NEW QST REGISTRATION RULES FOR BUSINESSES SELLING INTO QUEBEC

On September 1, 2019, new rules will be coming into force for businesses that sell to Quebec consumers.  Under the old rules, only businesses with permanent establishments in Quebec were required to register for and collect the QST.  Now, most businesses that sell more than $30,000 of goods or services to consumers in Quebec that are not QST registrants, will be required to become QST registrants.  As per Revenue Quebec’s website, registration is mandatory for Canadian businesses that:

  • do not have any establishments in Québec, nor do they carry on a business in Québec.
  • are not currently registered for the QST.
  • make more than $30,000 per year in taxable supplies to consumers in Québec.
  • supply property or services to consumers in Québec who are not registered for the QST.

If you think you may be affected, you should reach out to your professional accounting advisor to ensure you are in compliance.

 

GROWING YOUR BUSINESS

THE IMPORTANCE OF NETWORKING & PERSONAL RELATIONSHIPS

I thought I would take a break from writing about tax and accounting issues, and use this opportunity to talk about growing your business.  Most of us who run small to medium sized businesses are always looking to expand our client base.  If you don’t fall into this category, then you can safely stop reading this and return to whatever you were doing.

For those of you who are looking for new clients, I would like to share my experiences about what has worked for me.  Although every business (and business owner) is different, from discussions with clients and other businesspeople, I believe these experiences are relevant to the vast majority of service businesses, as well as any business that relies on repeat business from a core group of clients.  If you are in the retail sector (either online or bricks & mortar) your client acquisition profile will of course be quite different.

 

What vs. how

I am not going to spend time discussing the details of “how” to get new clients, but rather I will enumerate several business growth strategies that have been successful for me.  For the “how” there are many books, articles, blogs etc. out there about the importance of networking and marketing, and how to improve these skills.  What most of them lack is numbers, and being an accountant – I like numbers!  My objective is that once armed with this data, you can decide whether it would be beneficial for you to focus on any of these strategies, and then make your own plan as to how you would implement them.

 

Background

As a bit of background, I purchased my current business from a retiring accountant eight years ago. Since then, I have grown the business at an average rate of 21% per year.  The lowest growth year was 8% and the highest growth year was 31%.  Personally, I would not have wanted to grow any faster, since this could have negatively impacted client service. I have divided the sources of my new business growth into four categories:

Networking:    These are clients that I acquired through formal business networking groups, either directly because they were a member of that group, or indirectly because they were referred by a member of that group.

Referrals:  These are clients that were referred to me by anyone other than a member of a networking group that I participate in.  The majority are client referrals, but it also includes referrals from vendors and other business people with whom I maintain a relationship.

Personal:  These are clients that I acquired either through pre-existing personal relationships, or through other direct contacts in my life outside of business.

Internet:  These are clients who found me on the internet primarily through Google searches.

 

And the numbers are!

  1. Networking                           39%
  2. Referrals                                33%
  3. Personal                                18%
  4. Internet                                 10%

Another way of looking at this is that 90% of my business growth has come from interpersonal relationships!

 

Conclusions 

Networking has easily been my most important source of new business, especially when you consider that many of the clients in the Referrals category were referred by clients I acquired through networking.  If you are not doing any networking then I urge you to consider giving it a try.  Be prepared to be in it for the long haul however – this did not really start paying off for me until well into my second year.  A shout out to the networking groups that have helped me achieve this success:

Please feel free to contact me if you would like any information on either of these groups

Referrals: are my second biggest source of new business.  The key here is to provide your existing clients with exceptional customer service, since you won’t get referrals from unhappy clients.  This includes clients who may not be “important” clients on their own – some of my best referrals have come from small personal tax clients.

Personal:  Don’t forget to let your friends and family know that you are looking for clients, and who exactly your ideal client is!  Although not as important a source as the first two, this one comes with the least amount of expense and effort.

Internet:  This will be a larger source for many businesses. I have not exploited it to its full potential since I have been satisfied with my current growth rate.  Although I won’t get into the details of the myriad of internet marketing strategies, one thing I will mention is to make sure that whatever presence that you have on the internet is up to date and professional looking.  A bad internet site is more likely to turn customers away than attract them.  Also, I am quite certain that many of the clients I have in the Referrals category looked me up on the internet before giving me a call, and that call would never have happened if my internet presence was not professional.

 

Happy client hunting!

