If you have lost your job or retired, you may need to make some decisions about your retirement pension. Should you take the pension from the employer and which version? Should you take the lump-sum payment? What are the annuity options?

Up and above the financial considerations there are other factors to consider when evaluating your pension options.

Marriage

If you are married and concerned that the survivor benefits may not be enough you might consider taking the commuted value. On the other hand if you want a guaranteed income stream, consider an annuity or taking the employers pension.

Your Spouses’ Age

If you spouse is younger than you, you consider taking the pension since there are guaranteed survivor benefits to provide for your spouse.

Your Health

If you are in poor health, taking the commuted value of your pension may ensure there are assets to pass on to your spouse or your heirs.

Life Expectancy

If longevity runs in your family then leaving the funds in the pension plan and opting for the monthly benefit may make sense because there is no risk of outliving their capital with the pension payment.

Control

Do you feel the need to make your own investment decisions or do you just want to receive a stead stream of income.

Income Splitting Before Age 65

A pension payment is eligible for income splitting before age 65 but a payment from a registered account is not.  If this is important to you then consider taking the pension from the plan.

Inflation Protection

Inflation protection is an expensive option to replace.  If the you are entitled to inflation coverage as part of the pension then leaving that cost to your pension provider may make sense.

Future Stability of The Pension

Is your pension provider financially stable? If not you should consider taking the commuted value or other options that allow you take control or shift the assets elsewhere. There is nothing worse than being in retirement and having your pension cut because your pension provider is financially unstable.

Tax Considerations

There may be a portion of your pension that is considered ineligible to directly transfer to a locked in RRSP. This ineligible amount is fully taxable when received and if large enough may alter your decision to take the commuted value.

Remember that if you have sufficient RRSP contribution room they may be entitled to shelter more than just the eligible amount.

Survivor Benefits

What rate is the Survivor benefits paid at as a percentage of the monthly benefit?  The larger the replacement rate the more attractive the option may seem, but you may be taking a larger reduction in their monthly benefit to pay for this enhanced benefit.

Fringe Benefits

Will commuting the value of the pension mean that you lose other benefits? (i.e. Drug Coverage, Life Insurance). Depending upon what circumstances you may be eligible to receive other benefits from your former employer.  If selecting the commuted value means these benefits will need to be replaced then you will need to consider these costs into determining which option you will take.

Although the end of 2013 is still several weeks away, many income tax planning opportunities for individuals and businesses must be taken care of before the end of the calendar year.

This newsletter contains a number of tax planning opportunities that you should think about before the end of 2013 as well as considerations for the first part of the new year.

Year-End Tax Planning For Individuals

Many deductions and credits are available for the 2013 tax year only if payments are made by December 31, 2013. These include:

• Investment counsel fees
• Carrying charges on investments
• Safe deposit box fees => Safe deposit box fees can no longer be deducted as of the 2013 tax year.
• Professional memberships and union dues
• Charitable donations
• Medical expenses, including premiums paid for private health insurance and co-pay amounts
• Moving expenses
• Interest expenses
• Alimony and support payments
• Certain legal and accounting fees
• Political contributions
• Tuition fees
• Tax shelter investments
• Employment expenses (home office travel etc.)
• Contributions to RESP’s to qualify for the 2013 Canada education savings grant
• For those who turned 71 in 2013, RRSP contributions may be made until December 31st.

Be sure to consider these before the end of the tax year.

RRSP Contribution Deadline: The deadline to contribute to your RRSP for 2012 is March 1, 2014!

If you are married, consider making a spousal RRSP contribution to take advantage of income in the future splitting. Although the pension income splitting provides a great deal of flexibility, spousal RRSP’s still have their place, particularly if you plan to retire before age 65.

Stocks, Mutual Funds, and Other Investments: Be mindful of the timing of investment transactions. For most publicly traded securities, sales and purchases must take place on or before December 24, 2013 to settle by December 31, 2013.

Mutual Fund Purchases: Many mutual funds distribute their income and capital gains during December. Consider delaying the purchase until after this distribution has been made to avoid being allocated the full year of income.

