Archive: Segal LLP Insider Current News

We Finally Grew Into Our Dream Space

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2005 Sheppard East treated us well for 17 years. But it was never meant to be a forever address. We wanted to be conveniently central for clients and staff and no more than 20 minutes from Bay Street. We wanted an open-concept space to suit the modern working world. And we wanted a brighter, more collaborative environment.

So the goal was to grow big enough to warrant looking for an office like that and pulling the trigger on it. Well, we did. And then we did.

In August, we’ll be moving to the corner of Yonge and York Mills. We’ll be 90 seconds from the 401 and 17 minutes by subway from King and Bay. We’ll be surrounded by green space and close to great lunch options onsite and at Yonge and Lawrence, Yonge and Sheppard and Yonge and Eglinton. We’ll have underground guest parking, GO/TTC bus and subway access, and beautiful natural light in the office. You’ll love being here and we’ll love having you, just like we always dreamed.

Growing the Segal Team

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Giles Osborne CPA, CA joins the Segal team as a Principal with a focus on information technology.

Giles is a financial and tax advisor to private corporations and not-for-profits, with a concentration on clients in Toronto’s tech and start-up space. He has been involved in all stages of his clients’ development, from start-up through funding rounds and growth to business sale.

Drawing on 4 years’ consulting experience with Deloitte and 8 years as the Director of Professional Services, Americas, for Systems Union/Infor, a mid-market accounting vendor, Giles is also involved in the firm’s IT initiatives, including systems selection, implementation and integrative advisory services.

Giles received his accounting education at the University of Ottawa, and his CA designation from the Institute of Chartered Accountants of Ontario in 1994. He is a member of the Canadian Tax Foundation and has completed the Canadian Securities Course. His community and social involvement includes roles as Treasurer of Bellwoods Centres for Community Living and Vice-Commodore Finance of Ashbridges Bay Yacht Club.

We are very excited to welcome Giles and his unique IT, accounting and tax background to the firm.

Foreign Corporations in Canada: Permanent Establishment and Taxes

By Howard Wasserman, Principal—Taxation at Segal LLP 

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Any non-resident that has sales in Canada is taxable in Canada on the profit on those sales.

A number of treaties state that a non-resident corporation is only taxable in Canada if the non-resident corporation has a permanent establishment in Canada: a fixed place of business through which the business of a resident of one country is carried on.

In the Canada-US tax treaty, a permanent establishment is defined to be a place of management, a branch, an office, a factory or a workshop. Building sites or installation projects are also considered permanent establishments if they last more than 12 months. So too are people in Canada habitually exercising the authority to conclude contracts in the name of the non-resident.

And what’s not a permanent establishment?

1. The use of facilities for storage display or delivery of goods.
2. The maintenance of a stock of goods.
3. The purchase of goods or merchandise or the collection of information.
4. Advertising.
5. The use of a broker commission agent or any other independent agent.

Tax implications of permanent establishments

Once a permanent establishment has been created, the non-resident is taxable only on the profits earned in Canada, not the revenues. This can be calculated using foreign expenses that relate to the activity in Canada. For example, a non-resident corporation could allocate some management or administration costs if they can be clearly tied to the activities in Canada.

Additionally, the non-resident corporation must meet Canadian filing requirements even if no taxes are payable. More specifically, the foreign corporation should file schedule 91 and schedule 97 that would be attached to the jacket of a T2 corporate tax return. In this filing, the non-resident corporation is stating that the corporation earns Canadian revenue but is not taxable in Canada because there is no permanent establishment.

Tax implications of doing business in Canada in general

All payments to the non-resident corporation doing business in Canada are subject to 15% withholding tax on the work done in Canada. If it has been determined that the non-resident corporation is not taxable in Canada, then the non-resident corporation can file the treaty-based tax return and request a refund of the withholding taxes.

There is an opportunity to request a waiver for the 15% withholding tax on work done in Canada before the work commences. In order to get a waiver, a submission must be made to CRA, which often includes the contract related to the work being done in Canada. This gives CRA an opportunity to examine the situation to determine if the foreign corporation is taxable in Canada.

If the non-resident corporation receives a waiver, the corporation can give this waiver to its customers to ensure the no withholding tax is payable. Even if a waiver is received, the non-resident corporation must still file a treaty-based Canadian income tax return because of the Canadian revenues earned.