 

YOUR TAX ASSESSMENT – Why Investment Gains are Being Improperly Assessed

TAXOver the past few years, the use of automated technology in assessing tax returns has increased dramatically as the Canada Revenue Agency (CRA) works to leverage technological advances with the dual goal of increasing efficiencies and catching unreported income.  On the fairness side, this has been particularly effective at catching unreported capital gains, which has been second only to the underground economy as a source of lost tax revenue to the CRA.  The flip side of this is that these assessments are being issued by CRA computers based on the information they have on hand which is more often than not, incomplete.  Taxpayers will often pay these assessments without question, assuming that they did something wrong, and that the assessments must be correct.

 

Why the CRA has incomplete information:

The CRA now requires all financial institutions to report dispositions of all investments by taxpayers on a form called the T5008.  The financial institutions are still not required to report the cost base for these investments however – they have been fighting for years against assuming this responsibility saying it would be to costly to implement, and also arguing that their clients are in the best position to know the cost of their investments.  This argument is ludicrous considering the current complexity of securities markets, and that the majority of taxpayers are not sophisticated investors and have at best a limited knowledge of how the markets work.

 

Why Taxpayers do not report capital dispositions correctly

In my experience over many years of preparing tax returns, the majority of unreported capital gains by taxpayers are not actually willful tax avoidance.  Here is a list of the most common issues I have encountered:

  1. Mutual funds have become a very popular investment vehicle over the past few decades. A large number of taxpayers that I talk to unfortunately have the mistaken belief that all taxable income received from mutual funds is reported on the T3 slips issued by the financial institutions, and that they do not need to separately report dispositions or transfers of these investments. This has been reinforced by the fact that for years, they would never have received an assessment from the CRA for this misreporting – a situation that is now changing.
  2. Although most financial institutions provide detailed tax reporting packages, many taxpayers are overwhelmed by the volume of information contained in them.  The recent requirements for increased disclosure (while providing useful information) have served to exacerbate the situation by making the sheer volume of information even greater.  What many taxpayers will do is stick to the familiar “tax slips” that come with the package, assuming this is all they need.  As an aside – this also results in many taxpayers missing deductible investment fees that are buried within these tax packages.
  3. Most taxpayers do not realize they are supposed to report dispositions of securities such as GIC’s which under the majority of circumstances do not attract capital gains. This was never a problem before, since there would not be any tax associated with the disposition if it was reviewed. Now unfortunately, with financial institutions reporting the dispositions of GIC’s on T5008’s without a cost base, this results in a capital gain being assessed that does not exist.

 

What is happening now with assessments

If for any of the reasons listed above (or others) you have not reported a disposition of a financial investment on your tax return, at some point in the future you WILL get a reassessment from the Canada Revenue Agency assessing you for a capital gain based on the information that has been reported to them.  While some financial institutions have started reporting cost base to the CRA, in a review of my client base this accounted for less than 30% of all transactions for 2018. (The good news is that this is up from about 10% in 2017).  There is not even consistency within different accounts in the same institution with some reporting cost base and others not.  While these assessments will specify what has been changed in your tax return, they are notoriously difficult to comprehend.  Many taxpayers will simply pay the amount rather than trying to make sense out of it or hiring a professional to deal with it.

 

What needs to happen

    1. First and foremost, the Canada Revenue Agency needs to move forward with requiring all financial institutions to report the cost base for dispositions. In many cases we are dealing with seniors with dementia, or deceased taxpayers where the executors have no idea what the cost base is for these investments. With the proceeds of disposition now being consistently reported, it is inexcusable not to move forward with the other half of the equation.
    2. Since we already know the above has not happened for 2018 (and it is probably unrealistic to hope for 100% compliance in 2019) I would challenge the CRA to stop issuing assessments on dispositions of investments where no cost base has been reported. There are very few investments that have a nil cost base, so in my view it is completely unacceptable for the CRA to issue assessments for amounts that they know the taxpayers do not owe – even if they think the wording on these assessments is clear. What they need to do is issue a very clear pre-assessment letter, stating “your financial institution has reported to us that you sold X investment for proceeds of Y.  They have not however provided us with your cost base for this investment – please provide us with this information so we can properly assess this disposition”.
    3. As individual taxpayers, it is important that you ensure you are reporting the cost base for any securities dispositions you have made, since it is certain that the CRA will have the information regarding the proceeds. If you work with an investment advisor for all of your investments, then they are usually the best source of this information. If you have multiple sources of investments, you can always see what has been reported to the CRA by going into “My Account” online and under the section where you can look up your tax slips, check if you have any T5008’s and verify what has been reported on them.  Unfortunately, one of the things the CRA is still working on is the timeliness of this information getting posted, so you cannot count on it being there in time to prepare your tax returns – especially if you like getting them done early.

