How Would an Import Tax Affect Consumers?

sale, shopping, tourism and happy people concept – two beautiful women looking inside shopping bags in the ctiy

In 2017, U.S. President Donald Trump proposed a 20% import tax, also known as a “border adjustment tax.” The proposition created a lot of uncertainty, and while it has yet to come to fruition, many consumers wonder how an import tax will affect their wallets.

Any kind of import tax would likely increase prices for the average American consumer. But experts are still unsure of how much and for how long.

One thing they do know: most industries will be affected. This includes retail, food and manufacturing.

How quickly will prices rise? That depends on what is being imported. It’s possible that consumers could see an immediate rise in products like vegetables, televisions, shoes and clothing.

Most experts think that consumers would see a one-time inflation spike, but prices would adjust over time.

It’s also possible that other changes could come along with the tax that might affect how goods are imported.

The Union Customs Code changed the way goods are imported into EU countries. The changes on imports into Germany forced companies to establish a German EORI to act as a declarant. Previously, companies outside of Germany could import goods as long as they had a non-established VAT number and EORI.

Along with these changes, experts say that a tariff may also have unintended consequences. For example, a spike in inflation could prompt the Federal Reserve to raise interest rates at a quicker pace.

A report from Consumer Reports also pointed to the tariff on Chinese tires in 2009. Not only did the tariff raise prices on American consumers, but it cost companies nearly $1 million for each job saved, and three retail jobs were lost for every factory day. China also imposed a tariff on U.S. chicken, which cost the industry $1 billion in sales.

There are also experts who argue that people will hardly notice an import tax. Take, for example, the VAT in the United Arab Emirates (UAE). Consumers in the UAE have significant purchasing power, so a 3-5% VAT would likely not have a significant impact on consumers. A 10% or higher tax raise, on the other hand, would have a bigger impact.

Those purchasing big-ticket items will be impacted the most.

Back in the U.S., President Trump is doubling-down on his pledge to impose a reciprocal tax on imports. If implemented, consumers may not only face higher prices, but the action may also escalate tensions with important trading partners.

“What’s going to happen is either we’ll collect the same that they collect, or probably what happens is they’ll end up not charging a tax and we won’t have a tax, and that becomes free trade,” said Trump.

Although Trump is pushing for the tax, the White House says there is no such proposal for a reciprocal import tax in the works.

Still, economists point out that Trump has the authority to impose the tax without congressional action if he does so by increasing import tariffs. Much of the constitutional power over trade has been delegated to the president through various laws enacted over the years.

RRSP's

RRSP.ORG Registered Retirement Savings Plan

Registered Retirement Savings Plan – RRSP.ORG the original website that best describes everything you wanted to know about Canadian registered plans and schemes has taken a turn for the best. The information and knowledge base on RRSP.ORG is more than ready for change and a complete overhaul.

MONEY.CA the leading Canadian money and personal finance website has acquired the aging website for all the right reasons. RRSP is just one of many keyword subject sites that most of Canada wants and needs. For over 20 years this small and meaningful site providing news and information in the world of Registered plans for Canadians has now been taken over by people who know and care dearly about the subject matter and the benefits and advantages it brings to Canadian’s, the government and the country as a whole.

Look forward to the changes and updates as Canadian financial consumers will learn how to make, save and preserve more of their hard earned wealth. The advisor channel is more than welcome to contribute news, information, stories and articles that make sense and pays dividends to the average Canadian.

How to Save Money on Investment Taxes

Paying taxes on investments lowers your rate of return. Investors want to maximize their gains and save money on investment taxes. The right types of investments can help you save money on taxes, and this means more money in your pocket.

Of course, there are exceptions, but the following investments are often solid choices for reducing taxes.

1. Avoid Investing in Dividend-Paying Stocks

Stocks that pay dividends are income-generating, and while it’s great to make money off of an investment, this also means that you’ll be required to pay taxes on this income. A lot of mutual funds will use the tactic of avoiding dividend-paying stocks to minimize the tax burden on their investors.