Investment Losses: Consider selling investments that have an unrealized loss before December 24^th. If you intend to re-purchase the investment, be aware of the superficial loss rules and wait at least 31 days before re-purchasing.

GICs and Other Debt Certificates: If you are considering purchasing a GIC or reinvesting a maturing GIC, consider waiting until the new year. By doing so, you will defer interest on the new GIC by one full tax year.

Make Loans Deductible: As a general rule, consumer debt such as credit cards, car loans and mortgages are not tax deductible. Consider paying-off non-deductible debt with available cash or investments and then borrow funds to invest. By doing so, you can make the interest on your loans deductible.

The Tax-Free Savings Account: For most Canadians, the tax-free saving account (TFSA) is an excellent vehicle for short or long-term savings. Contributions are not-deductible but the investment income and subsequent withdrawals are completely tax-free.

Child Care Expenses: If you are considering the services of a nanny the cost for the nanny to travel from their home country and other related costs may qualify as eligible child care expenses according to a recent CRA interpretation.

Create Pension Income: Seniors who receive certain pension income are entitled to a tax credit for a portion of that pension income. Generally pension income includes income from RRIF’s and registered pension plans.

If you do not currently have pension income, you may be able to create it by concerting a portion of an RRSP to a registered annuity or by purchasing a regular or fixed annuity. Speak to your investment advisor for assistance in creating pension income.

Year-End Planning For Business Owners

Depreciation: If you are planning to acquire new capital assets, consider making your purchase before your year-end to take advantage of capital cost allowance this year.

Health Care Expenses: If you are a sole-proprietor and pay the premiums on a private health insurance plan, these premiums as well as any co-pay amounts qualify for the medical expense tax credit.

Salary to Family Members: If you have members of your immediate family working in your business, you may pay them a reasonable salary or wage. The income paid will be deductible to the business owner (or corporation) making the payment and taxable in the family members hands.

The filing deadline for T5’s & T4’s is February 28, 2013. It is important to consider the right salary and dividend mix. You should evaluate the combined tax rate, impact of the employer’s health tax, and your RRSP contribution limits. Also be mindful that if you pay yourself dividends you may attract the alternative minimum tax.

Eligible Dividends: If you have a corporation, you may be able to pay eligible dividends on taxable income earned over the $500,000 limit or income received as via dividends from investments in Canadian public companies. The personal rate of tax on eligible dividends is lower than dividends paid from income subject to the small business deduction.

Interest Rather Than Salary: If you are a shareholder and have lent your company money, consider having the company pay you interest on the loan rather than take a salary. The interest will normally be deductible by the company and will not attract the EHT.

Retirement Compensation Arrangements: In some circumstances a retirement compensation arrangement (RCA) can be used as an alternative to paying a bonus to an owner/manager or company executives.

The RCA provides future retirement benefits and can result in tax savings where retirement income is expected to be in a lower tax margin. The plan is also flexible in that annual contributions are not required and the investments and future income are not subject to the restrictions placed on registered retirement plans or pension plans.

Pay Less Tax

As a small business owner, the collection of HST may be seen as a nuisance and for some it may feel as if you are acting as a tax collector. Like it or not, we all have to comply, file and remit the HST we have collected.

Whether you complete your HST return yourself, have software calculate it for you, or you use a bookkeeper, you should take the time to review the return (or ask questions) to ensure that some of these common processing errors have not been made.

Restricted Input Tax Credits – Meals & Entertainment

The most common HST errors occur with meals and entertainment expenses. Under the Income Tax Act, the allowable deduction for meals and entertainment is restricted to 50%. Similarly, the HST that can be claimed as an input tax credit (ITC) is also restricted. If you file quarterly or monthly, you may claim the full amount of the ITC and make a year-end adjustment.

Another common error that occurs with meals is the proper accounting for the tip: Especially when using bookkeeping software. There is a tendency to input the total amount of the meal, including tip and let the software calculate the sale tax. Make sure the sale tax amounts are double-checked!

