Monthly Archive: May 2017

Risky Business: Participating in the Hidden Economy

051317_Thinkstock_614316980_lores_kwRoughly $45.6 billion of the Canadian economy was “hidden” in 2013, according to a Statistics Canada study about the underground economy that was published in June 2016.

That amount was up 7.5% from the $42.4 billion that was off the books in 2012, and it represents about 2.4% of the nation’s gross domestic product. The lost revenue partly helps explain why the Canada Revenue Agency (CRA) tried to up its game by sending “nudge” collection letters to encourage players in the underground economy to pay up.

Unfortunately, the nudge experiment reportedly failed. An internal CRA report obtained by CBC News states: “In conclusion, we failed to find evidence supporting any of the three behavioural outcomes that the nudge campaign expected to produce.” (The campaign involved sending two different types of collection letters to taxpayers who were assessed — but hadn’t paid — their taxes. One version used friendly encouragement. The other contained less-friendly language. The results were compared with those from a standard stern collection letter.)

The CRA defines the underground economy as “business activity that is unreported or underreported for tax purposes.” The problem is so great that Ottawa has made it a priority to collaborate with provincial, territorial and industry partners to reduce it. In Budget 2015, the government earmarked $118.2 million over five years to bolster the CRA’s audit capacity by expanding its Underground Economy Specialist Teams. These teams use advanced data analysis to identify and adopt new approaches to combat the underground economy.

Appealing to the Public

But the CRA also wants help from individuals and businesses. On its current website, it states: “Hiring a landscaper? Paying cash to avoid the tax is risky.”

It goes on to say that the risks are particularly high when it comes to home renovations. In fact, residential construction accounted for nearly one-third (27.8%) of the underground economy in 2013 followed by:

1. Retail trade (12.5%), and

2. Accommodation and food services (11.7%).

Explaining the Risks

The CRA elaborates that when you deal with a contractor in cash, you have no protection against:


  • Poor or incomplete work,
  • Lawsuits if a worker gets injured,
  • Cost overruns,
  • Use of substandard materials,
  • Responsibility for damages to your or a neighbour’s property, and
  • Fraud, if you pay for work that’s never done.


In another focus area, the CRA is tackling the problem of unreported income in property flipping, which involves individuals buying and reselling homes in a short period for a profit. This includes real estate agents. Flipping is believed to be one of the reasons for overheated housing markets and underreported income.

Starting with the 2016 tax year, in order to claim the full principal residence exemption, taxpayers are required to report basic information (date of acquisition, proceeds of disposition and description of the property) on their income tax and benefit returns if they sell their principal residences. The tax agency also now requires that every sale of a principal residence be reported on Form T1-2016 Schedule 3, Capital Gains (or Losses).

Cautioning Businesses

The tax agency is also taking on businesses. It warns them that there are serious consequences for participating in the underground economy. Businesses must report all sales or income, as well as all work performed for cash. Otherwise, an enterprise owner could wind up paying hefty fines, face a prison term and lose the business. “It’s that simple,” the CRA cautions.

Employer responsibilities generally include:

  • Collecting and remitting payroll deductions for employees,
  • Reporting employees’ income and deductions on T4 or T4A slips, and
  • Registering for the GST/HST if revenue (before expenses) is more than $30,000 a year.

The CRA emphasizes that paying employees under the table is unfair to them as well as against the law. Affected employees are deprived of such benefits as:

  • Employment Insurance,
  • Canada Pension Plan payments, and
  • Workers’ compensation coverage.

Employers who pay in cash put themselves at additional risk. They could face administrative penalties and legal repercussions by provincial workers’ compensation boards for failing to report accurate payroll amounts, or failing to report an accident if the worker is injured on the job. In Ontario, for example, the fines for not following provincial workers’ compensation rules can be up to $500,000.

Take Steps

What can taxpayers do about all of this? Quite a bit actually:

File returns. Those who must file individual, corporate, or goods and services tax/harmonized sales tax (GST/HST) returns should do so accurately and on time.

Check payslips. Employees should check to be certain that their employers are withholding taxes to ensure they’ll receive their entitlements and benefits.

Make deductions. Employers, trustees, estate executors, liquidators, administrators or others who pay various types of taxes should be sure they make the required deductions. They must also remit those amounts, as well as any share they owe, to the CRA and report the income and deductions on T4,T4A or other summary and information returns.

Ask questions and get transactions in writing. Individuals planning to hire contractors or others should obtain written contracts and ask for proof of Workers’ Compensation or equivalent private liability insurance to cover injury and any damage that might occur in their homes.

If someone offers to provide services for cash, or you suspect an individual or business hasn’t reported all their income or GST/HST, you can contact the CRA through its Informant Leads Program. The agency will review the information provided to help identify and follow up with taxpayers who aren’t complying with their tax obligations.

Voluntary Disclosures

The CRA urges individuals who may have participated in the underground economy to come clean and correct their tax situations through the Voluntary Disclosures Program. Under certain conditions, this program allows individuals to correct inaccurate or incomplete information on their tax returns. They can disclose amounts that weren’t previously reported, without penalty or prosecution. They’ll pay the taxes owed plus interest.

