Archive August 2017

CRA Suspends Audits on Charities’ Political Activities

072826_Thinkstock_186059084_lores_ABMany Canadians are generous in their gifts to charity, and in return, they may receive tax benefits. In recent months, there’s been some loosening of the restrictions placed on charities, which may be of interest to contributors.

While Ottawa was in the hands of the Conservative Party led by Stephen Harper, the government put strict restrictions the political activities of charities in 2012.

Five years later, Canada Revenue Agency (CRA), under the current Trudeau-led Liberal Party government, said it is suspending audits of political activity by charities. The move comes after recommendations by a panel the CRA commissioned to study the issue. The panel’s 2017 report urges the government to “broaden the ability of registered charities to engage in political activities,” while at the same time maintain “an absolute prohibition on partisan political activities.”

The five-member panel said that one particularly strong message emerging from the feedback it received during consultations was that a lack of clarity meant that some charities view political activities as too risky and engage in self-censorship. Without knowing the exact parameters within which they can operate, and given that the penalty for even an accidental breach of the rules may be deregistration, many charities make a rational choice to avoid or limit the risk.

Furthering a Group’s Charitable Purpose

The panel recommended that a charity’s political activities, whether pressing for a change in government policy or buttonholing a politician, be judged on whether they further the group’s charitable purpose. The panel proposes eliminating current rules that restrict a charity’s political activities to 10% of its resources.

One of the panel’s key recommendations was that the CRA revise its policy guidance to explicitly allow charities to:

1. Provide information to others related to their charitable objects (including the conduct of public awareness campaigns) for the purpose of informing and swaying public opinion. Such information must be truthful, accurate and not misleading.

2. Conduct research, distribute it to others and discuss the research and its findings with the media and others as they see fit.

3. Express opinions on matters relating to their charitable objectives, as long as they draw on research and evidence and don’t impinge on hate laws or other legitimate restrictions on freedom of speech.

4. Encourage keeping or changing law or policy, either in Canada (on any level of government) or outside of Canada.

5. Call on supporters or the general public to contact politicians of all parties to express their support for, or opposition to, a particular law or policy.

6. Make written or verbal statements to elected officials, parties and candidates, and release such materials publically. The adoption of a charity’s policy by a political party doesn’t in itself constitute partisan political activity.

7. Invite competing candidates and political representatives to speak at the same event, or request written submissions for publication, provided that candidates and parties are given an equal opportunity to speak or have their views published.

8. Express their views and offer others opportunities to express their views, on social media or elsewhere provided such platforms are monitored and partisan political messages are removed.

The panel also encouraged the CRA to:

  • Remove the requirement that a charity’s materials must reflect all sides of the argument, and add that they must be fact-based, and
  • Amend CRA Form T3010, Registered Charity Information Return (annual report) to remove the requirement to quantify resources used for political activities, and replace it with one to describe, in narrative form, the nature of the public policy dialogue and development work undertaken.

Expansive View of Charitable Activity

The panel went on to say that, in its view, the CRA could find support for a broader view of what constitutes charitable activity in case law.

For example, the 1999 Supreme Court ruling in Vancouver Society of Immigrant and Visible Minority Women v. Minister of National Revenue supports looking at the activity in the context of a charitable purpose. If a charity calls for a change in the law in furtherance of its charitable purpose — and such activity is subordinate and non-partisan, the panel said it believes the policy could accept it as charitable.

The panel noted that it believed such an expanded view would go a long way in providing clarity to the charitable sector and would enable it to more meaningfully contribute to public policy reform. Moreover, the panel said, it would remove the current disadvantage faced by the charitable sector in relation to for-profit companies, which can advocate in the public policy arena without restriction.

The panel also urged the CRA to list examples of what will be considered partisan political activities to replace the prohibition on both “direct and indirect” partisan political activities, which the panel suggested is highly subjective (particularly “indirect”), and has been the subject of much confusion.

