Tax Planning Tips
Here are some important tax tips that may affect your tax planning for the 2003 taxation year.
Taxable Benefit for Automobile Use
Prior to 2002, the taxable benefit for the use of a corporate-owned or corporate-leased vehicle could be reduced if the automobile was used all or substantially all (generally 90% or more) for employment purposes and personal use was less than 1,000 kilometres per month (12,000 kilometres per year).
Effective for 2003 and subsequent taxation years, the reduced standby charge is available where the automobile is used primarily (generally greater than 50%) for employment purposes and personal use is less than 1,667 kilometres per month (20,004 kilometres per year).
This will mean lower taxable benefits for many employees with employer-provided vehicles.
Small Business Deduction
The business limit for the federal small business deduction increases $100,000 over the next four years, which is good news for Canadian-controlled private corporations (CCPCs). In 2003, the lower corporate tax rates apply to the first $225,000 of taxable income for a CCPC with a December 31, 2003 taxation year.
The limits increase to $250,000 in 2004, and $275,000 in 2005.
For 2006 and subsequent years, the limit is $300,000.
These limits are pro-rated for non-calendar year-ends.
For taxation years commencing before 2004, eligible CCPCs will continue to benefit from the reduced corporate income tax rate that applies to active business income up to 150% of their business limit.
Commencing in 2004, the reduced general corporate rate will apply to all active business income. The higher small business deduction will provide opportunities to invest profits back into a small business through capital expenditures, market expansion or research and development.
Under the old $200,000 limit, entrepreneurs sometimes drew taxable bonuses to reduce their active business income. With the increased limits for 2003 and beyond, there will be more incentive for owner/managers to take smaller bonuses.
The February Budget had good news for those with spare cash or a good line of credit. The RRSP contribution levels are increased starting in the 2003 calendar year. The new limits are $14,500 for 2003, $15,500 for 2004, $16,500 for 2005 and $18,000 for 2006.
Plan to take advantage of the increased contribution limit in 2003 to reduce your personal tax liability and increase your deferral of taxes.
RRSP contributions are limited to 18% of earned income based on the taxpayer’s earned income for the preceding tax year and subject to the maximum RRSP contribution limit for that year. If you accrue benefits from a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP), that amount will reduce your deductible amount. Since the 18% of earned income remains in place, the amount of earned income required to make maximum RRSP contributions will increase from $75,000 to $100,000.
Owner/managers wishing to use the new limits should keep them in mind when determining the optimum mix of salary and dividends they receive from their companies.
More good news — the government has announced that it will study a new kind of retirement savings plan called a tax pre-paid savings plan (TPSP). The concept is that the contribution to these plans will not be eligible for a tax deduction but the investment income and withdrawals from the plans will not be subject to tax.
RRSP/RRIF Rollover to an Infirm Child
On the death of a parent or grandparent, a financially dependent infirm individual is entitled to rollover proceeds from the deceased’s RRSP or RRIF into his or her own RRSP. Prior to 2002, an individual was presumed to be financially dependent if his or her income did not exceed the basic personal amount.
For the 2003 and subsequent taxation years, this income threshold for an infirm individual is increased by $6,180 to $13,814.
A child with income above this amount may still be considered to be financially dependent, but only if the dependency can be demonstrated based on the particular facts of the situation.
Legal Fees for Spousal Support
Legal fees to establish or obtain additional spousal support under the Divorce Act and the equivalent provincial legislation are now deductible. As well, legal fees to obtain an increase in child support, or make the amount non-taxable, may also be deductible expenses. If you incur legal expenses to defend your current position, these fees may also be deductible.
Advertising for a Child Care Worker
The cost of advertising for child care or fees paid to an agency for the hiring of a nanny may be tax deductible, within your maximum limit for the deduction of child care expenses. Be sure to keep your receipts for these and other expenses incurred for child care.
Medical Expense Tax Credit
The following expenses have been added to the list of expenses eligible for the medical expense credit for 2003 and subsequent years:
- Amounts paid for real-time captioning services for an individual with a speech or hearing impairment if the payment is made to a person who is in the business of providing such services.
- Amounts paid for note-taking services for an individual with a mental or physical impairment if the payment is made to a person who is in the business of providing such services and the individual is certified by a medical practitioner to require these services because of the impairment.
- The cost of voice recognition software for an individual with a physical impairment if the individual has been certified by a medical practitioner to require that software because of the impairment.
- The incremental cost of gluten-free food products for an individual who suffers from celiac disease if the individual has been certified by a medical practitioner to require a gluten-free diet because of the disease.
Get Professional Advice
Taxpayers have the right to use every available means provided in the Income Tax Act to reduce their tax liability.