Automobile Expenses

Another common area where errors occur is with motor vehicle expenses. It is common to see the entire amount of HST on automobile expenses claimed as an ITC. Again, the Income Tax Act only permits a deduction for business use of the vehicle and a similar proration must be made.

Bad Debts

There are two common errors that occur when reporting bad debts. The first error occurs when the business owner writes off the full amount of the invoice including HST for income tax purposes and does claim the ITC. The amount that should be written off is the pre-HST amount and the unpaid HST is claimed as an ITC.

The second error occurs when an invoice is short-paid and the balance is written off. When this occurs the HST component must be pro-rated.

Inter-Company Charges

Often a business will transfer funds from one company to another and fail to issue an invoice and of course, fail to account for the HST. Certain elections may be available and must be on file to account for the HST or lack there on.

Bookkeeping Notes

Software controls can be relatively simple to input the reduce the impact of HST errors. For example, you can set-up QuickBooks to properly account for the 50% ITC up front so that you can claim the proper ITC.

Conclusion

Despite the software controls you can put in place, it is still recommended that a careful review of the HST filing be done to ensure that errors will not come back and surprise you when the CRA comes knocking for an audit.

Over my career, I’ve seen a lot of journal entries and I’ve seen what can happen to someone’s livelihood when bookkeeping mistakes are made. The fact is, that one of the most common reasons a business fails is due to poor financial management.

Your financial records will tell you where you stand:

• How much cash you have,
• Where the cash is coming from, and
• When you have to pay your bills.

If you don’t have a bookkeeping system, don’t keep it up-to-date, or don’t properly supervise your bookkeeper, you are asking for problems.

Here are the most common bookkeeping mistakes and how you can avoid them.

1. Shoebox Bookkeeping

Ignoring your bookkeeping is easy. Typically you toss all of your receipts into envelopes or in the proverbial “shoebox” to hand over to your accountant. I can tell you I cringe when I see these come through the door because they are difficult to assemble and costly to maintain. Often receipts are missing or the bank and credit card statements have expenses with no corresponding receipt.

2. Manual Systems & Spreadsheets

Spreadsheets are not accounting systems! They are good at creating lists and schedules of information. But when you need to track where money comes from and goes to, they are not as handy. You can’t reconcile a bank account to a spreadsheet easily, HST reporting is a difficult, and tracking payables and receivables is painful?

To give an example, assume you track all of your expenses on a spreadsheet. Perhaps you have a column to indicate you paid by credit card or through the bank. Inevitably, when it comes time to assemble the financial statements and prepare the tax return, something will be missing. Then valuable time is spent searching for the missing information, expenses are lost and shareholder loans compromised.

Forget spreadsheets and paper lists. If you are going to spend the effort on those, why not acquire bookkeeping software. Bookkeeping uses double entry accounting that indicates the source and use in each transaction.

3. Not Being Involved

Turning over your bookkeeping over to someone else may be a relief, but you still need to be involved at some level. Mistakes in bookkeeping can easily result in clients being unbilled, improper reporting of assets and liabilities, theft and fraud. Improper bookkeeping can also result in improper reports being created and you making decision on misinformation.

If you are not sure how to manage a bookkeeper, your accountant will and may offer controller services to supervise your bookkeeper and provide other support for a nominal fee.

4. Not Reconciling Bank and Credit Cards

Reconciling is a procedure where you match he transactions in your bank and credit card statement to the general ledger in your bookkeeping system. This process makes sure your accounting system reflects your cash position and helps you avoid bouncing a cheque or missing a deduction. The procedure helps ensures that all transactions related to your business flow through the reports.

5. Combining Personal and Business Funds

This can be an expensive tax issue when a corporate bank account is used as your personal bank account. If you operate your business through a corporation, you are required to keep your personal business separate. This means using only the company bank account and avoid reporting your personal credit cards on the company’s books.

If you are a sole-proprietor, use a separate bank account just for business and obtain a business credit card. Post only business transactions in these accounts. If you pay yourself, make it a regular amount.

