NEW TAX RULES EFFECTING PRIVATE CORPORATIONS

On July 18, 2017, the Liberal government and the Department of Finance issued draft legislation which significantly alters the tax planning available for private corporations. The following is a brief summary of each of the proposed new rules. We strongly suggest you consult your Segal advisor to discuss how these rules affect you and your business.

Income Splitting

It has been common tax practice to set up a structure whereby a trust owns shares in an operating company with both minor and adult beneficiaries. Alternatively, family members owned shares directly in the operating company. In the past, dividends could be paid to the adult family members who would pay tax at their graduated tax rate. For those adult family members who earned no other income, such as a student, the tax owing could be low on those dividends.

The new legislation proposes to tax those dividends at the highest tax rate. As well, the new rules propose to tax other kinds of income paid to related adult family members. There is relief if the adult family member contributes to the corporation by way of capital or involvement. CRA will have discretion to determine if the amounts paid to the related adult family member are reasonable in the circumstances. These rules are effective in 2018.

Multiplication of the Capital Gains Exemption

In the structure noted above, if a trust owns shares in an operating company, it is possible that a capital gain realized by the trust could be allocated to the beneficiaries and the beneficiaries could claim the capital gains exemption. The new rules would eliminate the ability for a trust to have a capital gain subject to the exemption. Moreover, any gain on a share owned by a trust would not be eligible for the capital gains exemption. This would also apply where family members acquired shares for a nominal amount without the use of a trust. If shares were owned by a minor, and the shares were ultimately disposed when that individual became an adult, the gain that would have accrued while the individual was a minor could not be sheltered by the capital gains exemption. The capital gains exemption will not be available to family members who are subject to the income splitting rules noted above.

There is a rule that will allow for trusts and family members to make an election to crystallize the capital gains exemption in 2018. However, this crystallization will only be available to adult beneficiaries and adult family member shareholders. These rules are effective in 2018.

Conversion of Dividend Income to Capital Gains

There is a significant difference in the tax rate of a dividend (39.34 or 45.30%) and capital gains (26.76%). Historically, with tax planning, one could convert what otherwise might have been a dividend into a capital gain. The new rules propose to convert the capital gains realized between non-arm’s length parties into a deemed dividend. This would mean that the tax-free portion of the capital gain would not be added to the capital dividend account. Moreover, it appears that there would not be an increase of the cost base of the shares that were received as consideration which could possibly result in double taxation.

There are also new rules that propose treating payments out of the capital dividend account as a taxable dividend where the capital dividend account was created by transactions whose goal was to reduce the personal income tax of the shareholder.

These rules could also affect post-mortem planning. These rules are effective for transactions and amounts paid or payable after July 18, 2017.

Making Investments in an Operating Company

While still in the public consultation phase, the government has proposed to increase the tax burden on an active corporation investing surplus funds. Those investments would no longer enjoy preferential tax treatment and access to the refundable tax regime and capital dividends. The government appears to be concerned that an active company subject to low tax rates would have significantly more to invest than if the funds were paid to the individual shareholder and all taxes were paid.

This issue gets complicated in terms of tracking which investments are from surplus funds and what the actual income related to those surplus funds are. The government has asked for input on how to apply their proposals.

Summary

These proposals are significant on their own and collectively will change the tax planning landscape for all privately held businesses and their shareholders. Every situation where a trust owns shares in a private corporation must now be evaluated to determine what the best tax planning is on a go forward basis.

Please contact your Segal advisor as soon as possible so that planning can start now.

Segal LLP | Tax Advisory

CRA Suspends Audits on Charities’ Political Activities

072826_Thinkstock_186059084_lores_ABMany Canadians are generous in their gifts to charity, and in return, they may receive tax benefits. In recent months, there’s been some loosening of the restrictions placed on charities, which may be of interest to contributors.

While Ottawa was in the hands of the Conservative Party led by Stephen Harper, the government put strict restrictions the political activities of charities in 2012.

Five years later, Canada Revenue Agency (CRA), under the current Trudeau-led Liberal Party government, said it is suspending audits of political activity by charities. The move comes after recommendations by a panel the CRA commissioned to study the issue. The panel’s 2017 report urges the government to “broaden the ability of registered charities to engage in political activities,” while at the same time maintain “an absolute prohibition on partisan political activities.”

The five-member panel said that one particularly strong message emerging from the feedback it received during consultations was that a lack of clarity meant that some charities view political activities as too risky and engage in self-censorship. Without knowing the exact parameters within which they can operate, and given that the penalty for even an accidental breach of the rules may be deregistration, many charities make a rational choice to avoid or limit the risk.

Furthering a Group’s Charitable Purpose

The panel recommended that a charity’s political activities, whether pressing for a change in government policy or buttonholing a politician, be judged on whether they further the group’s charitable purpose. The panel proposes eliminating current rules that restrict a charity’s political activities to 10% of its resources.