An Alternative to RESPs

Statistics Canada estimates that the total cost of a four-year university education is more than $80,000,  including tuition, housing, food, books and additional fees.


The Real Costs of College

When you think about how much it’s going to cost to send a child to college, you often concentrate only on the direct costs such as tuition and books. But there are indirect costs that also need to be considered.

Here’s a list of both types of expenses to evaluate when you are planning the costs of giving your child a higher education:

Direct Costs

  • Tuition: Some schools charge a flat fee, but others charge by the credit hours taken. Assume a minimum of 15 hours per term.
  • Room: This depends on whether the student lives in a dorm, an apartment or group house, or with a relative. Colleges usually provide an average figure for dorms, so use that because you won’t know the actual amount until your child has been assigned a room.
  • Board: If your student eats on campus, the school may require all meals to be taken in a dining hall or other campus facility. Some schools offer flexible meal plans, which are handy if your child doesn’t need three full meals a day seven days a week. The school’s estimates won’t include snacks or socializing. If the student lives off campus, calculate based on the usual amount consumed in a week at home.
  • Fees: Some fees are required and others depend on the course of study. For example, if your child takes science courses, you may be charged a lab breakage fee for each course. Some schools charge a student services fee based on participation in certain activities. And there may be fees for uniforms and equipment if the student plays a sport.
  • Books and Supplies: This depends on the student’s field of study. Science books can cost as much as $75 or more, and a literature course could require as many as 10 books. There may also be charges for workbooks, photocopied articles and study guides.

Indirect Costs

  • Transportation and Travel: Include commuting from the local residence to classes unless the student lives on campus, and travel expenses to and from home during school breaks. If the student has a car, include parking fees, insurance payments, and gas, oil, and maintenance.
  • Personal Expenses: Don’t forget the costs of laundry, entertainment, toothpaste, razor blades, haircuts and the like. They add up.

So it is no surprise that parents are looking for efficient ways to finance their children’s educations. Often the parent, or a grandparent, will gravitate to a Registered Education Savings Plan (RESP), the country’s top choice for financing higher education.

The popularity of RESPs stems from tax-deferred compounded growth, lower taxes on withdrawals because they are taxed to the child, and federal grants that help build the savings even faster.

But if the beneficiary decides not to get a higher education you may not be happy with the rules for accessing the money you’ve been putting aside.

For one thing, you must return to the government the grant portion of the RESP.

Then, in order to access the remaining money, three conditions must be met:

1. The account must have been open for at least 10 years,

2. The beneficiary must be at least 21 years old and be ineligible to receive education assistance payments from the plan, and

3.You must reside in Canada.

And then you have only two choices:

1. Transfer the money to a Registered Retirement Savings Plan (RRSP) held by you or your spouse or partner, provided there is contribution room, or

2. Withdraw it as cash and pay both your marginal tax rate as well as a 20 per cent penalty on money that you earned in the plan.

The alternative to these savings plans is an informal trust account.

The key difference between saving in-trust for your child and setting up an RESP is that the child has guaranteed access to the cash when he or she reaches the age of majority in your province. The money does not have to be used for schooling but could instead go toward travel, buying a car or home, or setting up a business.

But the money does belong to the child. You cannot access it unless it is for the benefit of the child. The money in an RESP belongs to you.

These informal trusts differ from formal trusts. The latter require a legal trust agreement, generally cost more to set up and administer, and are usually used for very large sums of money.

Informal trusts are simpler to set up and generally take the form of an in-trust account with a bank, trust company, credit union, investment company or mutual fund company.

Unlike an RESP, there is no limit on how much money may be held in the trust and no limits on when and how much you can contribute. That means you can put aside more than the lifetime maximum of $50,000 per beneficiary allowed by the registered plans. However, the trusts do not qualify for the federal education grants.

While setting up and contributing to an in-trust account is relatively simple, the tax structure is complex.

Income attribution rules apply to in-trust accounts. That means income such as dividends and interest are taxed in the hands of the higher tax bracket parent or adult who set up the trust.  If the trust is used exclusively to save Canada Child Benefits payments, however, interest and dividends are taxed to the lower tax bracket child.

Generally, then, in-trust accounts focus on growth stocks or mutual funds that invest in stocks, where growth is primarily from capital gains. There is no attribution of capital gains, and thus they are taxed to the child.

When money is withdrawn, the beneficiary will not owe taxes on the amounts you contributed. That’s because you put in after-tax dollars, so you have already paid income tax on the principal invested.

Using informal trusts is a complicated and at times controversial strategy that involves complex tax issues often reviewed closely by Canada Revenue Agency (CRA). Be certain to consult your professional advisor for help minimizing taxes and getting the most out of an in-trust education account.

Price Sale Items Carefully

thmb_gate_chain_link_padlock_field_MBVendors beware: Truth in advertising isn’t just a slogan for the Canadian Competition Bureau, which is determined to enforce the ordinary selling price provisions or the Competition Act.

Those provisions state that before a company advertises items on sale, it must sell a substantial volume of the items at the pre-sale price for a period of time. Specifically, a retailer cannot claim that a price is the ordinary selling price when the company has not:

The Competition Act contains criminal and civil provisions to address false or misleading representations and deceptive marketing practices.

