RRSP scheme

Beware Alert!!!

Recently Canada Revenue Agency issued an alert for RRSP scheme that could put you in trouble. Investing in schemes that promise you tax free withdrawals from RRSPs (Registered Retirement Saving Plan) and RRIFs (Registered Retirement Income Fund) could result in the loss of your full retirement savings.

What is an RRSP scheme and some example of it:

RRSP scheme is usually a type of investment promotion offering a “tax-free” withdrawal to access your RRSP funds directly or indirectly. Some examples of observed RRSP schemes by CRA (Canada Revenue Agency) have included:

-          Withdrawal of funds from an RRSP or RRIF without paying tax , where promoters often promise to return part of individual’s investment using offshore debit, credit card, offshore bank accounts, or loan-back arrangements.

-          Income tax receipts providing deduction of three or more amount contributed to an
RRSP and unrealistic returns on investments.

Promoters of these types of schemes direct the owners of RRSP or RRIF to purchase a particular investment through a specific trustee. The investment could be share in a company, a part in a co-operative, a mortgage, or other type of investments.

CRA is highly recommending people not to invest in such schemes that could result in losing your entire saving to fraudulent promoters. By doing so, not only you lose your savings also your tax return get reassessed. Over the past years to now, CRA has reassessed over 5,000 investors who participated in these schemes resulting in additional taxable income roughly $250million.


Are you thinking of investing your money? It is very important that you get independent legal and tax advice from a tax professional that is not connected to investment organization or promoters. If you are approached with such offer and not sure it is one of such scheme that revenue agencies are already issued alert, give us a call to book a consulting session with us, it will save you lots of money in tax, interest and gross negligence penalty.

Dividends Vs Salary

 

 

 

Salary Vs Dividend:

Most of my clients who set up a corporation have asked me how to take out money either by dividend or salary. Dividend and salary, both have their advantage and disadvantages.

 

Salary Advantages and Disadvantages:

-          Possible to contribute to RRSP

-          Require to contribute to CPP/QPP

-          Salary or Bonus expenses are deductible for Corporation

-          Income splitting is available by paying salary to related employees such as wife or children

Dividend Advantages and Disadvantages:

-          Dividends are taxed at a lower rate than salary which may result in paying less personal tax

-          No required to contribute to CPP/QPP, therefore saving money
 

o   Downside of only receiving dividend is  even if corporation owner  would like to contribute to CPP/QPP it is not possible

o   Receiving only dividend omit possibility to contribute to RRSP to reduce income or defer taxes

o   Receiving only divided can destroy possibility of other personal deduction such as child care expenses
 

-        Paying divided is simpler compare to paying salary as do not require calculating or remitting Deduction at sources.

The best solution depends on individual need of each of the business owners. Often time corporations pay out salary and bonuses to ensure that its Net Income do not exceed small business dedication limit ($500K for 2013-2014 tax year). In summary, salary or divided depends on business owners personal financial circumstances, such as income level, cash flow needs, corporate income, personal income tax deduction, net personal assets, net personal other income etc.

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Spousal Tax Credit for Non-Resident Spouse

Did you know, if you are sponsoring your spouse to Canada and your spouse is not here, you still can claim the spousal amount. As per Income Tax guide IT513R, it is necessary that the non-resident person be supported by or be dependent on you for support. I the non-resident spouse has enough income or assistance for a reasonable standard of living in the country in which they live, they are not considered to be supported by you.

Following are stated in IT513R

"In order for an individual to claim the spousal tax credit for a non-resident individual's spouse, it is necessary that such non-resident person be supported by or be dependent for support on the individual. The question of support or dependency is determined on the facts of each case. If the non-resident spouse have enough income or assistance for a reasonable

standard of living in the country in which they live, they are not considered to be supported by or be dependent for support on the individual. It is to be noted that gift which merely enhance or supplement the already adequate lifestyle of the non-resident person do not constitute support. In determining if the non-resident spouse is supported by the individual, the CRA will consider such factors as:

1) The income of the spouse
2) Any support provided to the spouse by government agencies of the country in which such spouse reside, such as pension, medicare, housing etc.
3) The cost of living in the particular country and the ability of the spouse, child or grandchild to provide self-support; and
4) Any support provided to the spouse by other persons. 

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Corporate Fiasco

After finishing the undergraduate program, I had opportunity to work for a forensic accounting firm. I worked on more then few high profile court cases. One of the cases, that I was required to obtain and maintain knowledge was litigation against Castor Holding.

Castor Holding was a Montreal based financial intermediary company for real-estate financing that declared bankruptcy in 1992. As a private company, Castor Holding was able to operate as an unregulated Financial Investment bank like organization. Auditor of Castor Holding Coopers & Lybrand (C&L currently known as as PWC ) was sued by the investors. In 2011, judge ruled in the favour of the investors seeking more then 1-billion in damages resulting from claims of professional negligence by the auditors Coopers & Lybrand.