One of the panel’s key recommendations was that the CRA revise its policy guidance to explicitly allow charities to:

1. Provide information to others related to their charitable objects (including the conduct of public awareness campaigns) for the purpose of informing and swaying public opinion. Such information must be truthful, accurate and not misleading.

2. Conduct research, distribute it to others and discuss the research and its findings with the media and others as they see fit.

3. Express opinions on matters relating to their charitable objectives, as long as they draw on research and evidence and don’t impinge on hate laws or other legitimate restrictions on freedom of speech.

4. Encourage keeping or changing law or policy, either in Canada (on any level of government) or outside of Canada.

5. Call on supporters or the general public to contact politicians of all parties to express their support for, or opposition to, a particular law or policy.

6. Make written or verbal statements to elected officials, parties and candidates, and release such materials publically. The adoption of a charity’s policy by a political party doesn’t in itself constitute partisan political activity.

7. Invite competing candidates and political representatives to speak at the same event, or request written submissions for publication, provided that candidates and parties are given an equal opportunity to speak or have their views published.

8. Express their views and offer others opportunities to express their views, on social media or elsewhere provided such platforms are monitored and partisan political messages are removed.

The panel also encouraged the CRA to:

  • Remove the requirement that a charity’s materials must reflect all sides of the argument, and add that they must be fact-based, and
  • Amend CRA Form T3010, Registered Charity Information Return (annual report) to remove the requirement to quantify resources used for political activities, and replace it with one to describe, in narrative form, the nature of the public policy dialogue and development work undertaken.

Expansive View of Charitable Activity

The panel went on to say that, in its view, the CRA could find support for a broader view of what constitutes charitable activity in case law.

For example, the 1999 Supreme Court ruling in Vancouver Society of Immigrant and Visible Minority Women v. Minister of National Revenue supports looking at the activity in the context of a charitable purpose. If a charity calls for a change in the law in furtherance of its charitable purpose — and such activity is subordinate and non-partisan, the panel said it believes the policy could accept it as charitable.

The panel noted that it believed such an expanded view would go a long way in providing clarity to the charitable sector and would enable it to more meaningfully contribute to public policy reform. Moreover, the panel said, it would remove the current disadvantage faced by the charitable sector in relation to for-profit companies, which can advocate in the public policy arena without restriction.

The panel also urged the CRA to list examples of what will be considered partisan political activities to replace the prohibition on both “direct and indirect” partisan political activities, which the panel suggested is highly subjective (particularly “indirect”), and has been the subject of much confusion.

Need for Legal Changes

Feedback on another issue was clear: fundamental legislative change is needed, and new policy or other administrative measures won’t be sufficient. Suggestions from the panel included:

  • Adopt an inclusive list of acceptable charitable purposes in the Income Tax Act that reflects contemporary society, its issues and expectations.
  • Consider the approach of other jurisdictions, some of which have softened restrictions on political purposes.
  • Clarify that public policy activities (for example, research, dialogue, advocacy, and calls to action) are charitable, provided they’re non-partisan and subordinate to a charitable purpose. In other words, accept the Supreme Court of Canada decision from the Vancouver Immigrant Society case and incorporate it in future legislation (that an activity is considered in the context of the charitable purpose).
  • Create a permanent mechanism for consultation with the charitable sector to ensure an ongoing process for developing policy guidance.
  • Enable charities to benefit from social enterprise and social finance models.

The CRA said the suspension of charity audits will be in effect until the government officially responds to the panel’s report.

 

Know the Tax Implications of Dividend Income

lores_investment_folder_file_amIf you are planning to buy shares in a company in the hope of receiving regular dividend payments, take some time to review how the Canada Revenue Agency (CRA) taxes income from directly held shares.

The first step is to realize that your tax bill on dividend income will depend on where the company is located. The CRA treats domestic and foreign dividend income differently.

For a conservative portfolio, you might look for disciplined, well-run, profitable companies that have a record of regularly boosting their payouts.

You can find blue-chip stocks that provide yields competitive with short-term bonds and Guaranteed Investment Contracts.

But remember, companies can cut their dividend outlays for any number of reasons and that can cause the stock’s price to slide.

Domestic Dividend Income: If you own shares in a taxable Canadian corporation, you are eligible to take a dividend tax credit aimed at preventing double taxation. Dividends are paid out of a company’s after-tax earnings, which means that when you get your payout, the company has already paid taxes on it.

Foreign Dividend Income: Taxation is more complicated when you receive dividends from a foreign company, although you may be eligible for a foreign tax credit. The tax due on foreign income is based on treaties between Canada and the countries where the companies are domiciled. Generally, Canadians will pay tax on foreign dividend income in Canada and get credit for foreign taxes withheld.