2. Aim to Avoid Short-Term Gains

Short-term gains are great, but long-term gains in the stock market are where fortunes are made. When short-term gains are realized, taxes need to be paid on the income from the sale of the stock.

Long-term gains offer better returns.

You’ll need to pay very close attention to the calendar here because long-term investments are generally considered investments that have been held for a period of more than one year.

3. Capital Gains Offsetting

When it comes to capital gains, hire an accountant that can help you with your capital gains. One tactic that is used often is offsetting these gains with losses to lower the tax burden. This legal method allows the investor to claim lower gains when they have losses in other areas.

4. Invest in Your Kids With a ROTH IRA

Kids can be left money now, and this can be done with a ROTH IRA. The tax-free compounding can turn a 7% increase annually, leading to a significant amount of money for your child over the long-term.

Money in your estate that will be left to your child will then be out of your estate, allowing you to lower the risk of state inheritance taxes.

You can also invest in a Section 529, which is designed only to be used for schooling.

5. Bond Funds

Bond funds don’t offer as high of a return as stocks in most cases, but there are municipal bond funds that are normally free from federal taxes. Tax-exempt bonds give a lower rate of return than taxable bonds because they offer significant savings.

Most municipal bonds are also free from state taxes – an added bonus.

Investors that are in high income brackets will often choose these types of bonds that offer a tax-free return even if the return is lower than other bond options available.

6. Defer Taxes with Treasury Bills

You can confidently defer your taxes slightly by strategically utilizing treasury bills. This means that you’ll only have to pay taxes on the treasury bill the year that it matures. Three- and six-month bills are the best option because you don’t have to pay taxes on the interest.

Interest taxes are also exempt on the state and local level.

So, when you want to be able to lower your tax bill the last minute, you can defer taxes through the purchase of treasury bills.

Creating Wills for Tax Planning Purposes

The most important thing you can do to reduce the amount of inheritance tax that must be paid on your estate is to make a will. In the absence of a will, estates are distributed according to the rules of intestacy. This can result in higher amounts of inheritance tax being owed to HM Revenue & Customs. The wills and probate solicitors in London at SCL Wills and Probate can assist you with will writing services to help minimise inheritance tax.

Inheritance tax is an extremely emotional subject that has been increasingly politicised in recent years. If you are concerned about reducing the taxes paid by your beneficiaries, you may want to seek advice from experienced tax planning solicitors and probate solicitors. Visit http://www.sclwillsandprobate.co.uk/ to learn more about the services provided by SCL Wills and Probate.

Factors to Consider When Planning Your Estate

Transferring property is one way people use to help minimise the amount of tax that must be paid on an estate. For this to be successful, specific rules must be followed. Property can be transferred to a spouse or civil partner without inheritance tax. However, when a person is giving assets to children or another person, the donor must survive for another seven years and must not maintain any interest in the property or the property will continue to be considered part of the estate for tax purposes.

Trusts are sometimes used to reduce taxes owed on an estate. You may choose to create a discretionary trust or fixed trust for tax purposes. There are limits to the amount of money, property, or assets that can be gifted through a trust. Get the advice of your solicitor regarding these limits and any possible charges or periodic charges that may need to be paid before setting up the trust to make sure your goals are well served.

Do you plan to leave money to charity? Donations to charity that amount to at least ten percent of the value of the estate may reduce inheritance tax by up to 36 percent. Tax planning solicitors can help you make decisions about charitable donations to reduce inheritance taxes.

Making gifts during your lifetime to your beneficiaries can help avoid inheritance tax. This can be done in small gift allowances, larger annual gift allowances, and one-time tax free wedding gifts to children and grandchildren, and regular contributions from excess income. There are annual limits to each type of git, which may be exceeded, provided that you survive for at least seven years beyond when the gifts are made.

Investments made in unquoted companies, companies listed on the Alternative Investment Market, and investments for companies that are enterprise investment schemes may qualify for Business Property Relief. In order for the investments to be exempt from inheritance tax, you must hold the shares for a minimum of two years. If the investments are held for more than two years and still held at the time of death, your beneficiaries may enjoy 100 percent inheritance tax relief.

