Archive May 2017

Risky Business: Participating in the Hidden Economy

051317_Thinkstock_614316980_lores_kwRoughly $45.6 billion of the Canadian economy was “hidden” in 2013, according to a Statistics Canada study about the underground economy that was published in June 2016.

That amount was up 7.5% from the $42.4 billion that was off the books in 2012, and it represents about 2.4% of the nation’s gross domestic product. The lost revenue partly helps explain why the Canada Revenue Agency (CRA) tried to up its game by sending “nudge” collection letters to encourage players in the underground economy to pay up.

Unfortunately, the nudge experiment reportedly failed. An internal CRA report obtained by CBC News states: “In conclusion, we failed to find evidence supporting any of the three behavioural outcomes that the nudge campaign expected to produce.” (The campaign involved sending two different types of collection letters to taxpayers who were assessed — but hadn’t paid — their taxes. One version used friendly encouragement. The other contained less-friendly language. The results were compared with those from a standard stern collection letter.)

The CRA defines the underground economy as “business activity that is unreported or underreported for tax purposes.” The problem is so great that Ottawa has made it a priority to collaborate with provincial, territorial and industry partners to reduce it. In Budget 2015, the government earmarked $118.2 million over five years to bolster the CRA’s audit capacity by expanding its Underground Economy Specialist Teams. These teams use advanced data analysis to identify and adopt new approaches to combat the underground economy.

Appealing to the Public

But the CRA also wants help from individuals and businesses. On its current website, it states: “Hiring a landscaper? Paying cash to avoid the tax is risky.”

It goes on to say that the risks are particularly high when it comes to home renovations. In fact, residential construction accounted for nearly one-third (27.8%) of the underground economy in 2013 followed by:

1. Retail trade (12.5%), and

2. Accommodation and food services (11.7%).

Explaining the Risks

The CRA elaborates that when you deal with a contractor in cash, you have no protection against:

 

  • Poor or incomplete work,
  • Lawsuits if a worker gets injured,
  • Cost overruns,
  • Use of substandard materials,
  • Responsibility for damages to your or a neighbour’s property, and
  • Fraud, if you pay for work that’s never done.

 

In another focus area, the CRA is tackling the problem of unreported income in property flipping, which involves individuals buying and reselling homes in a short period for a profit. This includes real estate agents. Flipping is believed to be one of the reasons for overheated housing markets and underreported income.

Starting with the 2016 tax year, in order to claim the full principal residence exemption, taxpayers are required to report basic information (date of acquisition, proceeds of disposition and description of the property) on their income tax and benefit returns if they sell their principal residences. The tax agency also now requires that every sale of a principal residence be reported on Form T1-2016 Schedule 3, Capital Gains (or Losses).

Cautioning Businesses

The tax agency is also taking on businesses. It warns them that there are serious consequences for participating in the underground economy. Businesses must report all sales or income, as well as all work performed for cash. Otherwise, an enterprise owner could wind up paying hefty fines, face a prison term and lose the business. “It’s that simple,” the CRA cautions.

Employer responsibilities generally include:

  • Collecting and remitting payroll deductions for employees,
  • Reporting employees’ income and deductions on T4 or T4A slips, and
  • Registering for the GST/HST if revenue (before expenses) is more than $30,000 a year.

The CRA emphasizes that paying employees under the table is unfair to them as well as against the law. Affected employees are deprived of such benefits as:

  • Employment Insurance,
  • Canada Pension Plan payments, and
  • Workers’ compensation coverage.

Employers who pay in cash put themselves at additional risk. They could face administrative penalties and legal repercussions by provincial workers’ compensation boards for failing to report accurate payroll amounts, or failing to report an accident if the worker is injured on the job. In Ontario, for example, the fines for not following provincial workers’ compensation rules can be up to $500,000.

Take Steps

What can taxpayers do about all of this? Quite a bit actually:

File returns. Those who must file individual, corporate, or goods and services tax/harmonized sales tax (GST/HST) returns should do so accurately and on time.

Check payslips. Employees should check to be certain that their employers are withholding taxes to ensure they’ll receive their entitlements and benefits.

Make deductions. Employers, trustees, estate executors, liquidators, administrators or others who pay various types of taxes should be sure they make the required deductions. They must also remit those amounts, as well as any share they owe, to the CRA and report the income and deductions on T4,T4A or other summary and information returns.

Ask questions and get transactions in writing. Individuals planning to hire contractors or others should obtain written contracts and ask for proof of Workers’ Compensation or equivalent private liability insurance to cover injury and any damage that might occur in their homes.