Need for Legal Changes

Feedback on another issue was clear: fundamental legislative change is needed, and new policy or other administrative measures won’t be sufficient. Suggestions from the panel included:

  • Adopt an inclusive list of acceptable charitable purposes in the Income Tax Act that reflects contemporary society, its issues and expectations.
  • Consider the approach of other jurisdictions, some of which have softened restrictions on political purposes.
  • Clarify that public policy activities (for example, research, dialogue, advocacy, and calls to action) are charitable, provided they’re non-partisan and subordinate to a charitable purpose. In other words, accept the Supreme Court of Canada decision from the Vancouver Immigrant Society case and incorporate it in future legislation (that an activity is considered in the context of the charitable purpose).
  • Create a permanent mechanism for consultation with the charitable sector to ensure an ongoing process for developing policy guidance.
  • Enable charities to benefit from social enterprise and social finance models.

The CRA said the suspension of charity audits will be in effect until the government officially responds to the panel’s report.

 

Know the Tax Implications of Dividend Income

lores_investment_folder_file_amIf you are planning to buy shares in a company in the hope of receiving regular dividend payments, take some time to review how the Canada Revenue Agency (CRA) taxes income from directly held shares.

The first step is to realize that your tax bill on dividend income will depend on where the company is located. The CRA treats domestic and foreign dividend income differently.

For a conservative portfolio, you might look for disciplined, well-run, profitable companies that have a record of regularly boosting their payouts.

You can find blue-chip stocks that provide yields competitive with short-term bonds and Guaranteed Investment Contracts.

But remember, companies can cut their dividend outlays for any number of reasons and that can cause the stock’s price to slide.

Domestic Dividend Income: If you own shares in a taxable Canadian corporation, you are eligible to take a dividend tax credit aimed at preventing double taxation. Dividends are paid out of a company’s after-tax earnings, which means that when you get your payout, the company has already paid taxes on it.

Foreign Dividend Income: Taxation is more complicated when you receive dividends from a foreign company, although you may be eligible for a foreign tax credit. The tax due on foreign income is based on treaties between Canada and the countries where the companies are domiciled. Generally, Canadians will pay tax on foreign dividend income in Canada and get credit for foreign taxes withheld.

More than 750,000 Canadians hold U.S. investments directly or through a registered account. American companies generally withhold taxes on your dividend payments but the exact amount depends on whether you certify that you are a Canadian resident. When your Canadian tax return is prepared, you may receive a foreign tax credit.

The tax credits for Canadian dividends make them a very tax-efficient source of income for most Canadian investors.

Taxation of dividend income can be complicated and it’s best to consult with your tax adviser, who can ensure you pay the least amount of tax possible.

Foil Fraud at Your Enterprise

thmb_hr_practices_hand_cookie_jar_savings_petty_cash_take_amMonitor, Verify and Verify Again

Over the past decade or so, well-publicized scandals involving Enron, Parmalat, Royal Ahold, WorldCom and other companies have prompted corporate officials, lawmakers and regulators to insist on beefing up internal auditing controls and risk-management operations.

Asset Misappropriation in Canada  

Ninety per cent of occupational fraud cases in Canada involve asset misappropriations, according to a study by the Association of Certified Fraud Examiners.
Those misappropriations had a median loss of $200,000; 38.9 per cent had a corruption component with a median loss of $250,000; 11.1 per cent involved fraudulent financial statement schemes with a median loss of $1,075,000.

Cash is by far the most frequently misappropriated asset, accounting for 86.4 per cent with a median loss of $198,500. That loss is nearly double the non-cash losses, which totaled a median $100,000.

This finding is most likely explained by the liquid nature of cash as opposed to inventory, equipment and other non-cash assets, according to the study, entitled Detecting Occupational Fraud in Canada.

And yet, fraud still occurs at companies, despite spending multi-millions of dollars on software and hiring multitudes of risk monitors, auditors and compliance personnel. While you may not want to budget large sums on risk-management, there are some fundamental tools that should never be ignored by any business of any size in any industry. At the top of the list is the most critical canon of forensic accounting:

Every employee must take some annual leave. While employees are on holiday, a co-worker should cover for them. This is a simple step, but it has uncovered many sophisticated frauds and embezzlements.

Employees who process transactions should be taken off their desks at intervals, so that any existing chain of successive falsifications can be discovered and broken. Refusing vacation time is one of a series of behaviours that should be considered suspicious if they arise in conjunction with fiduciary abnormalities. Watch for sudden changes in lifestyle, or buying a larger home, a more expensive car or costly clothing.

Here are five other steps to take to help ensure your business is protected from employee fraud:

1. Update and modify controls: Successful businesses grow and expand, and in the process their internal controls can become outdated or overworked. Be sure to review your company’s controls on a regular basis to help ensure that they are still adequate.