Keep your receipts, maintain careful records, and when contemplating financial decisions that may have tax planning implications, talk to your chartered accountant to ensure you understand the potential impact on your income tax liability.
Budgeting for Tomorrow
To run a successful business is to understand that foresight and planning spell profit.
In essence, a budget is the backbone of your business plan.
A long-term financial strategy is perhaps the most useful, yet sometimes the least understood, tool in the owner/manager’s arsenal for improving productivity, ensuring quality products and services and achieving a better bottom line.
Whether you develop a budget for next year or the next three or five years, this financial plan is essential for assessing your progress, fixing small problems before they become big problems and ensuring you stay focused on your business goals.
In preparing a budget, first review your fixed and variable expenses, those that generally remain the same as opposed to those that fluctuate.
This will help you focus on those costs that you can control in order to offset those you cannot control. Also, compare your overheads with those of other companies in your sector. These benchmarks are helpful for pinpointing potential areas that could be improved.
If expenses are increasing faster than revenues, you need to identify where problems exist and make appropriate changes. Here are a few examples:
• Labour Costs
Are your hourly rates or wages in line with similar businesses? Recruiting and training can be expensive. Are you recruiting the best talent to get the job done? Do you need additional staff and will you be able to afford this additional expense?
• Owner/Manager Salary
Should you consider reducing your draw to put more working capital into the business?
Do commissions show that some product lines are waning? Do sales representatives need incentives to increase sales of certain lines?
Can you continue to make the number of units you need with the current equipment? Are there inefficiencies in production that could be eliminated with staff training or new equipment? Is there a dependency on one supplier? Do some costs need to be renegotiated or new suppliers considered? If some products are continually losing market share, should these lines be discontinued?
• Delivery or Shipping
Are there software programs available that could help you streamline and reduce your delivery or shipping costs? Should the company consider outsourcing its delivery/shipping? Conversely, should you invest in your own fleet of delivery vehicles?
Are you using the most cost-effective communications tools? Do you need to upgrade computer or phone systems, set up an 800 number, or contract a call centre for sales or customer service support?
• Occupancy or Rent
What is the market value of the company’s real estate? Is it time to sell and move? If your rental costs are high and the real estate market is low, is it time to buy? Do you need to expand your facilities?
Do you need to upgrade your billing system to speed up collection, order or payment processes? Do you need to change to just-in-time inventory ordering?
With financing costs at an all-time low, should you invest in capital assets or new product development or negotiate a higher line of credit? Is the company financing customers who habitually do not pay on time?
What capital purchases will you need to purchase in the future? What will the equipment cost? Will you purchase or lease? Do you talk to your chartered accountant about the timing of major purchases in view of your tax planning strategies? Review the purchase date of all capital assets, their cost, and financing terms. Compare the anticipated improvement in productivity and length of service of the asset to the actual results. Consider maintaining a log of maintenance and downtime costs for all major equipment to help you make decisions about future purchases.
What sales do you need to achieve the desired profit? Do you need to look at other ways to increase sales? Review monthly sales, including breakdowns by product or service line, over the past few years. This will help you anticipate peak periods and schedule inventory and staffing to handle them.
Also look at periods of low sales. If, for example, sales are habitually slow during the summer months, consider developing a seasonal product line or reducing staffing during this period.
Can you create a cash reserve in the peak months to carry the company through a slow period without incurring additional financing costs?
Focus on the Big Picture
You need to know what your current profits are before you can determine the increase in profit you hope to achieve. Are your financial goals realistic given the current market and your projections? In setting your goals for future growth, plan for expenses that you anticipate being able to afford based on historical performance.
If you are constantly embroiled with the details of day-to-day operations, you could be missing the big picture.
You could also be making costly mistakes from having too narrow a focus. A long-term financial strategy can help you stay on top of the ebbs and flows of earnings and costs and make more knowledgeable decisions when you need to adjust your budget. Your chartered accountant can assist you in developing a long-term financial strategy that can help you plan more effectively for your business’ future growth.
When an Employee Leaves
Having to replace someone who has retired or simply decided they want a change can be a challenging experience for the owner/manager.
As owner/managers typically rely on their key employees, the transition may even have a detrimental impact on operations.
To ease the stress and raise the odds that you will find the right replacement employee, here are a few tips on hiring right
The first rule of thumb is not to conduct the entire interview process on your own. Not only are owner/managers usually too busy to carry out the interview and selection process for every position, other employees will benefit from the opportunity to develop their interviewing skills.
As the selection of the new employee will affect most of the people in the business, have supervisory staff conduct the initial interviews to narrow the selection to the best candidates. Make hiring a team decision by encouraging their input before you make the final selection.