Doug’s Top Ten Tax Tips for Canadians (revisited)

 

Looking back on my past posts, I realized it has been five years since I put out my last “Top 10 Tax Tips”. Some advice has not changed in that time (and is repeated below) while other tax tips have come and gone. The trend over the past few years has been a reduction in the diversity of tax credits available, and replacing it with direct spending. For example, the Children’s Art Credit, Sport’s Credit, Transit Credit, Education and Textbook amounts have all been eliminated, and been replaced by more direct payments in these areas, such as the enhanced Canada Child Benefit. The good news is that you no longer have to worry about collecting all of these receipts at tax time!

 

  1. Tuition tax credit

While as mentioned above, the education and textbook credits have been eliminated, the tuition credit is still in place. Tuition must first be claimed by the student to the extent they have taxes payable, but most students have limited income so the credit can be transferred to their parents. There is no age limitation on this; if your 30 year-old child is still going to school you can claim the credit as long as they sign it over to you. Several years ago, most educational institutions stopped mailing tax receipts – the student musr download the receipt from their student portal. Please ensure that if you have kids in post-secondary school that you ask them to do this. I have seen far too many people miss out on this credit simply because they do not get the receipt in the mail.

  1. Change in marital status

There are many tax-based credits and benefits that are dependent on the combined income of you and your spouse. These include the HST credit, Trillium Benefit and the Canada Child Benefit. Although Revenue Canada is probably not the first thing on your mind if you are getting married, separated or divorced, it is nonetheless important that you advise them as soon as possible. Depending on your situation, you may be either missing out on some well needed funds, or setting yourself up for a nasty surprise when they request that you repay benefits received.

  1. File your tax return – even if you have no taxes to pay

There are a number of reasons that it is important to file your tax return. One reason is that while all of the credits mentioned in point 9 above are only indirectly related to your income tax return – you will not receive them if you don’t file. If you are in a relatively low tax bracket, some of these credits can be significant. Another reason is that even if your earned income is quite low and you don’t have taxes to pay, declaring this income will still add to your RRSP contribution room that you may need in later years when your income is higher.

  1. Consider incorporating your business

If you are currently earning self-employment income from an unincorporated business, you should consider whether incorporation may be beneficial for you. There is a much wider range of opportunities for tax planning with income earned through a corporation than there is for self-employment income, and while there are additional costs involved in operating an incorporated business, these are often more than offset by the potential tax savings.

  1. Pay yourself a salary – even if your corporation is not yet profitable

For those of you who are already incorporated, one of the most common mistakes I see in start-ups is owners that do not pay themselves a salary, especially when they do not have any significant other source of income. Smaller salaries can be paid attracting little to no tax, and the additional losses created in the business can be used to offset taxes payable in the future when the business becomes profitable.  If the business cannot afford the cash-flow to pay the salary, then salaries payable can be simply added to shareholder loans, which can be paid out tax free in the future.  The regular government payroll reporting must be done however.

  1. Canada Caregiver Credit

Last year, the system of credits available for taxpayers who support dependants with a physical or mental impairment was completely overhauled, replacing the caregiver tax credit, the infirm dependant tax credit, and the family caregiver tax credit with the new Canada Caregiver Credit. This has greatly simplified claiming these amounts, since the manner in which the old credits interacted with each other was confusing at best.  There are also some major changes in eligibility criteria, such as it is not longer necessary that the dependant live with you in order to claim the credit.  If you are providing support for an infirm parent or other dependant with disabilities, you should verify whether you are eligible to claim this credit.

  1. Timing of expenses

The timing of when you incur expenses can have a significant impact on your taxes payable.  For example, if you operate an unincorporated business and were planning on a large stationary order in January (because that’s when you needed it), consider making that purchase in December instead.  Another area where timing can have an impact is on medical expenses.  Since medical expense claims for tax are reduced by the lesser of 3% of your net income and $2,300, it makes sense to consolidate your expenses into one year where possible.  Although the timing of many medical expense claims is not discretionary, some can be.  For example, if you just had a root canal done, maybe it’s time you looked at getting that new pair of glasses!

