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1 Kelowna Vancouver Surrey Edmonton Calgary Whitehorse Yellowknife FALL 2013 mackay.news A publication of MacKay LLP Chartered Accountants and Business Advisors IN THIS ISSUE MacKay Yellowknife Receives an Award from Yellowknife Ski Club... 2 A Message from the CEO, Murray Bye, CA MacKay Expands into Saskatchewan On behalf of the firm, I am pleased to announce the opening of our first office in Regina, Saskatchewan. Having a MacKay footprint in all Western provinces, including all the Prairie Provinces has been a strategic initiative for many years. We are now one step closer to that initiative coming to fruition. Effective January 1, 2014, Glen Berger will be joining the firm as equity partner and managing director for the new Regina office. Joining Glen, will be Brian Callele as associate partner. MacKay Kelowna s Day of Caring... 2 Who s Minding the Family Business?... 3 U.S. Citizens in Canada: Reporting Options to File Delayed U.S. Tax Returns... 4 Year End Tax Planning... 5 How To Impact Your 2013 Tax Bill...5 What Else is New for 2013 and 2014?... 6 Missed Opportunities Mean Extra Taxes... 7 New Partners On behalf of the firm, I m pleased to announce the admission of the following partners to MacKay LLP (soon to be Crowe MacKay LLP) in January Vancouver (604) Yellowknife (867) Surrey (604) Edmonton (780) Kelowna (250) Calgary (403) Glen Berger Equity Partner (Audit and Advisory) New Regina Office Brian Callele Associate Partner (Taxation) New Regina Office Paul Harris Associate Partner (Audit and Advisory) Edmonton Office Whitehorse (867) As with current partners, they are all available to serve new clients and welcome all referrals. Chartered Accountants and Business Advisors

2 Firm Chairman The Firm Chairman is an important role in our firm structure. Don Smith has been in this role since stepping down from the CEO role in 2008 and has been instrumental in assisting the firm move forward on many of our strategic initiatives. Don will be stepping down as Chairman so that he can concentrate more on his clients as well as his involvement with local charities within the Edmonton market. I will certainly miss Don in the Chairman role and I m thankful he stayed on during my initial transition into the CEO role. I m pleased to announce the appointment of Garry Cook as Firm Chairman effective January 1, Garry is a strong advocate for MacKay and will be a great addition to the executive committee as we continue to move the firm forward. MACKAY YELLOWKNIFE RECEIVES AN AWARD FROM YELLOWKNIFE SKI CLUB The Herringbone Award is presented to a business that provided significant in-kind services in the past year. MacKay provided accounting services to the Yellowknife Ski Club for the fiscal year, which included a significant in-kind donation. In addition to the regular business of producing cheques and making deposits, MacKay offered expert advice to revise the Club s chart-of-accounts, a critical tool for sound fiscal management. Corporate donations such as this are a great boost to the Club. MACKAY YELLOWKNIFE VOLUNTEER GROUP MacKay Yellowknife supports the community and the Northwest Territories. We have a volunteer group of staff that have provided the following services in Yellowknife: Long John Gymboree (winter event on Great Slave Lake) Food Drive - Relay for Life Spring cleanup Ovarian Cancer Walk of Hope Raised money by dropping used bottle/cans to recycling depot MACKAY KELOWNA S DAY OF CARING Our Kelowna office has always run a very successful United Way workplace campaign with over 95% participation. This year we kicked off our fall campaign with a Day of Caring, a United Way program that connects groups of volunteers with service projects at local charities. On a lovely sunny Tuesday evening in September, a group of MacKay staff members put on their red t-shirts and marched over to Kelowna Community Resources to paint most of the facility in anticipation of their 30th anniversary celebrations. This wonderful organization provides many different programs to our community from adoption and immigration services to a database of volunteer opportunities. We were more than happy to help them spruce up their workplace. Despite glitches (nearly running out of paint), we were all out the door by 9pm with only one team member having paint in their hair. 2

3 WHO S MINDING THE FAMILY BUSINESS? Don Turri is a partner in our Kelowna office who works primarily with family business owners. He assists his clients in starting, growing and operating successful businesses. Don also helps business owners develop and plan their exit strategies, which may include succession to the next generation, sale to management or a third party sale. I recently had the opportunity to review an excellent book Family Business As Paradox, Amy Schuman, Stacy Stutz, John L. Ward (Palgrave Macmillan, 2010) from the Family Business Consulting Group. Family Business As Paradox addresses the classic family business paradoxes that multigenerational family enterprises face. At the highest level, this paradox is Which to Choose: Family or Business?. Most of us are trained in how to choose between alternatives (the either/or approach). This means choosing business or family. However choosing one over the other will inevitably cause issues. Choosing business first could lead to few next generation family members capable of or interested in running the family enterprise. Choosing family first may mean that not enough capital is left in the business to allow it to grow and prosper, or that family members in the business are not qualified to lead the business into the future. Either circumstance will inevitably lead to the failure