More than 750,000 Canadians hold U.S. investments directly or through a registered account. American companies generally withhold taxes on your dividend payments but the exact amount depends on whether you certify that you are a Canadian resident. When your Canadian tax return is prepared, you may receive a foreign tax credit.

The tax credits for Canadian dividends make them a very tax-efficient source of income for most Canadian investors.

Taxation of dividend income can be complicated and it’s best to consult with your tax adviser, who can ensure you pay the least amount of tax possible.

Foil Fraud at Your Enterprise

thmb_hr_practices_hand_cookie_jar_savings_petty_cash_take_amMonitor, Verify and Verify Again

Over the past decade or so, well-publicized scandals involving Enron, Parmalat, Royal Ahold, WorldCom and other companies have prompted corporate officials, lawmakers and regulators to insist on beefing up internal auditing controls and risk-management operations.

Asset Misappropriation in Canada  

Ninety per cent of occupational fraud cases in Canada involve asset misappropriations, according to a study by the Association of Certified Fraud Examiners.
Those misappropriations had a median loss of $200,000; 38.9 per cent had a corruption component with a median loss of $250,000; 11.1 per cent involved fraudulent financial statement schemes with a median loss of $1,075,000.

Cash is by far the most frequently misappropriated asset, accounting for 86.4 per cent with a median loss of $198,500. That loss is nearly double the non-cash losses, which totaled a median $100,000.

This finding is most likely explained by the liquid nature of cash as opposed to inventory, equipment and other non-cash assets, according to the study, entitled Detecting Occupational Fraud in Canada.

And yet, fraud still occurs at companies, despite spending multi-millions of dollars on software and hiring multitudes of risk monitors, auditors and compliance personnel. While you may not want to budget large sums on risk-management, there are some fundamental tools that should never be ignored by any business of any size in any industry. At the top of the list is the most critical canon of forensic accounting:

Every employee must take some annual leave. While employees are on holiday, a co-worker should cover for them. This is a simple step, but it has uncovered many sophisticated frauds and embezzlements.

Employees who process transactions should be taken off their desks at intervals, so that any existing chain of successive falsifications can be discovered and broken. Refusing vacation time is one of a series of behaviours that should be considered suspicious if they arise in conjunction with fiduciary abnormalities. Watch for sudden changes in lifestyle, or buying a larger home, a more expensive car or costly clothing.

Here are five other steps to take to help ensure your business is protected from employee fraud:

1. Update and modify controls: Successful businesses grow and expand, and in the process their internal controls can become outdated or overworked. Be sure to review your company’s controls on a regular basis to help ensure that they are still adequate.

2. Set up checks and balances: Your company doesn’t have to be a world-class financial institution to have complex transactions that can involve several reports rather than a single document accounting for all aspects of the deal. Be certain that your company enforces disciplined reporting of facts and information and reviews them from all angles. Make sure all relevant parties — traders, accountants, risk managers and the people who run the business — regularly and rigorously review everything. And, perhaps most importantly, check reports randomly rather than on a regular schedule.

3. Vigilantly monitor internal controls: Part of monitoring controls should involve periodic testing to see how easily your company’s systems and procedures can be penetrated. And when designing security systems, always assume that every user has the potential to be a criminal. A trusted insider who learns the inner workings of the company network, security specialists warn, can do some of the worst damage.

4. Frequently review passwords:
 Make staff aware of the importance of keeping passwords confidential and secure. Limit employee access to information, and require use of passwords that are not easily guessed. Some forensic specialists recommend changing passwords at least every 30 days. Regularly audit systems that don’t require passwords.

5. Trust no one: While you don’t want to run your business like a prison, never assume that because an employee is performing “junior” work that there is no chance for fraud. When you are confronted with questions about any employee’s suspicious behaviour, take action immediately and double check what you discover. Verify everything. People tend to ignore suspicious activity, rationalize decisions to not take action, or misguidedly think that no single individual is in a position to create any damage.

Resolve the Deal Breaker

lores_handshake_agreement_deal_reach_blue_MBDisagreements over a business’s valuation aren’t uncommon.

If, for example, you want to sell your business, you may feel it is undervalued because of market conditions, so ou want to factor into your asking price the company’s future performance. A buyer may come along, however, who isn’t so sure that those future projections will be realized and hesitates when it comes to closing the sale.

That disagreement doesn’t have to be a deal breaker. You can bridge the gap of the two valuations by arranging an earn-out agreement, where you receive a partial payment with future specified amounts paid when the business meets certain goals.

For example: You set a sale price of $1 million based on projected sales for next year. The buyer feels those sales projections aren’t guaranteed. So you agree to take $500,000 on the spot and the remainder is paid out of, or adjusted to reflect, the income your business actually earns based on those projections.

You both benefit: The buyer gains an additional source of financing while minimizing risks and costs and you get to share in future earnings and, because the deal isn’t simply an installment plan, you gain some tax benefits. 

