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This Year is Your Last Chance to Take Two Child-Related Tax Credits

kidsThe kids are home for the next couple of months.

They’ll be running through sprinklers and getting brain freeze from ice cream cones. Or they’ll be glued to their mobile phones or gaming stations and generally underfoot. What to do, then, to keep them otherwise occupied, healthy, fit and out of trouble? Send them off to fitness activities or arts programs of course!

But that can be expensive. And this year, you can’t claim as much of the costs on your 2016 tax return as you did in previous years. Next year, you’ll get nothing.

Budget 2016 slashed by half the federal refundable children’s fitness tax credit and eliminates it in 2017. The amount has been cut to $500 from $1,000. The nonrefundable children’s arts credit has been cut to $250 from $500. However, both credits are still eligible for the additional $500 tax credit for a child with a disability (that additional amount also disappears in 2017). Here are the details:

Children’s Fitness Amount.

This refundable tax credit lets you claim eligible fees paid for registration or membership for a child in a prescribed program of physical activity, up to a maximum of $1,000 for each child of your own, your spouse or your common-law partner. The child must be under 16 years of age — or younger than 18 if eligible for the disability amount — at the beginning of 2016.

If the child does qualify for the disability amount, an additional $500 can be claimed provided at least $100 is paid in eligible fees in the year.

You calculate the maximum credit of $75 ($150 for a child eligible for the disability tax credit) by multiplying the lowest personal income tax rate (15% in 2016) by the eligible amount for each child.

Supervised and Suitable

Qualifying fitness programs must be supervised and suitable for children and they must last a minimum of eight consecutive weeks or, in the case of children’s camps, five consecutive days, if more than 50% of the daily activities include a significant amount of physical activity. They also must require action that contributes to significant cardiorespiratory endurance and one or more of:

  • Muscular strength,
  • Muscular endurance,
  • Flexibility, and/or
  • Balance.

Included among the many programs eligible for the credit are hockey and soccer camps, golf lessons, horseback riding, sailing, and bowling. For children qualifying for the disability amount, the requirement for significant physical activity is met when there is movement that requires an observable use of energy in a recreational context.

The following aren’t eligible:

  • Programs where riding in, or on, a motorized vehicle is an essential part of the activity,
  • Unsupervised activities,
  • Regular school programs (fees charged for extracurricular programs that take place in school are eligible),
  • Sports-academics programs, and
  • Fees paid for accommodation, travel, food or beverages (room and board at a fitness camp doesn’t qualify).

Keep in mind that costs eligible for the fitness amount can’t be used for the children’s arts credit.

Children’s Arts Credit.

You might send your kids to programs aimed at improving their minds. For this you may receive a nonrefundable tax credit that allows you to claim eligible fees paid in the year up to a maximum of $500 for the cost of registration or membership of a child in a prescribed program of artistic, cultural, recreational or developmental activity. An additional $500 is available if the child is eligible for the disability tax credit and a minimum of $100 has been paid in eligible fees in the year.

The maximum tax credit is calculated in the same way as the fitness credit.

You may claim a credit of as much as $500 for each child for all of their arts-related activities. The general requirements are the same as for the fitness credit in terms of age, program length and increases for children with disabilities.

A Broad Range of Activities

In general, eligible activities:

  • Contribute to the development of creative skills or expertise in artistic or cultural activities,
  • Provide a substantial focus on wilderness and the natural environment,
  • Help children develop and use particular intellectual skills,
  • Include structured interaction among children where supervisors teach or help children develop interpersonal skills, or
  • Provide enrichment or tutoring in academic subjects.

This covers a broad range of activities ranging from painting, music classes, languages and drama, to Scouts, Girl Guides and academic tutoring.

Eligible expenses include fees paid for the cost of registration or membership, which cover the costs of administration, instruction, and the rental of facilities or equipment. When the equipment or uniforms have little resale value after the program, the amount of the cost related to those items is eligible.

Ineligible expenses include:

  • Amounts in addition to fees and registration that are used to purchase uniforms or equipment,
  • Fees related to travel, meals and accommodation,
  • Fees paid to a program run by a person younger than 18 or by the spouse or common-law partner of the individual claiming the credit, or
  • Amounts claimed as a deduction, or as the Children’s Fitness Tax Credit or any other tax credit.

Hang on to Receipts

When you send your kids off to a program that qualifies for a tax credit, be sure you keep your receipts. You don’t submit the receipts with your income tax return, but you should keep them in case Canada Revenue Agency (CRA) asks for verification.

