Author Segal LLP

Prevent Data Leaks at Your Organization

Staunch Electronic Leaks

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Just as soldiers and government employees can electronically download and distribute secret and confidential information, so can employees who have access to electronic data, in any workplace.

Today’s digital storage of information and electronic communication simply makes it easier and faster to disclose substantially more. Some individuals who transfer confidential, private and secret information for worldwide dissemination may be motivated by noble intentions. They believe in the best interest of everyone by blowing the whistle on a company. But the greater risk for private companies comes from disgruntled employees and those about to be fired.

Many of these employees are disengaged from their jobs. Think of them as the employees who are present in the workplace, but absent from their work. Employee disengagement is a major risk for theft and distribution of unauthorized data — especially among IT employees. The more access an employee has to information at your company, the greater the risk.

Warding off Data Theft

There is no absolute 100% secure way to prevent all possible breaches of, theft of, and accidentally unauthorized distribution of private, secret, personal, and confidential information. However, there are many steps that businesses and organizations can take to defend against leaking and other types of data theft and unauthorized information distribution.

Here are ten steps to secure private, personal, confidential and valuable data:

1. Establish and nurture a culture of trust and fairness among employees.

2. Develop hiring procedures that:

  • Attract the kinds of people who want to work for you and who want to perform well in their jobs.
  • Place the people in the jobs they are most qualified to do. By matching the right applicants (those with values and expectations that fit your culture) to the right jobs (that make use of their talents), you increase the chances employees are engaged in their work and loyal to your organization.

3. Tighten internal electronic data access control. Information should be provided to employees only on the basis of need.

4. Destroy, on a regular maintenance schedule, older stored data that is no longer deemed necessary. Consult with your attorney and your accountant to develop guidelines and a schedule so that deletions conform to legal and accounting requirements.

5. Monitor employees’ electronic activity and investigate abnormal behavior. Look for access during non-work hours, large downloads and employees who obtain information that may not be required.

6. Proactively track who is accessing what information on the network. Compare the activity to what individuals should be accessing. Many organizations also scan outgoing and incoming e-mail. Audit the information employees are accessing remotely and the data being turned over to outsiders, third-party individuals, companies and contractors.

7. Overlap the responsibilities of multiple employees, who work with (or have access to) sensitive data, so they can observe each others activities. This would be similar to having two or more employees overlapping in dealing with financial recordkeeping to decrease the opportunities for embezzlement.

Having multiple employees overlapping duties is a must for any organization committed to data security. No one person in the IT team should have sole responsibility for a given system, platform or application. This requires cross-training of individuals and ensuring that the individuals regularly rotate responsibilities.

8. Adopt written policies and procedures about use of, and access to, your electronic and digital equipment and systems. The policies and procedures need to deal with what is allowed, what is prohibited, and the consequences if an employee misuses or wrongfully distributes information, records, and documents. Distribute the policies and procedures to all employees and obtain their signatures verifying they received, read, and understand the policies.

9. State clearly in the policies that former employees will no longer have access to private, sensitive, and confidential information. This especially means that former employees are not given access to employer-issued or employer-owned computers, laptops, other data-bearing devices, or paper documents.

10. Communicate regularly, at least once a year, these policies and procedures to all employees.

Unplug the Money Valves

thmb_pie_chart_half_nhYour company’s ability to manage cash flow is critical to its survival. Enterprises that successfully practice good cash management generally survive and prosper. Those that don’t are likely to be undone by the weight of increasing debt — if it’s even available — and the inability to pay employees and suppliers.

Maintaining smooth cash flow requires juggling most aspects of your enterprise, from accounts receivables to extending lines of credit and managing inventory. Increasing cash flow reduces the amount of fixed capital required to support your ongoing operations.

It may help to think of the process in terms of the cash cycle, which is the amount of cash your company needs in terms of days of activity to keep operating. Let’s assume your business had the following financial statistics at the end of its most recent fiscal year:

Annual sales $3,600,000
Annual cost of sales $3,285,000
Billed accounts receivables $   600,000
Unbilled accounts receivables $   400,000
Accounts payable and accrued expenses $   450,000

The first step in calculating the cash cycle is to determine the amount of average daily sales and the cost of sales. Dividing sales and cost of sales by 365 days gives you average daily sales of nearly $10,000 and average daily cost of sales of $9,000.

Then you calculate the number of days’ investment in billed and unbilled accounts receivable:

Billed accounts receivables $   600,000
Plus unbilled accounts receivables $   400,000
Subtotal $1,000,000
Divided by average daily sales $     10,000
Number of days investment            100

Thus, it takes 100 days on average between production of a good or service and payment. Similarly, using the daily cost of sales average, you can determine the number of days financed by vendors and employees:

Accounts payable and accrued expenses $   450,000
Divided by average daily cost of sales $       9,000
Number of days financed              50

With that in mind, here are eight tips to strengthen your business’s cash cycle and increase cash flow:

1. Stretch out your payables. Take the maximum time to pay your suppliers. Essentially this amounts to an interest-free line of credit and gives you more time to use your working capital.

2. Take advantage of payment incentives. If your suppliers offer you a discount for paying early, take it. Refusing it can be a major mistake. Let’s say you owe $1,000, but you could reduce that to $980 by paying the bill in 10 days rather than the usual 45 days. Foregoing the discount costs your business $20 to hold on to your $980 for 35 days. That is like borrowing money at a 21.3% interest rate. If your suppliers don’t offer incentives, ask for them. Many will be willing in order to speed up their own receivables.

A healthy cash cycle requires some cash flow forecasting. This helps you plan your cash balance and know if you will need to borrow at certain times of the year and how much surplus cash you are likely to have at certain times. Your cash flow forecast is usually done for one year or a quarter in advance and divided into months or weeks. For companies  who are barely making ends meet to pay their day-to-day expenses, a daily cash flow forecast may be needed.

3. Organize your billing schedule. The faster your business collects receivables the more money it has to spend. Prepare invoices as soon as goods or services are delivered. Waiting until the end of the month may add as many as 30 extra days to your cash flow conversion period. Offer discounts for fast payments, and if your business provides a service, ask customers for a deposit before work begins.

4. Closely track and collect overdue accounts.Software can help your business automatically classify the age of accounts receivable and flag overdue accounts. Act immediately on past-due accounts and use a collection agency if necessary.

5. Use fund transfers. If you use electronic fund transfers in place of cheques you can reduce your collection cycle.

6. Split business between suppliers. Sometimes you want to buy equipment, say computer hardware, from a value added reseller who can help you choose the right system for your needs. Other times, however, consider buying routine materials such as cables, software, paper and printer cartridges from a mail order catalogue at commodity prices. Alternatively, get together with some colleagues to buy supplies in bulk.

7. Keep a lean inventory. Having too much stock can tie up large amounts of cash. Calculate your turnover ratio (cost of goods sold divided by the average value of inventory) to keep turnover within industry norms. Regularly check for old or outdated stock. You can defer future orders to get rid of that stock or sell it at cost, which would improve your company’s liquidity.

8. Consider leasing instead of buying. Leasing computer equipment, cars, tools and other gear costs more than buying, but you will avoid tying up cash. Lease payments are a business expense, so they will also help lower your taxable income.

Talk with your accountant or business advisor who can help you review your cash flow statements, find weaknesses and come up with solutions to maintain a healthy balance between cash flowing in and out of your enterprise.

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.”)