The criminal provisions prohibit all materially false or misleading representations made knowingly or recklessly, deceptive telemarketing and notices of winning a prize, double ticketing, and pyramid sales schemes.

The civil provisions also ban all materially false or misleading representations and specifically prohibit performance representations that are not based on adequate and proper tests, misleading warranties and guarantees, false or misleading ordinary selling price representations, untrue, misleading or unauthorized use of tests and testimonials, bait and switch selling, and the sale of a product above its advertised price.

1. Sold a substantial volume of the product at that price or a higher price within a reasonable period of time before or after making the representation.

2. Offered the product at that price or a higher price in good faith for a substantial period of time recently before, or immediately after, making the representation.

To be considered an ordinary price, at least half the merchandise must be sold at that price during the previous six months, or offered at the price for half the time.

The landmark ruling that underscores the federal agency’s determination to enforce the law was the Competition Tribunal’s finding that Sears Canada at one point used false discounts to sell tires and exaggerated the possible savings to consumers.

In its ads, Sears claimed it was offering discounts as deep as 45 per cent on five types of tires. The retailer later conceded that it sold less than two per cent of the tires at the full regular price before they were advertised on sale. Sears stated that the original price in its ads reflected the price at which competitors regularly offered the tires for sale.

However, the tribunal found that the company could not have truly believed that its regular tire prices were genuine and bona fide prices that the market would validate.Sears was ordered to pay a $100,000 penalty as well as $387,000 toward the Competition Bureau’s legal costs.

In handing down the ruling, the tribunal also upheld the constitutionality of the ordinary price provision of the law, stating that false or misleading ordinary selling price claims can harm consumers, business competitors who do comply with the law and competition in general.

The ruling was a powerful message to be careful when your business uses comparative-price advertising. There is no need to stop using these powerful marketing tools, but be sure your enterprise can legitimately establish that ordinary selling price representations are offered in good faith and not misleading. Fortunately, the Competition Bureau offers guidance to that end, including:

The general test: Would a reasonable consumer conclude that the comparison price is the one at which the item was ordinarily sold? If the comparison price isn’t the regular market price, the business is liable for prosecution.

Such phrases as “Compare to,” “Was,” “$X or X? off,” “Special” and “Value” generally convey the impression that the comparison price is the one at which the product has been ordinarily sold.

If a business doesn’t know the market price and the sale price is a reduction from its price, the comparison price should be qualified by saying, for example, “our regular price.” Moreover, a business shouldn’t compare its prices to those in another region. An Ottawa retailer should not rely on a Toronto regular price.

Don’t rely on out-of-date pricing history. The comparison price should be one from a period that is sufficiently recent. If a business is setting an introductory price, the price should not be offered for a prolonged period of time.

Consumer savings alone aren’t sufficient to avoid liability. If the actual market price, say, was $15, a business would be liable for prosecution if its ads claimed, “Reg. $20.00 — Sale price $10.00,” even though an actual $5 saving was involved.

Using the term Manufacturer’s Suggested List Price can be deceptive when it doesn’t reflect a product’s ordinary selling price. The list price is also not reliable as a market price indicator because it is often significantly higher than the market price.

Blog Your Way to Sales and Customer Loyalty

thmb_laptop_technology_screen_bzUp Front and Personal

A while back, Internet aficionados started keeping diaries online, often just personal commentaries, about what was going on around them. The journals were called weblogs.

That was in the late 1990s, pretty much the Stone Age in Web time. Since then, the term has been shortened to “blog,” the writers are called bloggers, the action is blogging, the universe is the blogosphere, and companies are joining in left and right.

Blogging Guidelines

The casual nature of blogging can result in employees inadvertently giving out confidential information, breaking the law, or embarrassing your company. To help avoid problems, set up guidelines on appropriate content. Here are some tips:

  • Employee behaviour that is inappropriate in other situations and is included in your employee manual should be banned from a blog. If employees have questions about content, they should consult with their managers.
  • Employees should identify themselves in blogs and make it clear they speak for themselves, not for the company.
  • Bloggers should get permission to use company trademarks and reproduce company material.
  • Avoid ethnic slurs, personal insults, profanity and vulgarity, as well as sensitive topics such as politics and religion.
  • Bloggers must respect the company’s confidentiality, as well as proprietary and financial information, customers, partners, suppliers and competitors.
  • Bloggers should accept the fact that occasionally the company might bar certain topics for confidentiality or legal reasons.

Consult with your legal counsel to ensure that your guidelines don’t violate laws.

Blogging Mistakes

Blogging has protocols. Here’s a list of mistakes to avoid:

No RSS feed. Many readers access blogs through RSS (Really Simple Syndication) feeds rather than actually visiting the blog. This is standard procedure and is important in picking up more regular readers.

Comment space. If you don’t let readers leave comments, you send the message that you aren’t interested in their opinions.

Infrequent updating. This not only keeps the search engines away, it can bore readers and cause them not to come back.

No links. Blogging is about sharing and communicating. Linking shows you are involved in the community and gives your readers a chance to read content you like.