Receipts should include the:

1. Name and address of the organization and the program.

2. Amount received, date received, and amount eligible for the tax credit.

3. Full name of the person paying.

4. Full name and year of birth of the child.

5. Signature of an authorized person (not required for electronically generated receipts).

Talk to Your Advisor

Determining what qualifies for tax deductions or credits may be complex. And keep in mind, the provinces and territories may offer similar tax credits. Consult with your adviser who can help ensure you take all the tax breaks available to you.

Business Owners: Hire Your Kids This Summer for a Win-Win Situation

teensSchool’s out for summer and if you run your own business, you may have decided to hire your kids.

The decision makes business sense: You’ll get tax and financial benefits. Consider that by hiring the children, you can:

  • Redistribute company income to lower taxes,
  • Form a type of partnership with your kids, working together toward paying education costs and avoiding heavy student debt loads, and
  • Teach them money-management lessons.

Redistributing Income

Income splitting by redistributing company income may be the greatest tax break in this situation. You (a high earner) transfer money to the kids (low earners). This strategy not only shifts income from your business tax returns, your company also gets business deductions for the salaries it pays them.

And there’s an added bonus: If your children use their earnings to pay for college or university, their tuition and other tax credits will help offset any taxable earnings. If they don’t use all their credits, they can:

  • Carry them forward indefinitely to use when they’re working full time, earning more money and confronting larger tax bills,
  • Transfer them to their spouses, or
  • Transfer them to you.

Income splitting works with any business organization. It doesn’t matter whether you operate as a sole proprietor, a corporation or a spousal partnership. All three business forms can pay wages to children. There are, however, a few catches including:

  • The kids actually must perform work,
  • Their jobs must be legitimate, and
  • Their salary must be reasonable for the type of work done and their ages.

Caution: Red Flags

“Reasonable” is a crucial concept here. The Income Tax Act contains a rule that states expenses can’t be deducted unless they’re reasonable. When an employee is a relative, red flags may go up at Canada Revenue Agency (CRA) and auditors are likely to examine whether or not the salaries meet the test of reasonableness. If the pay cheques are considered unreasonable, the salary deductions will be disallowed. This will increase the income of the business and create additional tax. And if it can be shown that the excessive salaries were knowingly paid, penalties may be applied.

Unfortunately, there’s no hard-and-fast test to help determine what’s reasonable. A rule of thumb: Pay your children (or your spouse or common-law partner) the same amount you’d pay other employees for the same jobs with the same level of experience. If you pay more, be prepared for the CRA to request justification. Don’t forget to withhold income tax, pension plan contributions and provincial payroll taxes, if they apply.

You may also want to pay a bonus. In that case, if it’s eligible, the money is a deductible business expense that reduces your company’s taxable income and is taxed at the recipient’s lower rate. If your child is a shareholder, year-end bonuses can be paid out in the holder’s next tax year, deferring taxes.

Bonuses still need to be reasonable, given the amount and type of work done, or the CRA may deny them as corporate expenses. The tax agency generally won’t question bonuses paid to shareholders who actively work in the business, but it may question payments to inactive shareholders.

The All-Important Paper Trail

Hiring your kids does require some additional expenses and paperwork. Make sure your company keeps good records of both the services performed and the time worked. While it may seem like a nuisance to track everything, it is critical that you leave a paper trail.

Each child must be listed on the payroll, with salary deductions. Keep attendance records to prove they were on the job when you say they were. Among the critical elements of the paper trail are:

  • A work contract specifying the job to be done, the salary, hours to work, conditions of employment and benefits.
  • Social Insurance Numbers for each child.
  • Tax credit returns for each child.
  • Canada/Quebec Pension Plan and Employment Insurance premiums paid for children over the age of 18. Those children may also contribute to pension plans.

Pay your kids by cheques deposited directly into their bank accounts to indicate that they have control over the money. If you pay “in kind,” with items other than money, the amounts are considered taxable “non-cash benefits.” The fair market value of the payment is considered a benefit to the child and must be reported to the CRA.

You would need to report the value as part of your company’s gross sales, so you include it in income. But you get to deduct the amount as a business expense. Effectively, you’re selling the in-kind item and paying your child in cash.

If you’re in doubt about the child’s status for EI or pension purposes, consult with your tax adviser.

Lessons in Money Management

Once your kids file a tax return, even if they don’t owe taxes, they can open a Registered Retirement Savings Plan and start building contribution room. If they start putting money into the plan, they’ll eventually be eligible for the Home Buyers’ Plan that allows them to withdraw as much as $25,000 from their RRSP to purchase a house when they’re ready.