Planning ahead is the best way to minimise the inheritance tax that must be paid on your estate. Take into consideration all the possible options to make the best decision for your estate and heirs. Because each situation is unique and annual limits and other rules change periodically, it is best to consult with a solicitor for advice that is specific to your estate.

Ed Rempel Org

What is The Cash Flow Dam?

What Is The Cash Dam and How Does It Work?

 The Cash Dam (sometimes referred to as a “cash flow dam”) is a simple but powerful concept, and it’s an especially attractive option for those who are familiar with the Smith Manoeuvre or other tax minimization strategies. Cash Dam can help you with tax optimization if you have a mortgage and own either a small business or a rental property.

What is cash damming?

 The Cash Dam allows the owner of a small business or rental property to more quickly pay down their non-deductible mortgage on their home. It’s a variation on the Smith Manoeuvre, but without additional investing. The Cash Dam is essentially an expedient way to change bad debt into good debt.

For someone who’s using the Cash Dam, what it involves is using a line of credit to pay for business expenses. Then, while using the increased business cash flow, you pay down a non-deductible mortgage or loan. This, in turn, produces an increasing tax-deductible business loan, while paying down a non-deductible mortgage or loan. Be advised that the Cash Dam as described above will only work for those who own a non-incorporated personal or partnership-based small business or a rental property.

Example:

 If you own a small non-incorporated business that has $2,000 in expenses each month and you also have a readvanceable mortgage, then the $2,000 per month expense would be paid by the home equity line of credit (HELOC). You then use the additional $2,000 you have in your business expense account to make a payment on your non-deductible mortgage. Interest paid on money that’s borrowed for business expenses is tax-deductible; by using the Cash Dam, you’ll be left with a tax-deductible business loan and a non-deductible mortgage that’s been quickly paid down.

One of the keys to the Cash Dam, however, is capitalizing the interest on the business line of credit. That way, you avoid using any of your own cash flow and you keep the business line of credit tax-deductible.

How does the Cash Dam differ from the Smith Manoeuvre?

The Cash Dam relies on using a tax-deductible business loan to allow you to pay down a non-deductible debt, while the Smith Manoeuvre allows you to buy investments. Investing from your credit line is why the Smith Manoeuvre has much higher risk and return than the Cash Dam.

Potential applications

 Say that you’re a rental investor, instead of using your own cash flow to pay for rental-related expenses, you can use the Cash Dam and a line of credit. In this instance, using the Cash Dam would help you pay for your personal mortgage and help you satisfy your tax obligations as well.

And if you are a small business owner, the Cash Dam can be extremely advantageous. The strategy gives you a way to quickly pay down your non-deductible mortgage and convert that debt into a tax-deductible business loan.

Canada’s Taxation on Pain and Suffering, Litigation Damages

The Canadian Revenue Agency makes it clear that there is no income tax on pain and suffering awards. Awards can be granted by a judge, jury or they can be settled out-of-court without paying taxes.

Settlements are not taxed if they’re non-pecuniary damages.

Non-pecuniary damages are those damages that are difficult to measure. For example, it’s difficult to put an exact value on an impairment of life, emotional distress or impairment of physical or mental abilities.

“Trying to figure out the right medical treatments, whether surgery is necessary and you’re going to be able to pay these bills can be overwhelming for any victim,” states Reyna Injury Lawyers.

Awards are seen as compensation not income. They money awarded in a settlement is a reimbursement.

Litigation Damages

Personal injury awards are tax-free. Litigation damages, however, are not tax-free. Damages are taxed in the same manner as income, and in some areas, such as Alberta, the taxation rate may be as high as 39%.

Litigation damages are different than pain and suffering.

Business contracts or the destruction of property are within the scope of litigation damages. In these circumstances, it’s often plausible to put a monetary value on the damages. A contract, for example, may have resulted in a loss of $1 million in business.

