Monthly Archive: September 2016

Keep Employees Satisfied: Salary Gains Expected to Hit Record Low

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Canadian businesses are taking a cautious stand as salary gains in 2017 are expected to be the slowest in two decades.

A national survey of 500 companies across industry sectors by consulting firm Mercer Canada found that employers are projecting record-low salary increases next year, driven by weakness in the energy sector. Mercer Canada said the normally high-paying energy sector will also offer lower salary increases than other major sectors of the economy, which is a reversal from the past.

Raises are projected to be 2.6% across all employee groups, down from 2.8% in 2016 and 3% in 2015. Taking into account expected payroll freezes by some companies, overall pay raises next year are expected to be even lower, at 2.3%, according to the study, which is titled 2016/2017 Canada Compensation Planning Survey.

(Companies in energy-rich Alberta are projecting salary increases below the national average, partly because 40% of energy companies plan to freeze salaries in 2017. Excluding salary freezes, increases in the energy sector are projected to be 2.4%, still below the 2.6% national average.)

Highest-Performing Employees

When it comes to top performers, however, the survey found that businesses intend to continue giving higher-than-average salary increases. The average salary increase for the top 7% of workers in 2017 is expected to be 4.3%.

The salary projections exclude unionized employees because their increases are predetermined by negotiated agreements and aren’t typically subject to annual modifications depending on the company’s spending plans.

“People are being very cautious and conservative with what they’re planning for salary adjustments next year, primarily as a result of the economic uncertainty in the marketplace,” said Mercer’s Gordon Frost.

Non-Financial Ways to Keep Staff Members Content

If your company is among those expecting to offer lower raises next year, you may want to creatively address the issue taking into account why people come to work in the first place.

So, what exactly makes an employee satisfied? Money, of course, helps, but many studies have shown that as long as employees feel they’re fairly paid, there are many other factors that come into play and determine whether or not they’ll quit or, if they stay, they’ll continue to work hard. Here are 10 approaches to consider that may help keep your staff members content if there’s little cash for raises:

1. Give them a sense of purpose. Employees who have a sense of purpose are more focused, creative and resilient, so managers should make a point of reminding employees how their work is improving people’s lives. Distributing client or customer testimonials and announcing when corporate profits are donated to charities are a couple of ways to do this.

2. Increase benefits. Look into the costs of boosting the fringe benefits you offer. Explore your policies for benefits such as maternity and paternity leave, childcare reimbursements, gym memberships and bonuses for extraordinary performances. You also could offer an extra week’s vacation or a few additional days off.

Generally, employees look for benefits tied to health, family, and financial stability. The good news: Within each of these three categories, there are many creative solutions that don’t necessarily hurt the bottom line.

For example, you could add voluntary supplementary insurance such as life, critical illness or cancer insurance to your existing benefits options. This’ll enhance your offerings with no direct cost to your company. Premiums for voluntary insurance coverage are paid by employees who choose to apply. Voluntary plans help protect employees’ financial security in the event of a covered illness or injury with cash benefits that can go toward copayments, deductibles or any other health-related cost not covered by major medical insurance.

3. Allow flex work. Flexibility is something that employees crave but don’t often get. At some point, most employees need to spend some quality time with their families but are unable to do so, often because of their work schedules..

Flex work can take many forms but it usually involves giving someone the right to change where or when they work to help balance other responsibilities. Reasons for a flexible schedule could include allowing someone to pick up or drop off a child at day care or school, care for a loved one, enroll in a training or education program or participate in traditional indigenous practices such as hunting or fishing.

4. Provide strong interaction. Good communication is vital for keeping employees happy and satisfied. When a situation arises, employees want to be able to contact quickly the best person to help them resolve the issue.

Direct interaction fosters trust, openness and mutual accountability. Those values, in turn, help to create an environment where employees feel empowered to solve problems and try new things without endless meetings and paperwork.

4. Offer training and courses. Tuition reimbursement is a huge perk for employees. You could cover single classes they’re taking, help in their efforts to go back to college to get their degrees, and subsidize courses they’re taking to improve their careers. Training may takes the shape of free online training courses or massive open online courses (MOOCs) such as Coursera or edX. The idea is to help employees work on their careers.

6. Show gratitude. Recognition is one of the biggest rewards employees can get from managers. When they feel appreciated for their work, they become motivated to do more. At their best, formal recognition programs may pay for themselves through reduced turnover — saving the money you’d have to spend to hire and train a replacement.

8. Involve them decision-making. There’s a direct correlation between how involved employees are in decision-making in their department or team and their overall morale, motivation and satisfaction. Including staff in decisions makes them feel like a valued part of the team, and they tend to focus more on problem solving than blaming their problems on management.

9. Ask around. If you really want to know about your employees and keep them satisfied, get their feedback. They can give you insights that you might not have considered before. You may even get feedback about your current reward system. This’ll let you optimise your tactics for keeping them happy.

10. Keep staff in the loop. When employees don’t know what’s going on in their own company, productive time can give way to duplicate or unnecessary efforts. Worse yet, when employees get only part of the story, they’re left to fill in the blanks with gossip, rumors, and worry.

The bottom line is that if you can’t give employees large salary increases, you may be able to compensate them in other ways. Being creative can help foster a positive environment and keep turnover down.