Unethical Practices: 

Castor presented itself as a spread lender, placing deposits and loans from private & institutional investors, bank into high-yield mortgage and equity loans. Castor makes its profit from the difference between cost of borrowing and rate of lending. But in reality, castor was acting more like an equity partner. It continued lending money to most of its borrowers with very few exceptions, when it was obvious that the borrower would not be able to meet their financial obligations. As any other Ponzi scheme Castor Holding continue to raise increasing amount of money from her lenders and investors to satisfy its outstanding and exponentially increasing financial obligation as well as to support her borrowers insatiable cash needs.

Poor Internal Control: 

At that time, in general, the concept of internal control was almost non-existent and any time higher management can override any internal control. The owners of Castorl Holding Mr. Stolzenberg and Mr. Warsebe were very diligent to convene there steps. They put tremendous amount of pressure on their employee to falsify the reports. The management of castor was able to get away for so long with this fraud because of the regulatory slack that was existed at that time.  Sarbanes-Oxley Act (SOX) may have prevented this corporate Fiasco.  SOX is a good benchmark for public companies to ensure proper internal control but still it is far from perfect.

Dysfunctional Behaviors of Corporate managers: 

The fraud was committed by the owners of Castors. They were vary diligent hiding the truth. Even though, many argues that GAAS were not followed by C&L, however according to many other independent expert witness express their opinion which stated: there were plenty of evidence that GAAS were followed and there were many red flags that were caught by C&L. However they closed their eyes consciously and purposefully and allowed a massive fraud to be perpetrated.  There were many more events that I could name that are similar to this corporate fiasco like: Worldcom, Enron, Bernard Madoff, Earl Zones. This kind of dysfunctional behaviors will continue until people's morel and ethical sense is raised to a level that prevents this.

Disclaimer: All the facts of this story is publicly available information. Therefore, author can't be responsible for expressing his/her opinion.

Visit us: www.paulsandassociates.com

Self Employed Vs Employee

If your worker is an independent contractor (self-employed) or an employee?

Recently a new client that came to me and complain that his previous accountant did not advised him whether to pay his workers as self-employed individuals or employees. If Canadian Revenue Agency determines that your worker is an employee rather than self-employed, it can be very expensive both you and your employee. It is true, that it is more attractive to hire or to be hired as self-employed person then an employee because employer don’t get to pay the CPP or QPP or other benefits, on the other hand there are many deduction available to self-employer individuals.

So, the big tax advantage for the self-employed workers, of course, is the potential for tax deductions. A self-employed person can deduct all reasonable business expenses. That sounds great! But be aware! But if a business hires a self-employed worker who is later deemed to be an employee, both parties lose big as unpaid taxes, penalties, interest, CPP and EI premiums will all have to be paid.

Distinction between employee vs. self-employed:

Your worker will be considered to be self-employed if that person is free to choose the means of carrying out a contract and no relationship of subordination exists between you and that person. Conversely, your worker will be considered to be an employee if, under a written or verbal contract, that person undertake for a limited time to do work for remuneration under the direction or control of you. In order to determine whether a worker is an employee or a self-employed person, government will assess the degree of subordination existing between the worker and the person who provides the work according to six basic criteria. These criteria are interrelated and must be considered as a whole.

The six criteria are as follows:

• Subordination in the Performance of Work
• Financial or Economic Criterion:
• Ownership of Tools
• Integration of the Tasks Carried Out by the Worker
• Specific Result of the Work
• The Parties' Attitude Regarding Their Relationship

If you need to determine your workers are self-employed of employee please give us a call at 514-585-6848 or you can also visit us at http://paulsandassociates.com/

Please note: This article is not a substitute for professional advice. We recommend that you seek professional advice before making or considering or making important decision.

Employee loans & Home Relocation

If you have an employee and you provide the employee with a loan at little or no interest, the employee must include them as a table income in their annual income tax return. This benefit is calculated on the loan at a government provided prescribed rate minus the interest actually paid on the loan within the year or 30 days after year end.

However, there's special rule applies when  you provide your employee with low or no interest loan to a purchase a home to work in a new location. The table portion of the benefit could be eliminate partially or even totally by the special rule.  In general, this special deduction will entirely offset the taxable benefit arising from low-interest or interest free loans of $25,000 or less. This deduction applies on a 5 years period starting on the date of the loan is made.


Special rules also apply in you provide any of  your employees with a loan to purchase a new home. It is not necessary for the employee to move to a new work location to qualify under this rule. This borrowed money has to be used to either purchase or refinance the debt on the employee's home. The benefit from such loans is calculated by applying either the prescribed rate at the time the loan is granted or the prescribed rate for the particular quarter, whichever is lower. A new base rate on the loan will be established every five year.

For more information call: 514-585-6848 or visit us at http://paulsandassociates.com/

Note: This article is not a substitute for professional advice, which  you should seek when you are considering important action.

Author: Saurav Paul

Car Expense & Benefit:

When your employers provide automobiles to you (as an employee) to help perform the employment duties, or instead give you allowances or expense reimbursements, the tax implications can easily become very complex.

