Archive December 2016

Gear Up to Cut Tax on Year-End Fund Distributions

120816_thinkstock_512752992_lores_kwOnce again, mutual funds have calculated their year-end distributions and are paying them out.

In some cases, these payouts produce unintended results that can push investors into a higher tax bracket than expected. This is because mutual fund companies are required to distribute all interest, dividends, other income and net capital gains to their unit holders at least once every year at their fiscal year-end.

For most mutual fund trusts, the fiscal year ends December 31. Money will be distributed to you even if you buy into a fund late in the year. So you may want to hold off investing until the new year.

Fiscal years for mutual fund corporations, on the other hand, may end on dates other than the calendar year-end. That means distributions could occur at any time in the year. Your best bet may be to invest shortly after the distributions are made to avoid the tax.

The Liberal Government has introduced a new tax rule that makes switching between classes in a mutual fund corporation taxable after December 31, 2016. The exchange of shares of one class for another will be considered a disposition for tax purposes for proceeds equal to the fair market value of the exchanged shares.

The rule contains exemptions, however. A switch between series of the same class will continue to be tax deferred. In addition, share exchanges taking place in the course of a reorganization or amalgamation will continue to be eligible for rollover treatment.

Start a Review

As a result, it may be a good idea to review risk tolerance and investment objectives, as this change will speed up the taxes that would otherwise be deferred until disposition. In light of these changes, consult with your advisor about whether you can better manage tax outcomes by rebalancing your investment portfolio before the year-end.

In most situations, income from mutual funds is taxed in two ways:

  • On the distributions that are flowed out to you while you own the shares or units. If you own units of a mutual fund trust, you will receive a T3 slip, Statement of Trust Income Allocation and Designations. If you own shares of a mutual fund corporation, you will get a T5 slip, Statement of Investment Income. The income can be capital gains, capital gains dividends, dividends, foreign income, interest, other income, return of capital, or a combination of these amounts.
  • On the capital gain, if any, when you redeem (or cash in) your units or shares. Your mutual fund investment is considered capital property for tax purposes. You will receive a T5008 slip, Statement of Securities Transactions, or an account statement from the mutual fund.

The paradox with mutual funds is that even if they show thousands of dollars of losses in a bear market, you may still owe capital gains taxes. This is because the fund trust may have to sell holdings to finance redemptions if too many investors sell fund units. If the trust had held the stocks for many years, the sale could generate substantial capital gains. Those gains are passed on to you — along with dividends and interest earned — as taxable distributions.

Taxation Categories

Taxable earnings fall into four broad categories, each taxed at a different rate:

  • Interest income on Treasury bills, bonds and similar instruments is taxed at the highest rate and receives no preferential tax treatment.
  • Dividends from Canadian corporations are subject to a gross-up percentage and tax credit mechanism that results in preferred federal and provincial tax treatments. These distributions receive preferential tax treatment for individuals though the dividend tax credit.
  • Foreign income, which includes both interest and dividends from outside Canada, is taxed at the same rate as interest income, but you may claim a credit for foreign taxes paid. This income is reported in Canadian dollars, gross of any foreign taxes paid.
  • Capital gains, which will be taxed on what’s left after adding front-end loads and other such expenses to the purchase price and subtracting redemption fees and similar costs from the sale price. Preferential tax treatment of only 50% of a capital gain is taxable.

If your paper gain is likely to be smaller than the expected distribution, you may want to drop out of the fund before the distribution and buy back into it after the payout. That would keep you out of the fund for about a week.

If you’re looking at capital losses, you must first use them to reduce any capital gains you may have. After that, you can:

  • Carry back losses three years to offset earlier capital gains, which could generate a full or partial refund of capital gains taxes you already paid; or
  • Carry forward losses indefinitely to apply against future capital gains.

If you have tax losses available, you may want to invest in a mutual fund in December, apply the losses to the fund’s taxable distribution and potentially end up with no tax liability on the payout.