CIBC Poll: The Majority of Parents Misunderstand Tuition Costs

090816_thinkstock_112808460_lores_kkDo you have kids in college or at university and have discovered you underestimated the cost and wish you’d saved more?

You aren’t alone. A recent survey for Canadian Imperial Bank of Commerce (CIBC) shows that while eight out of 10 Canadian parents claim they have a good understanding of the costs associated with a post-secondary education, almost 75% don’t really grasp the actual cost of tuition.

What’s more, almost 40% of respondents admit they don’t know what to budget for their children’s non-tuition costs, such as books, accommodation and living expenses. And many fundamentally don’t know how Registered Education Savings Plans (RESP) work, although many have set one up for their kids.

The poll showed that:

  • As many parents underestimate yearly tuition (25%) as overestimate it (22%), with another 27% saying they don’t know how much it is.
  • One in five (19%) believe their children can get by on less than $500 a month (the mean estimate for non-tuition costs was $1,333 a month).
  • The majority (81%) say they have a good understanding of the overall cost of post-secondary education, yet only 20% correctly estimate tuition at between $6,000 and $9,999. According to the most recent data from Statistics Canada, tuition ranges from as low as $2,660 in Newfoundland and Labrador to a high of $7,868 in Ontario.

“With parents not really knowing what the costs are, it’s not surprising that so many students end up treating their parents like ATMs once they’re in school,” said Kathleen Woodard, Senior Vice President, Retail and Business Banking, CIBC. A CIBC poll in August 2015 found that more than half of post-secondary students tapped their parents for additional financial support while at school because they ran out of money.

Parents’ Regret

The recent poll found that 39% of parents with children enrolled or recently graduated say it cost them more than expected, while 46% admit that in hindsight they should have started saving earlier.

In reality, it can cost at least $100,000, or $25,000 a year, for one child to go away to college or university for four years, Woodard says. Financial advisers generally say it’s important to start early and put aside as much as possible.

Not only are parents surprised by these costs, they lack a fundamental knowledge about the RESPs they set up to save for their kids’ post-secondary education. While 76% of parents have an RESP,

  • 53% think their contributions are tax deductible (they aren’t).
  • 45% think the money is only for tuition (it can be used for any purpose related to education, including general living expenses).
  • 31% aren’t aware that they can catch up on claiming missed Canada Education Savings Grants (CESGs).
  • 65% mistakenly believe the last year to make a RESP contribution is the year your child turns 17 years of age (it can be until the child turns 31).

The Basics

If you have children you hope will pursue a post-secondary education and you want to help, here are RESP basics to help get you started:

There are two parts to an RESP:

1. Contributions, which are the amount you put into the plan, and

2. Accumulated income, which encompasses everything else, such as grants, capital gains, interest payments and dividends.

When you make a withdrawal, specify whether you want it to come from contributions, accumulated income or both. Contribution withdrawals can be sent to you or the student. Those from accumulated income generally must be sent to the student unless he or she agrees the money can go to someone else.

Accumulated Income Withdrawals

1. They’re taxable in the student’s hands (contribution withdrawals aren’t taxed). Most students may owe little or no tax, including on summer and part-time jobs, as they generally have low incomes and are entitled to various tax credits.

2. There’s no withholding tax. It’s up to you to keep track of the tax due. Your RESP provider will issue a T4A slip for any distributions during the year.

3. The government generally restricts withdrawals for full-time students to $5,000 in the first 13 weeks of a program. There are no limits after that if the student remains enrolled. Withdrawals for part-time students are limited to $2,500 for every 13-week enrollment period (there are no limits on contribution withdrawals).

4. Withdrawals must be used to further your child’s post-secondary education. But this includes tuition, fees, textbooks and reasonable costs for moving, rent, food and transportation. Your RESP provider generally determines what are considered reasonable expenses.

5. For both full- and part-time studies, payments can last for as long as six months after the end of a student’s enrollment, if your plan allows this.

How Much Should You Withdraw?

Withdrawing from an RESP isn’t as convenient as withdrawing from your chequing account. Consider taking out enough money to keep the student going for awhile. But you may want to provide the money in regular payments rather than a lump sum, as your student may not be as financially savvy as you. If the student is in a co-op program and has two work terms and one school term in the year, it may make more sense to withdraw contributions rather than accumulated income in that year.

Important note: One smart move is to deplete accumulated earnings first. Contributions remaining in the plan are yours to use as you wish. You can transfer them to another child’s plan or withdraw them for personal use.

If there’s accumulated income left in the plan, you may have to refund some CESG funds. You may have to repay CESG money in other situations, too, such as when a beneficiary doesn’t pursue higher education or the plan is terminated.

The government adds the grant money to your RESP. The basic grant gives 20% on every dollar you contribute, up to a maximum of $500 on an annual contribution of $2,500. That’s 20 cents on every dollar. Contributing at least $2,500 for each child will maximize the grants.

Grant room accumulates until December 31 in the year a child turns 17. If you can’t make a contribution in any given year, you can catch up in future years.

Depending on your net family income, you could receive an additional CESG, but if your family’s net income exceeds $90,563, you aren’t eligible. Keep track of the CESG money; you’ll have to repay any money exceeding the $7,200 lifetime limit.

There are no annual limits on your contributions, but there’s a lifetime limit of $50,000 for each child. And keep in mind that various provincial governments also have incentives for education savings that are administered through RESPs.