If someone offers to provide services for cash, or you suspect an individual or business hasn’t reported all their income or GST/HST, you can contact the CRA through its Informant Leads Program. The agency will review the information provided to help identify and follow up with taxpayers who aren’t complying with their tax obligations.

Voluntary Disclosures

The CRA urges individuals who may have participated in the underground economy to come clean and correct their tax situations through the Voluntary Disclosures Program. Under certain conditions, this program allows individuals to correct inaccurate or incomplete information on their tax returns. They can disclose amounts that weren’t previously reported, without penalty or prosecution. They’ll pay the taxes owed plus interest.

An Alternative to RESPs

Statistics Canada estimates that the total cost of a four-year university education is more than $80,000,  including tuition, housing, food, books and additional fees.

lores_diploma_university_degree_bow_white_mb

The Real Costs of College

When you think about how much it’s going to cost to send a child to college, you often concentrate only on the direct costs such as tuition and books. But there are indirect costs that also need to be considered.

Here’s a list of both types of expenses to evaluate when you are planning the costs of giving your child a higher education:

Direct Costs

  • Tuition: Some schools charge a flat fee, but others charge by the credit hours taken. Assume a minimum of 15 hours per term.
  • Room: This depends on whether the student lives in a dorm, an apartment or group house, or with a relative. Colleges usually provide an average figure for dorms, so use that because you won’t know the actual amount until your child has been assigned a room.
  • Board: If your student eats on campus, the school may require all meals to be taken in a dining hall or other campus facility. Some schools offer flexible meal plans, which are handy if your child doesn’t need three full meals a day seven days a week. The school’s estimates won’t include snacks or socializing. If the student lives off campus, calculate based on the usual amount consumed in a week at home.
  • Fees: Some fees are required and others depend on the course of study. For example, if your child takes science courses, you may be charged a lab breakage fee for each course. Some schools charge a student services fee based on participation in certain activities. And there may be fees for uniforms and equipment if the student plays a sport.
  • Books and Supplies: This depends on the student’s field of study. Science books can cost as much as $75 or more, and a literature course could require as many as 10 books. There may also be charges for workbooks, photocopied articles and study guides.

Indirect Costs

  • Transportation and Travel: Include commuting from the local residence to classes unless the student lives on campus, and travel expenses to and from home during school breaks. If the student has a car, include parking fees, insurance payments, and gas, oil, and maintenance.
  • Personal Expenses: Don’t forget the costs of laundry, entertainment, toothpaste, razor blades, haircuts and the like. They add up.

So it is no surprise that parents are looking for efficient ways to finance their children’s educations. Often the parent, or a grandparent, will gravitate to a Registered Education Savings Plan (RESP), the country’s top choice for financing higher education.

The popularity of RESPs stems from tax-deferred compounded growth, lower taxes on withdrawals because they are taxed to the child, and federal grants that help build the savings even faster.

But if the beneficiary decides not to get a higher education you may not be happy with the rules for accessing the money you’ve been putting aside.

For one thing, you must return to the government the grant portion of the RESP.

Then, in order to access the remaining money, three conditions must be met:

1. The account must have been open for at least 10 years,

2. The beneficiary must be at least 21 years old and be ineligible to receive education assistance payments from the plan, and

3.You must reside in Canada.

And then you have only two choices:

1. Transfer the money to a Registered Retirement Savings Plan (RRSP) held by you or your spouse or partner, provided there is contribution room, or

2. Withdraw it as cash and pay both your marginal tax rate as well as a 20 per cent penalty on money that you earned in the plan.

The alternative to these savings plans is an informal trust account.

The key difference between saving in-trust for your child and setting up an RESP is that the child has guaranteed access to the cash when he or she reaches the age of majority in your province. The money does not have to be used for schooling but could instead go toward travel, buying a car or home, or setting up a business.

But the money does belong to the child. You cannot access it unless it is for the benefit of the child. The money in an RESP belongs to you.

These informal trusts differ from formal trusts. The latter require a legal trust agreement, generally cost more to set up and administer, and are usually used for very large sums of money.

Informal trusts are simpler to set up and generally take the form of an in-trust account with a bank, trust company, credit union, investment company or mutual fund company.

Unlike an RESP, there is no limit on how much money may be held in the trust and no limits on when and how much you can contribute. That means you can put aside more than the lifetime maximum of $50,000 per beneficiary allowed by the registered plans. However, the trusts do not qualify for the federal education grants.