But the agreement needs to be structured properly and address several issues, including:  

  • Duration: Earn-outs can typically run as long as five years. However, the longer the term the more difficult it can be to attribute performance to the business alone. On the other hand, you may face resistance to a short term if the buyer is concerned that a shorter duration could encourage you to make business decisions that favor short-term results but damage the long-term viability of the business. Moreover, to be able to get the benefits of using the cost recovery method when you pay your taxes, the Canada Revenue Agency (CRA) insists that the agreement last no longer than five years.
  • Authority: You may want to draft an employment contract that specifies who has ultimate control over management and strategy. As the seller, you may want to retain control over operations to help ensure performance goals are met, over the sale or purchase of additional assets, and over the hiring of key staff members. Pay particular attention to the duration of the contract: the buyer may not be willing to maintain an employee role once the earn-out is paid.
  • Performance goals: The agreement should outline such clear and achievable performance goals as sales, pre-tax earnings or gross profit as well as non-financial goals such as product or account development, capacity utilization, or service improvements.
  • Performance evaluations: Clearly define the measurement base and be sure it is monitored. If the base is pre-tax earnings, you should ensure that the agreement specifies how one-time costs, unexpected costs, new management costs, transfer pricing and other costs or windfalls will be treated. Periodic audits can ensure that systems and operations aren’t manipulated to artificially boost or suppress performance measures.

Last Word: Any of these issues create the risk of litigation, so you should choose some method to resolve disputes and avoid litigation.

CRA Aims to Boost Services for Small and Medium-Sized Businesses

071417_Thinkstock_521090040_lores_kwSmall- and medium-sized businesses will be getting more help from Canada Revenue Agency (CRA) over the next couple of years.

The tax agency recently unveiled plans to make its services for those businesses more helpful and easier to use. The new plan follows consultations started in October 2016 and follows separate consultations in 2012 and 2014. The agency met with businesses, accountants and CRA employees who regularly interact with businesses, and also accepted feedback online and discussed issues with business associations.

“The vast majority of Canadians do everything right.”

— A CRA employee

The result is a program called Serving You Better. The CRA received more than 1,500 comments and suggestions. Here is a summary of the new initiative taken from the CRA website:

Making Tax Information Easier to Access, Understand and Use

Participants told the CRA they don’t like busy signals when they call and they do like services with a call-back option. Accountants want to ask complex questions on the phone. Businesses would like an auto-fill option and to be able to complete more tasks online.

The CRA said it will:

  • Switch over to the Government’s telephone platform and complete feasibility studies for adding call-back and secure chat lines.
  • Conduct a pilot for a service dedicated to letting tax preparers call experienced CRA staff members who can help with complex technical issues.
  • Review the Pensionable Insurable Earnings Report (PIER) and other notices and letters for businesses. Let corporations see the assessed value of income tax returns and schedules as well as their CRA-verified dividend account balances in My Business Account.
  • Expand the Liaison Officer Assistance Requests pilot program to allow businesses across Canada to request a Liaison Officer visit. Start an auto-fill option using commercial software.
  • Study the possibility of setting up a volunteer tax program that would help the smallest new businesses understand the payroll, GST/HST and other tax obligations that come with starting a business.
“My clients and I are frustrated that we aren’t able to obtain remittance forms online.”

— An accountant

Clarifying Information about Payment Options

Participants noted that payments don’t always go where they expect. Although there have been improvements, individuals said they still had concerns about these errors and the time it takes to resolve them.

The CRA said it will:

  • Improve the way it explains how to fix misallocated payments when and where taxpayers want.
  • Raise awareness about direct deposits into taxpayers’ bank accounts.
  • Make payroll remittance vouchers easier to order online.
  • Explain clearly how remittance vouchers are personalized to ensure payments go to the right accounts.
“Objections are a nightmare just to get assigned.”

— From an accountant

 Improving Services Related to Audits, Collections and Appeals

Taxpayers and accountants were clear about how unhappy they are with the amount of time it takes to resolve any objections. They want better communications between their businesses and representatives and CRA auditors.

The CRA said it will:

  • Improve the time it takes to resolve an objection (it developed a plan to improve timeliness and better inform Canadians of the expected and actual time frames for resolving an objection based on its complexity.
  • Improve audit processes and communications through a post-audit survey and by monitoring the feedback it receives.
  • Enhance the clearance certificate process by communicating earlier when you apply and by helping businesses identify situations when a certificate isn’t required.
  • Ensure consistency by communicating collection procedures to audit branches and offering training for auditors.

The CRA notes that it has previous consultations on cutting red tape in 2012 and 2014. As a result, the tax agency says it already has:

1. Introduced the Liaison Officer initiative.

2. Engaged associations including the Canadian Payroll Association and the Chartered Professional Accountants of Canada (CPA Canada) to identify CRA guides and forms needing to be simplified and clarified.

