Archive February 2017

Maintain Liquidity by Minimizing Credit Risk

Liquidity is critical to the viability of any business, regardless of the industry where it operates.

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Shore up Listless Collection Practices

When your business is confronted with some past due accounts, there are several ways to help encourage payment of bills. The first step, of course, is to be sure the invoice contains the due date. Providing incentives for prompt payment will also help. You can offer discounts for payments received before the due date and you can charge interest on late payments. If you apply penalties on overdue accounts, be sure the amounts you charge fall within the provisions of the Criminal Code and the federal Interest Act. When a customer does miss a due date, prompt and courteous contact will generally produce results. This can be done by telephone, mail or fax. Document all your collection attempts by sending written notices and keeping copies. It is important to respond rapidly in case the customer does clear the account so that unnecessary delays in shipping are avoided. Your company’s credit department and the accounts receivable bookkeeper should maintain close communication.

The most extreme method to obtain payment is to stop providing goods or services until you receive full payment. But be cautious. This could damage your company’s relationship with an important customer who provides you with significant business. If it becomes clear that you are not going to be paid, you have three main choices:

1. Write-off the account if you determine that it is not worth spending more time and money trying to collect it.

2. Hire a collection agency. You will have to pay a fee or a percentage of the amount collected. Meet with the agency to discuss its procedures and confirm that the collector will not incur any costs of start litigation without your permission.

3. Take legal action. This is no guarantee of being paid, so before you start litigation try to determine the likelihood of collection. Assess whether the individual has sufficient assets to cover the debt and legal fees.

Simply put, liquidity is the ability of your enterprise to meet its financial obligations, usually with cash on hand or by converting assets to cash. It also entails making sure your business has the financial ability to continue providing goods and services without heavy discounting and collecting your receivables timely with minimal write downs and write offs.

One way to avoid sliding into a liquidity crunch is not to extend credit to customers with little creditworthiness. Your enterprise’s liquidity and survival depends on a steady inflow from timely collected receivables.

Accomplishing that requires taking cautious steps before extending credit and staying on top of collection procedures. (See right-hand box for ways to encourage credit customers to pay on or before the invoice’s due date.)

Credit policies and procedures, however, do not always ensure the cash flow to sustain a business. Without a steady stream of revenue from sales, your business runs the risk of illiquidity and therefore being unable to pay its own debts.

When a customer asks for credit, be sure that the application requires:

1. The names, addresses and phone numbers of at least three companies the applicant has had credit dealings with.

2. The applicant’s bank accounts with branch addresses and account numbers.

With this information, you can start taking action. The next steps are critical to helping ensure your customers stay on track with their payments:

  • Call the applicants’ banks to ask if they are a good credit risk.
  • Verify the applicant’s bill-paying history with the business references.
  • Run a credit check with one of the two main rating agencies in Canada, Equifax Canada and TransUnion Canada.

Staying in Control of Receivables

Of course once you’ve granted credit to a customer, your job is just beginning. Your company’s collections manager needs to constantly monitor receivables and closely monitor slow-paying accounts. Part of that process involves balancing the benefits of extending credit, which will boost sales on paper, against the costs of carrying receivables and perhaps being unable to collect them.

There are tools to help you stay in control. Three of the most critical are:

1. Receivables Ratio. You should hold receivables for the shortest time possible. This boosts the timeliness of payments and maximizes the accounts receivable turnover ratio, or the rate at which you are collecting bills during a given period. To determine the ratio, divide net credit sales by average accounts receivable.

2. Aging Schedule. This gives you a bird’s eye view of your receivables and the due dates. It’s a straightforward way of understanding your collection efforts and highlighting overdue bills. The accounts receivable aging schedule typically includes the name of the creditor, the total due, and the amounts due in the current month, the previous month, the preceding two months and more than 60 days.

3. Average Collection Period. One of the most important measurements is the average number of days it takes to collect a bill. This is the length of time it takes to convert sales into cash and underscores the relationship between accounts receivable and cash flow.

The longer the collection period, the more you invest in accounts receivable. And a long collection period means less cash available for your company’s own needs. Remember your firm isn’t the banker so stop acting as if you are. It will only add to your financial problems if you continue doing so.

To calculate the collection period, divide the number of days in the year by the accounts receivables turnover ratio. Or you can take the average accounts receivable and divide that by the average daily sales (net credit sales/days in a year).