What if Your Kid Child Isn’t Interested in School?

If your child doesn’t want to pursue a post-secondary education, you have options for what to do with the money. Some may involve costs and tax consequences. Here are six possibilities:

1. Keep the RESP open for awhile. In a year or two, your child may decide to go to school after all. An individual or family plan can stay open for 36 years — 40 years for beneficiaries eligible for the disability tax credit.

2. Transfer money between individual RESPs for siblings tax-free (including any CESGs) if the child who benefits was under age 21 when the plan was opened. You may also have the option of transferring the money to another beneficiary, but consult with your financial advisor about this option and be sure you don’t over-contribute.

3. Pay for the education of another child in a family RESP.

4. Change beneficiaries or transfer the plan to another beneficiary if you have a group plan that allows this.

5. Transfer as much as $50,000 tax-free to your Registered Retirement Savings Plan (RRSP) or a spousal RRSP if:

  • The RESP has been open for at least 10 years,
  • All beneficiaries are at least 21 years old and aren’t currently pursuing a higher education,
  • You’re a Canadian resident, and
  • There’s enough contribution room in the RRSP.

6. Transfer the RESP to a Registered Disability Savings Plan on a tax-deferred basis if certain conditions are met. Any CESG money would have to be repaid to complete the transfer.

Of course, you could collapse the plan and the contributions would be tax-free. You would have to refund all grants and the accumulated income would be added to your gross income and taxed in your hands as ordinary income at normal tax rates — plus an additional 20%.

All of the complexities of RESPs go beyond the scope of this article. It’s in your best interest to consult with your financial advisor about the best strategy for making withdrawals.

Steps to Help Ease Your Debt Burden

Debt can sometimes seem like a weight that can never be lifted.

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Pull the Reins on Your Other Debt Obligations

Your mortgage is not the only debt that may be weighing you down.

To illustrate, add up your total monthly interest payments, including credit cards, lines of credit, mortgages and car loans and consider what else you could be doing with that money.

Here are some tips to help you take control of your finances:

Pay down high-cost borrowings. Apply as much as you can to high-interest, unsecured and non-tax deductible debt first. This can help double up your mortgage payments. Use any source of extra cash. If you expect a tax refund, spend it on bills. If you expect a raise, don’t increase your standard of living, lower your debts. See if you can trim household spending and use the extra cash on your credit card bills.

Pay as you go. Use your credit card like a charge card. Pay it in full monthly. You can still maximize reward points while avoiding interest. Never pay one credit card with another. If you really need to reduce your debt load quickly, consult with your adviser to see if a low-rate line of credit would make sense.

Pay yourself first. Find an online bank with a good interest rate on savings and transfer money from your chequing account each time you get paid. Just $20 a week will give you $1,040 in a year, plus the interest.

If you are one of the Canadians whose debt-to-income ratio is too high, you may find that you are not able to keep up payments on your mortgage and other debts. If this is the case for you or someone you know, here are can help control mortgage debt:

1. Stress-test your budget: You must be able to afford your mortgage. Rule of thumb: Total housing costs, including mortgage, property taxes, and heating costs, should add up to no more than one-third of your household income. Test your budget using a mortgage payment based on a higher rate.

2. Carefully weigh fixed vs. variable-rate loans: Variable-rate mortgages are touted as a winning strategy over the long term because they generally cost less in interest and become even cheaper as rates fall. But in order to pay less than those with fixed-rate home loans, you take on the risk of escalating borrowing costs. Consider what would happen if payments doubled over the next few years as interest rates inevitably start to rise.

Fixed-rate mortgage payments, in contrast, are not affected by rate increases so you always know what you will pay over the term of the loan. Typically, you can switch to a fixed-rate from a variable-rate without penalty.

3. Make a larger down payment: Before taking out a mortgage, try to pay off short-term debt. Then put as much as possible up front on your mortgage.

The larger the down payment, the less interest you will pay over the life of the loan. Aim for at least a 20 per cent down payment to avoid having to buy default insurance.

4. Choose your amortization wisely: A longer amortization may mean lower mortgage payments, but it also means more interest. Be disciplined about paying down the mortgage as quickly as you can.

Try to refinance to a shorter amortization as soon as possible. The sooner you are mortgage-free, the quicker you can build your retirement savings.

5. Maximize your payments: Your lender will let you pay more than required to service your loan. The extra amount will vary by institution, with some even allowing you to double your scheduled payments.

In addition, consider taking advantage of prepayments when possible. The extra payments are applied directly to the principal of the mortgage, reducing the loan’s balance outstanding.

6. Use equity lines of credit cautiously: If the value of your home is higher than the amount you owe, you can apply for an equity line of credit, although the government will not insure it. These and other credit lines can be useful for financial emergencies, but they add to your debt burden.

If you take one out, be sure you have a plan to pay it down as quickly as possible. In the event of a short-term cash crunch, your lender may offer alternatives, such as withdrawing funds from your extra payments or skipping a mortgage installment.

Consult with your financial adviser, who can help you decide how much you can comfortably afford when buying a first home, trading up or looking to refinance. Your adviser can also help you to identify how borrowing strategies can play a role in achieving your financial goals and offer solutions that make sense in your situation.