No contact information. Readers may not want to leave a comment on your blog, but they may want to contact you. Leave an e-mail address or set up a contact page.

Businesses are drawn to blogging because it’s a quick and inexpensive way to reach new customers, expand mature markets, and build loyalty.

Canada’s business blogosphere includes, but is not limited to, bankruptcy, investing, taxation, finance, personal finance, entrepreneurship and real estate. The blogs are written by consultants, lawyers, accountants, bankruptcy trustees, real estate brokers and others.

Companies maintain blogs for various reasons, including:

Visibility - Search engines target blogs because they are updated frequently and search engines always need new information. Your blog could wind up on Google or Yahoo in a matter of hours and be listed among the top results. This increased visibility can drive traffic to your Web site and translate into sales.

Alternative Media - You can bypass traditional media and present your side of a story or issue.

Broader Reach - Your company can potentially reach more people with a blog than with traditional marketing and public relations techniques. More people are likely to read a blog than will hear your speech at an industry gathering or meeting. And you can reach people who might not be in the habit of scanning business pages or trade magazines.

Customer Loyalty - Starting two-way, online chats with customers and others can generate buzz, build brand loyalty, and even generate ideas for your business.

Competition - If your competitors are blogging, you risk losing customers because the competition is reaching them faster and more efficiently.

If you are considering joining the corporate blogosphere, be prepared. Know what you want to achieve, particularly if you plan to invite comments and the blog is written by rank-and-file employees. Which employees have the talent to write in a casual, personal style? Blogs that sound like dull, dry press releases won’t win readers.

Here are eight other tips that can help your business be successful at blogging:

1. Check the facts. If you send out inaccurate information and readers accept it at face value, they may in turn blog the data on their own sites. Before you know it, thousands of people have taken inaccurate information as truth and it can be traced back to your company blog. This is what happened when one blogger erroneously wrote that a major technology company was planning to buy a phone company.

2. Be honest. Readers want frankness and if they find you have been less than straightforward, they will likely let other bloggers know. That can hurt your credibility.

3. Show sincerity. Blogs are meant to show transparency, so don’t post entries that are simply press releases. That tactic will backfire. That’s not to say you can’t get suggestions from your PR professional or let them edit your blogs lightly. But be sure that the words and thoughts belong to you or whoever is actually writing the entries.

4. Deliver high-value content. Include information about your company, its products or services, the latest efforts, your expertise, or your thoughts on an industry development. The key is to provide information that goes beyond what readers already know.

5. Accept criticism. You must be willing to cope with some negative comments. Criticism can help shift your business’s perceptions of its customers and your responses to it can help change public perception of your company. Comments should generally not be edited other than to remove profanity or personal attacks.

6. Respond to comments. You may lose customers if you ignore their questions and comments. Giving them answers lets them know you care, help build community and loyalty, and makes the blog more dynamic.

7. Update often. Stale blogs drive readers away and give the impression no one is paying attention at your company. Fans may check in every day looking for fresh information. This brings up a problem: Writing new blog entries, finding links, and responding to reader comments can be time-consuming. Don’t commit to blogging unless you are willing to put in the time to maintain and manage a blog that will add lustre to your company’s reputation.

8. Watch comments. Bloggers may unwittingly violate trademark, and copyright law, break securities regulations, leak proprietary secrets or libel employees, customers or competitors. Even if you post a disclaimer, it may not hold up in court. If you plan to have rank-and-file employees add to your blog, or they set up personal blogs related to the company, establish guidelines that help prevent legal liability and protect rights.

Consider the Benefits of EI for the Self-Employed

lores_canada_coins_currency_cash_dollars_close-up_mbIf you’re self-employed, you benefit from several tax advantages, but suffer from one big drawback: You’re not eligible for regular Employment Insurance (EI).

You can, however, voluntarily contribute to become eligible for EI special benefits, which cover 55% of your average weekly earnings for:

  • Maternity (as long as 15 weeks);
  • Parental Leave (as many as 35 weeks for either parent, or shared between spouses or common-law partners, to care for their new child);
  • Sickness or Injury (15 weeks); and
  • Compassionate Care (as long as six weeks to care for a dying family member).
  • Parents of critically ill children benefits are for parents who must be away from work to care for or support their critically ill or injured child. Either parent can receive benefits or they can share benefits between them (up to 35 weeks).

Any Canadian who runs an unincorporated business or is a shareholder of a private corporation may opt in. After paying premiums for 12 months, you will be eligible to receive the special benefits. The premiums match those paid by regularly employed individuals. You pay a set percentage of your net business income (owners of unincorporated companies) or of your wages (shareholders in private corporations). The percentage is set annually by the federal government.

You pay the premium as part of your income tax return at the end of the year. It’s worth noting that as a regular employee, not only would you have to pay your premium (deducted from your paycheque) but your employer also has to pay a larger portion for you. As a self-employed person, you only need to pay your own portion to access the special benefits.

Another important distinction for shareholders is that the premiums and benefits are based only on the uninsurable wages taken from your company. Dividends you take are not taken into account.

This program can be very attractive to people in certain life positions. For example, a self-employed woman in her 30s with income of $30,000 a year will;

  • Pay $549 in special EI premiums each year to potentially access $317 a week in EI special benefits; and
  • Receive $15,850 if she has a baby and takes a total of 50 weeks for maternity and parental leave.