or sale of the business. The book highlights that, in family business situations, either/or needs to be replaced with both/and, as in family and business. The needs of both must be considered when decisions are being made regarding the business (how will this impact the family?) or the family (how will this impact the business?). The family business paradoxes discussed in the book include: Tradition and change Every family business that hopes to develop into a multigenerational business must deal with this paradox. The older generation is typically tied to doing things the way they always have been done, while the younger generation is keen to do new and different things. Managed poorly, this paradox has the potential to wreak discord in both the business and the family. Resistance to change may result in the older generation not letting go and lack of respect for tradition may result in the younger generation choosing to leave the family business. Successful multigenerational family businesses have learned that respect between generations and creating a positive environment that allows for discussion, planning and setting strategy are the keys to successfully managing the tradition and change paradox. Control and trust (Founders stage) Typically many founders have created successful businesses by being in complete control of all decision making since the inception of the business. This control may tend to continue as the business grows larger and more complex, even as more non-family management becomes involved. While founders want nothing more than to see their children succeed them in the business, they often have trouble moving from proprietorship to stewardship. They have difficulty transitioning from making the decisions to mentoring the younger generation and trusting them to make their own decisions, even if some of the decisions do not turn out well. Founders control issues result in a lack of decision making ability if the founder is unable to serve, and often can lead to weak next generation leaders without the experience to be successful. Those businesses that become multigenerational typically have learned that, over time and with proper training, mentoring and processes in place, a transfer of control can allow a family business to grow stronger and better. Work and home (Siblings stage) Siblings in a family business have typically grown up in an environment that saw one or both parents devote enormous effort to making the family business successful. This often resulted in the siblings having limited time with one or both parents. As the siblings become parents themselves they tend to set very different priorities, limiting their time at the family business and devoting their time to home, family and other personal priorities. Successfully managing this paradox means recognizing the importance of both work and home and creating a business environment that allows for a reasonable balance. In some cases this will involve greater use of non-family members in management to allow the business to remain successful. Harvest and invest As a business transitions across generations there tends to be more passive owners and more family branches relying on the business to support them financially. Those still active in the business typically want to retain ample capital to allow 3

4 the business to grow, while passive owners would prefer to be able to remove capital to support their families generously. If too little is available to harvest, passive owners may become disgruntled and look to divest themselves of their interest in the business, concentrating ownership in fewer family members. Successful families realize that it is important to both harvest and invest and keep all owners informed through appropriate communication and education of the family about the business. Informed owners tend to make appropriate decisions about dividend policies, know when it is appropriate to retain capital for expansion and devise rules and mechanisms by which owners may choose to divest their ownership in a harmonious manner. The book discusses a continuum for addressing paradoxes and suggests that in a family business an integration approach on the paradox management continuum is more likely to provide a both/and result. This approach involves identifying the opportunities and weaknesses of each side of a paradox. For example, with respect to family employment, the business side of the paradox might require five years outside experience and relevant education before entering the family business. Conversely, the family side of the paradox might suggest that no specific qualifications are required and all family members are welcome in the business. Involving family members in determining the opportunities and weaknesses tends to result in better informed family members. The integration approach can result in the family employment issue being reframed as one of involvement and maximizing of opportunities for family members to participate in the business as well as other family endeavours. Family Business as Paradox contains a number of other useful insights, tools and references. The Family First-Business First Assessment questionnaire contained in the book is particularly useful for family businesses wanting to understand where they are in the family/business continuum. The book is well written and organized and I would recommend it to anyone who wants their family business to become or remain multigenerational. U.S. CITIZENS IN CANADA: REPORTING OPTIONS TO FILE DELAYED U.S. TAX RETURNS There are a large number of U.S. citizens in Canada, all of who have a requirement to annually file U.S. Tax returns and Foreign bank or investing disclosure