There are a number of issues to be dealt with on carrying on business in Canada, but the first one is always the determination of whether the company owes Canadian corporate income taxes. For help or advice, you can contact me directly.

Tax Relief for the Cost of Driving

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It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre in Manitoba to 148.5 cents per litre in British Columbia. On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

Unfortunately, for most taxpayers, there’s no relief provided by our tax system to help alleviate the cost of driving as the cost of driving to and from work and back home. That said, there are some (fairly narrow) circumstances in which employees can claim a deduction for the cost of work-related travel.

Those circumstances exist where an employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might be required to see clients at their premises for meetings or other work-related activities and be expected to use his or her own vehicle to get there. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own motor vehicle expenses and that no tax-free allowance was provided, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include:

  • fuel (gasoline, propane, oil);
  • maintenance and repairs;
  • insurance;
  • license and registration fees;
  • interest paid on a loan to purchase the vehicle;
  • eligible leasing costs for the vehicle; and
  • depreciation, in the form of capital cost allowance.

In almost all instances, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the portion of expenses incurred for work-related driving can be deducted and the employee must keep a record of both the total kilometres driven and the kilometres driven for work-related purposes. As well, receipts must be kept to document all expenses incurred and claimed.

While no limits (other than the general limit of reasonableness) are placed on the amount of costs that can be deducted in the first four categories listed above, limits and restrictions do exist with respect to allowable deductions for interest, eligible leasing costs and depreciation claims. The rules governing those claims and the tax treatment of employee automobile allowances and available deductions for employment-related automobile use generally are outlined on the Canada Revenue Agency website.

No amount of tax relief is going to make driving, especially for a lengthy daily commute, an inexpensive proposition. But seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

Deciphering the Notice of Assessment

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By the middle of May 2018, the Canada Revenue Agency (CRA) had processed just over 26 million individual income tax returns filed for the 2017 tax year. Just over 14 million of those returns resulted in a refund to the taxpayer, 5.5 million required additional payment and about 4.4 million returns were “nil returns” where no tax was owing and no refunds were claimed, but the return was used to provide income information to determine eligibility for tax credit payments (like the federal Canada Child Benefit or the HST credit).

No matter what the outcome of the filing, all returns filed with and processed by the CRA have one thing in common: they result in the issuance of a Notice of Assessment (NOA) by the Agency, outlining income, deductions, credits and tax payable for the 2017 tax year, whether you will be receiving a refund or you have a balance owing. The amount of any refund or tax payable will appear in a box at the bottom of page 1, under the heading “Account Summary.”

On page 2 of the NOA, the CRA lists the most important figures resulting from their assessment, including your total income, net income, taxable income, total federal and provincial non-refundable tax credits, total income tax payable, total income tax withheld at source and the amount of any refund or balance owing. Page 2 also includes an explanation of any changes made by the CRA to your return during the assessment process and provides information on unused credits (like tuition and education credits) that you earned and can claim in future years.

On page 3 of the NOA, you will find information on your total RRSP contribution room (i.e., maximum allowable RRSP contribution) for 2018.

Finally, page 4 provides information on how to contact the CRA with questions about the information provided on the NOA, on how to change the return filed and on how to dispute the CRA’s assessment of the individual’s tax liability.

In a minority of cases, the information presented in the NOA will differ from what you provided on your return. Where that difference means an unanticipated refund, or a refund larger than the one expected, it’s a good day! If the NOA will swing the other way, that’s less good.

When that happens, you must figure out why, and to decide whether or not to dispute the CRA’s conclusions. In that case, your best bet is to consult a tax or accounting professional at Segal LLP.

2018 Federal Budget

On February 27, 2018, the Federal Government released the 2018 budget.

This budget has been long awaited in light of the controversy caused by the July 2017 private company tax proposals released by Finance Minster Bill Morneau.

The significant uncertainty hanging over Canadian business owners was the government’s proposals on passive income investments held by corporations. This budget has clarified the government’s position, which represents a retreat from the severity of the original proposals.