The average collection period is commonly used to compare your success at accounts receivable management to that of your industry peers. It can also be used to analyze your collection efforts across various time periods, and determine how well your customers are doing paying their bills when compared with your credit terms.

These are just some of the tools that let will assist you in controlling and monitoring accounts receivables. Your accountant can help you implement the use of these tools and interpret other ratios, reports and measurements involving credits and collections.

The U.S. Patriot Act and Canadian Data Security

Mention hosting data remotely to most people, and you will hear expressions of various concerns, such as:

  • Data might be inaccessible at times due to Internet failure;
  • Unauthorized people might see the information; orGovernment agencies could gain access to your personal or business data.

lores_DOJ_US_Department_Justice_Seal_Logo_goldAdd the U.S. Patriot Act to the mix and the reactions and anxiety are likely to become even stronger. Many companies and individuals fear that the American law gives the U.S. federal government sweeping powers to look at any data at any time for any reason. Before making a decision to embrace a cloud computing solution that involves hosting data in the U.S., you should separate myth from reality.

First, it is critical to be aware that today’s information technologies make it easy for organizations and individuals to exchange information quickly around the globe. This transborder data flow is becoming increasingly popular as both companies and governments take advantage of outsourcing.

In today’s global economy, suppliers can be located anywhere. Even if a domestic supplier is chosen, it may have offices located in other countries. When a supplier is hired to administer personal information and any parts of its operations, including subcontractors, are outside of Australia, the laws of the other countries may be applicable to information stored or electronically accessible in the foreign country. If a company located in the United States or with U.S. connections is hired, then the U.S. Patriot Act may be applicable.

That legislation primarily extended to anti-terrorism the provisions that originally were used simply to deal with typical criminal investigations. The law permits U.S. law enforcement officials to seek a court order giving them access to the records of a company or individual, sometimes without the suspect’s knowledge. Any organization with a presence in the U.S. or controlled by a U.S. business may be subject to these court orders and compelled to comply with the warrant.

In some circumstances, the law may have made it easier for the U.S. government to gain access to personal data. It did not, however, “fundamentally alter the right of the government to that data in those circumstances,” according to an article written by Jeff Bullwinkel, Associate General Counsel and Director of Legal & Corporate Affairs, Microsoft Australia. In other words, the U.S. government has long had the ability to seek access to personal information in pursuit of legal investigations.

How does the U.S. Patriot Act affect American government access to information that is stored outside of the U.S.? If the data is under the control of a U.S.-headquartered company, the government can use the law just as if the information were stored inside the U.S. If the company is not an American company the U.S. Patriot Act does not apply, although there still are ways the U.S. can gain access to the information it is seeking.

The U.S. has long had many cross-jurisdictional agreements that allow law-enforcement agencies in one country to gain access to data stored in another country. Government agencies in every country at some time have legitimate needs to access information to enforce their nation’s laws. Increasingly, that information is stored in foreign jurisdictions. While different laws and international agreements help facilitate access to this data, both domestic and some foreign laws maintain strong protections.

Deciding where to store your data has become increasingly complex as the options have expanded from storing data on a computer you or your business directly controls to sending the information into the cloud and storing it on some server remotely located anywhere on the globe. Wherever you decide to store information, be certain that appropriate measures are in place to protect that data from unauthorised access.

Take the time to become informed about the pros and cons of the many places and methods available for storing data. Consult with your advisers to learn how various laws may or may not protect your information and then make an informed decision that is within your comfort zone.

Tax Credits to Help You Enjoy Your Golden Years

021617_Thinkstock_136978354_lores_KWIf you’re an older taxpayer, you’re eligible for a wide range of tax breaks, some of which aren’t available to others.

Here’s a list of tax breaks for senior taxpayers to consider as we head into tax season.

Age amount. This non-refundable tax credit is available to individuals who were, at the end of 2016, aged 65 or older. The federal age amount for 2016 is $7,125. If your net income is $83,427 or greater, you aren’t entitled to the credit. If your net income is less than $35,927, you get the full amount. If you earn between those two amounts, you’re entitled to $7,125 minus 15% of the amount of your income that exceeds $35,427.