schedules. In the past there were voluntary disclosure programs by the IRS which were confusing and inconsistent in their application. These often required the payment of taxes and penalties and which were not well understood or well explained or managed by the IRS. Some Canadian resident U.S. Citizens are not even aware of their U.S. citizenship as the rules for it have changed over time. In June 2012, the IRS announced a new filing procedure that U.S. Citizens living abroad may use to become compliant on their US tax delinquent tax or related filings. Submissions started in September This procedure, unlike the voluntary disclosure programs offered in the past, seemed to be simpler, more forgiving and maybe too good to be true. The program is to allow basic filings by Canadian Resident U.S. Citizens to undertake to catch up where U.S. tax returns have not yet been filed for a number of years subject to many conditions. The process has been fairly straightforward for the clients that we have helped. We prepared a questionnaire and charts to make gathering the information easier. As a result, fees have stayed in a reasonable range for most clients. As of now, the only correspondence we have had from the IRS has been requests for interest on small amounts of tax due and clarification on why some forms weren t submitted (because they weren t applicable for the taxpayer in certain years). We have not had any thorough reviews of any tax returns and have not had any penalties assessed under these streamlined catch up returns. This streamlined procedure may be the best option for delinquent US tax filers. If you have been waiting to see how it worked, the program appears to still be running on the tracks. 4

5 YEAR END TAX PLANNING HOW TO IMPACT YOUR 2013 TAX BILL Investments If you have realized capital gains in the current year, consider realizing any unrealized capital losses before year end. This strategy will reduce your tax bill as capital losses can be offset against capital gains. The key is to realize these losses in 2013 so the last trading day must be considered (it could be December 23, 2013). Also you are not permitted to reacquire the same shares within 30 days of sale, due to certain rules on loss realization. Salary to Family Members If you pay salaries to family members, make sure payment of net compensation is reasonable and is paid before December 31, Deposited cheques are an appropriate method of documentation. Payment of withholdings by January 15, 2014 (or the appropriate payment date if it is advanced) is also necessary. These payments cannot be a sham, but where family members are active in the business can be effective to reduce overall tax. Charitable or Political Donations If you are planning to give money to a charity or political party, make sure the gift is made before December 31, 2013 to ensure you can claim the tax credit on your 2013 return. Registered Education Savings Plans Make any contributions to an RESP before December 31 to qualify for any 2013 grants you may be eligible for. As in years past, assuming your family s qualifying net income for the year is more than $85,000 (the government will pay more if your income is lower), the government will pay a Canada Education Savings Grant of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum of $500 in respect of each beneficiary. They will pay $1,000 in CESG if there is unused grant room from a previous year. The lifetime limit of CESG from the government remains $7,200. Equipment Purchases If you have equipment you are planning to purchase early next year, consider purchasing it before December 31, 2013 or before your corporate year end as applicable. The tax depreciation only starts when the equipment or vehicle is available for use in your business. Family Trust Ensure distributions from a family trust are made to and from the Trust by December 31, If distributions are planned, ensure appropriate dividends are paid through the Trust by year end. Payments by cheques deposited and distributed before the end of the year are required, unless detailed steps are completed. If you are traveling at Christmas, see your MacKay LLP advisor in November. Shareholder Loans If you have a shareholder loan from your company that has been outstanding since the December 31, 2012 year end (i.e. it is at risk of showing up as a debit on 2 consecutive balance sheets), ensure it is repaid by December 31, 2013 (the last banking day of the year) or earlier. Consult your MacKay LLP advisor on other methods of payment such as dividend or net wage compensation. Spousal Loans If you have spousal loans, ensure the interest is paid by January 30, 2014 by a documented method such as a deposited cheque. These loans (with interest as low as 1%) are for income splitting where families have larger investment pools (over $1M). RRSPs Regular and spousal contributions may be made up to March 1, If you must repay a portion of your Home Buyers Plan or your Lifelong Learning Plan, payments must be made by March 1,