CRA Has Its Sights on Rental Income

lores_rural_land_use_country_fence_ranch_farm_property_tkInvesting in condominiums operated as hotels — where you own individual units that are often split into one-quarter shares — can present some income-earning opportunities, but they can be complicated when it comes to GST/HST.

If you are considering one of these investments, keep in mind that you must pay 5% GST; 13% HST on the purchase price and cannot claim the GST/HST new housing rebate because neither you nor your family will occupy the unit. Nor can you claim the GST/HST Rental Property rebate, because the unit is not rented out on a long term basis.

However, if you are a GST/HST registrant, you can buy the unit without paying the GST/HST. This is because when a property is used 90 per cent or more for commercial purposes, a GST/HST-registered buyer can claim an input tax credit equal to the GST/HST paid on the purchase.

There a few issues you should keep in mind related to owning short-term rental condos to help ensure you stay within tax law and survive potential audits of this favorite CRA target:

1. Rentals for fewer than 60 days aren’t characterized as residential complexes, which are exempt from GST/HST. Instead they are usually characterized as “hotel, motel, inn or boarding house, lodging house and other similar premises.” That means GST/HST is charged on the rentals and you can claim input tax credits on GST/HST paid on expenses relating to them.

2. If you or your family does stay in the unit, you will have to allocate a portion of the input tax credits as personal. That portion cannot be claimed as input tax credits, even if they are related to the purchase of the unit. When personal use is more than 50 per cent, you cannot claim any input tax credit on the purchase price.

If you do want to stay in the condominium complex, say for a vacation, you are generally better off staying in another unit and paying rent or arranging a swap with another unit holder. In the latter case, you both report rental revenue on the use of each other’s units.

3. Management companies who typically run these complexes do not claim input tax credits on expenses related to the units, although they do usually collect and remit GST/HST on the unit rentals. The companies will send you monthly reports on revenues and expenses. In addition, the management companies normally take care of renting units, the day-to-day operations of the complex and other routine matters.

Your record keeping is minimal, generally consisting of keeping the management company’s annual report to you and retaining receipts for expenses associated with the rental unit.

Here is an illustration of the types of expenses that are usually incurred and the GST/HSTrefund that would result if you were registered for GST/HST:

Expense ($)

Input Tax Credit ($)

GST/HST self assessed on purchase — $5,000

(5,000)

Unit purchase, GST/HST offset by tax credit

100,000

5,000

Net GST/HST payable on purchase price

NIL

Costs typically subject to GST/HST and refunds registered owners can claim

Cost

Claim

  • Legal costs on purchase
  • Management fees
  • Maintenance and Repairs
  • Travel
  • Strata Fees

1,500

10,300

2,900

500

2,400

75

515

145

25

120

Total

880

The refund depends on the amount of GST/HST paid out. The more expenses are subject to GST/HST, the greater the refund.

One final caution: You must be registered for GST/HST before the sale closes, or you cannot claim the input tax credit on the purchase. Talk to your tax professional before you purchase the unit if you think that you might benefit by registering for GST/HST.

Red Flags for a CRA Audit

thmb_red_flag_risk_danger_mbYou might think the Canada Revenue Agency (CRA) would keep silent about what triggers an audit. But the agency is actually quite candid about why it chooses certain tax returns.

For example, the CRA publishes newsletters, technical interpretations and taxpayer alerts on its Web site that elaborate on audit issues, describe areas of concern to the government, and warn about actions and investments the agency is likely to investigate.

In addition, the Auditor General of Canada has issued a report titled “Verifying Income Tax Returns of Individuals and Trusts,” which discusses in detail how the CRA processing and review system works.

Red Flag

Potential Solution

Gross profit margin is lower than direct competitors — or higher — while net profit is lower. Properly record and categorize expenses.

Ensure the accuracy of direct and operating costs, as well as inventory valuation.

High vehicle expenses Keep a vehicle log.
Unusual home office business expenses Determine the business use of your home on a consistent and defendable basis.
Small Business Deduction: High “other revenue” or investment revenue. Large cash balance on balance sheet. Pay dividends to remove excess cash from the corporation. Repay shareholder loans. Consider forming a separate holding company for investments.
Income is low for many years. Report all income, including non-taxable sources.

With all that information, it’s generally easy to determine some of the transactions and recording methods that are likely to prompt an audit.

Here are 10 red flags gleaned from these documents to help you gauge whether your tax return is likely to trigger an audit:

1. Revenue discrepancies. A sure-fire trigger for an audit is reporting revenue on your GST return that doesn’t match what you report on your income tax return. Report all revenue on your GST return, even if you don’t collect the tax on some revenue.

Treat revenue and expenses the same way on both returns. For example, when filing your income tax return, don’t reduce revenue by the associated expenses and report only the profit while reporting total revenue on your GST return.

In addition, the CRA annually matches information on tax returns with information provided by employers, financial institutions, and other third parties. The tax returns of individuals who are married or living common law are also compared with their spouses’ or partners’ returns.

These comparisons are made to identify unreported income, incorrect claims for an amount of “income tax deducted,” credits and deductions that exceed the limits, net family income for the purpose of claiming several credits as well as incorrect “pension adjustments.”

2. Claiming large interest and carrying charges. A taxpayer with business or rental income should claim related accounting fees and interest expense on the business or rental income schedule. They should not be claimed as carrying charges and interest expense. This deduction is for expenses related to investment income.