Pension income amount. If you’re no longer working, you may claim up to $2,000 in a non-refundable tax credit if you have eligible pension income. Eligible income includes pension or annuity income you received as payments for a pension or superannuation plan or from payments you receive from a Registered Retirement Savings Plans (RRSP).

Pension splitting. If you’re married or have a common-law partner, you may shift pension income from one partner to lower the tax liability of the family. If your spouse or partner earns less than you, he or she will likely have a lower tax rate. You can transfer up to 50% of your eligible pension income to your spouse or partner.

The extent to which pension income splitting is beneficial depends on the marginal tax bracket of you and your spouse or common-law partner, as well as the amount of qualifying income that can be split.

The pension income must satisfy certain criteria to qualify for splitting. If you’re 65 years of age or older, eligible pension income includes lifetime annuity payments under a registered pension plan (RPP), an RRSP, or a deferred profit sharing plan (DPSP) and payments from a Registered Retirement Income Fund (RRIF).

If you’re younger than 65, eligible pension income includes lifetime annuity payments under an RPP and certain other payments received as a result of the death of your spouse or common-law partner. Eligible pension income doesn’t include payments under the Canada Pension Plan (CPP) or Old Age Security (OAS) payments.

Pension income can also be split in the year of death, but there are special rules that apply depending on whether the pension income recipient or transferee has passed away. Consult with your tax advisor.

Medical expenses. These expenses can be significant for anyone, particularly as you get older. You can claim eligible medical expenses if you or your spouse or common-law partner:

  • Paid for the medical expenses in any 12-month period ending in 2016, and
  • Didn’t claim them in 2015.

Generally, you can claim all eligible amounts paid, even if they weren’t paid in Canada.

You may claim only the part of the expenses that you (or someone else) haven’t been — and won’t be — reimbursed for. However, the expense can be claimed if the reimbursement is included in your or someone else’s income and the reimbursement wasn’t deducted anywhere else on your income tax and benefit return. Generally, total eligible medical expenses must first be reduced by 3% of your net income or $1,813, whichever is less.

You also may aggregate medical expenses between you and your spouse and dependent children. When aggregated, one taxpayer reports the sum of the eligible expenses and receives the credit as long as the total expenses exceed 3% of that person’s net income, or $2,237. Your tax advisor can help you determine which spouse should use the aggregate medical expenses to claim the tax credit.

The credit covers a wide range of medical expenses, including prescription medications, and the amounts you pay to your doctors. If you have a doctor’s prescription due to certain conditions, you may get a tax break for air conditioning, bathroom aids and similar devices. When you list your medical expenses, you must be able to account for each cost with documentation, so keep your receipts.

Disability amount. Taxpayers, their spouses, common-law partners or dependents with severe and prolonged physical or mental impairments may be eligible for the disability tax credit (DTC). To determine eligibility, they must complete Form T2201, Disability Tax Credit Certificate and have it certified by a medical practitioner.

Caregiver amount. If, at any time in 2016, you (either alone or with another person) maintained a dwelling where you and one or more of your dependants lived, you may be able to claim a maximum amount of $4,667 ($6,788 if he or she is eligible for the family caregiver amount) for each dependant.

Each dependant must have met all of the following criteria:

  • Have been 18 years of age or older,
  • Earned net income of less than $20,607 ($22,728 if he or she was eligible for the family caregiver amount), and
  • Have been dependent on you, or was born in 1951 or earlier if he or she is your (or your spouse’s or common-law partner’s) parent or grandparent.

Family caregiver amount. This credit, which differs from the caregiver amount, is an additional tax credit of up to $2,121 that can be claimed for one or more of the following amounts:

  • The spouse or common-law partner amount,
  • The amount for an eligible dependant,
  • The caregiver amount.

The impaired dependant must be 18 years of age or older. An individual under 18 may also qualify if the impairment is prolonged and indefinite and requires greater care than other children of the same age. This credit can be claimed for each impaired dependant. You may be able to claim this credit for more than one eligible dependant.

Spouse or common-law partner amount. You may claim this if at any time in the year you supported your spouse or common-law partner and his or her net income was generally less than $11,474.

Transferred amounts. You may choose to have some of your tax credits transferred to your spouse. Once your tax liability is reduced to, you can then transfer any additional tax credits to your spouse. Your spouse may do the same for you.