Those under 18 can also contribute to a Registered Education Savings Plan, assuming you open one for them. Of course, you and others may also contribute to the plan. The kids will receive a federal grant equal to 20% of annual contributions made to a maximum of $500 ($1,000 if there is unused grant room from a previous year). The lifetime grant limit is $7,200.

If you’re taking care of all the RESP contributions, the children can put earnings aside for their education to help avoid graduating from college or university with massive amounts of student debt. And to add to their money-management education, it won’t hurt to teach them how to budget and let them start paying for their own haircuts, clothes, smartphones and other discretionary items.

Consult with your accountant if you’ve hired your child or want to. Income splitting can be complex and some techniques may be restricted by corporate attribution rules.

Lighten the Tax Load on Your Heirs

Your Registered Retirement Savings Plan (RRSP) poses the potential threat of a large tax liability, as well as probate fees, when you die. This can place a burden on your spouse or other heirs unless you carefully map out a plan to either minimize or defer taxes.

Here are some considerations:

If your RRSP isn’t paying retirement income when you die, Canada Revenue


Leaving a Mature RRSP

If your RRSP has matured (in other words, it is paying retirement income), you are considered to have received the full fair market value of all remaining payments as income.
That amount, along with any payments already made during the year, must be included on your final tax return after you die.
However, the beneficiary won’t have to pay tax on an RRSP payment if it can reasonably be regarded as included in your income.
If you name your spouse, common-law partner, financial dependent child or grandchild as sole beneficiary, the CRA allows the RRSP to be rolled over to them. The beneficiary simply becomes the successor annuitant and receives all future payments.
But if you also name another beneficiary, the portion of the fair market value that doesn’t go to the qualified beneficiary must be included in the final return as taxable income.
What if you don’t name an RRSP beneficiary in the contract? Your will plays a central role.
The plan’s assets go to the estate. Your spouse, common-law partner, or financially dependent child or grandchild, along with the legal representative, can jointly choose in writing to be the successor annuitant. This is only the case, however, if your will states that one if these people is the heir or is entitled to the RRSP annuities.
The CRA will then assume that the successor annuitant received the RRSP property and it will have to be included in income for the year it was received.
Any post-death decreases in the value of an RRSP or Registered Retirement Income Fund can be carried back and deducted against the year of death inclusion. 

Agency (CRA) considers that you received the entire fair market value of its assets on the date of your death. Thus, the value becomes taxable income on your final return.

What happens next depends entirely on how well you planned and who you named as the beneficiary in your RRSP contract. If you haven’t specified a beneficiary, your heirs may receive very little of the money. The after-tax funds become part of your estate, probate fees are assessed, and what’s left is distributed according to the terms of your will.

If you named a beneficiary, the person will receive all of the value of your RRSP. Probate fees are not assessed, but the income taxes are paid by the estate. This can result in an imbalance of the inheritance — with the heirs of the estate receiving very little after the taxes are paid, and the RRSP beneficiary receiving most of the value of the estate. (If the estate is unable to pay the taxes due on the RRSP at the date of death, the RRSP beneficiary is jointly liable for the taxes owed on the RRSP value.)

The good news is the Income Tax Act contains strategies that allow you either to defer or to minimize those taxes:

Tax Deferral: You can roll over your RRSP tax-free to a spouse or common law partner, or to a financially dependent child or grandchild. To the CRA, this rollover is the same as if that beneficiary had been the annuitant all along. So taxes aren’t due until that person actually withdraws money from the plan or from an annuity set up with the RRSP funds.

This strategy requires two basic steps:

1. In the RRSP contract, you must name the qualified individual as the sole beneficiary.
2. Before December 31 of the year of death, the beneficiary must arrange for the RRSP issuer to transfer the plan’s assets to an eligible RRSP, a Registered Retirement Income Fund (RRIF), or an annuity.
Warning: This tax-free rollover isn’t available if you named a beneficiary other than your spouse, common law partner, dependent child or grandchild, or you named more than one beneficiary.

Tax Minimization: Alternatively, your qualifying beneficiaries can qualify for special treatment by rolling the RRSP amount over into their own RRSPs — your income essentially becomes their income.

Amounts actually received by a qualifying beneficiary can be removed from your income and added to the beneficiary’s income. Then, the beneficiary can deduct the amount contributed to the RRSP, resulting in no taxes being paid. This allows the beneficiary to minimize the total taxes paid.