While setting up and contributing to an in-trust account is relatively simple, the tax structure is complex.

Income attribution rules apply to in-trust accounts. That means income such as dividends and interest are taxed in the hands of the higher tax bracket parent or adult who set up the trust.  If the trust is used exclusively to save Canada Child Benefits payments, however, interest and dividends are taxed to the lower tax bracket child.

Generally, then, in-trust accounts focus on growth stocks or mutual funds that invest in stocks, where growth is primarily from capital gains. There is no attribution of capital gains, and thus they are taxed to the child.

When money is withdrawn, the beneficiary will not owe taxes on the amounts you contributed. That’s because you put in after-tax dollars, so you have already paid income tax on the principal invested.

Using informal trusts is a complicated and at times controversial strategy that involves complex tax issues often reviewed closely by Canada Revenue Agency (CRA). Be certain to consult your professional advisor for help minimizing taxes and getting the most out of an in-trust education account.

Price Sale Items Carefully

thmb_gate_chain_link_padlock_field_MBVendors beware: Truth in advertising isn’t just a slogan for the Canadian Competition Bureau, which is determined to enforce the ordinary selling price provisions or the Competition Act.

Those provisions state that before a company advertises items on sale, it must sell a substantial volume of the items at the pre-sale price for a period of time. Specifically, a retailer cannot claim that a price is the ordinary selling price when the company has not:

The Competition Act contains criminal and civil provisions to address false or misleading representations and deceptive marketing practices.

The criminal provisions prohibit all materially false or misleading representations made knowingly or recklessly, deceptive telemarketing and notices of winning a prize, double ticketing, and pyramid sales schemes.

The civil provisions also ban all materially false or misleading representations and specifically prohibit performance representations that are not based on adequate and proper tests, misleading warranties and guarantees, false or misleading ordinary selling price representations, untrue, misleading or unauthorized use of tests and testimonials, bait and switch selling, and the sale of a product above its advertised price.

1. Sold a substantial volume of the product at that price or a higher price within a reasonable period of time before or after making the representation.

2. Offered the product at that price or a higher price in good faith for a substantial period of time recently before, or immediately after, making the representation.

To be considered an ordinary price, at least half the merchandise must be sold at that price during the previous six months, or offered at the price for half the time.

The landmark ruling that underscores the federal agency’s determination to enforce the law was the Competition Tribunal’s finding that Sears Canada at one point used false discounts to sell tires and exaggerated the possible savings to consumers.

In its ads, Sears claimed it was offering discounts as deep as 45 per cent on five types of tires. The retailer later conceded that it sold less than two per cent of the tires at the full regular price before they were advertised on sale. Sears stated that the original price in its ads reflected the price at which competitors regularly offered the tires for sale.

However, the tribunal found that the company could not have truly believed that its regular tire prices were genuine and bona fide prices that the market would validate.Sears was ordered to pay a $100,000 penalty as well as $387,000 toward the Competition Bureau’s legal costs.

In handing down the ruling, the tribunal also upheld the constitutionality of the ordinary price provision of the law, stating that false or misleading ordinary selling price claims can harm consumers, business competitors who do comply with the law and competition in general.

The ruling was a powerful message to be careful when your business uses comparative-price advertising. There is no need to stop using these powerful marketing tools, but be sure your enterprise can legitimately establish that ordinary selling price representations are offered in good faith and not misleading. Fortunately, the Competition Bureau offers guidance to that end, including:

The general test: Would a reasonable consumer conclude that the comparison price is the one at which the item was ordinarily sold? If the comparison price isn’t the regular market price, the business is liable for prosecution.

Such phrases as “Compare to,” “Was,” “$X or X? off,” “Special” and “Value” generally convey the impression that the comparison price is the one at which the product has been ordinarily sold.

If a business doesn’t know the market price and the sale price is a reduction from its price, the comparison price should be qualified by saying, for example, “our regular price.” Moreover, a business shouldn’t compare its prices to those in another region. An Ottawa retailer should not rely on a Toronto regular price.

Don’t rely on out-of-date pricing history. The comparison price should be one from a period that is sufficiently recent. If a business is setting an introductory price, the price should not be offered for a prolonged period of time.

Consumer savings alone aren’t sufficient to avoid liability. If the actual market price, say, was $15, a business would be liable for prosecution if its ads claimed, “Reg. $20.00 — Sale price $10.00,” even though an actual $5 saving was involved.