Assuming her income and the EI rates remained the same, she could contribute for almost 30 years, and still be ahead.

There are downsides to the program. For instance, if you change your mind after enrolling you still must pay a full year of premiums unless you withdraw right away. An even larger downside is that if you enroll and at some point take benefits, you must remain in the program for the remainder of your self-employed career.

An example: A 25-year-old man registers while he is a self-employed painter and takes compassionate care benefits when his parents become gravely ill. Eventually his parents, die, he gets an inheritance and stops painting to attend dentistry school. When he graduates, he starts his own company and takes wages. He has no choice but to pay EI premiums on those wages and he still will qualify only for the special benefits, not regular benefits.

Individuals who work for an employer are eligible for those regular benefits, which they receive if they lose their jobs through no fault of their own, such as a shortage of work or layoffs, and are available and able to work but cannot find a job. Regular benefits also generally pay out 55% of average weekly wages and last anywhere from 14 to 50 weeks, depending on:

  • The unemployment rate in the region where the person lives; and
  • The number of hours of insurable employment that the person accumulates during the 52 weeks before the start date of the claim.

Full-time employees also are eligible for the maternity, parental leave, sickness, compassionate care benefits and parents of critically ill children benefits.

Enrolling in this optional EI program is an important choice for every self-employed person. For many, the thought of deliberately paying more to the government seems preposterous, but there are those for whom this system could really be helpful when they need a financial safety net.

If you think this might be a valid option for you, speak to your financial adviser or accountant for a second perspective on your situation before you take the plunge.

Properly Account for Asset Transfers

lores_hr_employee_business_man_reading_paper_work_amIf you are incorporating a partnership or a sole proprietorship, you will likely transfer assets. When you do that, take precautions so you don’t pay too much in taxes.

The transfer of physical assets into a corporation is considered a disposition at fair market value (FMV). You cannot assign little or no value to the assets. If you do, Canada Revenue Agency can later determine that you not only owe taxes but also must pay penalties and interest. Transfers of assets can generate gains or losses, and the tax treatment depends largely on whether the property has been previously used in a business.

Income Taxes

Gains: The transfer of assets that were not previously used in a business will generally produce capital gains, in which case fifty per cent of the difference between FMV and the original cost will be taxable income.

In cases where the property had already been used in a business, the transfer is taxed in two steps:

1. The gain is first accounted for as a recapture of previously claimed Capital Cost Allowance (CCA) and taxed as business income.

2. If the FMV of the asset exceeds the original purchase price plus improvements, the excess will be a capital gain.

Losses: If an asset was not already used in a business, a loss from the transaction won’t be deductible because it will be considered a loss on a personal-use asset.

Property that was used in a business can generate two types of losses, depending on the nature of the asset. For example, land will produce a deductible capital loss while buildings vehicles, equipment or tools will produce a terminal loss.

Stop-loss rules may apply when transferring assets. Consult with your accountant before transferring any assets.

Section 85 Elections: To avoid taxes immediately on asset transfers, you can make an Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation. This allows many, although not all, assets to be transferred to a corporation without triggering taxes.

The corporation is deemed to have acquired the assets at the original cost and to have taken Capital Cost Allowance in prior years. If the corporation later disposes of the assets, it will add the CCA recapture to income and either pay a capital gains tax, deduct a terminal loss or claim a capital loss, depending on the situation.

Excise Taxes

The Excise Tax Act allows for a tax-free transfer of the assets of one business to another, as long as both are GST/HST registrants. You must file an Election Concerning the Acquisition of a Business or Part of a Business.

Personal assets not used for business purposes before transferring them to a corporation or using them in a proprietorship aren’t subject to GST/HST on the transfer. These assets may qualify for input tax credits when the business starts to use them. The most common example of this is when you start to use your personal vehicle for commercial purposes.

The tax implications of asset transfers can be complicated. Talk to your accountant about the transaction before you incorporate. Waiting until it’s time to file a tax return could cost you money.

Hold a Mortgage in Your Retirement Plan

Many people have two main investments: a home and retirement savings, the latter usually in either a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF).


Q. Can I use my RRSPs for the Home Buyers Plan at the same time as the Lifelong Learning Plan?

A. Yes, you can participate in the Home Buyers’ Plan, even if you have withdrawn funds from your RRSPs under the Lifelong Learning Plan and you have not yet fully repaid the balance owed.

Source: Canada Revenue Agency

The natural question then is whether you use those retirement plans to buy a home or other property? The answer is a qualified yes, under two circumstances.

1. Direct Purchase

If you have an RRSP, you can take advantage of the Home Buyers Plan and withdraw a maximum of $25,000 to buy a home (RRIFs are not eligible).