6 Overall tax savings are most significant for individuals who are currently in a high tax bracket, but will be in a lower bracket when the RRSP money is withdrawn. We suggest that you consult MacKay LLP. It may be more favourable to pay down nondeductible debts in certain cases. If you are starting to withdraw funds from your RRSP, consider using your RRSPs to purchase an annuity that will be eligible for the pension credit and income splitting. Accounting Fees (and Legal Fees) For certain accounting fees such as the cost of representation on tax disputes, the fees are deductible in the year paid. If you have these costs be sure to pay them before the end of the year. WHAT ELSE IS NEW FOR 2013 AND 2014? Deduction for safety deposit boxes The deduction for safety deposit box fees has been eliminated for taxation years beginning after March As a result, 2013 will be the last year you can deduct the cost of a safety deposit box. Capital Gains Exemption limit rising in 2014 to $800,000 It has taken twelve years to happen, but the $750,000 lifetime capital gains exemption limit has increased. Starting with the 2014 tax year, the farm and small business qualifying shares exemption limits will be raised by $50,000 to $800,000. Starting in 2015, the new ($800,000) lifetime limit will be indexed to inflation. Government wants details of offshore investing While the criteria and filing deadlines for those who must file Form T1135 have not changed, the reporting for foreign investment detail has become significantly more onerous for you and us to complete and now requires: Names of bank/other entities holding the funds/assets Maximum cost of assets, investments or funds held during the year by those entities Fund balances or cost amounts at year end Income or loss, including capital gains if applicable from these funds/assets during the year If you think Form T1135 applies to you for the 2013 taxation year as investments at cost have exceeded $100,000 in 2013, we suggest reviewing all foreign assets for their maximum cost amount during the year as well as documenting the cost amounts as of December 31, First-time donor s super credit A new first-time donor super credit on up to $1,000 of donations has been created to encourage charitable giving among new donors. This increased tax credit adds 25% to the current credit. This increased tax credit only applies to cash donations and does not apply to donations in kind. For donations of up to $200, there will be a credit of 40% as opposed to the current 15% and for donations in excess of $200 there will be a credit of 54% as opposed to the current 29%. The credit is only available to individuals if neither the individual nor the individual s spouse has claimed any donation tax credits in the preceding five tax years. Part-time farm loss restrictions revised The new annual restricted farm loss deduction has been increased from a maximum of $15,000 to a maximum of $17,500 ($2,500 plus ½ of the next $30,000). MISSED OPPORTUNITIES MEAN EXTRA TAXES Thousands of Canadians pay extra income tax. In fact, they pay more than they should. By not taking full advantage of deductions, you may be one of these generous Canadians without even knowing it. Are you taking advantage of all deductions available to you? Do you file your return on time? Do you pay tax instalments quarterly to avoid interest charges? Here is a subjective look at some of the common missed opportunities that could be contributing to your tax bill. 6

7 MISSED TAX DEDUCTIONS Carrying Charges and Deductible Interest Loans must be incurred to purchase an investment (with the intent to earn income) in order to have the interest deductible. Proper documentation on the loans will ensure that the interest is deductible. Deduction is dependent on the actual direct use of funds borrowed. Carrying charges may also include investment counsel fees and accounting fees, but receipts and bank annual statements need to be printed for our review. Medical Expenses You may claim medical expenses for yourself, your spouse and dependent children. While either spouse can make the claim, as with charitable donations, medical expenses should usually be added together and claimed on the income tax return of one spouse (usually the lower income spouse as they have a lower income threshold to meet and therefore more medical expenses can be claimed). You are not restricted to claiming on a calendar year basis; you can claim medical expenses for any 12-month period that ends in the year. The most commonly missed expenses are dental bills, eyeglasses, private medical insurance (including travel medical insurance), and travel (such as to regional or provincial centres for treatment). For certain seniors, some or all of the payments to a nursing home qualify as a medical expense. The key is to keep the receipts. Employment Expenses Employees using their own automobile for work (other than to and from the work place) without reimbursement by their employer can deduct the business portion of their automotive expenses. If you are reimbursed and the amount is not reasonable, you can still claim a deduction for the non-reimbursed portion. Your employer will have to complete form T2200 in order for you to get the deduction. Childcare Expenses Subject to certain limitations, childcare expenses are deducted from earned income by the lower income spouse. These expenses include day-care, babysitting, boarding school and day camps. You will have to provide the Social Insurance Number if you paid an individual in order to get the deduction and a copy of this form is frequently requested by CRA. The key is to keep the receipts. Charitable Donations Charitable donations made by you or your spouse during the year should normally be added together and claimed on the income tax return of one spouse. A higher credit is available for donations over $200, so it makes more sense to aggregate the credits and use the low rate only once. If donations total less than $200 they can be claimed on either return, either separately or jointly. The key is to keep the receipts. Donations can also be carried forward five years so if you find a slip that was not previously claimed, bring it in to review with your MacKay LLP advisor. Children s Fitness and Arts Amount Tax Credits If your children participate in fitness or arts activities, you can claim them as a tax credit. Tax credits