Year: 2022

GST/HST Implications on Associate Agreements

Posted on by Edixon

Associates are a key part of the healthcare industry as a large majority of practitioners either are one or have hired one throughout their careers.  It can be a way for someone to gain experience as they start their career or a viable way to mitigate some of the hard costs that go along with running a practice.  As part of this process, practitioners and their associates arrange some form of fee-sharing arrangement with each other to account for the fact that the associate typically must directly bill and collect their OHIP revenues, but also has use of the main practitioner’s office space in order to generate those revenues.  While this arrangement may be somewhat formal in the eyes of the practitioner and associate, it is commonly a verbal agreement and therefore can create some complications, especially when it comes to GST/HST (“HST”) rules.

The applicability of HST on associate fees has been a bit of a hot topic with the Canada Revenue Agency (CRA) in recent years.  They have been looking more closely at these associate arrangements and have reassessed and charged HST to a number of health care providers (particularly optometrists).

The starting assumption made by most involved in these fee-sharing arrangements is frequently that since the healthcare services provided to the patients by the associate are HST exempt, the revenues from these services that are transferred in either direction under the associate agreement would also be considered HST exempt.

However, it needs to be considered what the associate is actually paying the main practitioner for and what kind of support exists for that.  The CRA has taken the position in a number of instances that these associate fee payments are effectively rent/admin type fees that the main practitioner is charging the associate for use of the clinic space and therefore there is to be HST charged on this amount, as that is a taxable supply.  The CRA has said that only if there is a bona fide arrangement between the two parties that shows this is simply a fee-sharing arrangement, then HST can be avoided. 

As we have found, many health care professionals do not have adequate associate agreements in place to support the “fee sharing” position and avoid potential HST reassessments by the CRA.  In this situation, the more conservative approach is to charge the HST and then have the payor register for HST to at least recover a portion of this cost. 

To avoid these difficulties, health care practitioners should consider looking at the associate agreements that they have in place to determine if changes should be made.  Qualities of a valid bona fide arrangement are that it:

  • Is a written document signed by both parties involved and is not just verbal;
  • Clearly states that the arrangement is an apportionment of the fee for the health care service provided to the individual patient;
  • Should not refer to any of the fee sharing amounts as payment for use of facilities by the associate;

Lastly, many associate agreements have slightly different terms, depending on the situation.  This could include the agreed-upon percentage of fees to share, further revenues to be shared in addition to the healthcare billings, which party is making the payments, and how frequently the payments are being made.  Most of these differences will not have an effect on the HST obligations, but care should be taken to examine all revenue sources included in the agreement as certain types may in fact require HST to be charged.  For example, an optometrist associate may receive a percentage of the net revenues generated from their sale of eyeglass frames to patients, which is a HST taxable supply.  Therefore that portion of the associate agreement will require HST to be charged and remit if the principal party is a HST registrant.

Consider involving your lawyer and one of our Professional Specialists in this process to obtain a template agreement and ensure that your agreement will meet the CRA requirements.

Updated: Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Agreement – Debt or Equity?

Posted on by Edixon

The Accounting Standards Board has amended Section 3856 Financial Instruments to restrict instances in which preferred shares that were issued in a tax planning agreement (Income Tax Act Sections 51, 85, 85.1, 86, 87, or 88) are recorded at stated or assigned value.  These shares are now referred to as retractable or mandatorily redeemable shares (ROMRS). Instead, these shares would now be presented as a liability (likely a current liability classification) and measured on initial recognition at the redemption amount.  These amended rules came into effect for fiscal years beginning on or after January 1, 2021.  The December 31, 2021, financial statements are the first time we will be seeing the impact of these new rules.

This will result in material changes to many company’s balance sheets as a new (potentially significant) liability will be recognized, with a corresponding reduction to equity. The equity section would specifically identify this component of equity to enable users to isolate and evaluate the impact of the new rules. In addition, specific disclosures relating to the transaction that resulted in the reduction of equity and recognition of liability would also be required.