This figure can be determined by how much money was lost as a result of the contract obligations not being fulfilled.

Personal injury claims cannot have an exact amount given with 100% certainty. A person may have been awarded lost wages in a settlement, but this figure will also not be taxed. The main difference is pecuniary versus non-pecuniary damages.

Profits from Awards

Settlement money is yours to do as you wish, but if you choose to invest this money, the income earned will be taxable. That is, if you were to invest your money at a 5% rate per year and earned $1,000 in income, this would be taxable income.

Settlements are only tax-free initially.

You can also opt to receive a structured settlement. These settlements are interest- and tax-free, and they’re periodic payments.

Annuity payments must meet the following criteria:

  • Awarded only in death or personal injury cases
  • Agreement on payment terms
  • An annuity contract must be purchased
  • Insurers must remain in accordance to the settlement

Canada’s non-pecuniary damages had a maximum compensation value of $100,000 following a 1978 Supreme Court decision. The value is adjusted for inflation and remains around $350,000 at the time of writing this article.

Employment damages are tricky because the characterization may result in the defendant needing to meet withholding requirements or not. Exceptions must be clear if the income is not to be taxed. Otherwise, the income from employment damages would be subject to the Income Tax Act.

Employers that are paying a settlement to an employee are almost always going to result in the settlement being seen as employment income. Necessary withholdings will be required. If the employment income is related to another matter, it may fall within an exception.

Ed Rempel CFS

Ed Rempel Top Key Note Speaker at The Canadian Financial Summit

Ed Rempel is a well known Canadian “Financial” Keynote Speaker and shares his enthusiasm and many years of experience to primed financial audiences that want, need and deserve more and better insight and information. Join Ed Rempel a senior financial industry expert with a host of other top speakers at the Canadian Financial Summit. www.canadianfinancialsummit.com September 13-16 Online Event.

 

 

How Self-Employed Workers Can Deduct Phone Costs on Their Tax Returns

Most entrepreneurs today will tell you how important it is to have a smartphone for your business. What they may not tell you is that you may be able to write off phone expenses every year on your taxes. Here’s how to deduct your cell phone bills when filing taxes.

Calculating Your Deduction

cell phone bill

Image via Flickr by TheBetterDay

You can deduct your cell phone bills from your taxes if you file as self-emloyed or if your total business expenses combined with other specified deductions exceed 2 percent of your total gross income. If you want to take this deduction, it’s essential to know exactly how much time was actually used for your business from your phone. It’s likely that less than 100 percent of your cell phone time was used for business purposes, so the IRS will not allow you to deduct your entire phone bill.

Because of this, you can only deduct the percentage of your bill that represents how much your phone was used for your business. For example, if 60 percent of your phone time was spent talking to clients, then the IRS will allow you to deduct 60 percent of your annual phone bill from your taxes. Many times the numbers won’t be so cut and dry, so when in doubt, underestimate the percentage. Unusually high amounts can result in an audit.

Keep Phone Records

In case of an audit, it’s important to retain copies of your itemized phone bills. The IRS will need to be able to see who you called and for what purpose as well. Keeping detailed records on a calendar or in a spreadsheet will go a long way in making sure you get the deduction you’re due.

When the tax year is over, don’t be quick to throw out your records. The IRS can audit anyone up to seven years after any tax year, so if you’re subject to an audit five years down the line, being ready with those old records will help.

Deducting With a Family Plan

While it may seem like a hassle to deduct your bill if it’s part of a family plan, the process is actually simple. Determine how much of the bill per month is yours, which is especially easy with a carrier like T-Mobile, which simply divides the total cost of the monthly bill by how many lines are in use. Check your carrier for plan details so that you can accurately report and deduct your phone bill on your taxes.

Having a Separate Phone for Personal Use

While not practical for everyone, having two separate phones, one for your personal use and one for business is beneficial to some. The IRS will even allow you to deduct the entire cost of the phone – the initial purchase and the monthly bills – if the phone was exclusively used for your business. The LG V20 is a high-end smartphone with the latest technology and a large screen that makes it great for self-employed entrepreneurs who need to keep in contact with clients through emails and phone calls.