3. Reduced the payroll remittance burden for the smallest new employers.

4. Allowed businesses to request a payment search using the My Business Account Enquiries Service and to submit cashed cheques as proof of payment using Submit Documents.

5. Included a My Audit tab in My Business Account that allows electronic communications between businesses and auditors.

6. Provided a streamlined Interactive Voice Response system that makes it easier for business callers to connect with an agent.

7. Introduced training to help auditors become more sensitive to the needs and realities of small and medium businesses.

8. Reviewed completely its notices and letters to make them clearer and easier to understand.

9. Reduced the need for callers to repeat information when a call is transferred from one agent to another.

10. Set up a way to connect callers to the right expert.

Top 10 Things You’ll Be Able to Do

The CRA’s 2017-2019 Serving You Better action plan contains over 50 action items that the agency expects will improve services for small and medium businesses.

According to the CRA, here are the top 10 things you’ll be able to do:

1. Receive a CRA security code by email

2. Call a new dedicated telephone service for tax preparers that helps with more complex technical issues

3. Request a Liaison Officer visit

4. Provide T4 information slips to your employees in electronic format (certain conditions apply)

5. Use T2 Auto-fill through commercial software

6. Create your own filing and balance confirmation letters online

7. View short “how-to” videos that explain the services on My Business Account

8. Experience telephone service improvements

9. Share feedback about your audit experience in a new post-audit survey

10. Have your objections resolved faster

Canada: Fifth Most Millionaire Households Yet Many Are Buried in Debt

070717_Thinkstock_452678211_lores_kwCanada moved up to fifth place from eighth of countries with the most millionaire households in 2016, according to a recently published report by Boston Consulting Group (BCG).

And yet, the Bank for International Settlements (BIS), Bank of Canada and other organizations have recently expressed concern about the country’s debt problems.

Warnings About Debt

The BIS, which serves as a bank for central banks, is flashing warning signals that mean Canadian debt has reached critical levels, and will likely result in a financial crisis. The BIS notes that the gap between credit consumption and economic output (gross domestic product) has reached a critical 14.1 level in Canada.

That gap measures the risk associated with the credit given to households and businesses in a country. The BIS considers anything above 2 to be a strong gap, and anything above 10 to be a critical warning. Breaching 10 results in a banking crisis in two-thirds of economies within three years.

More locally, the Bank of Canada recently warned that Canada’s financial system is becoming increasingly exposed to economic shocks as household debt levels continue to climb and major housing markets remain hot. The central bank noted that highly indebted households have less flexibility to deal with sudden changes in their income.

“As the number of these households grows, it is more likely that adverse economic shocks to households would significantly affect the economy and the financial system,” the bank said.

And while it seemed Canadians were ignoring its warnings about high household debt, the central bank posted a video on YouTube explaining how the dangerous combination of debt and inflated house prices could lead to recession or worse.

Statistics Canada also recently confirmed that many Canadians are drowning in debt. The agency said Canadians owed $1.67 in consumer credit, mortgages and non-mortgage loans for every dollar of household disposable income in the first quarter of 2017. That was a slight quarterly decrease as household net worth rose from the end of 2016.

It’s interesting to note that despite the high debt levels, most Canadians don’t appear to be defaulting. Credit agency TransUnion says that the 90-plus day non-mortgage account delinquency rate in the first quarter of 2017 dropped to 2.72%, down nearly 1.5% from the year before.

Back to the Wealthy

Meanwhile, Canada’s richest households control an ever-growing share of the country’s wealth. According to the Fraser Institute, a nonpartisan research and educational organization, the top 20% of Canadians own about 67% of the country’s wealth and the bottom 20% own none. But what accounts for this inequality? Not necessarily hard work or large inheritances.

“A deeper understanding of the statistics reveals the vast majority of wealth inequality in Canada is simply due to differences in people’s age and the fact that people accumulate more wealth as they get older. In other words, wealth inequality is largely a fact of life,” the Fraser Institute says.

Meaning that the wealth gap in Canada is explained by people’s stage in life.

But that doesn’t help if you’re saddled with debt, whether you make more than $500,000 a year or less than $30,000. What can you do about it? Here are a few suggestions.

Getting Out of Debt

The first step is to calculate your debt situation. Your financial advisor can help with this. One way is to find your debt-to-asset ratio. This measures what you owe (liabilities) to what you own (assets). Add up your mortgage, car loan, lines of credit, credit card debt and anything else you owe. Then tally your total assets, including the appraised value of your home, savings and investments including Registered Retirement Savings Plans and Tax Free Savings Accounts, and any other property that’ll grow or retain its value.

Divide your debts by your assets and multiply by 100. You want a low ratio. For example, if you owe $300,000 and have $75,000 in assets, your ratio is 400%. But if you owe $75,000 and have $300,000 in assets, the number is a much smaller 25%.