The beneficiary can transfer any amount of refunded premiums to an RRSP, RRIF or annuity, and claim a deduction to offset some or all of the refunded premiums included in income. This is not the same as a regular RRSP deduction because the beneficiary does not need RRSP contribution room, and the deduction does not use up any contribution room.

If you own an RRSP and are concerned about the taxes your heirs will pay after you die, consult with a professional to ensure you make the proper arrangements. And while you’re at it, make sure your named beneficiaries reflect any changes in your life circumstances to avoid any unwanted results.

Fed Up Customers Can Hurt Profits

Sometimes It Only Takes A Smile and a Friendly Word


Businesses can’t afford to underestimate the influence customer service has on their bottom line. One nearly certain way to lose customers is to make them wait too long.

Breaking Point

   One survey by Maritz Research asked how long individuals thought was an acceptable wait time at  specific types of organizations. Respondents gave the following average times:

  • Doctor – 81 minutes;
  • Public transit – 22 minutes;
  • Grocery store – 15 minutes;
  • Department store – 6 minutes;
  • Fast food restaurant – 6 minutes;
  • Convenience store – 3 minutes;
  • Bank – 6 minutes.

The following percentages of customers left specific businesses after what they considered an unacceptably long wait:

  • Department store, 78 per cent;
  • Public transit, 64 per cent;
  • Fast food restaurant, 58 per cent;
  • Convenience store, 54 per cent;
  • Medical facility, 50 per cent, and
  • Grocery store, 40 per cent.

Customers indicated there are some simple ways to keep them relatively happy while waiting, such as:

  • An apology for the delay, 82 per cent;
  • A greeting with a smile, 74 per cent, and
  • Updates on their status, 67 per cent.

Polls have shown that more than 80 per cent of customers have left a business because of long waits. The amount of time a customer has to wait is a primary driver of customer satisfaction and should be at the top of your business’s list when it assesses how it can better serve consumers.

One survey also showed that bad customer experiences tend to have a ripple effect where customers who perceive negative service are not only less likely to spend money at that business again, but they are also more likely to tell others about their experience.

In a time where shopping research takes place online and people are engaged in social networks to share and collect ideas, businesses risk losing potential customers before they ever set foot in a  store or office.

Knowing that customer service is one of the best routes to a healthy bottom line, here is a management checklist that will help improve your enterprise’s customer-satisfaction ratings:

1. Require executives to personally and regularly serve customers.

By dealing with the public, executives cement relationships with customers or clients and let employees know that service is honorable and rewarding as well as the focus of corporate energy.

2. Survey customers and give immediate feedback.

A customer satisfaction survey can establish performance benchmarks, build relationships, identify customers your business risks losing and can be a catalyst for enhancing overall satisfaction. Surveys should be short, taking no longer than 10 minutes to complete. Ask concise rather than open ended questions and mix topics to force continual thinking about different subjects.

When you get enough results and spot trends, let your employees know. Moreover, be sure staff quickly  hear comments about problems or positive results. This lets them make the connection between their behaviour and customer attitudes toward the company. A quick response to customers shows them that your organization cares and rewards them for taking the time to speak up.

3. Hire people who have a service attitude.

Some people simply enjoy serving others and that urge dominates their personalities. These individuals make the best salespeople, present a good image for your business and help your enterprise grow.

4. Cultivate service heroes.

Your company’s staff and management meetings should regularly feature examples of outstanding customer service. Public praise creates heroes and encourages excellence. Give employees the power to do whatever has to be done to make a customer’s experience pleasant. There will be occasional failures but those are opportunities to find new strategies. When employees deliver the goods, reward them. One way is to link compensation to employee contributions. Companies that do not reward innovation are not likely to be encouraging outstanding service.

5. Devote as much time to service training as you do to technical and procedural training.

Getting it right technically doesn’t count if the customers feel they haven’t received a commitment to a continued relationship. If customers feel they received poor service then they did receive poor service. Your employees represent you, your company, and your brand. Working with customers is the most important thing they will do. Give them the tools by giving them sufficient training. Never let an untrained employee have customer contact.

6. Make customers your only concern.

Let them think you have all the time in the world — even when you don’t. A relaxed tone of voice and patience go a long way toward keeping them happy, even when they don’t get what they want. Take their complaints seriously — they don’t care if you’ve heard the problem before, they want your complete attention. Studies have shown that as many as 90 per cent of customers whose complaints are resolved will purchase again.