Be Wary of the Superficial Loss Rule

The Income Tax Act bans selling investments to trigger a capital loss to reduce taxes and then repurchasing the same or an identical investment within 30 calendar days. This is called the superficial loss rule. It applies when you sell the asset to an affiliated person or if an affiliated person repurchases the same or identical asset within those 30 days.

The rules are complex, but generally a loss is deemed superficial and you can’t claim it if you, your spouse or common-law partner — or a company either of you controls — purchases an asset identical to one you sold within 30 days before or after the original disposition. The denied loss can usually be added to the adjusted cost base (ACB) of the investment (see box below).

Moreover, you also can’t sell property held in a non-registered account and reacquire it within an RRSP or Registered Retirement Income Fund (RRIF).

Additional Strategies

Staying out of the market to avoid a superficial loss generally means you can’t take advantage of potential price gains in the fund’s underlying securities. But the following tactics may let you remain invested and still realize a capital loss:

1. Transfer fund units to a child or parent at fair market value — the superficial loss rules won’t apply.

2. Invest in another fund in the same family. You may realize the loss incurred by a Canadian equity fund trust by switching to another equity fund trust in the same family. Your ability to claim the loss will hinge on whether the trusts are considered identical.

3. Transfer the loss to a spouse or common-law partner who has a capital gain to deal with. Sell the shares with a promissory note at Canada Revenue Agency’s (CRA) prescribed interest rate. That triggers a superficial loss that’s denied and added to your spouse’s ACB. Your spouse must hold the investment for 30 days after the disposition.

Before making investment decisions, talk with your advisor to avoid making choices that might cost you money.

Calculating ACB and Capital Gains When Selling a Fund

If you hold mutual funds in a non-registered account, you must keep track of your adjusted cost base (ACB) for each mutual fund.

Most mutual fund companies provide information on how to calculate this.

The ACB of your investment in one mutual fund will be the total of:

1. Amount you paid for the units, including commissions

2. Plus the amount of all reinvested distributions or dividends

3. Minus the return of capital component of any distributions

4. Minus the ACB of any previously sold units.

When you sell some or all of your units, your capital gain or loss is:

1. Net proceeds, after commissions or fees

2. Minus the ACB of the units sold.

List Your Home Successfully

lores_for_sale_sign_real_estate_nhIf you want to sell your home and increase your chances of getting a decent price even when market conditions are rough, there are a few steps you can take that will help you reach your goal.

The first step is to know what else is out there. Study your local market to see what other sellers are asking and what buyers are paying. Ask your real estate agent for selling prices in your area, but don’t rely just on price lists. Visit open houses to evaluate the competition, to determine what features come with the price, and listen to what other viewers are saying about the properties.

Once you have that information in hand, here are three other tips the can help ensure your home makes the cut with potential buyers:

1. Price to sell

If you genuinely want to sell you must be competitive. You may not be able to simply set the price you want and wait for the bidding. If buyers think your home is overpriced, they will move on. Remember, the more listings there are, the more choice buyers have. That means they can wait to find their perfect home for their perfect price. Consult with your agent to determine if setting an asking price just below what the market will bear would generate more traffic and put your home into serious play.

2. Negotiate

You may boost your chances of a successful sale if you offer such concessions as making minor repairs. Buyers weigh the time, effort and cost they will have to invest, even the smallest repairs. If there is a glut of listings, the little things take on even more importance. Most buyers are looking for a home that is ready for immediate occupancy. Talk to your agent about hiring an inspector so you know what to repair before the property goes on the market.

3. Highlight the assets

It’s up to you to impress buyers. Repaint the interior and get rid of clutter to make the house appear more spacious. The idea is to help the potential new owners see themselves in their new home. Clean out the closets and garage. You can donate items to charity and receive tax credits, or hold a garage sale and make some extra cash. Don’t worry about taxes on money earned at a garage sale. It is generally tax-free, unless you sell an item for more than you originally paid. Some inexpensive landscaping can also help speed up a sale.