reduce your taxes by 15%, therefore your tax savings can be up to $150 ($75 for each credit fitness and arts). Each child must be under the age of 16 at the beginning of the year (or 18 if qualifying for the disability amount) to be eligible. For both credits, the programs must be ongoing (eight consecutive weeks or five consecutive days), supervised and suitable for children. Program s qualifying for the arts tax credits must either be an artistic or cultural activity, focus on wilderness and the natural environment, develop and use particular intellectual or interpersonal skills, or provide enrichment of tutoring in academic subjects. Some programs may qualify for both the fitness and arts tax credits, but can only be used for one of them. If you are unsure whether a program qualifies, include the receipt with your other tax documents and your accountant can help decide. The key to this deduction is (surprise) to keep the receipts. Tax Instalments Failure to pay quarterly instalments results in interest charges and possible penalty interest. It is possible to pay catch-up payments and reduce or offset the interest charges. Currently, the minimum interest by CRA is 6% compounded daily. 7

8 Moving Expenses Moving costs, real estate commissions on the sale of your former home, property purchase tax on your new home, and legal fees qualify as moving expenses (with certain restrictions). If you are a student, it is possible to claim the moving expenses to start a job (including your summer job) or to start a business. Either way, you must earn income at the new location from a new job or a business and have moved in order to be at least 40 kilometres closer to your present position. The key is to keep the receipts. Some costs (vehicle travel, meals) can be claimed as an allowance, so print Google Maps showing the route to the new work location and bring it into us for the preparation of your personal tax returns. Filing on time The normal deadline for filing an income tax return for the previous year is April 30. This filing deadline is extended to June 15 if you are self-employed or your spouse is self-employed. However, income taxes payable are still due on April 30. The filing of the information return for Specified Foreign Property with an aggregate cost over $100,000 at any time during the year (Form T1135) is subject to penalties if not filed by these dates. Taxpayers who do not file their tax returns on time face late-filing penalties (5% + 1% per month to a maximum of 17%) on the tax outstanding, plus interest. A second occurrence penalty is double the amount above and can be charged if the taxpayer has failed to file on time for a second time in three years or if a formal demand for filing has been issued by the Minister. Interest and penalties are not tax deductible and add up quickly at the rates charged by Canada Revenue Agency. Even if you cannot pay the amount of taxes due, ensure you file that return on time. Disability Tax Credit This credit is available to a person with a severe and prolonged (must last for a continuous period of at least 12 months) impairment in physical or mental functions. To qualify, Canada Revenue Agency must approve original documents signed by your doctor. Examples of situations that may apply include a person who: is unable to walk a short distance without stopping frequently to rest because of shortness of breath or pain takes an inordinate amount of time (i.e. 3 times as long as normal ) to successfully eat substantially all the time must make several attempts and experiences significant discomfort in order to get dressed, even with the help of an aid, substantially all of the time even with the use of a device or for whom a device is not appropriate, is unable to hear or who takes significantly longer than an average person to understand spoken conversation substantially all the time requires assistance substantially all the time to get to the washroom and to manage their elimination once there or a person who is incontinent of bladder functions and requires an inordinate amount of time to manage and tend to changing of incontinence pads even with therapy devices is substantially all the time unable to speak so as to be understood and must rely on other means of communication or who takes significantly longer than an average person to make themselves understood is suffering from a degenerative eye condition that will not improve with the use of corrective lenses or medication and whose visual acuity is equal to or less than 20/200 in both eyes or whose greatest diameter of the field of vision in both eyes is 20 degrees or less receives life-sustaining therapy that is required to support a vital function, even if it alleviates the symptoms and the therapy is needed at least 3 times per week for an average of at least 14 hours per week. Examples include: Chest physiotherapy to facilitate breathing Kidney dialysis to filter blood Prepared by the Taxation Services Section of MacKay LLP Chartered Accountants and Business Advisors for review by our clients and other interested parties. If you would like to be added or removed from our mailing list, please contact your local office. MacKay LLP is a Canadian firm of chartered accountants based in Western and Northern Canada and represented by offices in Alberta, British Columbia, Yukon and the Northwest Territories. The firm currently has 43 partners and principals, approximately 220 staff, and offers a full range of accounting, auditing, taxation, insolvency, valuation, computer, and management consulting services to all clients. In other areas of Canada and internationally, the firm is represented by other locally managed independent accounting firms. 8