Then, regardless of how much you earn, consider these ways to control your spending, manage debts wisely and, if necessary, reduce your liabilities:

Create or review a budget. This will help you figure out how much money you take in, spend and save. It’ll also help you balance your income and regular expenses as well as guide you toward your financial goals.

Organize. Take stock over everything you’re spending money on each week. Keep receipts in order to help you get a handle on where your money is going. Pay yourself first, through auto-deposits into savings accounts or retirement/pension plans.

Distinguish between want and need. This can help you reduce expenses for what might be frivolous things such as a sports car you’ve been eyeing, extra cable channels or that big-screen 4K television set. Make spending choices based on what you need — not what the TV ads or signs in shop windows say you need.

Review your automatic payments. You may be paying for things you no long use, such as club or gym memberships, newspapers or magazines. Stop these immediately.

Shop for bargains. You can usually find ways to cut costs, whether it’s the kids’ clothes, dental checkups, car wash, books you could get at the library instead of purchasing them or bulk food instead of expensive premium brand food.

Avoid late fees. Save yourself extra fees and expenses by paying bills before they’re due or set up auto-payments at your bank for what you actually use.

Decide which debts to pay off first. By paying off the balances with the highest interest first, you’ll pay less interest. This will help you become debt-free sooner. List your debts in order from the highest interest rate to the lowest. Make the minimum payments on all your debts. Then, use any extra money to pay down the highest interest debt.

You may want to start with your debt with the lowest balance. You may feel an accomplishment by paying off a debt. This can keep you motivated to maintain your goal of becoming debt-free. However, this option may cost you more in interest over time.

Work with your creditors. Contact creditors to discuss your financial situation. They may offer such solutions as:

  • Lowering the interest rate on your debt,
  • Extending payments over a longer period of time, or
  • Reducing your minimum monthly payment.

Close accounts that are paid. Once you pay off a debt, consider closing it. One account with a low credit limit can be useful to maintain or improve your credit score. Keep only what you need and can manage responsibly. You may also want to consider using a secured credit card instead of a regular credit card. A secured credit card requires you to leave a deposit with the credit card issuer as a guarantee.

Lose the credit cards. There’s no easier or faster way for you to increase debt than using credit cards. Something about charging purchases makes many people think they aren’t increasing their debt. The best way to dispel this illusion and get your spending and debt under control may be to cut up credit cards.

Consolidate debts. If you have high-interest loans, consider taking out a single loan with a lower interest rate to consolidate your debt. This will mean you’ll only have to make one payment.

A consolidation loan may help you get out of debt, if it:

  • Has a lower interest rate than all your other debts put together, and
  • Has a lower monthly payment than all your other debts put together.

But be careful to not to use the credit that is freed up. If you can increase your payments on the consolidation loan, you’ll reduce your debt faster and pay less in interest. A consolidation loan won’t hurt your credit rating if you make the payments on time.

Consult with your financial advisor for more ways to manage your debt and build your net worth.

Put Trust into Your Financial Plans

Regardless of your age, you should be planning financial goals. One of the most efficient ways is through trusts that can help save tax dollars and provide for your heirs.

Here are just some of the ways trusts can be used to maximize your wealth:

lores_planning_tax_wills_trusts_generations_bz

Words of Caution

The CRA has said it launched a special project to audit domestic “inter vivos” trusts to ensure they are set up and managed according to the relevant legislation.

Among the potential targets:

  • Promissory note: Has one been issued to the beneficiaries and it is enforceable?
  • Trustee withdrawals: If trustees have withdrawn money for personal use the CRA could challenge the deduction taken or asses a taxable benefit to the trustees.
  • Twenty-One year rule: The CRA may check to see if the trust has paid the required taxes on accrued capital gains every 21 years..
  • Proper records: The agency may check to see if all the proper accounting records have been kept, minutes taken and that the original settlement property can be produced.

Failure to be in compliance with all the necessary trust and income tax rules might result in tax liabilities, penalties and interest. The worst-case scenario would be for the CRA to determine the trust never existed, in which case all benefit and growth would accrue to the original shareholder.

Support for Your Spouse

You can set up a trust (as provided by your will) to supply a source of income for your spouse and defer taxes. Property transferred to a spousal trust on death does not trigger capital gains taxes until the trust sells the property or the beneficiary spouse dies. Assets transferred to trusts are deemed to be disposed of at their fair market price, which can create tax liabilities.

A spousal trust is a good choice when: a spouse lacks financial expertise; requires long-term care; or you wish to ensure that children are beneficiaries of your estate on the death of your spouse.

Transfer Assets to Children

Assets transferred to a trust for children can still be subject to tax in the hands of the parent transferor, if that parent can control the ultimate disposition of the assets during their life time. This is why inter vivos trusts are usually created by grandparents, with an adult child as trustee and using an asset that is not subject to attribution.