There are a few exceptions to these new rules which will allow your company to continue to classify these preferred (ROMRS) shares as equity. For shares issued on or after January 1, 2018, all three of the below criteria need to be met in order to maintain the current equity classification:

  • Retention of Control – Control of the organization must be retained by the party receiving the ROMRS issued in a tax planning agreement. The shareholder receiving the ROMRS should have the ability to control the strategic operating, investing, and financing policies of the company before and after the transaction. If control is maintained, the shares can continue to be classified as equity as long as the next exceptions are met as well.  This is measured on an individual-by-individual basis and not by a related group of shareholders. 
  • No Redemption Schedule – If there is a written or oral arrangement surrounding a redemption schedule, then the shares must be treated as a liability. Even if the redemption schedule is an informal agreement, the shares must be presented as a liability and measured at their redemption value. These liabilities will typically be reported as a current liability (there may also be a portion that can be reported as long term depending on the redemption schedule).
  • No Consideration Other Than Shares Exchanged – If there was any non-share consideration received by the shareholder on the transaction (other than nominal consideration) when the ROMRS were issued then the shares must be presented as a liability and measured at their redemption amount.

It is important to note that the exceptions noted above must be reviewed at each financial statement date. If conditions have changed from the prior year, it may be that the exception is no longer relevant thereby requiring reclassification from equity to liabilities. Shares originally recognized as liabilities cannot subsequently be classified as equity.

If these three conditions are not met, then you must classify the shares as a liability at the redemption amount. Any resulting adjustment is debited to retained earnings or a separate component of equity (i.e. separate account) which will be presented on the balance sheet as a separate component in the equity section.

It is important to note that for shares issued prior to January 1, 2018, only two of the three conditions need to be met in order to maintain equity classification. The condition of only share for share exchange is excluded for ROMRS issued prior to January 1, 2018, meaning ROMRS issued in an asset rollover will qualify for equity classification provided the other two conditions are met.

Transitioning to the New Presentation Rules

Assuming you need to reclassify your ROMRS from equity to liabilities, the new standards allow for two alternative transitional provisions.

Option 1

The cumulative effect of applying the amendments is recorded in opening retained earnings or in a separate component of equity of the earliest period presented. For example, for fiscal December 31, 2021, the cumulative adjustment is recorded as of January 1, 2020. Note, retrospective adjustment is not required for ROMRS that were extinguished prior to the beginning of the fiscal period in which amendments are first applied (i.e. January 1, 2021). For example, assume ROMRS classified as equity are redeemed in May 2020 and amendments adopted January 1, 2021. If those shares do not meet the classification exception, the entity will not be required to apply the new accounting to those redeemed shares in the 2020 financial statements.

Option 2

Apply at the beginning of the fiscal year in which the amendments are first applied.

With this option, the cumulative effect of applying the amendments is recorded in opening retained earnings or separate component of equity as of January 1, 2021. This option was given to help with the challenges that some ROMRS may have been issued many years ago and we may not have all the details from way back when. These transitional provisions therefore consider control at the adoption date (e.g. January 1, 2021) rather than at the time of the original transaction.

Other Reporting Implications

If you are required to treat ROMRS as a liability, any dividend paid on those shares will be reported as an interest expense on the income statement. This will also still be treated as a dividend for filing your income tax return which will cause differences in your taxable income calculation and other reporting requirements with Canada Revenue Agency (i.e. dividend versus interest on a T5).

What impact does this have on my company, my financial statements, and my ability to borrow?

It is prudent to analyze your company’s balance sheet to determine if any issued ROMRS will require a reclassification to liabilities when the standards become effective for your company or if the exceptions noted above change in the future. If so, the sooner you determine the impact it will have on your balance sheet, the sooner you can start to have conversations with your financial statement users to ensure they are aware of the upcoming changes to your liabilities and equity sections.  This will allow you to have an open dialogue with your financing partners to ensure your banking covenant calculations are revisited to ensure the reclassification will not result in a covenant breach.

If you have questions about these new standards or require assistance in determining the impact it will have on your company’s financial statements, please contact your DJB advisor.

DIGITAL ADOPTION PROGRAM: Grants, Loans, and Professional Assistance

Posted on by Edixon

On March 3, 2022, the Canada Digital Adoption Program (CDAP) was launched and opened for application. This $4 billion program provides funding through two initiatives.