7. Keep raising the bar.

Successful organizations continually raise the bar. If your entire enterprise isn’t pushing to do better today you risk being left behind. Create an atmosphere of excellence at your enterprise by spreading the word that everything your company and its employees do must be the best and that you won’t accept less.

8. Comparison shop.

Visit the competition, see what they are doing and then do it better or differently. Customers have more than one choice, so stay ahead of the curve by asking how you can add value to their experience. When you are a customer, get involved with clerks and service attendants.

9. Keep employees up to date.

Let staff know what new products have been ordered, when they will arrive, what kind of advertising promotions you plan and what business changes you may be planning. The more your employees know, the better then can serve the customers or clients.

10. Stay positive.

When a problem or question arises with a customer, say you will try to resolve it rather than that you can’t do anything about it. If a customer demands something that is against company policy, explain the situation but then offer to help come up with an alternative solution.

Final Thought: Always say thank you. A good rule of thumb is to end every interaction with a word or two showing appreciation. Even when customers complain, you can thank them for bringing the problem to your attention.

Consider Some Middle Level Financing

If your company is mature and you are looking for financing to bring it to the next level, but you don’t want to go public and are unwilling to give up any control of your business, mezzanine financing could be for you.

Mezzanine financing —  also known as subordinated debt, junior debt, structured equity, and equity-linked notes — can be particularly useful when your capital needs exceed what your senior secured lender and your equity holders are willing to provide.

Mezzanine Applications

 Mezzanine financing can be a good option if your company has exhausted such secured financing as term loans based on capital assets, or short-term financing based on current assets.

In addition, because this type of financing helps preserve cash flow needed for daily operations, it can be particularly useful if you are raising capital to:

  • Boost market penetration;
  • Improve research and development;
  • Expand payroll;
  • Broaden distribution;
  • Finance marketing programs;
  • Increase inventory;
  • Acquire equipment;
  • Expand geographically, and
  • Develop export markets.

Other reasons to consider subordinated debt include:

  • Management buyouts and succession planning;
  • Leveraged buyouts;
  • Acquiring intangible assets such as intellectual property;
  • Strategic mergers and acquisitions.

What It Costs

This type of financing is a hybrid of debt and equity that lenders expect to generate a 20 per cent to 30 per cent return through capital appreciation and interest. With that expected return, mezzanine financing is not cheap.

First, the lender advances cash through a term loan at interest of between eight per cent and 12 per cent. The interest payments, paid regularly over the term of the loan, are tax-deductible.

Then the lender enhances the rate of return with an “equity kicker,” which is usually some form of participation in the expected success of your company.

These participation features can take the form of royalties on sales; a percentage of net cash flow; participation fees; warrants or options to buy shares, and rights to convert debt into common stock.

And finally, origination fees generally run between two per cent and three per cent of the transaction, although in some cases the lender may waive the fees.

Mezzanine lenders don’t really want an interest in your company, so instead of holding real assets as collateral, as is the case with equity loans and venture capital financing, mezzanine financers prefer rights to convert their stakes into ownership equity should your company default on the loan. As a result, the debt doesn’t dilute your equity stake and you retain control of the business.

Getting in and Getting Out

Given that cash flow and the success of your business account for much of the lenders’ return, they typically will want to see that your company has a sound track record and management team; a history of profits; strong margins; an established line of credit, and a strong business plan. Start-ups and businesses with financial difficulties need not apply.

The lenders will also want a clearly defined exit strategy, which could involve selling the company, recapitalizing, refinancing, or even an initial public offering.

One disadvantage of mezzanine financing comes from its position on your company’s balance sheet.

Subordinated debt is sandwiched between senior debt and equity. So, in the event of bankruptcy or the sale of your business to pay debts, proceeds first would go to pay off senior lenders, then subordinated lenders. Your common and preferred shareholders would come last and likely receive a much smaller share of those proceeds.

A Borrowing Advantage

On the other hand, a mezzanine layer in your financing could help your company raise more total capital.
For example, say you wanted to make a $100 million acquisition through bank debt and equity. The bank might lend you $50 million, leaving you with an equity requirement of $50 million.

If you added mezzanine financing, the bank might lend just $40 million, but the subordinated lender might provide $25 million, for a total capital of $65 million. Your equity requirement then has dropped to $35 million.

Moreover, banks often look more favourably on companies that have institutional backers and may offer more attractive credit terms.

Your financial advisor can discuss the merits of mezzanine financing and help determine if it would be an ideal solution for your company’s growth needs.