Author Segal LLP

Take Advantage of the Super Tax Credit

If you haven’t claimed a donation tax credit since 2007 you may want to take full advantage of the First-time Donor’s Super Credit (FDSC).

lores_calculator_canadian_flag_mb

Alternatives To Cash Gifts

Donations of Public Securities: If you have stocks or bonds, it is more efficient to donate the investment directly as this will eliminate the capital gain.

Flow-Through Tax Shelters:  If you entered into any flow-through agreement after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Consult with your accountant to help ensure you don’t create an unwanted capital gain.

Estate Plan Donations: If you worry that you may at some point have to deal with medical costs or simply cover daily living expenses, you can make a bequest in your will. Donation bequests are deductible on your final tax return. For deaths that occur after 2015, donations made by will and designation donations will no longer be deemed to be made by an individual immediately before the individual’s death. Instead, these donations will be deemed to be made by the individual’s estate and where certain conditions are met, these donations will be deemed to be made by the individual’s graduated rate estate.

The nonrefundable credit is a one-time deal and adds 25% to the normal Charitable Donation Tax Credit (CDTC). To maximize this tax break you may want to avoid claiming smaller donations in the years you make them and instead carry them forward over the five years the temporary credit is available until they add up to a $1,000 threshold.

The super credit is available to you if neither you nor your spouse of common-law partner has claimed a charitable credit since 2007. You may have made charitable donations since 2007, but as long as you didn’t claim a credit for them, you remain eligible for the super credit.

The $1,000 limit applies to individuals and couples; there is no doubling of the credit. If you share your super credit in a particular year, the total amount claimed can’t exceed the maximum allowable credit. There is no age limit on eligibility.

Gifts of property don’t qualify for the super credit. Donations of property, including investments, will normally qualify for the charitable donation credit, but for donations to earn the super credit they must be made in cash only.

Also, the credit’s restricted to individual taxpayers. Corporations making donations for the first time won’t be eligible. They will be limited to the tax deduction typically available for corporate donations.

For income tax purposes, the first $200 of charitable donations qualify for the 15% CDTC and gifts over that amount qualify for a 29% credit. The super credit boosts those federal tax breaks by an additional 25% on all donations up to the $1,000 limit.

The super credit effectively adds 25% to the rates used to calculate the normal refundable tax credit for as much as $1,000 of monetary donations. That means first-time individual donors are allowed a 40% federal credit for donations of $200 or less, and a 54% on amounts exceeding $200 but not exceeding $1,000.

Example 1 – All cash: A taxpayer eligible for the credit claims $500 of charitable donations. All of the gifts are donations of money. The taxpayer’s federal super and normal charitable credits would be calculated as follows:

First $200 of donations claimed $200 times 15% = $30
Donations exceeding $200 $300 times 29%  = $87
First-Time Donor’s Super Credit $500 times 25%  = $125
Total of both credits     $2421

Example 2 – Mix of cash and investments: An eligible first-time donor claims $700 of charitable donations, but investments make up $400 of the total. Deducting that amount from the total leaves a cash donation of $300. The federal credits would be calculated as follows:

First $200 of $300 donations claimed  $200 times 15%  = $30
Donations exceeding $200 $500 times 29%  = $145
First-Time Donor’s Super Credit $300 times 25%  = $75
Total of both credits $2501

Consult with your advisor on how best to use this tax credit.

1. Provincial credits would increase these amounts.

Important Tax Figures for 2017

121516_thinkstock_587889772_thmb_kwThe following chart shows changes in important federal tax information for 2017 from 2016. Some of the figures are unchanged, some are indexed to inflation and others changed because of legislation.