  1. RRSP vs. TFSA

If you ask the typical Canadian taxpayer what they are doing to save on taxes, probably the most common answer will be contribution to an RRSP and/or a TFSA. It is important however to analyze how to best maximize savings using these vehicles.  One common pitfall I have seen is where RRSP contributions are being made in years when the taxpayer’s marginal tax rate is very low or even when no income tax is payable at all.  As Canadians, we have become used to RRSP’s being our primary retirement strategy so any contribution is seen a good thing to help us in our retirement years.  In most cases when I have talked to taxpayers that have made contributions resulting in little or no tax savings, they were already aware that this would be the case but they still wanted to make that contribution towards their retirement.  What most of them failed to consider is that by putting these funds into an RRSP, they will become 100% taxable when they are taken out even though little or no tax deduction was received.  In this type of scenario, they would be far better off contributing to a TFSA which has no tax deduction, but also does not attract any tax when funds are withdrawn.

  1. Disability tax credit  

The disability tax credit is definitely one of the larger “missed” tax credits that I commonly see. Sometimes this is because the taxpayer (or their caregiver) is unaware of the criteria.  Other times, it is because individuals don’t want to be labelled as disabled, even when it brings a large tax break.  I have had several cases in my practice where significant tax refunds have been received by making retroactive claims for this credit. Common areas missed for claims are for cases of dementia, or the inability to walk unassisted.  In cases where the taxpayer is unable to use the credit, it is transferrable to a spouse or other supporting person, so it is indeed a valuable credit. If you think that you or someone you care for may be eligible for this credit, you should definitely look further into the criteria for eligibility.

  1. Pension income splitting

While I have not seen many cases of missed pension income splitting, it still rates the number one spot due to the potential for large tax savings foregone. For many retired taxpayers, this has been by far the most generous change in our tax laws of the past decade.  In extreme cases where one spouse has retired with investment savings and a good pension, and the other spouse stayed at home throughout their married life, I have seen annual tax savings from this measure exceed $10,000. Multiply that by the number of retirement years, and it can end up being a very significant tax savings indeed!

Capital Gains Exemption for Small Business Corps – Don’t miss out!

TAXMost small business owners that I talk to are aware of the capital gains exemption for Small Business Corporations, but very few know the details of how it works and fewer still are actively planning to take advantage of it. When entrepreneurs are just starting out, the concept of selling their newly minted business for large profits seems remote, and by the time the business is established, they are too involved in the daily operations to plan for its eventual disposition.

The amount of the capital gains exemption is indexed to inflation and for 2018 is currently pegged at $848,252 – you definitely do not want to miss out if your business qualifies!

 

Does my business qualify?

There are three tests that your business needs to meet in order to qualify for the exemption:

  1. At the time of the disposition, at least 90% of the company’s assets must be used in an active business carried on primarily in Canada.
  2. Throughout the 24 months prior to the disposition, more that 50% of the company’s assets must have been used in an active business carried on primarily in Canada.
  3. The corporation must be a Canadian controlled private corporation, and the shares must have been owned by the current shareholder or a related person for at least 24 months prior to the disposition.

 

What if my business does not meet these tests?

Fortunately, there are strategies that can be implemented to “purify” a company so that is meets the tests. The most common issue profitable companies have is that they have started to accumulate cash or investments within the corporation. When these funds are in excess of what is required to run the business, they do not meet the test of being assets “used in an active business”. There are several strategies that can be used to deal with this, such as using funds to pay down debt, or by declaring dividends to pay out excess cash. If a holding company is not already in place, it may be advisable to create one in order to defer taxes on the dividends being paid out.

 

When should I start implementing these strategies?

At a minimum, you should start implementing strategies to ensure your company qualifies at least two years before any contemplated sale (so that the second test can be met). That being said, the question I always like to ask my clients (not to be macabre) is what if you walk out of my office and get run over by a bus? Upon death, you are deemed to dispose of your assets at fair market value (other than inter-spousal transfers) so by not dealing with the issue now, you are potentially turning an $800,000 tax free capital gain into a large tax liability for your estate.

The better answer is to ensure that your business is properly structured so that you are never accumulating excess funds within an operating company. This is also a good strategy for creditor protection so there is no excuse not to do it. You can set up the appropriate structures either right at the outset when you incorporate, or with a little additional effort, later on once the business actually starts generating those excess funds.

 

Common pitfalls

There are many pitfalls to watch out for including:

  • Alternative minimum tax might turn what is expected to be a tax-free transaction into an expensive tax bill – especially when other sources of income for the year are low.
  • There are various income-based tests that are calculated on total income before the capital gains deduction. This includes for example the claw-back of Old Age Security pension
  • If you have claimed investment expenses in prior years that exceed your reported investment income, your capital gains exemption may be restricted.

 

You should seek out professional advice prior to engaging in a business transaction that might involve claiming the capital gains exemption.