Where to Claim Deductions
When tax season comes, it’s important to know exactly which forms to fill out. It can be easier if using a service like TurboTax or H&R Block, as they’ll walk you through the steps and show you at every step how to get the biggest refund. If you’ve decided to do your taxes yourself, however, make sure you fill out Form 1040 and Schedule A if you’re filing as an individual or fill out Form 1040 and Schedule C or Schedule C-EZ if you’re filing as self-employed.

If using Schedule A, you’ll also need to fill out Form 2106 or Form 2106 EZ, which will document your itemizations. Be warned that if filing this way, the government will only allow you to deduct the amount of your bill that exceeds 2 percent of your total yearly income. It may be safer in this case to take a standard deduction or to file as self-employed.

If filing as self-employed, simply fill out line 48 on Schedule C or C-EZ and write in the total amount on line 27. No further paperwork is required.

Deducting your cell phone charges has never been easier for today’s self-employed. Simply follow these guidelines and you’ll be on your way to a bigger deduction.

 

Employee versus Independent Contractor

“The difference between slaves in Roman and Ottoman days and today’s employees is that  slaves did not need to flatter their boss.”
 – Nassim Nicholas Taleb, BS, MS, MBA, PhD is a scholar, statistician, and author of the book, “The Black Swan”

sweatshop

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

 

The exploitation of labor conjures up images of workers laboring in sweatshops for 12 hours or more a day, for pennies an hour, driven by a merciless overseer.  Employment in Canada has evolved – some might argue just enough to keep abreast of changes in provincial employment standards, where the payer offers low wages and has control over how you work.

When starting one’s career, one likely has to take whatever they can to make money and to gain work experience.  But for highly educated or experienced workers, there exist some types of work where the payer doesn’t control every aspect of what to do and how to do it.  It is in these types of roles where respect and satisfaction are more likely to be found and where one is treated as a professional.

Where one can be considered as an independent contractor, such status can come with valuable tax benefits of being able to deduct a wide range of business expenses and taxable income being subject to the small business tax rate (for 2016, the combined federal and BC corporate tax rate on the first $500,000 of active business income is 13%).

So, if you are the type of person that wants to be in business as opposed to working for someone, let’s look at some of the obstacles you’ll need to navigate.

 

Personal Services Business

To be able to claim a wide range of business expenses and enjoy the small business tax rate, your business cannot be considered to be a Personal Services Business (“PSB”) under 125(7) of the Income Tax Act.

A Personal Services Business carried on by a corporation in a taxation year means a business of providing services where:

  • an individual who performs services on behalf of the corporation (an “incorporated employee”), or
  • a person related to the incorporated employee

is a specified shareholder (i.e. owns 10% or more of the company) of the corporation and the relationship between the provider of the service and the entity receiving the service could reasonably be regarded as an employee/employer relationship.

As most consultants will own more than 10% of their company, the issue is that of whether you are in an employee / employer relationship.

 

Are you an Employee or Independent Contractor?

There is no one, definitive test of whether a worker is an employee or an independent contractor.  Such a determination requires consideration of a wide variety of factors and each situation requires an independent assessment.  The key is determining whether the worker is performing services as a person in business on his or her own account or as an employee.

The Canada Revenue Agency guide, “RC4110 Employee or Self-employed?”, tells you the process that the CRA goes through in making an assessment.  They look at several elements to determine whether the responses better reflect a contract of service (employee) or a contract for service (independent contractor) for tax purposes:

1. Intention of the parties

– whether the parties intend the relationship to be one of employer / employee or independent contractor.

To decide the parties’ intentions, the CRA examines a copy of the contract and receive testimony from both the worker and the payer to ascertain the actual nature of the working relationship.

 

2. Control

Control is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done.  When examining the factor of control, it is necessary to focus on both the payer’s control over the worker’s daily activities and the payer’s influence over the worker.  It is the right of the payer to exercise control that is relevant, not whether the payer actually exercises that right.