Grow Your Business Online Initiative

This initiative provides $2,400 micro-grants and access to e-commerce advisors to help applicants adopt digital technology. Grants can cover costs such as website development, search engine optimization, subscription fees for e-commerce platforms, and social media advertising. To be eligible, businesses must be for-profit (including for-profit social enterprises and co-operatives), be registered or incorporated, have at least one employee, commit to maintaining a digital adoption strategy for six months after participation and partake in post-program surveys, share information with the government (e.g. Statistics Canada) and allow the business’ name to be published as a recipient of funding. Corporate chains, franchises or registered charities, representatives of multi-level marketing companies, and real estate brokerages are ineligible.

Boost Your Business Technology Initiative

This initiative provides Canadian-owned small and medium-sized enterprises grants to develop a digital plan and leverage funded work placements to help applicants with their digital transformation. The grant can cover up to 90% (to a maximum of $15,000) of the cost of developing a digital adoption plan. Businesses can also apply for an interest-free loan of up to $100,000 from the Business Development Bank of Canada. Eligible businesses must be a Canadian sole proprietor or corporation, be a for-profit privately owned business, have between 1 and 499 full-time employees and have had an annual revenue of at least $500,000 in one of the three previous tax years.

Applicants will also need to complete a digital needs assessment that will generate a report outlining the applicant’s digital maturity and compare it to an industry-specific benchmark. Once the assessment is completed, applicants can select a digital advisor from those registered with CDAP and determine the specific terms of work and cost for the digital application plan. Once the advisor has completed the digital application plan, it can be submitted for grant payment. Organizations that meet specific criteria to deliver digital advisory services can register with CDAP to provide these services to eligible applicants.

ACTION ITEM: Review eligibility for these supports to help with digital commerce and apply as soon as possible.

Increasing a Not for Profit Organization’s impact through operational efficiency

Posted on by Edixon

Not for Profit organizations often have lean operational budgets. They want to put as much of their resources as possible into fulfilling important missions. But a nonprofit that struggles with its operations will soon find itself with limited mission impact as well.

As such, it is vital that nonprofits be as efficient as possible. Their operations must be as smooth, or even smoother, than their counterparts in the for-profit world. Gone are the days when Not for Profit entities could get away with substandard operational practices.

But there are paths to operational efficiency that are cost-neutral or better. Nonprofits can improve their operational efficiency by undertaking four key actions:

  • Eliminate
  • Automate
  • Outsource
  • Enhance

Each of these actions is crucial to increasing an organization’s impact and should be looked at individually.

Eliminate

It can feel intimidating to look at an organization’s structure and say, “What can we cut?” This sensation of being overwhelmed is one reason why so many nonprofits never address their processes or methods.

So don’t do it—or rather, avoid trying to overhaul your entire organization all at once. Instead, take inventory of your key tasks and systems. Look for small changes. Are there steps that were once necessary but are now irrelevant? Are certain activities redundant or needlessly complex?

It is unlikely that every process or every task is important, or even necessary. For example, one nonprofit had a policy that three separate people had to approve a certain report. But it became clear that the last reviewer was just a rubber stamp, and two rounds of approval were sufficient. Eliminating that final round of approval created a substantial gain in efficiency, and importantly, it did so without sacrificing internal controls.

Once the philosophy of eliminating the unnecessary takes hold, an organization can tackle the bigger issues. Another nonprofit, for instance, had four different departments that were essentially walled off from one another. That meant four siloes with four entirely different processes for accomplishing one goal. Eliminating the silo mentality provoked an efficiency boom in the organization, with no drop-off in quality.

Therefore, be brutally honest when eliminating those activities that have outlived their usefulness. By rejecting redundancy, your organization becomes more efficient, and employees will find a greater sense of purpose in their jobs.

Automate

Consider the case of the Not for Profit organization that published a special report every 90 days. The data was important to the organization’s mission, but because it took 90 days to compile, by the time the report came out, it contained nothing but old data. As such, the organization’s employees were taking a great deal of time and effort to provide instantly obsolete information.

