Do Government Employees Earn More?

According to a study by the Fraser Institute this year, public sector workers in Ontario enjoy a 13.4% compensation advantage over their private sector counterparts.

“Using data on individual workers from January to December 2015, this report estimates the wage differential between the government and private sectors in Ontario. It also evaluates four available non-wage benefits in an attempt to quantify compensation differences between the two sectors. After controlling for such factors as gender, age, marital status, education, tenure, size of firm, type of job, industry, and occupation, Ontario’s government sector workers (from the federal, provincial, and local governments) were found to enjoy a 13.4 percent wage premium, on average, over their private sector counterparts in 2015. When unionization status is factored into the analysis, the wage premium for the government sector declines to 10.3 percent.

The available data on non-wage benefits suggest that the government sector enjoys an advantage over the private sector. For example, 82.1 percent of government workers in Ontario are covered by a registered pension plan, compared to 25.2 percent of private sector workers. Of those covered by a registered pension plan, 97.0 percent of government workers enjoyed a defined benefit pension compared to just under half (45.1 percent) of private sector workers.

In addition, government workers retire earlier than their private sector counterparts—about 1.4 years on average—and are much less likely to lose their jobs (3.2 percent in the private sector versus 0.5 percent in the public sector). Moreover, full-time workers in the government sector lost more work time in 2015 for personal reasons (10.9 days on average) than their private sector counterparts (6.8 days).”

While I often take studies by the Fraser Institute with a grain of salt – in terms of objectivity they’re on a par with those of the Canadian Centre for Policy Alternatives – in this case they probably have a point.

The thing is that public sector workers have much better benefits than those in the private sector. Specifically their pensions are – in the Finance Minister’s own words “are at a level that they (i.e. most Canadians) can only dream about”.

Of course I don’t believe that public sector workers actually believe that they are better paid than their private sector counterparts. The value of their tax-free, indexed pensions are clearly too high. However a young family with kids can’t live on gilt-edged pensions that they will start to enjoy long after their kids are grown.

‘public sector workers don’t actually believe that they are better paid than their private sector counterparts’

In the mean time they won’t be able to afford housing in Canada’s most expensive housing markets. That puts government departments like the Canada Revenue Agency in a difficult position. How do they provide services in high cost markets like Vancouver and Toronto, if they can’t afford ‘competitive wages’ (not including retirement benefits) in those centres?

The simple answer – don’t bother. Instead they will replace skilled people with processes – and do most of their processing in lower cost communities where wages are lower. This means that small businesses will absorb most of the costs of the resulting inefficiencies.

 

 

2017 Department of Finance Proposals Regarding the Taxation of Private Corporations

On July 18th of this year the Finance Department released proposal relating to the taxation of private corporations in Canada. The stated goal was to ‘level the playing field’ and eliminate unfair tax advantages enjoyed by Canada’s wealthiest taxpayers. They have tried to suggest that this will only affect the so-called ‘one per cent’.

I actually applaud the Finance Minister’s intentions here. The problem is that their proposals are very poorly thought-out. I have already seen the damage for one of my small business clients.

The business community and the tax administrators have a kind of necessary competitive tension. Sometimes this translates into Finance drafting measures in an attempt to win. The proposals are very complex and pretty much impossible to discuss intelligently with the uninitiated.

I have the benefit of more than 30 years of experience working in the income tax field. I’ve been a tax auditor with the CRA, a senior manager in a tax specialty with one of Canada’s Big 4 accounting firms, taken the CPA’s In-Depth Tax Course and spent 3 hours of professional development time this summer studying the proposals. The proposals are complex and cannot be discussed intelligently in the media or on talk shows.

The average citizen simply doesn’t have any idea about the theory of tax integration. The tax system was designed generally so that it shouldn’t matter whether income of a certain kind was earned directly by an individual, or through a corporation and then flowed out to the shareholder as wages, dividends or whatever. Mostly this works.