Indicators of an employment relationship

  • The relationship is one of subordination. The payer will often direct, scrutinize, and effectively control many elements of how and when the work is carried out.
  • The payer controls the worker with respect to both the results of the work and the method used to do the work.
  • The payer chooses and controls the method and amount of pay. Salary negotiations may still take place in an employer-employee relationship.
  • The payer decides what jobs the worker will do.
  • The payer chooses to listen to the worker’s suggestions but has the final word.
  • The worker requires permission to work for other payers while working for this payer.
  • Where the schedule is irregular, priority on the worker’s time is an indication of control over the worker.
  • The worker receives training or direction from the payer on how to do the work. The overall work environment between the worker and the payer is one of subordination.

Indicators of an independent contractor relationship

  • A self-employed individual usually works independently.
  • The worker does not have anyone overseeing his or her activities.
  • The worker is usually free to work when and for whom he or she chooses and may provide his or her services to different payers at the same time.
  • The worker can accept or refuse work from the payer.
  • The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship.

 

3. Ownership of tools

– generally independent contractors provide their own tools and equipment to accomplish that work. If the payer provides a furnished office and a computer, it may point to an employment relationship.  Contractual control of, and responsibility for, an asset in a rental or lease situation is also considered under this factor.

What is relevant is the significant investment in the tools and equipment along with the cost of replacement, repair, and insurance. A worker who has made a significant investment is likely to retain a right over the use of these assets, diminishing the payer’s control over how the work is carried out. In addition, such a significant investment may place the worker at a risk of a financial loss.

Indicators of an employment relationship

  • The payer supplies most of the tools and equipment the worker needs. In addition, the payer is responsible for repair, maintenance, and insurance costs.
  • The payer retains the right of use over the tools and equipment provided to the worker.
  • The worker supplies the tools and equipment and the payer reimburses the worker for their use.

Indicators of an independent contractor relationship

  • The worker provides the tools and equipment needed for the work. In addition, the worker is responsible for the costs of repairs, insurance, and maintenance to the tools and equipment.
  • The worker has made a significant investment in the tools and equipment and the worker retains the right over the use of these assets.
  • The worker supplies his or her own workspace, is responsible for the costs to maintain it, and does substantial work from that site.

 

4. Subcontracting work or hiring assistants

Indicators of an employment relationship

  • The worker cannot hire helpers or assistants.
  • The worker does not have the ability to hire and send replacements. The worker has to do the work personally.

Indicators of an independent contractor relationship

  • The worker does not have to carry out the services personally. He or she can hire another party to either do the work or help do the work, and pays the costs for doing so.
  • The payer has no say in whom the worker hires.

 

5. Financial Risk taken by the worker

– Employees usually don’t have any financial risk as their expenses will be reimbursed, and they will not have fixed ongoing costs. Self-employed individuals may pay fixed monthly expenses even if work is not currently being done.  Both employees and self-employed may be reimbursement for business or travel expenses so they consider only expenses that are not reimbursed by the payer.

Indicators of an employment relationship

  • The worker is not usually responsible for any operating expenses.
  • Generally, the working relationship between the worker and the payer is continuous.
  • The worker is not financially liable if he or she does not fulfil the obligations of the contract.
  • The payer chooses and controls the method and amount of pay.

Indicators of an independent contractor relationship

  • The worker hires helpers to assist in the work. The worker pays the hired helpers.
  • The worker does a substantial amount of work from his or her own workspace and incurs expenses relating to the operation of that workspace.
  • The worker is hired for a specific job rather than an ongoing relationship.
  • The worker is financially liable if he or she does not fulfil the obligations of the contract.
  • The worker does not receive any protection or benefits from the payer.
  • The worker advertises and actively markets his or her services.

 

6. Responsibility for investment and management

– Is the worker required to make any investment in order to provide the services? A significant investment is evidence that a business relationship may exist.  The CRA will also consider if the worker is free to make business decisions that affect his or her profit or loss.