2. Set up checks and balances: Your company doesn’t have to be a world-class financial institution to have complex transactions that can involve several reports rather than a single document accounting for all aspects of the deal. Be certain that your company enforces disciplined reporting of facts and information and reviews them from all angles. Make sure all relevant parties — traders, accountants, risk managers and the people who run the business — regularly and rigorously review everything. And, perhaps most importantly, check reports randomly rather than on a regular schedule.

3. Vigilantly monitor internal controls: Part of monitoring controls should involve periodic testing to see how easily your company’s systems and procedures can be penetrated. And when designing security systems, always assume that every user has the potential to be a criminal. A trusted insider who learns the inner workings of the company network, security specialists warn, can do some of the worst damage.

4. Frequently review passwords:
 Make staff aware of the importance of keeping passwords confidential and secure. Limit employee access to information, and require use of passwords that are not easily guessed. Some forensic specialists recommend changing passwords at least every 30 days. Regularly audit systems that don’t require passwords.

5. Trust no one: While you don’t want to run your business like a prison, never assume that because an employee is performing “junior” work that there is no chance for fraud. When you are confronted with questions about any employee’s suspicious behaviour, take action immediately and double check what you discover. Verify everything. People tend to ignore suspicious activity, rationalize decisions to not take action, or misguidedly think that no single individual is in a position to create any damage.

Resolve the Deal Breaker

lores_handshake_agreement_deal_reach_blue_MBDisagreements over a business’s valuation aren’t uncommon.

If, for example, you want to sell your business, you may feel it is undervalued because of market conditions, so ou want to factor into your asking price the company’s future performance. A buyer may come along, however, who isn’t so sure that those future projections will be realized and hesitates when it comes to closing the sale.

That disagreement doesn’t have to be a deal breaker. You can bridge the gap of the two valuations by arranging an earn-out agreement, where you receive a partial payment with future specified amounts paid when the business meets certain goals.

For example: You set a sale price of $1 million based on projected sales for next year. The buyer feels those sales projections aren’t guaranteed. So you agree to take $500,000 on the spot and the remainder is paid out of, or adjusted to reflect, the income your business actually earns based on those projections.

You both benefit: The buyer gains an additional source of financing while minimizing risks and costs and you get to share in future earnings and, because the deal isn’t simply an installment plan, you gain some tax benefits. 

But the agreement needs to be structured properly and address several issues, including:  

  • Duration: Earn-outs can typically run as long as five years. However, the longer the term the more difficult it can be to attribute performance to the business alone. On the other hand, you may face resistance to a short term if the buyer is concerned that a shorter duration could encourage you to make business decisions that favor short-term results but damage the long-term viability of the business. Moreover, to be able to get the benefits of using the cost recovery method when you pay your taxes, the Canada Revenue Agency (CRA) insists that the agreement last no longer than five years.
  • Authority: You may want to draft an employment contract that specifies who has ultimate control over management and strategy. As the seller, you may want to retain control over operations to help ensure performance goals are met, over the sale or purchase of additional assets, and over the hiring of key staff members. Pay particular attention to the duration of the contract: the buyer may not be willing to maintain an employee role once the earn-out is paid.
  • Performance goals: The agreement should outline such clear and achievable performance goals as sales, pre-tax earnings or gross profit as well as non-financial goals such as product or account development, capacity utilization, or service improvements.
  • Performance evaluations: Clearly define the measurement base and be sure it is monitored. If the base is pre-tax earnings, you should ensure that the agreement specifies how one-time costs, unexpected costs, new management costs, transfer pricing and other costs or windfalls will be treated. Periodic audits can ensure that systems and operations aren’t manipulated to artificially boost or suppress performance measures.

Last Word: Any of these issues create the risk of litigation, so you should choose some method to resolve disputes and avoid litigation.

CRA Aims to Boost Services for Small and Medium-Sized Businesses

071417_Thinkstock_521090040_lores_kwSmall- and medium-sized businesses will be getting more help from Canada Revenue Agency (CRA) over the next couple of years.

The tax agency recently unveiled plans to make its services for those businesses more helpful and easier to use. The new plan follows consultations started in October 2016 and follows separate consultations in 2012 and 2014. The agency met with businesses, accountants and CRA employees who regularly interact with businesses, and also accepted feedback online and discussed issues with business associations.