3. Changes in shareholder loans and large balances. If you hold stock in a corporation, large changes in shareholder loans or debit balances can attract attention. The CRA is looking for personal expenses recorded as business expenses and loans taken from a company. Your accountant can advise you about the best way to structure loans.

4. Deducting large business expenses. The CRA scrutinizes business and rental income schedules that show large amounts of advertising and promotion, travel, miscellaneous and interest expenses. The tax agency is looking for personal expenses, meals and entertainment that are improperly recorded and non-deductible expenses such as penalties and interest. Meal and entertainment expenses should be separated and expenses should be allocated individually rather than using “miscellaneous.”

5. Making calculation errors or leaving out information. Many audits result from simple math errors on tax returns or missing information slips, such as the T3, T4, and T5. Professionally prepared tax returns that minimize audit red flags are one of the many benefits of using a qualified accountant.

6. Large or unusual changes in deductions or credits. Employment expenses are limited to just a few people and large employment expenses are a flag for the CRA. Moreover, you may be requested to supply additional information if you have claimed childcare or tuition expenses.

7. Large charitable donations of cash exceeding $25,000 and capital property are often reviewed.

8. Investment gains and losses. The CRA will closely look at losses claimed on investments in small business corporations. The rules are complex and often misunderstood or misinterpreted. Many taxpayers also don’t correctly track capital gains and losses, so they, too are an audit flag. Account statements from financial institutions may not be accurate for tax purposes. Income trusts, for example, erode their cost base over time because of returns of capital. Foreign currency investments can present a problem as you need to account not only for your financial gain or loss but also for the foreign exchange gain or loss.

9. Foreign tax credits. These claims may trigger an audit for investors who earn income from foreign investments or employment.

10. RRSP overcontributions. If you overcontribute to your Registered Retirement Savings Plan, taxes are owed on the excess. Over contributions are common when retirement allowances are deposited into the accounts and when taxpayers contribute to their plans without referring to their annual Notice of Assessment.

Steps to Avoid Higher Tax on Sales of Goodwill and Other Intangibles

090216_thinkstock_483447992_lores_kkIf you own a business and you’re planning an exit strategy or asset sale, you may want to complete it by December 31.

Starting January 1, 2017, changes to the Income Tax Act brought about by the Liberal’s Budget 2016 will modify the way the government taxes asset sales. The change is meant to simplify the rules; it creates a new capital cost allowance (CCA) category (class 14.1) and essentially merges eligible capital property (ECP) into the depreciable property category.

As a result, your incorporated business will pay an additional refundable tax when it disposes of goodwill or other ECP. That tax isn’t refunded until taxable dividends are paid to shareholders.

ECP includes goodwill, customer lists, franchise rights, farm quotas and other intangibles. The costs of incorporation, reorganization or amalgamation also qualify.

If you own, say, a small Canadian-controlled private corporation, goodwill may be the single largest asset you’ll have to sell and it could be hit with a big tax liability. If you’re a dairy farmer who wants to sell quota held in a corporation, you’ll pay an extra tax on the gain in value.

Because of changes in the treatment of ECP, owners considering the sale of their corporations (or any ECP) might want to consider the advantages of:

  • Selling the assets before the end of the year, or
  • Crystallizing certain gains accrued on the assets through a corporate reorganization.

Here’s How It Works

Some capital expenditures are neither deductible from taxes as a business expense nor treated as a capital property subject to depreciation under the CCA rules. These expenditures are those a company pays out to acquire certain ECP in order to earn business income.

Currently, the taxation of ECP works this way:

1. 75% is included in a cumulative eligible capital (CEC) pool,

2. An annual deduction of 7% of the CEC pool on a declining balance basis may be deducted from active business income related to the ECP,

3. 50% of any gain from the disposition of ECP is taxed at the lower tax rate applicable to active business income, and

4. The remaining 50% is captured in a corporation’s capital dividend account and can be paid out to shareholders tax free (creating a significant tax deferral).

Income from most businesses qualifies as active business income, except when the money comes from a specified investment business, a personal services business or it’s investment income. The latter includes taxable capital gains less allowable capital losses, property income less property losses and foreign business income.

Starting January 1, ECP taxation of ECP will change so that:

1. 100% acquired on or after that date will be considered depreciable property,

2. An annual deduction of 5% will apply to ECP on a declining basis, and

3. Gains from the disposition of ECP will be taxed as investment income in the form of capital gains resulting in a higher tax liability.

So, under the new rules, you’ll no longer be able to take advantage of the tax deferral on captured gains and the effective tax rate on gains on goodwill or other ECPs could double, depending on your province. (If you sell your corporation for shares, the new ECP rules will have no effect on the tax cost of the sale.)

What Could this Mean for Your Business?

There are two ways to structure a business sale transaction: an asset sale or a share sale.

Buyers generally prefer asset transactions as they carry less risk and the buyer can cherry-pick which assets it will purchase and which liabilities it will assume. Also, the buyer needn’t take on non-union employees, unless the seller requires it, and there’s more complex paperwork.

Sellers, on the other hand, often prefer share sales, because all assets and liabilities are transferred, employees generally continue working and the paperwork is less cumbersome. Stock transactions also offer a lower tax rate on capital gains and the potential to shelter a portion of the proceeds from tax through the shareholders’ lifetime capital gains exemption.