Today, that organization creates a new report daily, so every morning the nonprofit’s leaders have access to the latest data. But it wasn’t magic that turned 90 days of labour into a few hours of work. It was automation.

There are certain tasks where the human touch is essential and cannot be replaced. For the other tasks, however, automation can speed up processes and eradicate tedious work. Nonprofits should embrace technological solutions as much as possible to automate their processes.

Standardizing processes and adding controls for critical data will help nonprofits support their members and donors. Speed to insights is essential. Not for Profite entities need to align their data strategy, governance, centralization and self-service initiatives to achieve innovative data maturity. 

Data inputs, advanced calculations, information consolidation—all of these and more are functions that can be automated. Changing manual tasks into automated procedures will increase data accuracy, enhance the ability of leaders to make informed decisions and allow staff members to focus more on their core jobs.

Enterprise resource planning (ERP) systems, customer relationship management (CRM) systems and association management systems (AMS) can help nonprofits take advantage of the latest technological options, saving a tremendous amount of human effort and personnel costs. Whatever technology an organization adopts, it needs to optimize the system to its own unique needs.

It’s not just about having the latest and greatest systems. It’s about using those systems to the best of the nonprofit’s ability. The goal is for staff members to view repetitive, boring tasks as a thing of the past, letting the machines take over.

Outsource

While your staff members may be great at fulfilling the missions of your nonprofit, they probably aren’t experts at converting a database to the cloud or troubleshooting tech issues. And they don’t have to be.

Outsourcing your information technology can free your staff members from moonlighting as “accidental techies” (as they are affectionately known in the nonprofit world), while enhancing the effectiveness of your IT platform. A managed services provider (MSP) can offer experienced professionals who are knowledgeable about the latest tech developments. Outsourced IT advisors can often solve problems faster than nonprofit staff who are not as well-versed in IT. And more important, these professionals can suggest upgrades, monitor cyber threats, and utilize advanced features that minimize the chances of those problems occurring in the first place.

Information Technology (IT) is the most common function that Not for Profits outsource, but there are other areas in which an MSP can be invaluable. Many providers offer finance and accounting outsourcing (FAO), in which experienced professionals handle the books, provide enhanced financial reporting, and look for the best ways to maintain the organization’s finances. Some nonprofit organizations also outsource parts of their human resource departments, streamlining their HR functions.

A premier MSP offers not just plug-and-play solutions, but actively engages with the nonprofit’s brain trust to transform the organization. In such cases, a nonprofit can work with an interim chief financial officer or chief information officer to hone its overall approach.

Whether the Not for Profit organization adopts IT, FAO, HR or strategic outsourcing, the MSP’s professionals will typically offer advanced tools and present best practices that they have learned by working with other clients. Another key benefit of working with an MSP is the ability to scale up or down at each level of expertise, depending on the organization’s needs. For such reasons, outsourcing has the potential to create a tremendous return on investment.

Enhance

Your nonprofit does something better than any other organization, which is why donors make contributions, sponsors sign up and staff members work so hard. But the final key to increasing your impact is to aim higher than maintaining those standards. The goal is to enhance, refocus and double down on your differentiators.

Of course, by virtue of eliminating, automating and outsourcing where possible, the tasks that remain are essential by default. As such, these are the core critical elements of your nonprofit, and you can achieve optimal efficiency by devoting more resources to those mission-specific activities.

Consider the time and money your organization has saved, and invest those newfound reserves into driving your mission forward. Keep in mind that with improved systems now in place, your Not for Profit organization will have better data, smoother workflows and more energized employees to tackle challenges.

Good governance and insightful analytics build trust within your organization. To maintain effective communication, partner with the different areas of your nonprofit to understand the downstream and upstream impact of changes in your data and reporting demand. Align your data and reporting strategy with your team’s key data elements to produce quality analytics.

At this stage, it’s not about making fundamental changes or altering your procedures. Rather, it is about honouring your nonprofit’s vision. Enhancing your nonprofit means being open to new ideas while maintaining a strong focus on achieving your organization’s objectives.

In summary, Not for Profit entities can eliminate, automate, outsource and enhance their way to improved operational efficiency. Doing so greatly increases the odds that they will make a significant impact and continue to fulfill their missions.