Using the term Manufacturer’s Suggested List Price can be deceptive when it doesn’t reflect a product’s ordinary selling price. The list price is also not reliable as a market price indicator because it is often significantly higher than the market price.

Blog Your Way to Sales and Customer Loyalty

thmb_laptop_technology_screen_bzUp Front and Personal

A while back, Internet aficionados started keeping diaries online, often just personal commentaries, about what was going on around them. The journals were called weblogs.

That was in the late 1990s, pretty much the Stone Age in Web time. Since then, the term has been shortened to “blog,” the writers are called bloggers, the action is blogging, the universe is the blogosphere, and companies are joining in left and right.

Blogging Guidelines

The casual nature of blogging can result in employees inadvertently giving out confidential information, breaking the law, or embarrassing your company. To help avoid problems, set up guidelines on appropriate content. Here are some tips:

  • Employee behaviour that is inappropriate in other situations and is included in your employee manual should be banned from a blog. If employees have questions about content, they should consult with their managers.
  • Employees should identify themselves in blogs and make it clear they speak for themselves, not for the company.
  • Bloggers should get permission to use company trademarks and reproduce company material.
  • Avoid ethnic slurs, personal insults, profanity and vulgarity, as well as sensitive topics such as politics and religion.
  • Bloggers must respect the company’s confidentiality, as well as proprietary and financial information, customers, partners, suppliers and competitors.
  • Bloggers should accept the fact that occasionally the company might bar certain topics for confidentiality or legal reasons.

Consult with your legal counsel to ensure that your guidelines don’t violate laws.

Blogging Mistakes

Blogging has protocols. Here’s a list of mistakes to avoid:

No RSS feed. Many readers access blogs through RSS (Really Simple Syndication) feeds rather than actually visiting the blog. This is standard procedure and is important in picking up more regular readers.

Comment space. If you don’t let readers leave comments, you send the message that you aren’t interested in their opinions.

Infrequent updating. This not only keeps the search engines away, it can bore readers and cause them not to come back.

No links. Blogging is about sharing and communicating. Linking shows you are involved in the community and gives your readers a chance to read content you like.

No contact information. Readers may not want to leave a comment on your blog, but they may want to contact you. Leave an e-mail address or set up a contact page.

Businesses are drawn to blogging because it’s a quick and inexpensive way to reach new customers, expand mature markets, and build loyalty.

Canada’s business blogosphere includes, but is not limited to, bankruptcy, investing, taxation, finance, personal finance, entrepreneurship and real estate. The blogs are written by consultants, lawyers, accountants, bankruptcy trustees, real estate brokers and others.

Companies maintain blogs for various reasons, including:

Visibility – Search engines target blogs because they are updated frequently and search engines always need new information. Your blog could wind up on Google or Yahoo in a matter of hours and be listed among the top results. This increased visibility can drive traffic to your Web site and translate into sales.

Alternative Media – You can bypass traditional media and present your side of a story or issue.

Broader Reach – Your company can potentially reach more people with a blog than with traditional marketing and public relations techniques. More people are likely to read a blog than will hear your speech at an industry gathering or meeting. And you can reach people who might not be in the habit of scanning business pages or trade magazines.

Customer Loyalty – Starting two-way, online chats with customers and others can generate buzz, build brand loyalty, and even generate ideas for your business.

Competition – If your competitors are blogging, you risk losing customers because the competition is reaching them faster and more efficiently.

If you are considering joining the corporate blogosphere, be prepared. Know what you want to achieve, particularly if you plan to invite comments and the blog is written by rank-and-file employees. Which employees have the talent to write in a casual, personal style? Blogs that sound like dull, dry press releases won’t win readers.

Here are eight other tips that can help your business be successful at blogging:

1. Check the facts. If you send out inaccurate information and readers accept it at face value, they may in turn blog the data on their own sites. Before you know it, thousands of people have taken inaccurate information as truth and it can be traced back to your company blog. This is what happened when one blogger erroneously wrote that a major technology company was planning to buy a phone company.

2. Be honest. Readers want frankness and if they find you have been less than straightforward, they will likely let other bloggers know. That can hurt your credibility.

3. Show sincerity. Blogs are meant to show transparency, so don’t post entries that are simply press releases. That tactic will backfire. That’s not to say you can’t get suggestions from your PR professional or let them edit your blogs lightly. But be sure that the words and thoughts belong to you or whoever is actually writing the entries.

4. Deliver high-value content. Include information about your company, its products or services, the latest efforts, your expertise, or your thoughts on an industry development. The key is to provide information that goes beyond what readers already know.