To participate in the Home Buyers Plan you must meet certain qualifications:

  • Unless you are disabled, you must be a first-time homebuyer. That means you or your spouse cannot have owned and occupied a home as a principal residence in the five years preceding the RRSP withdrawal.
  • You must have entered into a written agreement to build or buy a qualifying house before withdrawing the funds, and you must actually buy or build the house prior to October 1 of the year following the withdrawal.
  • Your Home Buyer Plan balance on January 1 of the year of withdrawal must be zero.
  • Neither you nor your spouse can own the home more than 30 days prior to the withdrawal being made. Also, you must make all of the withdrawals in the same calendar year.
  • You cannot buy a rental property or any other property that is not your principal residence.

2. Holding a Mortgage

Qualified investments in RRSPs and RRIFs include mortgages. So you can hold a mortgage inside your retirement plans and access more than the Home Buyers Plan maximum. However, you must meet the following strict requirements:

  • A lender approved under the National Housing Act must administer the mortgage. This includes most banks and credit unions, and many trust companies. The cost for this service varies, but typically is at least several hundred dollars a year.
  • You must insure the loan under the Canada Mortgage and Housing Corporation (CMHC) or through a private insurer licensed under the National Housing Act. The insurance may cost 2.9 per cent or more of the mortgage amount.
  • The amount of the mortgage payment, interest rate, and other terms of the loan must be in line with normal commercial practice. The interest rate must match rates in the market and other terms must match mortgages from financial institutions.

This approach does have a couple of disadvantages, including:

  • The extra cost and paperwork involved may make it unattractive.
  • Mortgages in your retirement plan may generate less income than other investments. If you would ordinarily hold investments yielding higher returns, the lost income could amount to a considerable sum over the term of the mortgage.

If you think that you want to hold your mortgage in your RRSP or RRIF, consult with your accountant to help determine the costs and how the restrictions might affect you.

The Current Lowdown On Remote Workers

040617_Thinkstock_536923559_lores_kwIBM, which has pioneered remote working for decades, recently joined some big name businesses that are now banning that practice.

The technology giant banned telecommuting or remote working for its marketing department in the United States. The move means the company has joined the likes of Yahoo, Google and Best Buy. Those businesses also generally don’t allow remote work.

Pretty much since it began, remote work has been controversial. Some of the major questions surrounding the issue are:

  1. Are remote workers more or less productive or creative?
  2. Are they more satisfied or more isolated?
  3. Do they feel more or less valued?

In an effort to answer these questions, Polycom, which provides voice, video and content collaboration solutions, commissioned a survey of 24,000-plus workers in 12 countries — including Canada. While the results varied by country, three key trends remained constant:

  • 62% of the global working population currently takes advantage of flexible working practices,
  • 98% say being able to work from anywhere boosts performance, and
  • 92% say they believe video conferencing or collaboration helps improve workplace relationships and teamwork.

(There are many pros and cons to the issue that are listed in the chart on the right.)

So let’s say you’re leaning toward offering your employees the chance to work remotely. Appropriate oversight will be necessary to avoid potential fraud and abuses that can wipe out many, if not all, of the benefits associated with a work-from-home program.

Before allowing employees to commute to their home-based desks, answer the following questions to help ensure that you minimize the risks and maximize the returns of the program:

1. Which jobs make sense from home?

There are numerous positions within a company that, despite pleas to the contrary from employees, aren’t suitable candidates for a work-from-home program.

For example, allowing a manager with a broad span of control to work at home is typically not a good idea. Managing by phone is often far less effective than being physically present. Also, employees may resent that their manager works from home while they’re stuck in the office.

Before announcing a work-from-home program, identify all of the positions that won’t be allowed to participate. Be sure to engage your company’s legal counsel to ensure that the process doesn’t violate employment law or create employee relations issues.

Pros Cons
Cost savings. Having employees work from home can reduce the demand for office space and also cut facility operating and parking costs. Not for everyone. Some employees fear less “face time” will reduce their chances for promotion. Others need or want an office environment.
Work/ life balance. There is more time for employees to care for their loved ones and address home emergencies. Time disputes. 

Without a system to record hours, disputes may arise over the time actually worked.

It’s green. Reducing the number of commutes to the workplace saves fuel, reduces vehicle carbon emissions and traffic congestion. Performance fears. Managers may equate remote work with an automatic drop in performance and may need to adjust to a culture oriented toward results more than toward processes.
Continuity. Working from home may mean that at least some of your company’s operations can continue during a snowstorm, natural disaster, terrorist attack or other emergency. Security. The IT infrastructure must be properly designed. Some jobs may simply not be able to be performed at home for security reasons.
Accommodation. Working from home can better accommodate individuals with disabilities. Friction. Staffers in the workplace may resent remote workers.
Performance may be enhanced. Remote workers may exceed their performance in the traditional workplace. Many report that they convert the old drive time into productive working hours. There may be fewer interruptions and absenteeism may drop. Performance may suffer. Outside a traditional structure, some employees may lose productivity by cleaning house, watching their young children, watching television or being otherwise distracted.
Job satisfaction. Working from home can increase personal freedom and flexibility, improve morale, and decrease stress. Safety. There may be liabilities if employees are injured off-site. Consult with your attorney.
Retention and recruitment. Offering a work-at-home option can boost your company’s attractiveness in the job market and lead to reduced turnover. Equipment cost, loss and damage. You must address who pays for equipment, how it is to be used and what to do if it is lost, stolen or damaged.
Staying in touch. Using instant messaging, conference calls, webinars, collaboration software and other technology can help employees feel less isolated. Team conflicts. Relationship problems among remote teams can be harder to resolve than those among on-site employees.