This article was written by Matt Haggerty, Joy Cruz, Morgan Diestler, Jacob Petraitis and originally appeared on Jul 14, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/industries/nonprofit/increasing-a-nonprofits-impact-through-operational-efficiency.html.

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DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

The Advantages and Pitfalls of Donation Receipting for Charities

Posted on by Edixon

One of the greatest benefits of a not for profit organization being categorized as a registered charity is its ability to issue official donation receipts.  Potential donors are more inclined to donate because they are able to claim the donated amount as a credit on their personal income tax return thus increasing the opportunity of these organizations in soliciting funds.

This benefit however comes with administrative time and responsibility to ensure that the official receipts issued are complete and accurate.  There are many rules and guidelines that the Canada Revenue Agency (CRA) has with respect to donation receipting that must be followed in addition to the specifics of what has to be included on the receipt itself. 

The starting point is determining if the donation qualifies as a gift eligible to be receipted as an official charitable donation.  A gift is the voluntary transfer of property without consideration.  In other words, it must be freely given, with no advantage received by the donor and consist of property.  As a result of this definition CRA specifically excludes donation receipts for the gift of services.  If a supplier of a service wants to donate their time, skill, or expertise and get a donation credit for it they must issue an invoice to the charity for the service provided, be paid by the charity and then donate funds back to the organization.  Without this payment and contribution exchange, no donation receipt should be provided.

After confirming that the gift qualifies the next determination is the value of the gift.  This may be straightforward for most cash donations but what about non-cash gifts?  The value is determined based on the fair market value of the property or goods however making this determination could be as easy as doing a search to determine what the product or good would sell for, or may have to involve other professionals to provide an appraisal. 

Finally, the last step is considering if there was any advantage provided to the donor and the value of that advantage.  This step is often needed for fundraising events such as dinners or golf tournaments.  For example, if a charity charges $250 to attend their annual golf tournament, which includes a round of golf, dinner and prize, the golfer is obviously getting something for the money paid.  If the value of the golf, dinner and prize is $200 then the eligible gift would be $50 being the amount that is in excess of the value that the golfer received.   

If you need assistance in determining whether the benefits of donation receipting outweigh the administrative time and responsibility, or have additional questions about CRA’s guidelines related to donation receipting, one of our Not-for-Profit Professionals would be happy to assist.

MONEY RECEIVED FROM ABROAD: CRA Reviews

Posted on by Edixon

As of 2015, financial institutions must report electronic fund transfers (EFT) into Canada of $10,000 or more not only to FINTRAC but also to CRA. Where two or more EFTs of less than $10,000 each are made within 24 consecutive hours by or on behalf of the same individual or entity, and the total is $10,000 or more, they are considered to be a single transaction and must be reported. CRA may use this data to identify and audit taxpayers, with the goal of reassessing the receipts as taxable business income.

In a December 14, 2021, French Court of Quebec case, a married couple had received funds from China totalling just over $600,000 from 2009 to 2011. The taxpayers owned a small restaurant in Montreal. Revenu Québec took the position that, since they could not verify where the funds came from and why, the funds were undeclared income. The taxpayers argued that they were gifts and loans from family members in China.

Taxpayers win

Although the taxpayers were not able to obtain banking records from China supporting their argument, they were able to have the parties in China corroborate their representations via video conference. The Court determined that this was sufficient to transfer the burden of proof to Revenu Québec, who was not able to demonstrate that the funds were undeclared income. Therefore, the funds received were determined to be non-taxable.

ACTION: Often, support beyond the taxpayer testimony is required to demonstrate that funds received from offshore accounts are not taxable. Recipients of such funds should obtain and retain support demonstrating what the funds were for and who they were from.

“Special Purchasers” and Their Impact on Fair Market Value

Posted on by Edixon

There are many instances when a formal business valuation is required regarding the fair market value of a business without exposing it for sale to the open market. For example, business valuations are often required when a business is not changing hands but the fair market value is still needed, such as for income tax and estate planning, family law matters, and for commercial litigation. When a business is valued without being placed for sale on the open market, the fair market value of the business is considered to be determined on a ‘notional’ basis. Since the business is not placed on the open market, Valuators must rely on theoretical principles, past experience, and their professional judgment in order to determine the fair market value a notional basis.