Perhaps because technophiles in the Department of Finance believe they have out-smarted the competition, they are not open to change and are instead hunkering down trying to withstand the massive backlash this has caused in the business community.

I represent a small business client who recently sold his business after about 10 years. The value in the business was a combination of goodwill and intellectual property. All in all, pretty standard for a service-based businesses (software in this case).

So of course he would simply use up his capital gains exemption right?

Well no.

That is actually pretty hard to do. No lawyer worth his salt would allow his client to purchase shares in a privately held corporation. They would invariably be worried about skeletons in the closet – and rightly so. That is one of the main problems with the capital gains exemption.

The business community needs to urge Finance to consider better legislation to facilitate arm’s length sale of assets when a small business owner sells his business. Small businesses are mostly service businesses, and their assets typically intangibles like goodwill or intellectual property. Nobody likes to pay very much for these kinds of assets, since the purchaser can’t deduct the costs very efficiently.

The capital gains exemption was introduced by a pre-Harper conservative government. Typically it was aimed at wealthy Canadians. It originally allowed for a $100,000 tax-free capital on public company shares and other passive investments. Heck I even got my late father to benefit – even though he didn’t really need it. While subsequent governments eliminated the $100,000 portion related to passive investments, the program has continued and even been expanded for qualifying small business corporation shares amongst other things.

However it remains awkward to use in true arm’s-length sales. Predictably the accounting profession has worked long and hard to find ways to use it for estate planning with their high net worth clients. In their lust to defeat this kind of tax planning, the Finance Department has proposed fiddling with rules related to the capital dividend account. That might work to defeat some of the more egregious tax schemes for high net worth taxpayers.

However it would also cause excessive – and I believe unintended – tax to be payable by my client trying to sell his software company.

The worst thing about these proposals however is the way in which the Liberals have allowed technophiles in Finance to score points against their adversaries in the accounting profession – instead of building good tax policy. The Liberals lost sight of “sunny ways” when it comes to tax fairness.

It attempts to address benefits enjoyed by one – admittedly annoyingly self-entitled – part of society (i.e. wealthy professionals). However it also ignores another equally smug and self-entitled group of Canadians:

Public sector workers who enjoy health benefits and indexed pensions that are the envy of everyone in the small business world.

I live on Pender Island which is a strange mixture of farmers, small business people, former hippies and retirees from the public sector. Retired government employees will support the proposed measures because it targets someone else and ignores fact that public sector workers in the province routinely take early retirement and have the benefit of full health coverage and indexed pensions for the rest of their pampered lives. The small business community is already taking aim at public sector workers, as they gear up to fight these proposals.

The Finance proposals are playing to the politics of envy. Instead the Government needs to look at evidence-based policies to improve tax fairness. They need to embrace the notion of “sunny ways’. If the Government can avoid vilifying Donald Trump in public for the sake of NAFTA negotiations, surely they can do the same for Canada’s wealthiest professionals in the interests of developing a fairer tax system.

Instead of punishing tax professionals and their high net-worth clients for developing innovative new tax planning strategies – render many of them expensive and pointless by extending income splitting to ALL Canadian couples. Heck – if you think of it, it’s only reasonable. And it will benefit public sector employees, seniors and the 45% of BC residents who work in small business.

Do they want to go to the electorate in 2 years having alienated 45% of the population (i.e. the self-employed and people that work for them)?

In the same way, instead of penalizing public sector employees by taxing their (gilt-edged) benefits, allow ALL Canadians to directly deduct medical expenses from income. This would be a vast improvement on the miserly tax credit available to most of the self-employed AND their employees (in BC 45% of working population). It would also be important for seniors who don’t have indexed, public sector pensions and health benefits.