2. Which employees will be eligible?

For employees that are underperforming or have a track record of discipline issues, working from home may be viewed as an opportunity to “hide out” and avoid the scrutiny that comes from working in an office. Together with your human resources department, develop criteria that employees must meet in order to be considered for the program.

For example, you might require candidates to earn a “meets expectations” rating in their performance reviews and have no outstanding discipline issues.

3. How will you monitor productivity?

There’s an assumption that once employees are allowed to work from home their productivity will at least be equal to their “in office” performance — or may even be better. This may be true, but for employees who have never worked from home before, the distractions of home life (including a significant other, young children, noisy next-door neighbors or just plain loneliness) may be too much to bear and their productivity may actually decline.

This begs the question: Once an employee is out of sight, how will their performance be monitored? There are a number of technology solutions that can track keystrokes, periodically capture pictures of the employee’s computer screen as well as record activity within specific software systems. Regardless of the approach used, there should be some ways to track productivity and performance.

4. How will you communicate?

How many times have you misread and misunderstood an email? That kind of problem can be multiplied when staff is at home. Distance can lead to miscommunication and workers falling off the same page.

In the Polycom survey, 62% of respondents said they want access to collaboration technology to connect with their colleagues and 92% surveyed said they believe that video collaboration technology helps improve relationships and fosters better teamwork. The study also showed that an employee’s reliance on technology, especially video conferencing, actually drives them to pick up the phone more regularly. Two-thirds said their favorite colleagues work in a different location.

Video conferences and chats can help remote workers feel less isolated and you’ll be able to pick up on visual cues, reactions to changes and employees’ overall moods.

Chat apps or instant messaging also help. They will let everyone know who’s available once they sign in and allow for quick, short conversations without the telephone, which often involves more time than you want to spend.

Make time for small talk. When talking with employees on the telephone or on video, use some of the time to talk about more than work. Build rapport. It will help you work through any problems that may arise later. Showing you care is important to employees and will make them like working for you more. And have longer talks on occasion, where you can discuss their goals.

5. Should home workers use company computers?

An employee’s personal computer may not have the most up-to-date virus software in place and that raises the risk that the person could download a virus that could affect both the home computer and the company’s entire network. It’s also conceivable that the employee’s computer can be accessed by other members of the family. That raises concerns of data loss or theft, as well as disclosure of customers’ private information.

There can also be problems if an employee is working on a personally-owned computer and the employer receives an e-discovery request. Electronically stored information is routinely requested in civil and criminal proceedings. Complying can be difficult if, for example, an employer doesn’t know what files or records employees have on their home computers or if an employee alters files or destroys them after an e-discovery request is received.

If possible, remote employees should only be allowed to use company-issued computers. Doing so ensures that the employee’s computer is subject to the same virus and system upgrades as other company-issued devices and reduces the risk that your business will be unable to comply with an e-discovery request.

6. What happens if data does go “missing?”

Allowing employees to work in their home offices can give them the false impression that no one is watching what they’re actually doing with company data. Before your company launches a work-from-home program, think about the data that remote employees can access as well as what would happen if that data were lost, stolen or misplaced.

For example, if an employee working from home steals confidential data, how would your company know? If the employee was the victim of a home invasion and the company laptop was stolen, several issues arise:

  • How much company data is stored on that laptop?
  • Is it encrypted?
  • What could your company do to limit or mitigate the potential damage?

7. What about expenses?

The potential for expense fraud and abuse by remote employees can also be a concern. One simple way to combat expense fraud by work-from-home employees is to ensure they’re appropriately identified in the company’s expense reimbursement system as remote employees.

For example, an expense reimbursement system could require that employees include their home office or base on their expense statements. For remote employees that designation could appear as Remote or VE (virtual employee) or WFH (work from home). The actual naming convention isn’t important. What is important is that your company can periodically target expense reimbursement requests from remote employees to ensure that expenses are reasonable, consistent with their remote status and consistent with company policy.

With appropriate policies and safeguards in place, you can help ensure that your company reaps the benefits of a work-from-home program and that employees perform at their best, whether they’re working down the hall in the workplace, in their homes or in off-site offices far away.

If You’re Involved in the Sharing Economy, Know the Tax Implications

042117_Thinkstock_515968676_lores_kwHousehold debt and housing costs are rising and some Canadians — especially Millennials —are turning to the “sharing economy” to help mitigate their expenses.

The sharing economy allows individuals to use technology to arrange transactions so they can earn money from assets such as their homes and cars. There are tax implications for those who engage in these transactions.

The latest numbers from Statistics Canada (StatsCan) show household debt at 167.3% of disposable income, which is a record. That means, on average, Canadians owe $1.67 for every $1 of disposable income.

The New Housing Price Index rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010. The actual (not seasonally adjusted) national average price for homes sold in February 2017 was $519,521, up 3.5% from where it stood a year earlier, according to the Canadian Real Estate Association.