When assessing the fair market value of a business in a notional context, there are two components to value that are considered; the first is the “intrinsic” value of the business, which is the value that buyers will place on the stand-alone business assuming it will continue to operate as-is, and the second is any additional value above the intrinsic value that hypothetical buyers in the market would expect to receive as a result of integrating the acquired business into their existing operations and any other benefits they expect to receive as a result of the acquisition.

Special Purchasers

Buyers that are expected to realize additional value from an acquisition above the intrinsic value of an acquired business are referred to as “special purchasers”. A special purchaser is defined in Canadian business valuation theory as a purchaser “who can, or believes they can, enjoy post-acquisition synergies or strategic advantages by combining the acquired business interest with its own”. These special purchasers are willing to pay a premium for the business above its intrinsic value because they expect to benefit from these post-acquisition synergies, economies of scale, or strategic advantages that are a result of combining the acquired business with their own.

Synergies

Special purchasers are often interested in acquiring a business in order to realize synergies. Synergies occur when the value of two combined entities is greater than the intrinsic value of each on their own, and typically arise as a result of new cost savings or increased revenues post-combination. Some examples of common synergies are increased purchasing power, reduced costs, lower debt interest rates, and increased diversification. It is generally difficult to determine the value of synergies when assessing the fair market value of a business. This is because each potential acquirer of a business typically has different types and amounts of synergies they expect to realize from an acquisition.

Economies of Scale

Economies of scale are cost advantages that a business receives as its operations grow and become more efficient. This can occur because when the volume of output of a business increases, the costs can be spread out over a larger amount of goods/services. When economies of scale exist, the value of the combined businesses to the purchaser is greater than the value of each business separately. In such cases, these buyers would be considered special purchasers since they would potentially be willing to pay more for the business than a buyer who is not able to take advantage of these economies of scale.

Strategic Advantages

Special purchases may also be motivated to purchase a business in order to receive greater strategic advantages. These buyers typically already own operating businesses in the same/similar industry, and are motivated to purchase other businesses in order to advance their strategic goals, such as eliminating a competitor, acquiring new technologies, or growing into a new geographic area. Often these special purchasers are competitors, suppliers, or clients of the subject business.

When Are Special Purchasers Considered?

In Canadian business valuation theory, the ”highest price” component of the fair market value definition mentioned earlier in this article is assumed to include the consideration of potential special purchasers, as these buyers are expected to offer a higher price for a business than non-special purchasers.

However, Canadian legal precedents generally dictate that when the notional fair market value of a business is required, consideration should only be given to special purchasers when such buyers are readily identifiable in the market and the price premiums they would be willing to pay can be reasonably estimated.

Even if it is believed that hypothetical buyers in a notional context may be able to realize synergies, economies of scale, or strategic advantages, it is often still difficult to determine to what level (if at all) these buyers would be willing to pay the seller for the additional value. For instance, in cases where only one special purchaser is thought to exist in the market, this special purchaser is not expected to pay a premium above the intrinsic value of a business for such benefits if they are the only buyer that could realize them. However, when multiple special purchasers exist, increased competition between these buyers to purchase the business and access these additional benefits is expected to result in the buyers offering more than the intrinsic value to acquire the business.

In such cases, valuators will examine the probability and number of special purchasers for a business that exist in the market, their ability and willingness to transact, and the estimated size of any premiums these special purchasers might pay. However, often the information available to valuators is not sufficient to determine with certainty the existence of special purchasers for a business and the size of any special purchaser premiums. It is also possible that the “special purchaser” premium warranted is already reflected in the calculated value if the calculations are based on multiples derived from actual market transactions which may already reflect industry-wide premiums. If this is the case, then no additional special purchaser premium should be considered.

A special purchaser premium is usually only considered in the notional fair market value of a business when these special purchasers in the market can be identified, and the additional value to each prospective buyer can be meaningfully quantified. When this is the case, it may be reasonable for valuators to attempt to determine the value of the business including the synergies, economies of scale, and strategic advantages that these market participants could reasonably be assumed to benefit from. However, this additional value is usually discounted to reflect the uncertainty of how much a special purchaser would pay for these additional benefits, and the risks associated with achieving them.