Sometimes, however, you need to know when to simply take the money. The longer your house stays on the market, the more you risk losing. If you get a reasonable offer now, even if it’s below your asking price, you may want to take it. Otherwise you could find that after some time you may have to lower your asking price anyway and still be unable to sell. If local sales are sliding, and you feel you need to sell, you might want to get out while you can.

It can be difficult to gauge the right time to simply take less than you hoped for. If a cooling market means making a smaller gain than you expected, consider relocating to a less expensive area to get more house for the money.

Talk to your real estate agent and professional advisor who can help you decide if you would be better off waiting before you put your home on the market and help you get the best price if you do decide to list your house.

Take Steps to Ensure Unbiased Retirements

Promote Flexibility and Choice

thmb_tax_trusts_nest_egg_planning_silver_bzAs the baby boom generation continues aging, retirement is becoming an increasingly complex economic, employment and human rights issue that can trigger age-discrimination concerns.

Defending Bona Fide Requirements

Discrimination or exclusion from a job is allowed in certain situations if the company shows that the position requires specific qualifications, which are known as bona fide occupational requirements (BFOR).

In a landmark ruling, the Supreme Court of Canada set a three-pronged test for a BFOR, determining that it must be:

1. Adopted for a purpose or goal that is rationally connected to the functions of the position.

2. Adopted in good faith, in the belief that it is necessary to fulfill the purpose or goal.

3. Is reasonably necessary to accomplish the purpose or goal in the sense that the employer cannot accommodate without undue hardship persons who don’t have the qualification. (Meiorin v. The Government of British Columbia).

The test requires that employers take into account the capabilities of different members of society before it adopts a BFOR and standards and tests to evaluate a person against the requirement. The standards must only reflect the true requirements of the job.

The physical demands of certain jobs may allow employers to restrict jobs to those over a certain age and those who don’t have certain chronic physical conditions and disabilities.

This is allowed because employers have a duty to provide a reasonable level of safety in the workplace, which includes ensuring that employees performing their jobs aren’t a danger to themselves or others.

Mandatory retirement is no longer a universal practice in Canada. At the federal level, it is still permitted under the Human Rights Act when an individual reaches the normal age of retirement for employees working in similar positions. And Canadian case law suggests that in some circumstances, laws or government policies permitting mandatory retirement are justified under Section 1 of the Charter of Rights and Freedoms.

However, several provinces and territories have now banned mandatory retirement at the age of 65 unless:

  • There are bona fide and reasonable requirements for essential job duties.
  • Accommodation would cause undue hardship to the business. (See right-hand box for the legal test of bona fide occupational requirements.)

Confronted with a decline in the number of employees retiring or a need to reduce the work force, some companies also offer voluntary early retirement packages. These can certainly benefit all staff members to the degree that the plans offer older employees a chance to pursue other interests or ambitions, ensure that fewer people will involuntarily lose their jobs and help retain promising young employees by offering more chances for them to advance in the company.

But early retirement plans by their nature target older employees and should be used carefully to avoid discrimination concerns.

First and foremost, early retirement plans should be truly voluntary and not contain any coercive element, according to the Ontario Human Rights Commission. For example, if faced with the possibility of losing their jobs altogether, many employees may feel compelled to accept early retirement. Packages can also be presented in a way that suggest older employees are being targeted or that refusal to accept the offers will result in some retaliation.

Some employees may even accept an offer as an alternative to facing negative workplace attitudes toward older staff members, which could suggest that they feel compelled to accept retirement.

So if your company is considering offering early retirement to its employees, consult with a lawyer to ensure that the offer is properly designed and doesn’t raise red flags of age-discrimination.