Making Ends Meet

What’s a person to do to keep up? Some people are turning to short-term rentals to make ends meet, according to survey results recently released by Altus Group. According to Altus, which provides real estate research, its FIRM survey found that in the past year, 4% of all Canadian households of all ages had used a short-term rental accommodation service, such as Airbnb. The number rose to 7% for those with a mortgage.

The survey found that 22% of Canadians under the age of 35 had used a short-term rental service in the past year to rent out all or part of their homes. The four markets are Toronto, Vancouver, Calgary and Montreal.

“There has been a lot of speculation lately about potential investor involvement in short-term accommodation rental services like Airbnb,” Altus stated. “But focusing on households rather investors, how extensive is the practice of short-term rentals of space in principal residences?”

Short-term home rental services such as Airbnb, Flipkey and HomeAway make up part of the sharing, or gig economy. This article deals only with rental services, although the principles also apply to ride-sharing (in services including Uber and Lyft) and other parts of the gig economy.

Gigs Can Be for Renters, Too

Even renters are doing it. In large cities, 12% of millennial renters in the four largest Canadian markets said they had used a short-term service to rent out part of their home. Among the general population, 4% of all renters across the country had sublet part of their homes.

StatsCan data supports these results. The statistics agency reported in February that use of “private accommodation services” was highest among Canadians aged 25 to 34 (8.6%), 35 to 44 (4.8%) and 18 to 24 (4.4%). Use of private accommodation services was lowest among people aged 55 and older (2.1%). The agency defines private accommodation services as those “that connect travellers and hosts through a mobile application or website that acts as an intermediary and processes the payment from the traveller to the host.”

In fact, from November 2015 to October 2016, StatsCan found that Canadians spent $367 million on private accommodation services inside Canada, spending an average of $307.

About 69,000 adults living in Canada indicated that they had offered private accommodation services. Most of them were living in Ontario (31.1%), Quebec (26.4%) or British Columbia (25.1%).

However, using the sharing economy to help pay debts or ease the cost of housing or a mortgage isn’t really sharing in the sense of letting people live in your house for free.

Paying Your Share

Under Canadian tax law, you must declare any income from any source, including any money made through these part-time services.

If you collect more than $30,000 a year, you also have to collect and remit goods and services tax or harmonized sales tax (GST/HST). If you earn $30,000 or less a year, you don’t have to register for a GST/HST account, but you can voluntarily register to recover the tax. Provincial sales tax depends on the province.

Here’s how the CRA defines the sharing economy:

“A technologically fuelled way to consume and access property and services. In this economy, communities pool, loan, and share their resources through networks of trust.”

The tax agency says it’s “co-operating with industries, the provinces, and the territories to identify and address areas in this economy where the tax system and tax compliance might be affected.”

Rental or Business Income?

When it comes to calculating your income tax if you rent out your home on a short-term basis, you must determine if you are earning business or rental income. If you provide only the space, electricity, heat, laundry facilities and parking, you’re earning rental income and should generally file a Form T776, Statement of Real Estate Rentals. Also, the amount of space you rent is important. Two out of five rooms means you’re earning rental income in the eyes of the CRA.

On the other hand, if you provide security, meals or cleaning, you’ll probably be considered to be earning business income. In that case, you file a Form T2125, Statement of Business or Professional Activities. You’ll also have to submit Canada Pension Plan payments. Keep in mind, when you change the use of a property, there could be tax consequences (see lower box).

In either case, you can generally deduct the reasonable expenses you incur to earn the income.

Calculating Expenses

If you rent out only part of your house, you’ll have to calculate what percentage of your home you’ve been using for rental purposes and then multiply that by the number or nights you rented the space.

Keep all of your expense receipts and careful records of your calculations in case the CRA questions your claims.

If you participate in the sharing economy and underreport or don’t report your revenue, you’re participating in the underground economy. That could result in serious consequences.

If you get caught evading tax, you may face fines, penalties, or even jail time, in addition to paying the taxes owed on the unreported amounts. If you have to register for and collect GST/HST on your transactions, but you don’t, the CRA will charge interest or penalties or both, depending on the circumstances.

Making Corrections

Filing taxes and claiming expenses if you participate in the sharing economy can be complex. Consult with your accountant for help avoiding an audit and penalties. Your accountant can also help if you didn’t report revenue from previous years and want to make a correction.

Changes in Use

In certain circumstances, according to the CRA, you can be considered to have sold all or part of your property even if you didn’t actually sell it. This can occur if:

  • You change all or part of your principal residence to a rental or business operation.
  • You change your rental or business operation to a principal residence.

Every time you change the use of a property, for example changing all or part of your principal residence to a rental or business operation, you’re considered to have sold the property at its fair market value and immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss for the year of the change.

If the property was your principal residence for any year you owned it before you changed its use, you don’t have to pay tax on any gain relating to those years. You only have to report the gain that relates to the years your home wasn’t your principal residence. Consult with your accountant about your situation.

Also, keep in mind that your mortgage lender may require you to inform it if you plan to occasionally rent out your home. Moreover, if you’re renting an apartment or condo, you’ll want to check with your landlord or the rules of the condominium corporation. You also should check provincial and other laws to about whether you can legally rent out space in your home, apartment or condo.