With the new rule in place, sellers may be even more motivated toward share sales. Purchasers who wish to proceed with an asset sale may have to compensate the seller for the additional tax costs associated with the deal. Likewise, sellers may become more selective when considering competing offers.

The remainder of 2016 is the last window of opportunity to sell your business in an asset sale (or a hybrid transaction that involves the sale of assets and shares) where the lifetime capital gains exemption is available to shareholders. This would allow your corporation to benefit from the deferral opportunities provided by the current ECP regime.

What to Do?

If you’re considering a full or partial sale of your business after the rules change, take into account these three issues:

1. Determine how much of your business value is goodwill and other eligible intangibles, and thus subject to the higher tax rates. If they don’t amount to much, no immediate action may be necessary.

2. Review your corporate structure. Changes to your business structure may allow you to shelter some of your capital gains from tax if you decide to sell after January 1.

3. Consider taking steps to crystallize your gains related to ECP. You may be able to have some of the gains taxed at the current rates, which will reduce the impact of potential taxes on a sale that takes place after January 1.

A sale is complex and requires careful planning — particularly with the changes coming down the road. Consult with your tax advisor for detailed information on the changes, how they’ll affect your corporation and the best steps to take moving forward.

Use Caution When Tapping an Executor

Choosing an executor is one of the most critical parts of planning your estate.

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Setting Up a Health Care Directive

If you suffer from an accident or illness and become unable to communicate the type of medical treatment you wish to receive, your family must guess what you want. A health care directive, or living will, eliminates the guesswork by making it clear what your wishes are.

Usually, a living will contains specific directions on the course of action you would or would not like to take if you are in a terminal condition, a permanent coma or in a persistent vegetative state. It may provide instructions on whether or not you wish to receive artificial life support, artificially administered food and water or comfort and care.

Here are the answers to some common questions about health care directives:

Q. Who can make a health care directive?

A.Generally, any person who has the ability to understand information relevant to making a medical decision and appreciate the consequences of a decision may make a heath care directive. The provinces and territories also have varying age requirements.

Q. Do I need a health care directive if I already have will?

A. Yes. Health care directives and last wills are very different. Your will deals with property and the directive deals with medical treatment and care.

Q. Are health care directives legally binding?

A. Yes. Once they are properly signed and witnessed, family, friends and health care providers must follow the directions as long as they are consistent with generally accepted health care practices. Keep in mind that health care practitioners are not required to ask whether you have signed a directive or to search for one.

Make sure that your family, friends and health care representative know that you have signed one and that they know where it is. Health care providers that are unwilling to follow your directions are usually obliged to refer you to a provider who will.

In some families, that decision is based on tradition or culture, where the oldest child or male is automatically given that role. But this may not be the best choice. It can cause family resentment and the person named may not be suited to the task.

If the administration of your estate is expected to be complicated — or there is family disharmony — consider naming someone else as executor. Your surviving spouse or children can receive regular reports from the executor, keeping them advised of the process of settling the estate.

In general, you can select anyone, or a group of individuals, to serve as your executor, but it is important to consider whether the person:

  • Will outlive you;
  • Is honest, trustworthy and will carry out the wishes you put in your will; and
  • Lives close to the decedent’s home and will be able to access the local court and settle the estate without delay.

Two questions commonly come up in discussions of naming an appropriate executor. Here are those questions and the answers:

Q. What qualities and abilities should an executor have?

A. When you write a will with the help of your attorney, it’s important to choose a competent and trustworthy executor and alternate executors. Otherwise, even careful estate planning could be rendered useless.

Your executor can be any person or institution that you desire. If you feel you cannot trust a family member, consider naming your accountant, attorney or bank trust department. Whoever you choose, keep in mind that your executor should be:

  • Familiar with your family situation, including children, step children and former spouses.
  • Able to spend the time necessary and is willing to perform the duties.
  • Willing to work with the estate’s attorney and accountant.
  • Familiar with your finances, property and other assets; and
  • Experienced and competent in business matters to provide for the continuation of your business if you have one.

Q. What are the executor’s responsibilities?

A. Your executor becomes your personal representative and fiduciary after your death and must administer the estate and ensure the will is carried out. In general, the executor must:

  • Arrange the funeral and pay for it;
  • Pay any outstanding bills of the estate;
  • Collect and preserve assets;
  • Pay debts, taxes and administration expenses of the estate; and
  • Distribute estate assets according to the terms of the will.

Besides naming an executor, you should consider giving someone Power of Attorney to make decisions about and sign official documents involving your finances and assets.

There are two general types of Power of Attorney:

1. Durable Power of Attorney: An individual acts on your behalf if you are unable to make decisions. This person would control your finances and your assets, so you need to choose someone you trust to ensure that your wishes will be heard, understood and carried out to your specifications. You set up the durable power of attorney to come into effect only if you are unable to act on your own behalf.

2. Non-Durable Power of Attorney: An individual acts on your behalf if you are not available to sign legal or financial documents for one reason or another.

Common examples of what a Power of Attorney allows a person to do on your behalf are:

  • Manage your money, bank accounts, and safety deposit boxes.
  • Enter into contracts and settle claims.
  • File tax returns and handle government benefits.
  • Sell, mortgage, and manage property.
  • Plan an estate and financial gifts.
  • Maintain business interests.