Segal LLP 2018 Federal Budget Commentary.PDF

Deciding when to start receiving Old Age Security benefits

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The baby boom generation, which is now in or near retirement, has always been able to factor receiving Old Age Security benefits, once they turn 65, into their retirement income plans. While receipt of such benefits can be still be assumed by the majority of Canadian retirees, the age at which such income will commence is no longer a fixed number. Retirees are now faced with a choice about when they want those benefits to start. For the past four years, Canadians have had the option of deferring receipt of their Old Age Security benefits, for months or for years past the age of 65, and that election to defer continues to be available. The difficulty that can arise is how to determine, on an individual basis, whether it makes sense to defer receipt of OAS benefits and, if so, for how long. It’s a consequential choice and decision, since any election made to defer is irrevocable.

Under the rules now in place, Canadians who are eligible to receive OAS benefits can defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.

The decision of whether to defer receipt of OAS benefits and for how long is very much an individual one — there really aren’t any “one size fits all” rules. There are, however, some general considerations which are common to most taxpayers:

  • The first consideration in determining when to begin receiving OAS benefits is how much total income will be required, at the age of 65 by determining what other sources of income are available to meet those needs, both currently and in the future.  Once income needs and sources and the possible timing of each is clear, it’s necessary to consider the income tax implications of the structuring and timing of those sources of income.  Taxpayers need to be aware of the following income tax thresholds and cut-offs.
    • Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2017, that second income tax bracket begins when taxable income reaches $45,916.
    • The Canadian tax system provides (for 2017) a non-refundable tax credit of $7,225 for taxpayers who are over the age of 65 at the end of the tax year. That amount of that credit is reduced once the taxpayer’s net income for the year exceeds $36,430, and disappears entirely for taxpayers with net income over $84,597.
    • Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2017, the full credit is payable to individual taxpayers whose family net income is less than $36,429.
    • Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback.   For the July 2017 to June 2018 benefit period, taxpayers whose income for 2016 was more than $73,756 will have a portion of their OAS benefit entitlement “clawed-back”. OAS entitlement for that time period is entirely eliminated where taxpayer income for 2016 was more than $119,615.

The goal is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits, or the need to repay OAS benefits received. Taxpayers who are trying to decide when to begin receiving OAS benefits could, depending on their circumstances, be affected by one or more of the following considerations.

  • What other sources of income are currently available?
  • Is the taxpayer eligible for Canada Pension Plan retirement benefits, and at what age will those benefits commence?
  • Does the taxpayer have private retirement savings through an RRSP?

Finally, not all the factors in deciding how to structure retirement income are based on purely financial and tax considerations. There are other, more personal issues and choices which come into play. Those include the state of one’s health at age 65 and the consequent implications for longevity, which might argue for accelerating receipt of any available income. Conversely, individuals who have a family history of longevity and who plan to continue working for as long as they can may be better off deferring receipt of retirement income where such deferral is possible.

Many Canadians put off plans, like a desire to travel, until their retirement years. Realistically, from a health standpoint, such plans are more likely to be possible earlier rather than later in retirement. The early years of retirement are usually the most active ones, and consequently are the years in which expenses for activities are likely to be highest. Having plans for significant expenditures in the early retirement years might argue for accelerating income into those years, when it can be used to make those plans a reality.

The ability to defer receipt of OAS benefits does provide Canadians with more flexibility when it comes to structuring retirement income. The price of that flexibility is increased complexity, particularly where, as is the case for most retirees, multiple sources of income and the timing of each of those income sources must be considered, and none can be considered in isolation from the others.

Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. Finally, taxpayers who have a Canada Pension Plan Statement of Contributions which outlines their CPP entitlement at age 65 will be able to determine the monthly benefit which would be payable where CPP retirement benefits commence at different ages between 60 and 70.

The Retirement Income Calculator can be found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html

The Debt load of Canadian households – onward and upward?

debt

The fact that Canadian households are carrying a significant amount of debt is not news.  In fact, debt loads seem to continually set new records. For several years, both private sector financial advisers and federal government banking and finance officials have warned of the risks being taken by Canadians who took advantage of historically low interest rates by continuing to increase their secured and unsecured debt.

The risks most commonly cited by those advising more borrowing restraint was the impact that an increase in interest rates would have on the ability of those debtors to repay  the debt which they had accumulated. As well, to the extent that such borrowings were secured by home equity, the risk was that a downturn in the real estate market could put those borrowers at risk.