Stephen Harper started using the CRA as a weapon against environmentalists and anti-poverty groups. I have already seen the beginnings of the politics of envy amongst CRA auditors, who appear to be using their powers arbitrarily against small business owners. This invariably is felt by small business owners who don’t simply get T4s from their employer. Unlike employees, the self-employed have to self-assess tax. Navigating the complexities of GST, PST, payroll (think of the “Phoenix Payroll System” debacle) and income tax isn’t for the faint of heart. I could relate numerous anecdotes in the last year or so, within my own practice.

My point is, let’s keep it positive (‘sunny ways’). Speak to the value of ALL Canadians, whether they work for large businesses, government or for small businesses. Don’t pit one group against another. That kind of divisive approach won’t end well.

Vancouver and Toronto-Waterloo Both Make Top 20 In 2017 Startup Genome Report

According to Startup Genome  2 of the top 20 startup ecosystems in the world are located in Canada.

Vancouver (No. 15)
The Vancouver startup ecosystem is currently comprised of 800-1,100 startups and shining success stories. In the early days Slack’s founder estimated the market for the software to be $100 million, which they exceeded in just three years—and have now become the fastest growing business software of all time.

Broadband.tv is now the third largest video streaming site in the world after Facebook and Google.

The dating app Plenty of Fish sold to Match.com for $575 million.

Bitstew exited in 2016 for $157 million – accounting for the largest exit in Canada last year, while TIO Logic exited for $233 million within the first few months of 2017

 

Toronto-Waterloo (No. 16)

The Toronto-Waterloo Corridor stretches from Toronto, Canada’s largest city and financial center to the Waterloo Region, which boasts the second highest density of startups in the world and is the headquarters of some of Canada’s largest tech companies.

These two startup ecosystems have been considered separately in past rankings. However, over the past year, there have been strong signals that the region is increasingly behaving as one ecosystem. Overall, an estimated 2,100-2,700 startups thrive thanks in part to world-class engineering talent, strong entrepreneurial culture, an affordable rental market, and a global base of customers.

 

New Reporting Rules for Sales of a Principal Residence

On October 3, 2016, the Government announced an administrative change to Canada Revenue Agency’s reporting requirements for the sale of a principal residence.


“When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.
Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption.”

On October 3, 2016 the Government introduced a new requirement to disclose the sale (or other disposition) of a principal residence on your personal tax return in the year that the property was disposed of. The disposition must be reported on page 2 of Schedule 3 of the return –

$8,000 (Max) Penalty For Failure To Report

According to the CRA website, if a taxpayer doesn’t report the sale and designation of the property as his or her principal residence, a penalty of up to $8,000 for failing to report the disposition may be applied :

“7. What should I do if I sold a property and want to claim the principal residence exemption but I forget to report the designation of principal residence on my income tax return for the year of sale?
For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to
accept a late designation in certain circumstances, but a penalty may apply.
The penalty is the lesser of the following amounts:
1. $8,000; or
2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections.
The CRA will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year (generally for which the designation would be required to be made in tax filings due by late April 2017) the penalty for late­filing a principal residence designation will only be assessed in the most excessive cases”

What About Deemed Dispositions on Change in Use?

By virtue of Paragraph 45(1)(a) of the Income Tax Act, if a person converts a residential property into a rental property (or the other way round), he or she is deemed to have disposed of the property at “fair market value” and re-acquired it at that same value. So if you move out of your principal residence and begin renting it out, you will need to report that disposition on Schedule 3 of your T1 return for the year.

The change in use rules have always been challenging for individuals filing their own returns. Since no actual purchase or sale has occurred, such transactions could easily be overlooked.