Indicators of an employment relationship

  • The worker has no capital investment in the payer’s business.
  • The worker does not have a business presence.

Indicators of an independent contractor relationship

  • The worker has capital investment.
  • The worker manages his or her staff.
  • The worker hires and pays individuals to help do the work.
  • The worker has established a business presence.

 

7. Opportunity for profit and risk of loss test

– employees generally don’t have an opportunity to earn profit (beyond their normal salary), nor do they risk a loss. If fewer clients come in, they generally still get a paycheque.  Contractors on the other hand, have both the opportunity for profit, and the risk of loss.  They have to pay for overhead expenses, and may not earn enough income to cover those expenses.

Self-employed individuals have the ability to pursue and accept contracts as they see fit.  They can negotiate the price (or unilaterally set their prices) for their services and have the right to offer those services to more than one payer. Self-employed individuals will normally incur expenses to carry out the terms and conditions of their contracts, and to manage those expenses to maximize net earnings.  Self-employed individuals can increase their proceeds and/or decrease their expenses in an effort to increase profit.

The method of payment may help to decide if the worker has the opportunity to make a profit or incur a loss.  In an employer-employee relationship, the worker is normally guaranteed a return for the work done and is usually paid on an hourly, daily, weekly, or similar basis.  Similarly, some self-employed individuals are paid on an hourly basis. However, when a worker is paid a flat rate for the work done, it generally indicates a business relationship, especially if the worker incurs expenses in doing the work.

Indicators of an employment relationship

  • The worker is not normally in a position to realize a business profit or loss.
  • The worker is entitled to benefit plans that are normally offered only to employees. These include registered pension plans, and group accident, health, and dental insurance plans.

Indicators of an independent contractor relationship

  • The worker can hire a substitute and the worker pays the substitute.
  • The worker is compensated by a flat fee and incurs expenses in carrying out the services.

 

Summary

Being an independent contractor as opposed to an employee takes a greater amount of risk.  There could even be times when you have little or no work.  And when the tough times come, you may be more vulnerable to your services being terminated and may be the first to be let go.  But with that greater risk comes the greater flexibility in doing the work the way you think it should be done.  As a result you might have greater job satisfaction.

You may have to invest in training to keep up-to-date and you have to secure your own benefits.  You may need to spend time marketing your services to secure new business.  And of course, being independent can result in significant tax savings.

To give up such lucrative tax status, freedom as to how you work, and be labelled as an employee, one should receive valuable training and skills development, have opportunities for advancement, and be entitled to employment benefits, paid time off and statutory holidays, and possibly accrue pension benefits.

An employee also has one additional advantage when it comes to their job coming to an end (other than for cause).  An employee will have an entitlement to severance or notice in lieu of severance.  An independent contractor has no such entitlement – their role can end at any time.

I hope that this article has been insightful to help you determine the type of role that makes best sense for you.  If you are interested in working with an investment adviser that you can talk to about your work, benefits, pensions, and quality of work life issues, then please call me, Steve Nyvik, at (604) 288-2083 Extension 2 or email me at: Steve@lycosasset.com.

Managing Company Income

“You must pay taxes. But there’s no law that says you gotta leave a tip.”

–Morgan Stanley advertisement

 

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

Understanding how different types of income are taxed is the starting point to learning how to manage tax on your income and reduce overall family taxes.  In this article we’re going to look at personal and corporate income tax rates and then make some observations which you might discuss with your tax accountant to see if there are opportunities to improve your tax planning.

Income Earned Personally

Generally speaking, as an individual, your income and dividends from a private corporation are taxed in one of the four categories below:

  • Dividends from public corporations (such income is considered as Eligible Income for the preferred dividend gross-up and tax credit),
  • Dividends from a Canadian private corporation (such income is considered as Non-Eligible Income subject to a different gross-up and dividend tax credit resulting in a higher amount of taxes),
  • Ordinary income (this includes wages net of CPP and EI, interest income and foreign dividends although any tax withheld may be partially offset by a foreign tax credit), and
  • Capital Gains (where only one-half the gain is included in your income which is taxed as Ordinary Income; the other half is a tax-free gain)

exhibit-1

 

 

Income Earned through a Canadian Private Corporation (a “CCPC”)

Income earned in a private corporate is typically classified as being either: (i) Active Income, or (ii) Passive Income – this generally being your portfolio income.