Both of those circumstances have started to materialize in the last two calendar quarters. The Canada-wide real estate market is not in a downturn. However, the expectation among borrowers that real estate values in major urban markets would simply continue to increase without limit has been tempered by the drop in real estate sales in the Greater Toronto Area since the spring of this year. While real estate prices in that market are still up, as measured on a year-over-year basis, they have declined, overall, from the highs recorded in the winter and early spring of 2017.

The long-anticipated increase in interest rates has finally occurred as well; The Bank of Canada raised the interest rate for the first time since September 2010. Financial institutions responded by increasing their mortgage and other loan interest rates.

The end of June, just prior to The Bank of Canada’s first interest rate increase, marked the end of second quarter of 2017. And, as is usually the case, many government and non-government organizations issued statistics and analysis of the current state of Canadian consumer debt. Given the timing, those figures will create a kind of benchmark against which future statistical summaries will be compared, as they create a “snapshot” of the state of Canadian consumer debt taken just as interest rates began to rise, at the end of the ultra-low interest rate environment which began in 2009, and as the ultra-hot real estate market started to cool down.

As of the end of June, the debt to disposable income ratio stood at $1.68, meaning that the average Canadian household carried $1.68 in debt for each $1.00 of disposable (after-tax) income.

While it’s easy to see that an increasing debt-to disposable income ratio means that Canadians are taking on more debt. What is striking is the growth of that ratio over the past quarter century and, especially, since 2005.

In 1990, that percentage stood at 93%, meaning that the debt load of the average Canadian household was 93% of disposable income. By 2005, the debt-to-disposable ratio had risen to 108%. It took 15 years for the percentage to increase from 93% (in 1990) to 108% (in 2005). From that point, the debt to disposable income ratio accelerated dramatically, as it rose from 108% in 2005 to 150% just five years later, in 2010. The ratio now stands, as of the second quarter of 2017, at 168%.

The StatsCanada figure captures all forms of debt; secured and unsecured, meaning that it includes mortgages, car loans, installment loans of all kinds, lines of credit, and credit card debt. There are a couple of significant differences between secured and unsecured debt — secured debt, by definition, is secured against an asset, so that in the event the borrower goes into default, the lender can seize the asset in payment of the secured debt. The value of that asset is always, at the time of borrowing, greater than the amount borrowed. Unsecured debt is provided on no more than the borrower’s promise to repay. For both those reasons, it’s more likely that borrowers, when faced with an interest rate increase which bumps up their cost of borrowing, will get into difficulty with unsecured debt. And, as of the second quarter of 2017, the average unsecured debt owed by individual Canadians was for the first time, over $22,000.

That figure — $22,154 average debt load per individual borrower — appeared in a summary issued by TransUnion. The summary also outlines the average balance per borrower by the kind of debt incurred, as follows:

Bank card (credit card) ………… $4,069

Automobile …………………………… $20,447

Line of Credit ………………………… $30,108

Installment Loan …………………… $25,455

And, as recently reported by the Financial Consumer Agency of Canada, recent trends in secured debt patterns may also give rise to concern going forward.

One of the fastest growing consumer credit products in Canada is the home equity line of credit (HELOC). A HELOC is similar to a mortgage, in that the debt is secured against the homeowner’s equity in the property. However, under a HELOC, a lender agrees to provide credit to a borrower, not for a fixed amount, but up to a maximum amount, based on the value of the property. Once the HELOC is in place, the available funds can be used for any purpose, whether that purpose is related to home ownership or not. And, while monthly payments are required, the borrower can usually, if he or she wishes, pay only the interest amount which has accrued since the last payment, without reducing the principal at all.

The number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40 percent since 2011.

  • 40 percent of consumers do not make regular payments toward their HELOC principal.
  • 25 percent of consumers pay only the interest or make the minimum payment.
  • Most consumers do not repay their HELOC in full until they sell their home.

If there is good news in the figures summarizing the ever-increasing debt load of Canadians, from all sources, it’s in the fact that borrowers are still managing to keep payment of those debts in good standing. In fact, delinquency rates (meaning debts on which payments are more than 90 days late) are, for the most part, down during the second quarter of this year, as measured on both a quarter-over-quarter and year-over-year basis. Whether that trend will continue or be reversed as the impact of the recent interest rate increases takes hold remains to be seen.

Legal fees — what’s deductible and when?

