time a prey who is curious will come to investigate, they’ll start sniffing around and BINGO – you’ve got dinner!  In business this is often referred to as ‘branding’ activities.  Corporate sponsorships, newspaper advertising, websites, LinkedIn, Facebook, etc.

Hunting is different – it’s more active.  You’re out there tracking down the game you want.  You find where it is right now, what it is doing and even better where it’s headed so that you can get out in front of it and lie in wait.  It is more direct, more face-to-face, and requires active participation at the critical moment of “conversion” (in hunting from wild game to meals for the coming winter, in business the conversion is from prospect to client).  The business equivalent here is networking, cold-calling, direct-mail campaigns, and ‘sale’ promotions, etc.

A good, balanced marketing system will have both of these components.  One that will allow the business owner to go out and actively seek new contacts and opportunities to grow their client base, and one that will hang out in places where clients are likely to come across the business when they are looking for you!

How to Choose an Accountant

I would love to be your accountant.  My practice is pretty young, it’s still growing and I am actively looking for passionate business people to work with.

But that doesn’t mean you should choose me.

Choosing an accountant is a big decision.  Your accountant needs to be involved in every financial aspect of your life, both business and personal, to ensure you get the right planning and advice for your specific situation.  It’s important that you find someone that fits your needs and your personality.

Since I’m likely to be a little bit biased about who you should choose I thought I would share some links to articles about choosing an accountant – give you some other perspectives.

http://www.theglobeandmail.com/report-on-business/small-business/sb-money/valuation/ten-tips-for-picking-the-perfect-accountant/article556238/

http://us.smetoolkit.org/us/en/content/en/2285/How-to-Find-the-Right-Accountant-Seven-Ways-to-Avoid-Making-a-Costly-Choice

If you want to explore the possibility of working together I would love to sit down and talk with you.  Even if you just want to chat about what your needs are and the alternatives you’re looking at, my door is open, the coffee’s on and there’s never a charge for meetings!

When Customers Don’t Pay

Collections are a pain in the neck.  That’s not why you’re in business.  You want to make sales calls, not collections calls.  So we try to mitigate collections by using different policies: credit, COD, deposits (or retainers), terms, early payment discounts.  These are all ways to treat the symptom but not the cause.

It has been a long-standing belief of mine that customers don’t pay for one of two reasons: they don’t have the money (or don’t want to part with it if they do), or you’ve made them not want to pay.

The first reason is a problem, but not a very big one.  In over 12 years of dealing with escalated collections matters I’ve run into this maybe 50 times – which may sound like lots, but with over 25,000 retail transactions undertaken that’s less than one quarter of one percent.  It’s annoying, it wastes your time, it’s frustrating, but it is not going to break your business.

The second is a much more serious problem.  Not the least of which is that it negatively affects your cashflow – the life blood of any business.  It’s also going to take up time – your time.  There isn’t enough time as it is, but now you’ve got to make phone calls, leave messages, make follow-up calls, send statements – all those things you’re supposed to do when someone owes you money.  This is your money – you’ve earned it, why won’t they give it to you?  It may go further – collections agencies (say goodbye to 30-50% of your money – if you get it at all), small claims (you think making phone calls took up a lot of time?), liens (when they refinance their property you’ll get your money – in five years!) or just writing it off as a “bad debt”.

The only thing more frustrating than this is realizing that it’s probably your fault.

In my experience, the majority of customers who don’t pay are unhappy with the product or service that they have received.  If they had been happy, they would have paid.  Promptly.

People appreciate value – and value is a perception.  Perceived value is a combination of a quality product and great customer service for a reasonable price.  If a customer is late paying you it’s probably because the product didn’t meet expectations, the customer didn’t feel like they were important to the business, or they felt the price was disproportionate to what they received.

About ten years ago the company I was working for at the time bought another multi-location business.  The deal included the physical assets of the company, the client lists and agreements and their receivables.  They had been having a terrible time collecting and had substantial balances over 90 and 120 days.  We set about contacting the customers who owed and time and time again we heard, “But the job isn’t done yet!”  In over 95% of the incidents it was a piece of trim or other aesthetic issue.  We would promptly send out a technician, fix the deficiency and immediately collect the money.  The customer was just waiting until they were happy with the work that had been done!

So measuring your receivables turnover is more than just a predictor of cash.  It’s also a measure of customer statisfaction.

It’s also a stark reminder that everything in business is driven by the customer.

It All Comes Down to the Paperwork

A question that I get asked frequently is: “How long do I have to keep all this paper?  I can get rid of it after seven years right?”

Yes.

Sort of.

Maybe.

According to the CRA website, “As a general rule, you have to keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years.”

Of course with every general rule there are exceptions: “Records and supporting documents concerning long-term acquisitions and disposal of property, the share registry, and other historical information that would have an impact upon sale or liquidation or wind-up of the business must be kept indefinitely.”