6. Adopting a DIY Attitude

Accounting and bookkeeping are highly complex and technical, particularly when you start to involve taxes. Most bookkeeping software is easy to use, but know how to properly use it requires skill and training. A good bookkeeper will properly classify and enter your business transactions and reconcile all accounts. He or she will ensure that personal and business assets are properly accounted for.

When the bookkeeping is correct, then the accounting side flows more easily. Your accountant can prepare the statements with minimal adjustments to correct errors. The result is improved information, lower taxes, lower professional fees and piece of mind.

7. Not Implementing Internal Controls

Internal controls are important to ensure that your business is not exposed to fraud or embezzlement. One key control you can have is to separate financial duties: The bookkeeper cannot have access to cheques or cash and store level personnel cannot have access to the full bookkeeping system.

8. Not Keeping Small Receipts

Every little bit accounts to reduce your tax bill and throwing out that receipt for a postage stamp or small supplies can add up in the long-run. Even if you do record them, retain them as they will be hand in case of an audit.

9. Relying on your credit card statement as your receipt

A client of mine recently went through an audit and surprised when the CRA denied a number of expenses reported on their credit card statements because there was no receipts.

10. Not Backing Up

Lost data due to corrupt files, dropped or stolen laptops, or crashed hard drives can cause havoc in your business. Always back-up your files on a regular and systematic basis. If possible, keep the copy off site.

Within any business, the financial controller or chief financial officer’s (CFO) is the top finance role within any organization. Their function is to understand your business’s numbers and provide you with a financial analysis of your business results that is actionable and easy to understand.

We offer CFO and controllership services to many businesses to help them understand, manage and grow their business.

Our controllership services include:

• Regular financial analysis
• Financial planning and reporting
• Cash management solutions and strategies
• Profitability analysis
• Risk management
• Tax saving strategies
• Work with banks, attorneys, vendors and insurance
• Manage and train your bookkeeping staff

The benefit of using a part-time CFO

• Improved understanding of your business
• A professional to bounce ideas off
• More time to focus on your business
• Better decision making ability
• A reliable partner to help you grow.

Our CFO services are tailored to meet your individual needs and available on a flat-monthly fee.

We have all heard of the shoebox accounting system where all of the receipts are put into a box and taken to the accountant or bookkeeper to be sorted and turned into financial statements or a tax return.

If you really want to save on professional bookkeeping fees (and your bookkeeper will appreciate it), here is a sure fire filing system to organize your business records.

Start With File Folders

Get a set of file folders to organize your receipts and invoices and label according to how you paid for them. That’s right: How you paid for them and not by the type of expense.

Here is how it works. Have one file folder for each bank account and another for each credit card account. If you pay some expenses personally, you’ll need another folder for those expenses. These folders are as follows:

1. Bank A – Chequing
2. Bank A – Credit Card
3. Bank B – Credit Card
4. Paid Cash or with Personal Funds

Drop your receipts in the file for the account or method of payment.

You will need another group of folders labeled as follows:

1. Unpaid bills (you have the bill but have not paid it)
2. Statements (for your bank and credit card statements)
3. Invoices / Sales (for copies of your invoices issued or sales receipts)

With this system, your bookkeeper can quickly assemble and enter your bookkeeping information and prepare your trial balance.

Repeat Monthly

Assuming you have your books done monthly, you will need to turn over the filing system to your bookkeeper. While he or she has the filing system, you will be without a filing system to keep you organized.

The second set of folders allows you be able to turn over your current filed to your bookkeeper and carry on staying organized. If your bookkeeper stores your files for you, you may even need a few more sets

Have The Books Prepared Frequently

Part of your filing system includes actually having your bookkeeping done. The bookkeeper will rearrange your filing and reconcile your accounts. You should get a trial balance and other reporting that is essential to help you manage your business.

The report you receive back can then be filed into your permanent file system by month and year for quick retrieval along with the now sorted documents you provided.

Having the books prepared frequently will cost you less than bringing all your yearly records to your accountant, particularly during the busy tax season when you may actually be charged a premium!

Do You Have A Different System

If you have a successful system that is efficient and works, feel free to share your story with others.