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For most Canadians, having to pay for legal services is an infrequent occurrence. In many instances, the need to seek out and obtain legal services is associated with life’s more unwelcome occurrences and experiences, such as a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees would be being able to claim a tax credit or deduction for the fees paid.

Unfortunately, while there are some circumstances in which such a deduction can be claimed, those circumstances don’t usually include the routine reasons — purchasing a home, getting a divorce, establishing custody rights, or seeking legal advice about the disposition of a family estate. Generally, personal legal fees become deductible for most Canadian taxpayers only where they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involved employment or employment-related income or, in some cases, family support obligations.

The first situation in which legal fees paid may be deductible is that of an employee seeking to collect (or to establish a right to collect) salary or wages. In all Canadian provinces and territories, employment standards laws provide that an employee who is about to lose his or her job (for reasons not involving fault on the part of the employee) is entitled to receive a specified amount of notice, or salary or wages equivalent to such notice. However, the employee can establish a right to a period of notice (or payment in lieu) greater than the statutory minimum. The amount of notice or payment in lieu of notice which is payable can then become a matter of negotiation between the employer and its former employee, and such negotiations usually involve legal representation, legal fees incurred by the employee to establish a right to amounts allegedly owed by the employer are deductible by that former employee. If a court action is necessary and the Court requires the employer to reimburse its former employee for some or all of the legal fees incurred, the amount of that reimbursement must be subtracted from any deduction claimed.

In some situations, an employee or former employee seeks legal help in order to collect or to establish a right to collect a retiring allowance or pension benefits. In such situations, the legal fees incurred can be deducted, up to the total amount of the retiring allowance or pension income actually received for that year. Where part of the retiring allowance or pension benefits received in a particular year is contributed to an RRSP or registered pension plan, the amount contributed must be subtracted from the total amount received when calculating the maximum allowable deduction for legal fees.

The rules covering the deduction of legal fees incurred where an employee claims amounts from an employer or former employer are relatively straightforward. The same, unfortunately, cannot be said for the rules governing the deductibility of legal fees paid in connection with family support obligations. Those rules have evolved over the past number of years in a somewhat piecemeal fashion. The current rules are as follows:

  • Legal fees incurred by either party in the course of negotiating a separation agreement or obtaining a divorce are not deductible. Such fees paid to establish child custody or visitation rights are similarly not deductible by either parent.

Legal fees paid for the following purposes will be deductible by the person receiving those support payments:

  1. Collecting late support payments;
  2. Establishing the amount of support payments from a current or former spouse or common-law partner;
  3. Establishing the amount of support payments from the legal parent of that person’s child (who is not a current or former spouse or common-law partner). However, in these circumstances the deduction is allowed only where the support is payable under a court order, not simply under the terms of an agreement between the parties; or
  4. Seeking an increase in support payments;

On the payment side of the support payment/receipt equation, the situation is not so favourable, as a deduction for legal fees incurred will generally not be allowed to a person paying support. More specifically, as outlined on the Canada Revenue Agency (CRA) website, a person paying support cannot claim legal fees incurred in order to “establish, negotiate or contest the amount of support payments”.

Finally, where the CRA reviews or challenges income amounts, deductions, or credits reported or claimed by a taxpayer for a tax year, any fees paid for advice or assistance in dealing with the CRA’s review, assessment or reassessment, or in objecting to that assessment or reassessment, can be deducted by the taxpayer. A deduction can similarly be claimed where the taxpayer incurs such fees in relation to a dispute involving employment insurance, the Canada Pension Plan or the Quebec Pension Plan.

Segal LLP A 2017 Best of the Best Firm

best2017INSIDE Public Accounting (IPA) has named Segal LLP a Best of the Best Canadian Firm for the second consecutive year.  Segal is honoured to be one of only 5 Canadian CPA firms ranked as a 2017 Best of the Best firm based on a wide variety of financial and operational performance.

“We are honoured to once again be named a Best of the Best in Canada; it is a vote of confidence in our people and in Segal’s unwavering commitment to client service, our vision and our approach to our business” said Dan Natale, Managing Partner at Segal.

“Best of the Best firms excel by achieving the delicate balance of focus on culture, clients, team and financial results,” says Michael Platt, principal of the Platt Group and publisher of the accounting trade publication, INSIDE Public Accounting.