Because the individual’s powers are significant, there is often a clause in a Power of Attorney to appoint a second person if the first is unwilling or unable to perform the duties. This person is called a successor agent or a successor attorney-in-fact.

Consult with your adviser. Naming an executor and giving someone power of attorney are critical decisions and your adviser can help you choose the right individuals.

Restrict Cell Phone Use and Texting While Driving

lores_cell_phone_car_drive_talk_mbIn this wireless age, some people tend to consider driving time as a business opportunity. So using cell phones to call or send text messages is just another way to help boost productivity and swell the bottom line.

And even more ways of being mobile and productive are on the way. Automakers are planning to include more in-dash computers and communications technology that can be accessed with drivers’ fingertips.

But beneath the convenience is an expensive potential liability. Some companies have inserted clauses in their employee handbooks stating that staff members are only allowed to conduct business while using a hands-free cell phone. But that may not be enough.

The Insurance Bureau of Canada has noted that studies show drivers are four times more likely to be involved in a collision while talking on a cell phone. The bureau also noted that in addition to talking on the phone, too many drivers are distracted as they multitask while commuting. The distractions include eating, playing with the CD changer or MP3 player and even reading the newspaper.

Studies have found that hands-free phones are not safer than hand-held devices. Some researchers have found that all types of phone conversations are so distracting that the driver’s mind just isn’t on the road. Other studies have shown that 73 per cent of all cell phone users sometimes talk on their phones while driving, and 19 per cent send text messages.

A Transport Canada study found that drivers performing certain tasks spend more time looking centrally and less time looking to the right. They spend less time checking instruments, and as driving tasks demand more concentration, drivers change inspection patterns and do more hard brake work. The drivers studied were equally distracted whether they used a hand-held phone or a hands-free headset.

Simply put: Phone conversations — particularly about business — can be demanding and stressful enough to keep drivers’ minds off the road.

All of this has led some Canadian companies, including Imperial Oil Ltd. and ExxonMobil Canada, to adopt policies banning employees from making cell phone calls while driving on company business.

Other companies have put restrictions on cell phones, limiting them to hands-free only phones while driving. But that may not be enough.

That’s a start, but there are other steps your company can take to encourage safety and limit liability. Consider adding these factors to a written policy on cell phone use:

  • Issue regular bulletins to your entire staff telling them to use common sense when calling someone on a cell phone.
  • Place a sticker on company-owned cell phones warning that using the phone while driving is dangerous and should only be done in an emergency.
  • Notify all employees that any violation of the company’s cell-phone policy will bring disciplinary action — including termination of employment.
  • Be sure all employees sign your policies to indicate they have read and understand them. Let your staff know the safety issues and laws involving cell phone use.

The provinces have started to tackle the issue. So far, Ontario, Quebec, Newfoundland and Labrador have laws  banning the use of hand-held cell phones while driving. Those laws do not, however, affect the use of hands-free devices. Cell-phone laws also tend to ban texting while driving as well as using hand-held entertainment devices, although it is generally legal to use an MP3 player plugged into a vehicle’s sound system.

But even where there is no specific provincial legislation, a driver who causes a collision by using a cellular phone or who is observed driving unsafely while using the device could be charged under a number of other provincial, territorial or federal laws including, those related to dangerous driving, careless driving and criminal negligence causing death or injury.

Moreover, it might be possible for your company to be sued for vicarious liability associated with accidents involving cell phone use by employees while performing their job duties

Your company may benefit when employees conduct business while they’re in traffic, but you must balance the extra productivity against potential liability and safety.

Tally the Pros and Cons of Going Public

For many business owners, going public is the pinnacle of success. But the process is rigorous, requires enormous effort and time, and can be extremely expensive.

Leading up to the day your business goes public, you need to engage an investment banker, build a successful IPO team, avoid some pitfalls and be ready to meet the stringent requirements of a publicly owned corporation. The process is rigorous, requires enormous effort and time, and can be extremely expensive.

Going public is not for everyone, but if your company is set on it, carefully consider the pros and cons.

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Terms You Need to Know

Here are some of the other terms you will hear during an initial public offering:

Aftermarket performance. The difference between a stock’s initial offering price and its market price.

Expression of interest. A firm and obligated order to buy a specific number of shares.

Greenshoe. An agreement that the underwriter may authorize more shares for distribution if demand for an offering is high.

Oversubscribed. The spread between demand and supply for an issue. If an issue is four times oversubscribed, expressions of interest are four times greater than the amount of stock available.

Pricing date. The day underwriters determine the final price, yield, and size of an offering.

Selling group. A group of dealers the lead underwriter appoints to market a new or secondary issue. Members may or may not be a part of the underwriting group.

Syndicate. A group of investment dealers who underwrite and distribute a new issue of securities.

Time, Expense and Wary Investors

First you need a clear idea why you want to sell stock on the public market. Among the benefits:

  • Raising money for growth and expansion without taking on additional debt.
  • Providing liquidity for shareholders. Bear in mind the securities exchanges and underwriters generally want principal holders to stay with the company for a certain period of time, during which their shares typically are in escrow and released over time. Moreover, company officers and senior executives have access to material information and cannot trade shares until that information is made public.
  • Increasing stockholder value. Publicly traded shares generally trade at higher prices than holders can demand in private transactions.
  • Boosting your company’s profile and reputation. However, while an increased profile can help raise more capital, the spotlight can also attract hostile bidders that eventually could result in a loss of control of your business.
  • Acquiring shares for stock option incentives to attract and retain skilled employees or to use in place of cash to make acquisitions.
  • Increasing liquidity for a succession plan if family and associates don’t have the money to purchase your stock.