Understand the Job
A failure to match prospects with the position often results when management does not have a clear understanding of the job function. You need an in-depth understanding of the work and the required skills to be able to attract the right candidate.
Consider that quality candidates looking towards future opportunities within the company may shy away from a position if the job definition is lacking or unfocused on their chosen career directions.
A best practice is to complete an in-depth review of the job function when an employee gives notice.
Discuss every aspect of the job. Once you assess the current job, you can set out the education, skill and training requirements more accurately.
Rethink the Position
When an employee leaves, this is an opportunity to rethink a job position. The longer employees are in a position, the more their tasks and responsibilities may broaden and develop. A combination of new technology, a changing market, and the experience and skills of other employees could make all, or part, of
the old position redundant. Or, the function may have evolved to the point where you need a person with more experience and training.
Look for the Right Fit
The majority of people who leave their jobs cite a key factor was “bad chemistry”. Selecting the right replacement is not simply a matter of finding someone with the right job skills. As owner/managed businesses are families that must be able to work as a team, an excellent source of candidates is the people who already work for you.
Since they already have many of the attributes that your company values, they may know someone who has similar characteristics and the right job skills.
Use staff meetings and job postings to let your employees know that the company is looking for staff. Some businesses offer cash incentives to the employee who recommends a candidate who is ultimately hired.
When you consider the cost of advertising or a placement agency, this incentive could actually save working capital. In addition, employee rewards encourage them to recommend a good fit, which also helps narrow the selection process.
Consider Temporary Staffing
When a business is picking up, labour costs can often outstrip the revenue stream. If you are reluctant to hire permanent staff, consider temporary staffing until you are better able to assess the company’s needs.
You could also consider hiring a contract worker or part-time employee to fill the position during the time it takes to find a full-time replacement. Hire students part-time or join a local secondary school or university co-op program to give students an opportunity to learn about your business. If the position requires more experience and skills or your employees are too busy to provide the necessary training, consider the wealth of experience that a retired worker can offer.
A transition period will give you more time to find the right candidate as well as provide opportunities for your staff to train and supervise others.
However, covering labour shortages for a short term may be fine, but if the situation continues, you risk exhausting your valuable employees who must handle the additional responsibilities.
Perhaps the greatest shortfall in managing a company’s staffing needs is not planning for the inevitable loss of employees. Plan not only for the inevitability that some employees will decide to move on but also the career development of valued employees who need an opportunity to move up the ladder of responsibility and be rewarded for their gains in skills, knowledge and performance.
Good management looks at the long-term future of the organization to determine how the company can develop the strengths of the people already on board.
Hire Right the First Time
Smaller organizations need individuals who are strong in specific job skills but also have the flexibility, creativity and desire to learn new skills and work co-operatively with the entire team. The key to a successful, consistent workforce in small business is making sure that employees are the right fit for your company and that includes a positive attitude about their jobs, fellow employees and the organization.
Each year, the federal personal income tax amounts are adjusted according to changes in the Consumer Price Index (CPI) to account for the effects of inflation.
Full indexation of the federal personal income tax system was re-introduced in the 2000 Federal Budget effective for the 2000 taxation year. The indexation factor is applied every year to tax bracket thresholds, certain non-refundable tax credit amounts and benefit amounts.
For 2003, the indexation factor is 1.6%. Indexation increases the income tax ceilings thereby allowing taxpayers to make additional income within a tax bracket before having to pay a higher tax rate.
Indexing of Tax Rates for 2003
For the 2003 taxation year, the tax brackets and income ceilings are as follows:
- The upper level of taxable income for the lowest tax rate of 16% increases from the 2002 amount of $31,677 to $32,183.
- The upper level of the second tax bracket (22%) increases from $63,354 to $64,368.
- The upper level of the third tax bracket (26%) increases from $103,000 to $104,648.
- Taxable income over $104,648 is taxed at 29%.
Indexing also affects many non-refundable personal tax credits, including increases to the basic personal amount, age amount and spouse/common-law partner amount as well as the child tax credit and the GST tax credit. For 2003, the basic personal amount increases $122 from $7,634 in 2002 to $7,756.
Many provinces also adjust their personal tax amounts on an annual basis. Some adjust the amounts using the same indexing factor as the federal government while others use an adjustment that is specific to that province.
If you pay your personal income taxes in instalments, keep these changes in mind when determining your best instalment payment option.
Personal Income Tax Planning
As part of your annual tax planning, consult with your chartered accountant to determine the impact these federal and provincial changes will have on your personal tax situation.
BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by The Canadian Institute of Chartered Accountants for the clients of its members.
Richard Fulcher, CA – Author; Kathleen Aldridge, B.A., Dip. Ed. – CICA Editor.