Home accessibility tax credit. If you made changes to your home to improve your quality of life, you may claim up to $10,000 in home improvement expenses. Among the expenses you can claim are: wheelchair ramps, walk-in bathtubs or wheel-in showers, widening of doors, non-slip bathroom flooring, ergonomic, easy-to-use, door locks and hands-free water taps. Relatives who support a related senior may also be eligible for this credit.

Goods and services tax/harmonized sales tax (GST/HST) credit. This tax-free quarterly payment helps you offset all or part of the GST or HST you pay. To receive this credit, you must file an income tax and benefit return every year, even if you didn’t earn income. If you have a spouse or common-law partner, only one of you can receive the credit. The credit will be paid to the person whose return is assessed first.

Public transit amount. You may be able to claim the cost of monthly or annual public transit passes for travel within Canada in 2016.

Consult with your tax advisor to determine any credits, deductions and benefits for which you’re eligible.

Add an Ingredient to Your Wealth-Planning Mix

Tax Free Savings Accounts (TFSA) can not only help you to save, they can help you minimize your taxes and plan your estate.

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Benefits and Drawbacks

In a Nutshell

There are many benefit to owning a Tax-Free Savings account, including:

1. Tax-free compounded growth and withdrawals. Contributions are made with after-tax money.

2. Withdrawals that won’t affect income-tested benefits such as the child tax benefit, GST credit, age credit, or Old Age Security payments or supplements;

3. No upper age or lifetime limit for contributions. If you don’t contribute for 25 years and then receive a $100,000 inheritance, you could conceivably shield that entire amount from taxes.

4. Unused contribution room is carried forward indefinitely and withdrawals can be replaced later without penalty or having to create additional contribution room. Unlike an RRSP, withdrawals will be added back to accrued contribution room.

5. You don’t need earnings to make annual contributions.

The accounts present some drawbacks that should be considered:

1. Interest paid to borrow money to contribute to a TFSA isn’t tax deductible;

2. Over-contributions are subject to a penalty of one per cent a month, the same as RRSPs, and

3. Capital gains (or losses) accrued in a TFSA won’t be available to offset gains/losses outside it.

Contribution limits will be calculated on the annual Notice of Assessment you receive from Canada Revenue Agency (CRA).

Canadians aged 18 and older may invest in a TFSA. The accounts are mirror images of Registered Retirement Savings Plans (RRSPs) — contributions are made with after-tax dollars, rather than pre-tax money, but withdrawals are tax-free.

Withdrawals add contribution room matching the amount taken out. In contrast, when you withdraw money from your RRSP you lose contribution room. In other words, if you withdraw $4,000 from your RRSP, $4,000 of your contribution room is lost forever.

Generally, the same investments eligible for RRSPs are eligible for TFSAs. So you can hold a number of income-earning holdings in the account, including equities, bonds, mutual funds, savings accounts, and term deposits. (See right-hand box for a closer look at the benefits of TFSAs.)

However, the point of the TFSAs is not to replace registered plans. In fact, all things being equal, the two plans are a wash.

There generally would be no advantage to either a TFSA or RRSP, although both can provide a better rate of return compared with unregistered savings. The only difference is that with an RRSP you receive an initial tax deduction, which leaves you with more pre-tax dollars to compound over the years. The after-tax TFSA contributions mean you essentially have less money to grow.

Ideally, you would have both accounts and maximize their uses. Then you would have the flexibility to choose annually whether to pay tax on withdrawals from a registered plan. In some years you may want to keep taxable income low to minimize benefit clawbacks and in other years you may want some taxable income to account for losses.

Here are several ways to use the savings accounts that you should discuss with your accountant:

1. Shelter Investment Income: Generally, TFSAs will work best with fixed income investments. But if you consider yourself a very good trader, you could trade stocks within the TFSA and profits will be tax-free. But CRA does not like active trade in TFSA accounts.  If you are actively trading in your TFSAs account, CRA can assess tax to TFSAs in respect of income earned from carrying on securities trading business inside the TFSA.

But, be wary. Capital gains inside a TFSA are tax-free, so you cannot claim a capital loss to offset other capital gains nor can you carry it forward. So if you own any laggard stocks, they would generally be wasted in a TFSA, while in a conventional investment account you can apply losses against taxable capital gains.