Here are some other prudent considerations form the Ontario Human Rights Commission when providing incentives for an early retirement:

  • Offer a plan that does not pressure employees to accept it or penalize those who reject it. Regardless of how generous a package is, companies could be subject to claims of age discrimination if their plans aren’t truly voluntary.
  • Define the eligibility criteria and share it with all employees. Some companies even offer similar voluntary exit packages to individuals who are not near retirement.
  • Do not link acceptance of an early retirement package to job loss. If downsizing, indicate the criteria your company is using to select the jobs that will be eliminated. Assure staff members that eligibility for a voluntary exit program in no way influences decisions about job loss. Choose positions to terminate, rather than people, and don’t re-establish a position after it’s been eliminated.
  • Structure pensions and benefits so that the actuarial value of reduced pensions for early retirees is at least equal to the current value of the deferred pensions for those electing to stay until they are eligible for full benefits.

Ease the transition: When your employees retire or accept an early retirement package, consider accommodating them with programs that help them ease out of the daily work routine. Programs could include flexible hours and working conditions, part-time positions, job sharing arrangements, and hiring retired workers for short-term contracts and consultant positions.

(For more information on how to avoid claims of age discrimination, click here to read our previous article, “Guarding Against Age Bias.”)

Tap into the Growing Power of Social Recruiting

thmb_smart_cell_phone_text_keyboard_email_social_nh

Companies are increasingly turning to social recruiting — using social media outlets to find applicants.

 Fine Tune Your Strategy
If your business wants to socially recruit, keep in mind that each platform attracts different types of people and that looking for applicants online doesn’t work for certain jobs.For example, mainstream blue-collar jobs in trucking, heavy industry or mining may require the traditional approach.On the other hand, high paid corporate positions, which are generally filled with the help of a head-hunter, may be able to benefit from a bit of social recruiting.

Social media sites vary in terms of who you can attract. If you run a small grocery store, potential candidates are likely logging onto more casual sites such as Facebook. If your company needs a director of human resources, LinkedIn may be the best route.

Twitter works well for broadcasting. Tweets can direct applicants to your business’s Web site or Facebook page. And tweets offer the potential for re-tweeting, which can lead to a viral recruitment campaign.

Cost and efficiency are among the reasons. Plus, Canada has one of the highest rates of social media usage in the world.

Here’s a cost comparison between old school and contemporary head-hunting.

Using traditional methods, the estimated cost of filling a $60,000-a-year position looks something like this:

  • Newspaper ad        $5,000
  • Online job board     $700
  • Recruiter’s fee        $15,000 (25 per cent of starting salary)
  • Total:                    $20,700

With a social recruitment approach, the process might look like this:

  • Your business plans a couple of open house meet and greets.
  • The information goes out on your Facebook, Twitter and LinkedIn pages, as well as your corporate Web site. Followers and fans spread the word.
  • You ask employees to place the job posting and open house invitations on their pages. Before you know it, you could have hundreds of job applicants at the open houses.

Total: The cost of cheese, wine and whatever refreshments you might want.

As social recruiting becomes increasingly effective in luring candidates, your company needs to plan strategies to gain the upper hand. Here are four tips on how to snare the crème de la crème:

1. Think 80/20. That’s the Pareto Principle, and it means that 20 per cent of something is always responsible for 80 per cent of the results. For example, 20 per cent of customers account for 80 per cent of revenue.

Start with the large sites. LinkedIn, Facebook, YouTube and Twitter will generally provide the 80 per cent result, particularly if you cross publish. Try to avoid redundancy. A little repetition is fine, but tweeting the same message seven times in one day is overkill.

2. Get involved. Participate in conversations with substantive and thoughtful content. Look for individuals who are genuinely interested in your company’s business and industry. If you connect with a specific person, individualize your approach. And always be responsive. If someone asks you a question, find a way to respond, even if you have to take the conversation offline.

3. Be real. In order to see the “real” candidate you, too, must be authentic. Social recruiting is about relationships. Your company and its representatives should be forthright about the business, its culture and its jobs. In a hiring environment, people generally connect with people, not brands.