5. Accept criticism. You must be willing to cope with some negative comments. Criticism can help shift your business’s perceptions of its customers and your responses to it can help change public perception of your company. Comments should generally not be edited other than to remove profanity or personal attacks.

6. Respond to comments. You may lose customers if you ignore their questions and comments. Giving them answers lets them know you care, help build community and loyalty, and makes the blog more dynamic.

7. Update often. Stale blogs drive readers away and give the impression no one is paying attention at your company. Fans may check in every day looking for fresh information. This brings up a problem: Writing new blog entries, finding links, and responding to reader comments can be time-consuming. Don’t commit to blogging unless you are willing to put in the time to maintain and manage a blog that will add lustre to your company’s reputation.

8. Watch comments. Bloggers may unwittingly violate trademark, and copyright law, break securities regulations, leak proprietary secrets or libel employees, customers or competitors. Even if you post a disclaimer, it may not hold up in court. If you plan to have rank-and-file employees add to your blog, or they set up personal blogs related to the company, establish guidelines that help prevent legal liability and protect rights.

Consider the Benefits of EI for the Self-Employed

lores_canada_coins_currency_cash_dollars_close-up_mbIf you’re self-employed, you benefit from several tax advantages, but suffer from one big drawback: You’re not eligible for regular Employment Insurance (EI).

You can, however, voluntarily contribute to become eligible for EI special benefits, which cover 55% of your average weekly earnings for:

  • Maternity (as long as 15 weeks);
  • Parental Leave (as many as 35 weeks for either parent, or shared between spouses or common-law partners, to care for their new child);
  • Sickness or Injury (15 weeks); and
  • Compassionate Care (as long as six weeks to care for a dying family member).
  • Parents of critically ill children benefits are for parents who must be away from work to care for or support their critically ill or injured child. Either parent can receive benefits or they can share benefits between them (up to 35 weeks).

Any Canadian who runs an unincorporated business or is a shareholder of a private corporation may opt in. After paying premiums for 12 months, you will be eligible to receive the special benefits. The premiums match those paid by regularly employed individuals. You pay a set percentage of your net business income (owners of unincorporated companies) or of your wages (shareholders in private corporations). The percentage is set annually by the federal government.

You pay the premium as part of your income tax return at the end of the year. It’s worth noting that as a regular employee, not only would you have to pay your premium (deducted from your paycheque) but your employer also has to pay a larger portion for you. As a self-employed person, you only need to pay your own portion to access the special benefits.

Another important distinction for shareholders is that the premiums and benefits are based only on the uninsurable wages taken from your company. Dividends you take are not taken into account.

This program can be very attractive to people in certain life positions. For example, a self-employed woman in her 30s with income of $30,000 a year will;

  • Pay $549 in special EI premiums each year to potentially access $317 a week in EI special benefits; and
  • Receive $15,850 if she has a baby and takes a total of 50 weeks for maternity and parental leave.

Assuming her income and the EI rates remained the same, she could contribute for almost 30 years, and still be ahead.

There are downsides to the program. For instance, if you change your mind after enrolling you still must pay a full year of premiums unless you withdraw right away. An even larger downside is that if you enroll and at some point take benefits, you must remain in the program for the remainder of your self-employed career.

An example: A 25-year-old man registers while he is a self-employed painter and takes compassionate care benefits when his parents become gravely ill. Eventually his parents, die, he gets an inheritance and stops painting to attend dentistry school. When he graduates, he starts his own company and takes wages. He has no choice but to pay EI premiums on those wages and he still will qualify only for the special benefits, not regular benefits.

Individuals who work for an employer are eligible for those regular benefits, which they receive if they lose their jobs through no fault of their own, such as a shortage of work or layoffs, and are available and able to work but cannot find a job. Regular benefits also generally pay out 55% of average weekly wages and last anywhere from 14 to 50 weeks, depending on:

  • The unemployment rate in the region where the person lives; and
  • The number of hours of insurable employment that the person accumulates during the 52 weeks before the start date of the claim.

Full-time employees also are eligible for the maternity, parental leave, sickness, compassionate care benefits and parents of critically ill children benefits.

Enrolling in this optional EI program is an important choice for every self-employed person. For many, the thought of deliberately paying more to the government seems preposterous, but there are those for whom this system could really be helpful when they need a financial safety net.

If you think this might be a valid option for you, speak to your financial adviser or accountant for a second perspective on your situation before you take the plunge.