Acquiring a Business as a Special Purchaser

In addition to scenarios where the notional fair market value of a business is required, valuators may also be asked by potential special purchasers in a business acquisition to assist in quantifying the additional value that should be paid for the target business above its intrinsic value. In this case, valuators may attempt to determine the value of the synergies, economies of scale, and/or strategic advantages that will arise from the acquisition being considered. However, even if the additional value above the intrinsic value of the business can be reasonably determined it is often still difficult to determine to what extent the purchaser should pay for this additional value. Generally, when a business is purchased with the intent of realizing synergies, economies of scale, and/ or strategic advantages, the additional value paid for the business above its intrinsic value is determined as a result of negotiations between the buyer and seller.

If you are considering a sale transaction where a “Special Purchaser” may be involved, we can help guide you in the right direction.

Special Needs Planning

Posted on by Edixon

Recall your last vacation? How much time did you spend planning where you were going, how were you going to get there, and what activities you would enjoy once you arrived? Sadly, most people spend more time vacation planning than they do financial planning.

A financial plan is the roadmap for your future and the strategy for your family’s security. It is important for every adult, but it’s particularly important if you have dependants, and even more so if one or more of those dependants are disabled. When you are planning for a disabled dependant, you need to factor in the additional needs and time the financial resources must last for a disabled dependant, along with the healthcare needs and associated costs, managing support needs, dealing with government agencies, and a myriad of other concerns.

Most financial plans will recommend using Registered Retirement Savings Plans, Tax-Free Savings Accounts, Insurance, and Wills along with Powers of Attorney to help achieve goals and protect
lifestyle.

However, those requiring Special Needs Planning will likely benefit from having a Life Plan Guide, a special trust referred to as a Henson Trust, Registered Disability Savings Plans, Ontario Disability Support Planning, along with other special investment and insurance options to protect and support loved ones. In addition to the financial planning needs, there are
also long-term care planning needs.

  • Who will look after my child when I die or if I become incapacitated?
  • Where will they live?
  • Who will take them to their doctor and therapy appointments?
  • How will they pay their bills?
  • My whole life has been about looking after my child, but I have other goals that I would like to achieve; how can I do both?

These questions can be overwhelming. Consider building a network of people to provide support for your disabled dependant while you are still healthy and involved is critical. Disabled dependants often rely heavily on their care providers. If their sole care provider is Mom or Dad and they are suddenly out of the picture, it can be devastating for them. Parents should consider aligning themselves with professionals who have experience in dealing with special needs planning, such as Accountants, Lawyers, Certified Financial Planners, Trust Officers, Counsellors, Support Workers, Caregivers and Doctors, as well as Associations, Support Groups and other related networks.

The best advice for families with special needs dependants is to choose a qualified, trusted team of professionals. The financial planning process is similar regardless of whether you have disabled dependants or not.

Develop and implement a comprehensive financial plan and long-term care strategy without delay. Contact us today, we can help!

Income Splitting – Prescribed Rate Loans

Posted on by Edixon

A common question that gets asked is, “Are there any ways of splitting income with my spouse?” This is especially popular when two spouses have significantly different levels of income, meaning that they are taxed at vastly different marginal tax rates. In the ideal scenario, the higher-income spouse would be able to shift some of their investment income to their spouse’s tax return in order to utilize the marginal rate tax system in Canada and pay lower taxes overall. Specifically, in Ontario, the lowest combined tax bracket is 20.05% which is the tax rate that an individual would pay on most income sources up to about $46,000 of taxable income. In Ontario, an individual starts to pay a 53.53% combined income tax rate on most sources of income when their taxable income exceeds about $222,000. As shown, there are varying tax rates that are levied in Ontario which makes it desirable to income-split with your spouse, given the right circumstances.