Dean C. Paley, Certified General Accountant is a Burlington based accounting firm that offers full service accounting firm that offers bookkeeping, QuickBooks consulting as well as personal and corporate taxes. If you are looking for bookkeeping help, give us a call at (289) 288-1206.

Bookkeeping is an important part of your business!

The information in your bookkeeping system tells you how your business is performing and helps you make informed decisions. Without an effective bookkeeping system, you can easily lose track of you cash flows and potentially get in some hot water with the CRA.

Bookkeepers Save Time

As a busy business owner, it’s easy to let your bookkeeping get out of control. After only a few months, the amount of receipts and paperwork can quickly pile up and become a major distraction.

By using an experienced bookkeeper, you can spend more doing what you do best … running your business.

Cost Effective

The cost of hiring a bookkeeper is not as expensive as you might think. For about $150 per month, you can drop off your invoices, receipts, bank statements and other information and your bookkeeper will:

• prepare all of your accounting records,
• file your HST & WSIB returns,
• file payroll remittances,
• and prepare your payroll, and
• Other administrative tasks.

Far less than hiring someone part-time to do this for you!

How It Works

We will work with you to determine what information you need and set up a schedule a regular schedule for you to bring in your information. We can help you identify areas to improve your business and save you money in the long run.

Call us at (289) 288-1206 to find out how we can help you free up more of your valuable time and take on this administrative burden.

Perhaps you moved out of the country for a few years and then decided to make it permanent or you have purchased property in Canada as an investment to generate income.

No matter the reason, you should be aware that Canada imposes a withholding tax on the rents and sale of real property.

Knowing the highlights can help you avoid nasty surprises when the tax man comes calling.

Real Estate & Tax Residency

Although the ownership of a residential property in Canada may be considered a significant residential tie, the property in Canada must be available for your occupation.

By renting the property, under a long-term lease to an unrelated third party, you may be able to avoid t being considered a resident for tax purposes.

Principal Residence Exemption

If you are leaving Canada, you can likely claim the principal residence exemption and avoid any immediate gains.

If you sell your home after you leave, the issue becomes more complex because you cannot claim the principal residence exemption for years in which you were not a resident of Canada.

You will also be subject to the 25% withholding tax applied on gains of the sale of real estate located in Canada.

Tax On Rental Income

Renting the property may generate much needed cash flow and may be more than sufficient to maintain the property while you are away.

Like most endeavours, rental income is still subject to Canadian income tax.

There are withholding taxes as well as annual non-resident rental tax filing requirements that you must comply with if you are a non-resident earning rental income from Canadian real estate.

Failing to comply with these requirements could result in significant interest and penalties. Some filing requirements must be met even if you never rented the property.

Final Words

Owning and renting property as a non-resident or former resident of Canada can carry with it significant tax obligations for non-compliance. There are withholding taxes that must be remitted monthly if the property is being rented and penalties for the failure to comply can be significant.

If you are a non-resident and are renting property in Canada, it is important to make sure that you are filing the proper returns and making the required installments.

We Can help

We can help you comply with these important regulations by assisting with the necessary filings and help reduce the overall tax burden.

If you have not complied for several years, there are programs available to help bring your tax situation up to date.

Call us at +1 (289) 288-1206 or send us an email to arrange an appointment to discuss your situation and what we can do to help.

Ontario allows regulated health practitioners to incorporate and reap the benefits of operating through a corporation. This means that Physicians, Dentists, Surgeons, Audiologists, Dental Technicians, Psychologists, Nurses, Midwives, Chiropractors, Physiotherapists and Massage Therapists to incorporate their practices.

In addition, other professionals such as veterinarians, social workers, and lawyers are also permitted to incorporate and take advantage of the same tax benefits explained here.

In order to incorporate, you must gain approval the regulating organization and adhere to the naming requirements. Once incorporated,

Tax Benefits of Incorporation

A significant income tax deferral opportunity is derived from the fact that a medical professional corporation is considered like any other small business corporation: It will pay tax at only 15.5% on its first $500,000 of income.