Company automobiles, expense allowances and reimbursements may increase productivity, provide job satisfaction and improve the benefit package-things that both employees and employers care about.

With automobile expenses revenue agencies want to ensure that you do not receive receive tax free benefit. It is important to keep in mind that there's a difference between allowance and benefit. The benefit is taxable where as long allowance are reasonable it is not.


Please note, this article is not a substitute for professional advice. For more information call us at 514-585-6848 or visit us at www.paulsandassociates.com

Importance of Capital Budgeting:

Even if you are a small company, still capital budgeting can draw down all the pro and cons of your capital spending. Normally capital budgeting defines as a process that is used to determine whether an company’s long term investment such as new machinery, replacement machinery, new plants, new products, or even research and development projects are worth the funding of cash through the firms capitalization structure. Capital budgeting process will ensure proper allocation of your major investment.

There are many methods for evaluating your capital expenditure such as:

-          Accounting rate of return

-          Payback Period

-          Net Present Value Analysis

-          Profitability index

-          Internal rate of return

-          Modified internal rate of return

-          Equivalent annuity

If you are expending and would like to see how beneficial your capital expenditures or new projects are, we are here to help. We will use multiple techniques, and determine which one is best suited for your situation. For more information contact us at: 514-585-6848, or visit us at www.paulsandassociates.com. 

Open Letters to our clients or potential clients:

Having a tax specialist on your side is hugely beneficial during all times of the year, especially when you own a business. We offer the services that you need to be fully satisfied with your taxes once they are done. You will be safer, there will be added protection, and you do not have to worry as much about financial issues. You have someone who is capable and who understands what you need. Our services will cover all of your accounting and tax needs, both personal and professional, so it should be easy for you to make use of this.

For your personal taxes, we are available to help. Our team can guide you through this so that you come out of it with as much money to your name as possible. With a decrease in risks, it should be easier for you to benefit. You will be able to get more money out of your taxes in savings and returns, and this is something that you can keep with you.

If you need help understanding certain things, RRSP, RESP, notice of assessment, investment choices, you can contact us, as well. Canada has one of the world’s most complex tax structure but we are here to help you better understand all required areas of accounting and taxes so that you know what to do. You will be prepared for whatever is ahead and you will have vital information when trying to navigate income tax preparation process.

Professionals can benefit from us, too. Our accountants can help guide you so that your business is improving and doing well financially. You will have the information and assistance that you need to make the most beneficial decisions for your business. Accurate, reliable work is going to prove invaluable as you continue to grow and work your way up.

Our income tax specialist can also help you to get everything sorted just in time for taxes. Regular or senior income tax, you can better understand the process and navigate it with confidence.

Having a boost in your tax return is a major advantage here. When you file your taxes, you want this on your side. You may earn money that you did not know you can get, making the most out of this experience quickly. The knowledge that you have here gives a boost in returns because we know what to look for. We use our skill to help you earn more every year.

Tax Credit for Childcare Expenses

The refundable tax credit for childcare expenses is one of the tax measures intended for families. The tax credit rate is based on your family income, that is, your income and that of your spouse, where applicable.

To claim the tax credit, you must:

meet the eligibility requirements

file your income tax return and complete Schedule C

For More info, give us a call at 514-585-6848

Residency:

Under Canada's tax system, your income tax obligations to Canada are based on your residency status. You need to know your residency status before you can know what your tax responsibilities and filing requirements to Canada are.

An individual's residency status is determined on a case by case basis and the individual's whole situation and all the relevant facts must be considered.

The relevant facts in determining your residency status include: the residential ties you have in Canada, the purpose and permanence of your stays abroad, and your ties abroad.

The following steps can help you determine your residency status for income tax purposes and your tax obligations to Canada.

Determine if you have residential ties with Canada:

The most important thing to consider when determining your residency status in Canada for income tax purposes is whether or not you maintain, or you establish, residential ties with Canada.


Significant residential ties to Canada include:

· If you have a home in Canada;

· If you have spouse or common law partners in Canada; and

· If you have dependents in Canada;


Secondary residential ties that may be relevant include:

· Any personal property in Canada, such as a car or furniture;

· Any social ties in Canada, such as memberships in Canadian recreational or religious organizations;

· Any economic ties in Canada, such as Canadian bank accounts or credit cards;

· Canadian driver's license;

· Canadian passport; and

· Health insurance with a Canadian province or territory.

· The residential ties you establish or maintain in other countries may also be relevant.

For more information on residential ties contact us at 514-585-6848


But what happens if you are Resident of Canada and another Country:

If taxpayer is resident of Canada and another country, he will be subject to double taxation. But not to worry!! Article IV deals with most treaties between Canada and the other jurisdiction that usually provides relief by determining that the individual will be a resident of either Canada or the other country by applying the tests listed below in the following order:

a) He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (center of vital interests);

b) If the Contracting State in which he has his center of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

c) If he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

d) If he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Posted by:

Pauls & Associates Team

http://paulsandassociates.com/