Generally, high-income investors with extensive investments in non-registered plans might want to keep interest-paying investments in a TFSA and stocks outside. If you have small holdings outside a registered plan, you could consolidate into a TFSA. That could save you significant tax liabilities when you withdraw the money.

“In-kind” transfers from taxable plans to TFSAs would trigger capital gains. If such transfers were deemed a sale, you would be liable for capital gains taxes.

Similar to RRSPs, there is no limit on foreign content, potentially making the accounts a good place to park foreign investments that pay dividends or interest. Under conventional non-registered accounts, foreign dividends are considered income and are taxed at the full rate. They are not eligible for the dividend tax credit. In a TFSA those dividends would be tax free.

If you happen to favour leveraged investing you can benefit by using a TFSA as collateral for low-interest investment loans. However, avoid using borrowed money to invest in a TFSA; the interest costs won’t be deductible as they are in a conventional investment account.

2. Retirement Planning: You may want to melt down your RRSP as you approach 65 years of age, pay a little tax while you are in a low tax bracket, and move the proceeds into TFSAs in order to minimize future clawbacks of Old Age Security benefits.

In the year you turn 71, when you must convert your RRSP into an Registered Retirement Income Fund (RRIF) or an annuity, you could pay tax on the minimum RRIF payments and then move $5,500 of the remaining money into your TFSA each year, sheltering that income from taxes for the remainder of your life. The advantage here is maintaining tax-sheltered savings for emergencies or estate planning.

TFSAs could also supplement RRSPs if you have maxed out your contribution room and still want to continue putting aside money for later years.

3. Estate Planning: TFSAs will make it easy to bequeath large tax-free nest eggs. The amounts could total $1 million or more over 40 years of savings. TFSA holders can name spouses or common-law partners as beneficiaries and rollover the proceeds tax-free to them upon their death.

4. Income Splitting: As with spousal RRSPs, spouses or common-law partners can contribute to their partner’s TFSA. And when it comes to income splitting for taxes, attribution rules will not apply to income earned in a TFSA.

5. Pension Plans: Some specialists suggest that low-income earners may choose TFSAs instead of employer-sponsored pension plans because the latter will generate taxes in retirement, while the former will not.

The Fundamental Implication: TFSAs offer you an additional choice on how to manage your savings and investments. Consult with your professional advisor for the best ways to use this new account to maximize your wealth.

Safe Tax Shelters Aren’t Just for the Rich and Famous

021017_Thinkstock_477753770_KWIf you’re a high income taxpayer, you likely want ways to shelter your money from the tax collector.

Well, it’s the annual season to contribute to one of the perfectly legal tax shelters the federal government offers. That shelter, of course, is the Registered Retirement Savings Plan (RRSP), and the deadline for getting your 2016 contribution is March 1. Another useful government tax shelter is the Tax-Free Savings Plan (TFSA).

Both plans are simply containers in which you can hold various eligible investment products, such as GICs, mutual funds and even individual stocks and bonds. Other tax-shelter possibilities are spousal loans and universal life insurance. More on those later.

RRSP contributions are, of course, tax deductible and generally most Canadians take the deductions during their working lives when they’re in a higher tax brackets and take withdrawals after retirement when their tax liabilities are lower.

Maxing Out Registered Plans

Many high-net-worth investors, however, max out their RRSP and TFSA contribution room quickly. But they make the most of the accounts by wisely splitting their investments between registered and non-registered plans.

For example, income from bonds and GICs is taxed at the highest rate. So it makes sense to keep these inside a registered, tax-deferred account. On the other hand, stocks and dividends fare better in non-registered accounts, as capital gains on shares and dividends from Canadian corporation are taxed at a lower rate.

But there are limits to how much you can put into to your RRSP. Most people can contribute 18% of their earned income to an RRSP. But that doesn’t work for high earners. For example, if you earned $350,000 last year, in theory you could contribute $63,000. But the contribution limit for 2016 is $25,370, plus any leftover contribution room from previous years. (The limit is 26,010 for 2017).

And of course, your spouse or common-law partner can open a plan to increase the investments and income stashed away tax free. However, contributions you make to a spousal or common-law partner RRSP reduce your deduction limit. The total amount you can deduct for contributions you make to your RRSP, or your spouse’s or common-law partner’s RRSP, cannot be more than your personal limit.