Connect with as many social networkers as possible – each is a potential referral to the right person for the job your company wants to fill. Watch how individuals connect online. If they are actively engaged, that trait may transfer to the job.

4. Don’t be all work and no play. Engage in the high-tech equivalent of chit-chat. Have fun and share interesting news and bits of information.

If your business has some colourful history, share the stories. If your company had a recent get-together, post some pictures. The fun and entertainment on social sites is limited only by imagination.

Dig in and build your online presence now, even if you don’t have any hiring plans. By making connections and creating a vibrant online community, your enterprise will be prepared to reach a broad audience for less money when it does decide to fill a few openings.

Consumers Are Aggressive When It Comes to Privacy

thmb_sepia_security_lock_padlock_bzThe Mot du Jour: Consensual Marketing

Despite a growing number of privacy protection laws, consumers are increasingly taking the issue into their own hands with actions that signal it may be time to alter your marketing efforts.

Despite a growing number of privacy protection laws, consumers are increasingly taking the issue into their own hands with actions that signal it may be time to alter your marketing efforts.

At least that is the case in the U.S., according to a survey that shows a 30 per cent increase in the number of individuals taking privacy-assertive actions.

Canadian companies should take heart, however.Another survey of corporate attitudes about privacy showed that Canadian companies care more about privacy than their American counterparts: 61 per cent of surveyed Canadian companies linked “good privacy practices” to customer trust and brand loyalty, compared to only 17 per cent of U.S. companies.

The U.S. study of consumer concerns about private data does offer valuable insights for businesses. Among the findings:

At Issue

2003

1999

Asked company to remove name and address from marketing lists 87% 58%
Refused to give data because it was too personal or not necessary 83% 78%
Asked company not to sell or provide name and address to another company 81% 53%
Didn’t use a company because they were unclear how the data is used 60% 54%
Asked to see the information about them in company records. 15% 18%

The message from these figures is that smart companies are altering their privacy policies to make them more meaningful to their customers and are switching their marketing to consensual programs from consumer targeting.

But to get a fuller sense of your customer’s attitudes, it is wise to survey them to get a handle on how they feel about your current privacy policies, marketing efforts and any new information-collection and marketing campaigns you are considering.

“Getting to Know all About You”

When it comes to marketing, you can take the shotgun approach and mail  everything, or you can offer your customers an a la carte selection. The latter choice is consensual marketing.

Take a hint from American Express of Canada. The company asked its cardholders to select either, mailings that interested them, no mailings at all, or all mailings.

From those who responded, the company learned what products and services they were most interested in and effectively received consent to send solicitations in those categories.

The idea is that the cardholders are then more receptive to the mailings, actually read them, and consequently, are more likely to respond.

However, don’t worry. As a Canadian company, chances are you’re doing pretty well already. The survey comparing Canadian and U.S. companies, which was commissioned by the Ontario Information and Privacy Commissioner, found that:

  • Privacy preferences of customers are captured by 79 per cent of Canadian companies, compared to 53 per cent of U.S. companies;
  • Eighty-two percent of Canadian companies have privacy-training programs and 71 per cent have privacy-awareness activities for new employees, compared to just 50 per cent and 43 per cent in the U.S.;
  • About three-quarters of Canadian companies assigned a senior executive as their privacy officer, and those individuals were twice as likely to be assigned on a full-time basis. In the U.S. only half the companies have a privacy officer;
  • Nearly 70 per cent of Canadian companies have a policy regarding surveillance and computer monitoring in the workplace, compared with just 13 per cent of U.S. companies. U.S. businesses, however, are more likely to give their employees a say in how their data is collected, and
  • Canadian companies are more likely to let consumers “opt out” over the secondary use and sharing of their personal information.

The bottom line: Canadian companies appear to view privacy programs as a way to improve relations with customers while American companies view them as a way to comply with the law and avoid litigation.