Pension Contribution Limits 2017($) 2016($)
Registered Retirement Savings Plan 26,010 25,370
Money Purchase Registered Pension Plan 26,230 26,010
Deferred Profit Sharing Plan 13,115 13,005
Tax Free Savings Account (TFSA) unchanged 5,500
TFSA Cumulative Total 52,000 46,500
Canada and Quebec Pension Plan (CPP/QPP) 2017($) 2016($)
Maximum Pensionable Earnings 55,300 54,900
Employee/Employer Contribution Limit 2,564.10 2,544.30
Self-Employed Contribution Limit 5,128.20 5,088.60
Quebec Maximum Pensionable Earnings 55,300 54,900
Quebec Employee/Employer Maximum 2.797.20 2.737.05
Quebec Self-Employed Contribution Limit 5,594.40 5,474.10
Non-Refundable Tax Credits (Base Amount) 2017($) 2016($)
Personal/spousal/equivalent to spouse 11,635 11,474
Age Amount (65+ years of age) 7,225 7,124
Net Income Threshold 36,430 35,927
Disability Amount 8,113 8,002
Caregiver 4,723 4,668
Infirm Dependent 6,883 6,787
Medical Expense (3% of net income ceiling) 2,268 2,237
Eligible Adoption Expenses 15,669 15,453
Old Age Security Repayment Threshold 73,756 72,809
Children’s Fitness Maximum N/A  500
Children’s Art Maximum N/A 250
Employment Amount 1,178 1,161
Federal Dividend Gross Up (non-eligible payouts) Unchanged 17%
Employment Insurance Maximums 2017($) 2016($)
Employee Premium (Federal) 836.19 955.04
Employee Premium (Quebec) 651.51 772.16
Employer Premium (Federal) 1.170.67 1,337.06
Employer Premium (Quebec) 912.11 1,081.02
Maximum Insurable Earnings (Federal) 51,300 50,800
Maximum Insurable Earnings (Quebec) 51,300 50,800
General Federal Corporate Tax Rates

(after federal abatement and M&P rate reductions)

2017(%) 2016(%)
General M&P Income unchanged 15
General Active Income unchanged 15
Investment Income unchanged 15
CCPC Tax Rates (after federal abatement, small business and rate deduction and refundable tax) 2017 (%) 2016(%)
Income up to $500,000 unchanged 10.5
General Active Business Income unchanged 15
Investment Income unchanged 38.7
Marginal Federal Tax Bracket Thresholds 2017($) 2016($)
Taxable income above which the 20.5% bracket begins 45,916 45,282
Taxable income above which the 26% bracket begins 91,131 90,563
Taxable income above which the 29% bracket begins 142,353 140,388
Taxable income above which the 33.0% bracket begins 202,800 200,000

Get Up to Speed on Your Financial Status

Polls often suggest that many Canadians don’t have a firm understanding about their finances and maintain some misconceptions about credit.

thmb_track_sport_run_rank_first_lane_win_curve_mb

The Low Down on Credit

To get a better handle on your debt, it helps to know how financial institutions calculate the charges on your monthly credit card statement.

If you always pay the amount owed by the due date, you pay no interest at all. But if you carry over balances, there are differences in charges for various transactions:

  • Cash advances and balance transfers carry interest from the moment you make the transaction. There is no interest-free period.
  • Old purchases are unpaid transactions from a previous statement. On these, you are charged interest either from the date of the transaction or the date the purchases are posted to your account, until they’re paid in full.
  • New purchases can be interest-free under certain conditions. The interest-free period has two parts: The time between the purchase and your statement date, and the time between your statement date and your payment due date. This grace period can vary from 19 to 26 days.

Read the fine print when you take out a new credit card, use the ones you have, or take advantage of low introductory offers.

Not knowing how your rates are calculated can cost you more than you realize.

To protect your credit rating, many financial specialists recommend making the highest payment you can on credit cards, make all payments on time, and avoid signing up for multiple credit cards.