That way, the adult child can continue to control the assets, a strategy often used as part of an estate freeze – a way of freezing the tax liability on assets. You will have to pay capital gains tax on any increase in the assets’ value to the time of transfer (or freeze), but the remaining taxes on any further increase in value are deferred until the trust sells the assets.

Keep in mind that living trusts have a deemed 21-year life span after which accrued gains in the trust are taxed.

Also, remember that depending on how the property is acquired and the nature of the income earned by the children’s trust, income attribution or “kiddie” taxes may apply if minor children or grandchildren are beneficiaries.

Manage Inheritances

If you are concerned that a child or grandchild won’t be able to handle an inheritance wisely until a certain age, a trustee can professionally manage the money until the beneficiary reaches a specified age.

Care for Children

A trust can ensure that minor children are cared for after your death. If you have children with disabilities, a trust can provide the income for their needs. If you have adult children, setting up a trust to take care of their financial needs can cut taxes. The child is responsible for taxes on trust income that is paid out, possibly at a lower rate.

Trusts have many other uses and can be complicated. So contact your accountant to discuss the ways you can effectively maximize your wealth by creating trusts.

Get to the Meat in Job Interviews

After a while, interviewing job applicants gets to be routine and you may fall into the trap of asking the wrong questions.

When that happens, you may not be getting the information you need. For example, how often have you asked

 Judging a Book by Its Cover

lores_interview_sign_nhA supervisor walks into a room and notices a male applicant in clean, professional-looking clothes. But he’s wearing dirty athletic shoes. The supervisor is tempted to go through the motions of the job interview, although he’s already rejected the prospect mentally because of his shoes. That’s reacting subjectively to a gut feeling.

But suppose the supervisor conducts a vigorous interview and discovers the applicant is smart, articulate and has handled many difficult situations with ease. The supervisor decides to hire the man and tells him the dress code requires clean dress shoes. That’s interviewing and hiring with controlled subjectivity.

 Develop Good Habits

   Don’t lose good prospects because of interviewing habits. Train staff members on interviewing techniques. As part of the sessions:

  • Have employees role-play as applicants, with interviewers asking them test questions and learning from reactions.
  • Identify questions that provide real, specific, job-related and experience-related information.
  • Prepare a list of the best questions for all supervisors to use in interviews.

these typical questions?

  • “What do you want to be doing five years from now?”
  • “How would you handle a situation where an another employee needed to be disciplined?”
  • “What do you consider to be your strengths and weaknesses?”

There is only one way to describe these questions: Useless.

The reason discussing these issues is a waste of time is that it’s far too easy for candidates to tell you what you want to hear.

The better way is to ask for specifics, emphasizing what applicants have done rather than what they intend to do. If you ask theoretical questions, you’ll get theoretical answers. So, let’s reshape the three earlier questions:

  • “What do you want to be doing five years from now? And give me examples of achievements from your past work history that will help you achieve your goals.”
  • “Give me a specific time when you had to discipline or reprimand an employee and whether or not it worked. What effect did the action have on the employee? And what effect did it have on you as the supervisor?”
  • “What would your three most recent supervisors tell us about your work-related strengths and weaknesses?”

Phrasing the questions this way offers two benefits:

1. The applicant is likely to give a truthful answer because he or she believes you will check the answer with former supervisors.

2. You might be able to verify the truthfulness of the answer when you check references with the former supervisors.

Often, applicants give more information than they intended. Or, they stammer trying to reply because they don’t have enough practical experience – despite listing years of practical application on their resumes.

The goal in asking job interview questions is “controlled subjectivity.” You can’t freeze out all emotions and gut feelings, but you can control the questions and the direction of the interview. Your ultimate aim is to get as much information that can be objectively analyzed and verified.

Quash Bullying at Your Company

thmb_sales_mouse_trap_finger_catch_caught_danger_amPersonal harassment in the workplace is continuing to garner attention.

Although there is no federal law banning bullying, employers still risk legal liability if they don’t actively prohibit the behaviour. A number of factors point to this conclusion, including:

When Constructive Isn’t Positive

Several court rulings have upheld claims of constructive dismissal when an employee quit because of personal harassment by co-workers.

The theory behind the rulings is that bullying in the workplace represents an employer’s breach of the implied contractual obligation to provide employeeswith civility, respect and dignity. That breach, in turn, allows the employee to consider that he or she has effectively been dismissed.

In Shah v. Xerox Canada Ltd.,for example, the Ontario Court of Appeal rejected the argument that to prove constructive dismissal, an employee must prove the employer breached a specific fundamental term of the employment contract. A specific breach may be necessary in some cases, the court ruled, but not when a pattern of bullying has been established.