Active Income is then characterized based on whether it qualifies for the Small Business Deduction (the first $500,000 of taxable income) or not.

Passive income is divided into:

  • dividends from Canadian corporations,
  • interest income, and
  • capital gains (where only one-half the gain is included in your income; the other half is added to your Capital Dividend Account where an election can be made to pay out to your personally a non-taxed capital dividend)

exhibit-2

 

 

Observations

Number 1:          For all passive income, the corporate tax rates are higher than the highest personal tax rate for each type of income.

This higher tax on passive income is punitive, so we need to either:

  • find a deduction against such income and avoid that high tax, or
  • pay out a dividend of the after-tax income assuming that the company tax less any dividend tax refund plus personal tax becomes competitive to the personal tax rates.

Number 2:          Active Business Income that qualifies for the Small Business Deduction is taxed at a lower rate than all personal marginal rates of income if earned personally (see Exhibit 3 below as to the Ordinary Income compared to the 13% corporate tax rate on Active Income).

The difference in tax ranges from 7.06% to 34.7% (see Exhibit 2 as to the 13% tax rate on active income qualifying for the Small Business Deduction and Exhibit 3 as to the tax rate on Ordinary Income – which includes business income earned personally).  This is a tax deferral as we have to pay tax when we take that after-tax income out of the company.

Company Active Income is taxed preferentially to incentivize people to create and grow small businesses which are responsible for most of our country’s jobs.

Once we take out this income, the tax deferral ends.  If we pay a dividend out equal to the after-tax income, our total income tax burden (personal tax plus corporate tax) is slightly more than if we had earned the income personally (see Exhibit 4 and compare to Exhibit 3).

 

exhibit-3

 

exhibit-4

 

 

Offsetting Income

If a company earns both passive income and active income, any bonuses or employment income taken goes first to offset active income.  Once our active income is used up, then the remaining salary is offset against our passive income.  This is exactly the opposite of what we desire.  So, if we have both active and passive income in the same company, a bonus doesn’t achieve our goal to minimize tax.

But what if we dividended out the after-tax passive income?  Exhibit 5 shows that the result is a marginal tax rate ranging from 12.70% to 47.79%.  In effect, the marginal tax rate difference varies with taxable income.  In the lower tax rates, dividending out passive income results in lower tax (eg. 12.70% versus 20.06% for taxable income to $38210) and at the high tax rate results in slightly higher tax (48.33% versus 47.70% for income over $200,000).  So one corporation can serve your needs.

exhibit-5

 

Having two corporations – one for active income and one for passive

An alternative way of doing things is where all after-tax passive income is dividended out to an investment holding company.

The key reasons for this include:

  • To segregate your investment assets and any insurance from potential creditors of your business;
  • To maintain your corporation as a Qualifying Small Business Corporation. The principal advantage of this is access to the Small Business Capital Gains Exemption through time.
  • It makes it easier for a banker or investor to gauge the performance of the active business through time (and you then have financial statements and tax returns to back this up). And if you take on a partner in your active business, they don’t inadvertently become partners in your other assets.

 

Summary

This article has explored the tax rates of various types of income to help give you some insight to how you might manage income and whether to incorporate an investment holding company.  Your next step might be to talk with your tax accountant to see if you are managing your company income tax efficiently.  It also makes sense to review with your financial planner and portfolio manager so that they understand the tax planning in place, tax carryforward info (unusued contribution room, capital losses carryforward), and taxation of your income (like your marginal tax rates) so they can help you create a tax efficient portfolio.

If you are interested in having an investment adviser knowledgeable about taxes, then please call Steve Nyvik at (604) 288-2083 Extension 2 or email him at: Steve@lycosasset.com.