That means the 25 year-old forklift you’ve got out in the back lot – you need the original invoice on that for as long as you own it – and six years after you’ve gotten rid of it.  The building you bought in 1989?  Same thing.  The reason for this is that the Capital Cost Allowance (depreciation) that you claim for that asset this year is, in CRA’s view, a transaction in the current year.  So the document must be retained as though the original transaction had just happened.

If you reorganize your company to create a family trust or pass the business on to the next generation those documents need to be kept for as long as the company continues (and a couple years after that too).  The good news is that you’re accountant and lawyer will probably want to keep those on hand for their own reference as well.

These days many companies are adopting a ‘paperless office’ strategy, or maybe just a less-paper office.  This will usually involve scanning and keeping many of the original documents (invoices from suppliers, bank statements, bills to clients) electronically, often as PDF’s.  These records will most likely satisfy CRA’s requirements, but they do have some specific additional guidance in this area, so if you are planning to, or already have, start in this direction you should find out what these criteria are.

The golden rule is: save it. 

If you have specific questions give me a call – I would love to chat.

Why I Don’t Charge for Meetings

There are a couple of different ways that accountants figure out what they are going to charge you to do your accounting and taxes.  They can use a flat rate system where they charge so much for a certain type of work or they can use a quoted system where they quote a price for you based on what they know about you, but the most common method is to charge you by the hour.  This eliminates the risk for the practitioner, its low cost for them to administer and it allows them to get right to work.

I use a combination of methods depending on the work that I am doing – I customize it for each client and engagement.

One thing that I don’t do is charge for meeting time with my clients, and I think I’ve finally figured out why.

At first I thought I was being responsive to my clients.  What I was hearing potential clients say was that they were being charged for small talk and that really bothered them – they didn’t feel they were getting value for their money.  I knew that my clients were talking loud and clear and I had to listen.

Then I thought it was just me – I like to chat with my clients and I didn’t want them to be penalized for being personable.

But I finally realized that underneath there was a very real, valid business reason for what I was doing.  I realized that my effectiveness as a practitioner depended on my chats with my clients.  This is when then juicy stuff comes out!  You see what makes the difference in personal finance and tax planning isn’t the little tidbits of obscure technical details of how accounting and tax law works.  It’s the ability to look at the big picture.  To step back and take in all of the details and pull the disparate pieces together to create a picture – and a plan.  These little details aren’t things that typically come up when talking business – it’s in the small talk. 

Planning on having a baby?  Let’s make sure you’re maxed on EI contributions.  Have a sick parent?  Let’s talk about providing for their care and maximizing the government’s contributions to it.  Your children going off to college?  Finishing?  Let’s sure we captured all the tuition and education credits.

Life events can have a big effect on your finances.  If I know about them then we can work together to plan for these things. 

If you know that I’m charging you for the meeting time and all you can hear is the ticking clock in the back of your mind then maybe we don’t talk about these things until it’s too late.  And I’m not able to do my job as well as I could.

So come on in for a chat, we’ll forget about the clock, and we’ll chat about what really matters to you.  No charge, no clock and the coffee’s on me.

The Third Thing Business School Didn’t Teach Me – Leadership

Leadership fascinates me – the ability to inspire, direct and engage groups of people towards a common goal or purpose.  What it takes, who can do it, who can’t, why there are many right ways – and so many wrong ways.

There are innumerable articles and books on leadership and I suppose I could have just posted a link to one of my favourite websites, but I then I would have had to choose just one and I wouldn’t have had the opportunity to share some of my own thoughts.

Hire the right people, good people.

There is nothing you can do if you don’t have the right tools.  You shouldn’t perform brain surgery with a steak knife, and neither should you try to power a rocket with firewood.  Both of those things are useful, but not for those purposes.  You MUST hire the right people.  You MUST train them correctly.  And, critically, you MUST remove those pieces that don’t fit.  This is the first essential building block of leading a successful team.

Give them the freedom to do the job for which you hired them.

You can call it empowerment, you can call it autonomy, you can call it self-actualization.  What you call it really doesn’t matter.  You’ve hired the right people and you’ve trained them well – now you must set them free.  If you don’t then you will stifle them, they will leave and you will have failed.  If you set out to hire the best and the brightest candidates for the positions available then why would you treat them as though they are incompetent?

Provide guidance and support

You’ve hired great people and fully empowered them – now what?  What do they even need you for?  Your job is to make sure that they have everything they need to perform those tasks which you’ve required of them.  Materials, assistance and time are the most common – make you’re your people are well equipped.  Motivation – communicate your mission – often.  It is your job to keep your people focussed on the goal that you’ve set.  Check in with them regularly – make sure they’re on track and that they have everything they need.  Show them that it is important to you that they succeed – and that you’re committed to helping them get there.

Being a leader is more than just being a boss.  It is not easy, but its incredibly rewarding – and it is the only way to succeed when you get to the place where you need help to achieve the business goals you’ve set.