Compare this to Ontario’s highest personal tax rate of 46.41% on income in excess of $132,000 and the difference is nearly 31%!

This means that for every $100,000 you retain in the corporation and not use for any other expenditure, you can defer $31,000.

This provides an additional $31,000 that can be put to use for investments, expanding your practice, or acquiring additional equipment.

Income Splitting Opportunities

The first $40,000 or so of income paid out of the corporation by way of dividends is not subject to any personal income tax (assuming no other personal income).

You can multiply this savings by issuing shares to your spouse and paying them an additional dividend of up to $40,000 without additional income tax.

If you have children who are 18 or older, you can issue them dividends as well, or if you wish to retain control over the funds, you can use a family trust.

Cash Flow Comparison

Let assume a fictional doctor operates a practice and generates $250,000 of income after direct expenses. The doctor is married and her spouse does not work. To meet her family’s lifestyle goals, she needs to have approximately $100,000 of after-tax cash.

Personal Taxes

Without a corporation, the doctor’s cash flow will look something like this:

Using A Professional Corporation

Professional Income	$250,000
Corporate Income Taxes:	($38,750)
Dividends to Generate $100,000 of personal lifestyle needs	($120,000)
Personal Income Tax	($18,973)
Remaining Cash	$72,277

By using the professional corporation, the doctor has saved $21,354.

If the doctor has issued shares to her spouse, and her spouse had no other income, the dividends could have been split equally between them and the combined personal tax bill would have been only $7,840. The remaining cash flow would have increased by a further $11,130.

Other Benefits of Using A Professional Corporation

Some of the other opportunities available through a professional corporation come in the way of tax savings generated from alternative business practices:

• Bonus Deferral: A bonus may be declared and deducted but does not need to be paid until 179 days following the corporation’s year end. By selecting an appropriate year-end, the deferral can be effective.
• Health & Welfare Trust: A health and welfare trust is a tool that helps pay uninsured medical dental expenses without the need to acquire group medical insurance. The funding is tax deductible.
• Creditor Proofing: Provides limited liability from leases, contracts and other liabilities. The PC cannot shield you from professional liability and you still require malpractice insurance.
• Pay Salaries to Family: If you employ family members in you practice you can pay them a reasonable salary and further split income.
• Building Acquisition: If you use the corporation to acquire a building to house your practice, the lower rate of tax will help accelerate the repayment of the mortgage.
• Defer Tax Installments: You have the opportunity to defer income tax installments for the first full tax year of the corporation.

Dean Paley Can Help

Dean Paley CFA CFP is the Principal of Dean C Paley Certified General Accountant, a public practice firm that provides professional accounting and tax services to small and medium sized businesses and professional in Burlington Ontario. Dean has more than 15 years of experience as a professional accountant. You can reach him at (289) 288-1206 or by email at dcpaley@deanpaley.com.

The shareholders agreement is an important part of your business. It addresses many common situation business owners may face when they have partners in the business.

Your shareholders agreement is also part of your succession plan and deals with what happens on your death.

If you have a shareholders agreement, does it provide enough flexibility for your executor and the remaining shareholders to structure the buyout to minimize taxes and provide positive cash flow to your estate?

The tax-free nature of life insurance payments may help. Here’s how:

Life insurance proceeds received by a corporation or individual is normally received tax free. In a corporation, the proceeds are credited to a notional account known as the the capital dividend account.

An amount equal to the proceeds less the adjusted cost basis of the policy can is added to this account and in turn can be paid to the shareholders tax-free as a capital dividend.

This tax-free dividend can be used by the surviving shareholders to purchase your shares and potentially preserve $750,000 capital gains exemption.

On the other hand, the corporation may redeem your shares and your estate receive a tax-free dividend to the extent of the balance in the company’s capital dividend account.

Without life insurance, the tax-free transfer of ownership cannot occur and there will be either a capital gain or a deemed dividend reported.

It is important to structure the agreement properly and have the proper insurance in place to minimize the tax bill and provide more value to your family.

Is Your Succession Plan Tax efficient?

Call us today at (289) 288-1206 to email us to arrange your appointment.