One potential income-splitting strategy is to provide your spouse or a family trust with a prescribed rate loan. It is important to highlight the difference between “a gift” to a spouse or a family trust and a “prescribed rate loan”. If funds are being gifted, then the income generated from that gift are subject to the attribution rules of the Income Tax Act and the income is reported on the gifting individual’s tax return resulting in no income-splitting benefit. The prescribed rate loan strategy also avoids any negative implications of the Tax on Split Income (TOSI) rules. In order to avoid the attribution rules, the following criteria must be met:

  1. Interest must be charged on a loan at a rate equal to or greater than the prescribed rate that was in effect at the time the loan was made; and
  2. The amount of interest that was payable in respect of each year the loan is outstanding is paid no later than January 30 of the following year.

The Canada Revenue Agency (CRA) prescribed rate is 3% (previously 2%) after September 30, 2022. This strategy is only effective if the loaned funds are generating income at a rate that is higher than the prescribed rate of 3%.

Click on the Downloadable Table button below for an example of the tax savings calculation by effectively utilizing the prescribed rate spousal loan.

Download Table

There are some additional steps that need to be undertaken in order to formalize the spousal or family trust  loan and to be in accordance to CRA’s protocols:

  1. A promissory note should be drafted and signed by both parties to formalize the terms of the loan.
  2. The interest on the loan needs to be paid, preferably from an account solely in the payer’s name to an account solely in the recipient’s name, before January 30 annually.  Documentation such as cancelled cheques or proof of transfer should be retained for CRA audit purposes.

Further considerations need to be explored if any US persons (US resident, US citizen or green card holder) are involved in this type of arrangement. These issues are beyond the scope of this article.

In closing, the prescribed rate spousal or family trust loan strategy can be an effective way to income-split with your spouse or a family trust in the right circumstances. It is also important to follow all of the Income Tax Act’s rules to ensure you are onside should CRA ever review the details of the loan arrangement. Contact one of our Taxation Professionals if you feel you may benefit from a prescribed rate spousal or family trust loan arrangement.

AUDITING OLD TAX RETURNS: CRA Abilities and Limitations

Posted on by Edixon

CRA may reassess the tax returns for CCPCs and individuals within three years from the sending of the notice of assessment. Returns for which this three-year period have expired are commonly referred to as being “statute-barred.” However, CRA may reassess a return beyond this period in certain cases, such as where:

  • a waiver of the normal time limits has been timely filed, or
  • the taxpayer has made a misrepresentation attributable to neglect, carelessness, or willful default or has committed fraud in filing the return or in supplying any relevant information.

Although there are restrictions on when a (re)assessment can be made, these limits do not apply to the periods that CRA may audit. In other words, while a taxpayer may believe that they cannot be assessed for periods beyond three years, CRA still has the ability to analyze those prior years and ask for information, as long as it is reasonable. Likewise, although taxpayers are only generally required to retain support for six years after last being applicable, CRA can still request older documents. If the older documents are available, they must be provided.

In a January 10, 2022, Federal Court case, the Court addressed an application for judicial review of CRA’s decision to expand its audit of the taxpayer and his professional corporation to encompass the 2003 to 2018 taxation years.

The audit, which was initially limited to the 2010 to 2016 tax years, was prompted by information obtained from Citibank and the Royal Bank of Canada under an unnamed persons’ requirement for information on transactions involving the Cayman National Bank. The information identified funds entering Canada, including bank drafts to car dealerships for vehicle purchases. CRA’s initial review identified a Cayman Islands corporation (“COG”) in which the taxpayer and a number of other Canadians, also screened for audit, were involved.

Taxpayer loses

The Court noted the following:

  • the taxpayer was involved in COG from its incorporation in 1996, eventually becoming its president and sole shareholder, but had never declared any offshore income;
  • while it was true that records are generally only required to be retained for six years, COG’s general ledger for the 2003 to 2018 tax years was known to be on a USB key, so the records were known to exist and were accessible;
  • the taxpayer’s long association with COG justified CRA’s requirement for accounting information for that entity; and
  • the documents and other information sought were sufficiently detailed in CRA’s correspondence. CRA’s requests were held to be reasonable, so the application for judicial review was dismissed.

ACTION ITEM: Review document retention and destruction policies to ensure that they align with CRA guidance and the applicable law. CRA may review filings for years even though they appear to be statute-barred.