Unfair treatment and bullying also can overturn a justifiable cause for dismissal. In Paitich v. Clarke Institute of Psychiatry, the Ontario Court of Appeal upheld a constructive dismissal ruling in the case of an employee who had been fired for writing insubordinate memos to management. The trial judge ruled that bullying that occurred before the memos and management’s failure to address the problem was tantamount to constructive dismissal.

When certain conditions are met, courts have ruled that an employer’s conduct constitutes intentional infliction of mental distress or nervous shock. In Prinzo v. Baycrest Centre for Geriatric Care, the Ontario Court of Appeal upheld damages of $15,000 for nervous shock suffered by an employee.

And in Zorn-Smith v. Bank of Montreal, the trial judge awarded $15,000 in mental distress damages to a fired bank employee, ruling that the employer’s “callous disregard” set the preconditions for intentional infliction of mental suffering. Those preconditions were: flagrant or outrageous conduct calculated to produce harm that results in a visible and provable illness.

  • Successful lawsuits filed against employers (see right hand box);
  • Quebec’s Labour Standards Act, which prohibits psychological harassment;
  • Ontario’s Occupational Health and Safety Act, which requires all employers to protect their employees from the risk of violence. The law’s definition of violence includes threats that give employees reasonable grounds to believe they are at risk of physical injury;
  • Saskatchewan’s Occupational Health and Safety (Harassment Prevention) Amendment Act, which prohibits psychological harassment, and
  • Alberta’s Occupational Health and Safety Code bans workplace violence, which is broadly defined as any act in which a person is abused, threatened, or intimidated.
  • The country’s Criminal Code includes offences that can be applied to bullying or cyber bullying, including criminal harassment, intimidation, threats and identity fraud. However there is nothing that explicitly mentions bullying or cyber bullying.

Canadian human rights legislation, of course, prohibits workplace harassment based on protected characteristics such as age, race, gender, sexual preference or disability. But bullying is different because it may not involve harassment on protected grounds.

Personal harassment also shouldn’t be confused with the differences of opinion or ordinary conflicts that arise in the workplace. Instead, bullying is behaviour that a reasonable person would consider humiliating, intimidating, undermining or threatening.

According to one study by the Workplace Bullying and Trauma Institute, one in six employees experience destructive bullying. The North American not-for-profit group also found that half of workplace bullies are women who target other women 84 per cent of the time. Male bullies target women 69 per cent of the time.

According to the Canada Safety Council, more than 80 per cent of bullies are managers or people in power and some of those are serial bullies who take aim at one employee until that person quits and then target another.

In some instances, bullies perceive their positions are threatened and work to eliminate the competition.

Don’t underestimate the financial costs of bullying. Personal harassment creates an unhealthy environment and can result in increased:

  • Absenteeism;
  • Turnover and recruitment costs (according to some experts, bullies push out more than 75 per cent of their victims);
  •  Stress and related health consequences;
  • Costs for Employee Assistance Programs (EAPs); and
  • Safety risks.

Add to that decreased productivity, motivation and morale, as well as reduced customer service and customer confidence, and it’s easy to see how the costs can add up.

Bullying can also expose a business to grievances, lawsuits and damages because employees are increasingly suing on grounds that by tolerating or not actively banning the behaviour, an employer has violated a staff member’s fundamental right to be protected from physical and mental risks at work.

So, to protect your employees as well as help reduce your company’s legal exposure, you may want to consider including anti-bullying measures in your written employment policy handbook. To be effective, your company’s anti-bullying policy should:

1. Apply to everyone, including management, clients, independent contractors and others who deal with your company.

2. Clearly define and provide examples of what constitutes unacceptable behaviour.

3. State your company’s commitment to preventing workplace bullying and the consequences for violating the policy.

4. Encourage employees to report incidents of bullying and outline a confidential process for reporting them.

5. Assure that no reprisals will be made against reporting employees.

6. Outline the procedures for investigating and resolving complaints.

In addition, your company should:

  • Train personnel to recognize bullying.
  • Take measures to ensure that managers and supervisors treat complaints seriously and deal with them promptly.
  • Provide impartial third party help to resolve situations, if necessary.

Insidious Forms of Behaviour

Bullying can take many forms. Some are obvious such as verbal abuse, threats, taunting and intimidation. Others are less up front and can include:

  • Spreading malicious rumours.
  • Making false allegations in company documents.
  • Undermining a person’s work by, for example, providing the wrong information or withholding information.
  • Constantly changing guidelines and expectations.
  • Taking away responsibilities and making a person feel useless.
  • Blocking applications for leave, training or promotion.
  • Assigning unreasonable duties.
  • Constantly and persistently criticizing work.

It’s not always easy to distinguish bullying from strong management or constructive criticism. In some cases, what appears to be bullying may be a personality clash. Be sure your policy takes the various forms of bullying into account and protects managers and supervisors, as well as employees.

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