Other information that is critical to maintaining a healthy credit standing includes knowing that:

  • You are responsible for joint accounts and co-signed loans. Activity on those accounts shows up on your credit report.
  • Paying off a negative record doesn’t completely remove it from your credit report. Collection accounts, late payments and bankruptcies can remain on your report for as long as ten years, even if the bills are paid off.
  • Checking your credit reports will not lower your credit score and is a good way both to monitor your credit, find errors, and reduce the chances of identity theft.
  • Changing old accounts can actually lower your credit score rather than improve it. When you close old accounts, you shorten your credit history and that can actually lower your credit score. If you want to close your accounts, start with the newer accounts to help preserve your long established credit history.

Among other things, surveys have shown that many Canadians don’t have a household budget and don’t know their credit rating, a key tool in managing finances and debt. Moreover, Canadians who have credit cards often lack such critical knowledge as the annual interest rate they pay on their most-used card and that credit reports contain information about every loan, credit card, line of credit, mortgage or fault of payment incurred. (Equifax Canada and TransUnion Canada will provide a free copy of your credit report by mail or online for a small fee.)

Moreover, sizable numbers of Canadians don’t consider the effect changing interest rates will have on their borrowing costs.

This lack of understanding along with certain misconceptions about credit can hurt your credit score, which determines your ability to borrow, cost you thousands of dollars in unnecessary extra payments, and hinder your ability to save (see right hand box for some of the common misconceptions).

Assessing Your Situation

Two tools are critical in helping you evaluate your current financial situation and, when prepared and reviewed annually, they can help keep you on track toward your financial goals.

With the help of your accountant, work up a net worth statement and a spending analysis. You may then also want to work out a budget.

The net worth statement lists your assets and liabilities. The difference between them is your net worth. The statement should include all assets including retirement plan balances, personal property, jewelry, and household items. Value the assets at the price they could fetch now.

Once the statement is prepared, review it with your accountant and discuss the following:

1. Your ratio of assets to liabilities: A ratio of less than one to one indicates you have more liabilities than assets and a negative net worth. If that is the case, talk to your accountant about steps to take to cut your liabilities. As your debt declines, the ratio should increase. Ideally, the ratio should be at least two to one or greater.

2. Net worth growth compared to inflation: Growth in your net worth should outpace inflation. If it isn’t, determine why and take steps. Otherwise inflation is just eating away at your net worth.

3. Good vs. bad debts: The amounts and types of debt you have weigh heavily on your financial health. Mortgages are typically used to purchase items appreciating in value and are generally considered “good” debt. Credit card balances and auto loans finance items that typically don’t appreciate and should be kept to a minimum.

4. Liquid vs. nonliquid assets:Nonliquid assets such as a home and other real estate, jewelry, and works of art may increase in value but be difficult to sell quickly at full market value. Liquid assets such as bank accounts and stocks are more easily converted to cash. You want enough of them to cover emergencies.

Once you have a handle on your net worth, analyze your spending patterns and identify ways to increase savings, if necessary.

Start with a cash flow statement that details all sources of income over the past year and all expenditures by category.

Divide the expenditures among:

1. Fixed and essential expenses (such as housing, insurance, taxes and savings),

2. Variable and essential expenses (such as food, medical care and utilities), and

3. Discretionary expenses (such as entertainment, clothing, and charitable contributions).

Cancelled cheques, credit card receipts, and tax returns can provide much of the needed information. If you are unable to account for large sums of money, keep a journal of all expenditures for a month or so.

The spending analysis could lead you to decide you need a budget to help guide you toward your financial goals. Points to consider include:

  • Make conscious spending decisions. Don’t just assume you’ll spend the same amount as last year.
  • Prepare a flexible budget. Unexpected expenditures are bound to happen and your budget should incorporate that possibility.
  • Budget for large, periodic expenditures, such as tuition or insurance premiums.
  • Don’t try to be too exact. All family members should have a reasonable personal allowance that can be spent without accounting for it.
  • Periodically compare actual expenditures to your budget to ensure you stay on track.

Prevent Data Leaks at Your Organization

Staunch Electronic Leaks

thmb_computer_keyboard_mouse_2_bz

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.