But having a reason to go public isn’t enough. Your company must be ready to face investors, who generally scrutinize three factors:

1. Earnings: Investors buy into potential growth and want to see a strong record of good returns on sales and assets. If you have been adjusting your earnings for the best tax benefits, you may have to restructure your business and restate earnings. Carefully review potential tax reorganizations and individual tax consequences with your accountants.

2. Business Plan: Having a business plan helps gauge the soundness of your intention to go public. It also helps write the prospectus that investors need to evaluate your offering. The business plan should include a market analysis, a description of your company’s products and services, management structure, and financial information and projections.

3. Management: Investors want to know you have an expert management team that can carry out your business plan. Investor reaction to both your prospectus and your management team can play a large role in determining the valuation of your company and the pricing of the stock issue. As well, you need a strong board of directors that understands your industry and reflects a varied business background. The board will be accountable to all shareholders for overseeing the operations of your public company and must consider their rights in all major business decisions.

Examine the Drawbacks

Finally, you want to discuss with your advisers the potential disadvantages to ensure they don’t outweigh the advantages. Among the drawbacks:

  • Financial Costs: Going public is expensive, and among the costs that can quickly add up are: Underwriting fees can range as high as 15 per cent;
  • Legal and accounting fees, as well as printing, listing and registration costs can add up to as much as four per cent; and
  • Continuing costs that include annual reports, board and shareholder meetings, shareholder registrations and transfer, and publishing disclosure information.
  • Time Costs: Typically, preparing to go public can take one to two years and eat up as much as 50 per cent of managers’ time. This can distract them from the efficient running of your business and can lead to lost opportunities.

Public companies must follow stringent, expensive, and time-consuming reporting and filing requirements. Some of the information you make public could be sensitive and you must disclose any information that can affect an investor’s decisions. You may have to spend a considerable amount to upgrade your accounting and information systems to handle the volume and variety of information required. Regulatory compliance can add from $25,000 to $200,000 in expenses.

Phase Two

But getting your business in shape for an initial public offering (IPO) is just half the battle. Once everyone involved determines you are ready, phase two begins.

While starting work on your prospectus, you must choose a lead underwriter, then file the prospectus and amend it if any of the appropriate securities commissions have concerns. And then you take the show on the road to market the offering.

The process is complex and time consuming, but the success of your IPO depends on it

The underwriter is typically an investment bank and acts as agent for the IPO. The roll is central to your offering so choose carefully. Get recommendations from your lawyers and accountants as well as others who have gone public. Check references thoroughly.

Among the qualities to look for in an underwriter are:

  • Reputation in your industry.
  • Availability of experienced analysts.
  • Existing relationships with your current and future customers, suppliers and competitors.
  • Chemistry with you and your management team.
  • Ability to provide after-market support.

Working with the underwriter you will determine the amount you want to raise and the number and types of securities you want to issue. The structure of the offering is typically one of two scenarios:

  1. A firm commitment, where the underwriter guarantees to raise a certain amount by buying the entire offer and then reselling to the public, and
  2. A best efforts agreement where the underwriter sells shares but doesn’t guarantee an amount.

Writing and Filing the Prospectus

Your prospectus serves two purposes: compliance with legal disclosure requirements and acting as the main marketing tool for your offering.

Your lawyer, managers, advisors and underwriters will work together to compile documentation about your company and its holdings, its capitalization, risk factors associated with the offering, a description of how the offering is structured, and a due diligence report.

You file the prospectus with securities regulators in each of the provinces where you plan to offer the shares. The more provinces you choose the higher your costs but the broader the exposure of your offering. Filing in Quebec will require English and French versions of the prospectus.

The regulators review the documents and issue comment letters with concerns they expect you to address, usually by modifying the prospectus. When regulators are satisfied, they will ask for a final prospectus and issue a receipt. You are then officially a reporting issuer and may start selling the shares.

The Quiet Period and Road Show

The time between filing the preliminary prospectus and getting the receipt for the final prospectus is the “quiet period” when you can market your offering only through oral statements and the preliminary prospectus. You must ensure that you do not issue any press releases, written presentations or other material that would be classified as advertising and that hypes the offering.

However, you can begin your road show, where you generally meet with two types of investment professionals:

  1. Buy-side analysts and fund managers working for mutual funds, insurance companies, and large investment groups looking for investments where they can put some of their pool of money, and
  2. Sell-side professionals who are usually brokers with retail investment houses looking for investments to recommend to their clients.

When the road show is over and you have distributed the final prospectus, the underwriter will set the final offering price and size.

The pricing will try to balance your need for cash with investors’ desire for investment gains. Your underwriter may recommend reducing the size of the offering if interest appears to be waning or increasing it in the face of strong demand. It is unusual to postpone an IPO due to lack of interest.

Once the sale is complete, you are a public company and subject to all the disclosure laws and regulations and responsible for your shareholders’ best interests.