Contribution Limits

For TFSAs, the annual contribution limit is $5,500 for 2017, and the maximum cumulative contribution allowance since the accounts began is $52,000. So if you haven’t opened an account, you could contribute that amount this year and keep earning tax-deferred income. In each successive year, just contribute more. The amount is indexed to inflation.

Again, if you’re married or have a common-law partner, those amounts double. TFSA contributions can’t be deducted, but the income earned within the plan is never taxed.

Spousal Loans

Another way to shelter from tax is to lend your spouse an investment loan. You lend your spouse or common-law partner money and charge the prescribed rate of interest, currently 1% (don’t gift money because any income earned on the money will be attributed back to you and taxed in your hands). The interest rate can be locked in indefinitely at the time you set up the loan.

Your spouse or common-law partner takes the money, invests it, earns income on it, pays you the interest and then pays tax on the balance of the income at his or her lower rates. Therefore, you’ll save tax as a couple. Your spouse will have to actually pay you the interest every year by January 30 for the prior year’s interest charge.

When a Spousal Loan Makes Sense

This tactic makes sense, particularly if:

1. You lend a significant amount (thing in terms of hundreds of thousands of dollars),

2. The difference between your marginal tax rates is great, and

3. You’re investing for income.

It may also make sense if you’re expecting significant capital gains.

Universal Life Insurance

You also can shelter significant amounts of non-registered money if you take out a Universal Life Insurance Policy. The amounts have been reduced somewhat starting January 1, 2017, but not on polices taken out before 2017.

Here is the strategy. A Universal Life Insurance policy allows you to add additional investments into funds (stock, bond, global, domestic, etc.). These investments are tax sheltered if they’re held within a life insurance policy.

Savings Feature

Universal life insurance has a savings feature that can be allocated into various active and passive investment options that grow tax-free. Fees tend to be higher than non-insurance solutions, so fees and tax savings need to be compared. Whole life insurance invests some of your premiums on a tax-free basis by the insurance company into unique asset classes, such as private placement bonds, residential and commercial mortgages, private equity and policy loans to other policyholders. Commissions are generally high up-front, so a whole life policy shouldn’t be a short-term commitment.

The amount you can hold depends on a number of factors. While there can be some drawbacks to investing in an insurance policy, for those holding significant non-registered assets, the tax shelter may outweigh any drawbacks.

However, you need to access the funds in a tax efficient way.

Multiple Beneficiaries

The key is to set up a joint policy with multiple people insured — so you might have a policy with you and your spouse and your parents. In some cases, if any one of the three or four people has an insurable event, it allows you to withdraw the accumulated investments funds with no tax implications. So, just like a TFSA, there was tax sheltered growth and no tax to withdraw funds.

Your advisor can provide more details on this complex situation.

Of course, these aren’t the only tax shelters out there. But beware of illegal mass marketed gifting tax shelter arrangements. These include schemes where taxpayers receive a charitable donation receipt with a higher value than what they paid. This can typically be four or five times their out-of-pocket cost. On its website, Canada Revenue Agency (CRA) says it “audits every mass-marketed tax shelter arrangement and no arrangement has been found to comply with the Income Tax Act.”

There’s a major distinction between tax avoidance (where you take advantage of the rules to minimize your tax bill) and tax evasion (where you try to hide income or break the law). The first is perfectly legal, while the second obviously isn’t.

Cautionary Steps

If you’re considering entering into a tax shelter arrangement, get some advice from your tax advisor. Among Here are some steps the CRA recommends taking to help protect yourself and your money:

1. Know who you’re dealing with. Request and read the prospectus or offering memorandum and any other documents available in respect of the investment.

2. Pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. These opinions may tell you about potential problems.

3. Don’t rely on verbal assurances from the promoter or others.Get them in writing.

4. Ask the promoter for a copy of any advance income tax ruling provided by the CRA with respect of the investment. Read the ruling and any exceptions.

Be Wary of the CRA

Individual taxpayers should be aware that the CRA could normally reassess returns up to three years after the date of assessment. The fact that tax shelter investements were accepted on initial assessment shouldn’t be interpreted as acceptance of the claim by the CRA. It may take more than one year to complete a tax shelter audit.

Consult with your advisor about maximizing your RRSP and TFSA contributions before thinking about other tax shelters.