“The vast majority of Canadians do everything right.”

— A CRA employee

The result is a program called Serving You Better. The CRA received more than 1,500 comments and suggestions. Here is a summary of the new initiative taken from the CRA website:

Making Tax Information Easier to Access, Understand and Use

Participants told the CRA they don’t like busy signals when they call and they do like services with a call-back option. Accountants want to ask complex questions on the phone. Businesses would like an auto-fill option and to be able to complete more tasks online.

The CRA said it will:

  • Switch over to the Government’s telephone platform and complete feasibility studies for adding call-back and secure chat lines.
  • Conduct a pilot for a service dedicated to letting tax preparers call experienced CRA staff members who can help with complex technical issues.
  • Review the Pensionable Insurable Earnings Report (PIER) and other notices and letters for businesses. Let corporations see the assessed value of income tax returns and schedules as well as their CRA-verified dividend account balances in My Business Account.
  • Expand the Liaison Officer Assistance Requests pilot program to allow businesses across Canada to request a Liaison Officer visit. Start an auto-fill option using commercial software.
  • Study the possibility of setting up a volunteer tax program that would help the smallest new businesses understand the payroll, GST/HST and other tax obligations that come with starting a business.
“My clients and I are frustrated that we aren’t able to obtain remittance forms online.”

— An accountant

Clarifying Information about Payment Options

Participants noted that payments don’t always go where they expect. Although there have been improvements, individuals said they still had concerns about these errors and the time it takes to resolve them.

The CRA said it will:

  • Improve the way it explains how to fix misallocated payments when and where taxpayers want.
  • Raise awareness about direct deposits into taxpayers’ bank accounts.
  • Make payroll remittance vouchers easier to order online.
  • Explain clearly how remittance vouchers are personalized to ensure payments go to the right accounts.
“Objections are a nightmare just to get assigned.”

— From an accountant

 Improving Services Related to Audits, Collections and Appeals

Taxpayers and accountants were clear about how unhappy they are with the amount of time it takes to resolve any objections. They want better communications between their businesses and representatives and CRA auditors.

The CRA said it will:

  • Improve the time it takes to resolve an objection (it developed a plan to improve timeliness and better inform Canadians of the expected and actual time frames for resolving an objection based on its complexity.
  • Improve audit processes and communications through a post-audit survey and by monitoring the feedback it receives.
  • Enhance the clearance certificate process by communicating earlier when you apply and by helping businesses identify situations when a certificate isn’t required.
  • Ensure consistency by communicating collection procedures to audit branches and offering training for auditors.

The CRA notes that it has previous consultations on cutting red tape in 2012 and 2014. As a result, the tax agency says it already has:

1. Introduced the Liaison Officer initiative.

2. Engaged associations including the Canadian Payroll Association and the Chartered Professional Accountants of Canada (CPA Canada) to identify CRA guides and forms needing to be simplified and clarified.

3. Reduced the payroll remittance burden for the smallest new employers.

4. Allowed businesses to request a payment search using the My Business Account Enquiries Service and to submit cashed cheques as proof of payment using Submit Documents.

5. Included a My Audit tab in My Business Account that allows electronic communications between businesses and auditors.

6. Provided a streamlined Interactive Voice Response system that makes it easier for business callers to connect with an agent.

7. Introduced training to help auditors become more sensitive to the needs and realities of small and medium businesses.

8. Reviewed completely its notices and letters to make them clearer and easier to understand.

9. Reduced the need for callers to repeat information when a call is transferred from one agent to another.

10. Set up a way to connect callers to the right expert.

Top 10 Things You’ll Be Able to Do

The CRA’s 2017-2019 Serving You Better action plan contains over 50 action items that the agency expects will improve services for small and medium businesses.

According to the CRA, here are the top 10 things you’ll be able to do:

1. Receive a CRA security code by email

2. Call a new dedicated telephone service for tax preparers that helps with more complex technical issues

3. Request a Liaison Officer visit

4. Provide T4 information slips to your employees in electronic format (certain conditions apply)

5. Use T2 Auto-fill through commercial software

6. Create your own filing and balance confirmation letters online

7. View short “how-to” videos that explain the services on My Business Account

8. Experience telephone service improvements

9. Share feedback about your audit experience in a new post-audit survey

10. Have your objections resolved faster