Finance Minister’s Advisory Panel on Economic Growth Report Based on Flawed Analysis

On February 7, 2017 Canada’s Advisory Council on Economic Growth Released its report:

UNLOCKING INNOVATION TO DRIVE SCALE AND GROWTH

Unfortunately at least one of the key underlying assumptions is demonstrably false and therefore may have led the council to reach the wrong conclusions. Specifically:

“Small firms account for about half of business sector employment in Canada versus just over one-third in the United States.” – see page 4 of the report

I suspected that this assertion was false based upon my analysis in 2012 when I was setting up my own accounting practice.  At that time I took a look at US and Canadian statistics for employment and firm size in 2012, in order to gain a better understanding of the market. Surprisingly, the results showed me that the 2 countries were very similar. Predictably, the US had more very large businesses, at least in absolute terms. However there was also a relatively larger number of self-employed persons in the US.

Interestingly the US Census Bureau excludes nonemployer firms from their analyses:

“Nonemployer Statistics is an annual series that provides subnational economic data for businesses that have no paid employees and are subject to federal income tax. The data consist of the number of businesses and total receipts by industry. Most nonemployers are self-employed individuals operating unincorporated businesses (known as sole proprietorships), which may or may not be the owner’s principal source of income.

 The majority of all business establishments in the United States are nonemployers, yet these firms average less than 4 percent of all sales and receipts nationally. Due to their small economic impact, these firms are excluded from most other Census Bureau business statistics (the primary exception being the Survey of Business Owners). The Nonemployers Statistics series is the primary resource available to study the scope and activities of nonemployers at a detailed geographic level. For complementary statistics on the firms that do have paid employees, refer to the County Business Patterns. Additional sources of data on small businesses include the Economic Census, and the Statistics of U.S. Businesses.”

The definition of small business is also troubling and likely outdated. If you define small and medium enterprises (“SMEs”) as having fewer than 500 employees, you are left with a very small number of large businesses. In British Columbia, BC Stats uses 50 or more employees as the cut-off for large businesses. Using this definition, and including “non-employer firms”, there is virtually no difference between US and Canadian statistics:

 

Based upon their flawed analysis the Advisory Council infers that:

 

“This lack of scale accounts for 20 percent of the labour productivity gap between Canada’s business sector and that of the United States.”

 

The Finance Minister’s Advisory Panel appears set to re-visit programs that benefit early stage technology companies and re-allocate resources to favour larger companies, universities and venture capitalists – presumably after input from these groups – and with almost no input from startups and early stage companies.

It is precisely these larger companies, universities and venture capitalists that are not performing.

Commercialization is critical – but it won’t be achieved by rewarding institutions that have failed to deliver in the past.

Alberta Introduces New 30% Venture Capital Credit

On January 16, 2017 the Alberta Government has introduced a new Alberta Investors Tax Credit, providing a tax credit for investments in private, early stage companies in Alberta (Dentons).

Under the terms of the legislation, the province provides tax credits of 30% calculated on the gross amount of the investment. For individuals the tax credit is refundable, so individual investors will get a tax refund if their Alberta tax liability is less than $30,000. For corporate investors, the tax credit is deducted from tax otherwise payable.

A quick read of the review by Dentons indicates that it was copied almost word for word from BC’s Small Business Venture Capital Act. It seems that both provinces cap the tax credits each year at about $30 million, so businesses need to register early to avoid disappointment.

In BC, if companies arrange for offerings that are eligible, they need to quickly file Share Purchase Reports to ensure that their investors receive the tax credit. So waiting until the end of the calendar year isn’t advisable.

 

 

 

Open Letter to The Minister of Innovation, Science and Economic Development

I understand that your Minister of Science launched a review of innovation policy on June 13th of this year, and that you are now responsible for that review.

As a CPA and income tax practitioner my clients will be very much affected by changes to Canada’s existing policies designed to encourage innovation. I am a member of an ad hoc CATA “LinkedIn Group”. As such I am aware of lobbying efforts being made by CATA to your Ministry.

I feel that I must point out to you that CATA does not represent the vast majority of my clients and that while their lobbying efforts have some merit, you should not believe that they necessarily represent the best interests of the entire community.

They are presenting your Ministry with a complex suite of recommendations and seeking validation from members using online petitions. As you would expect, their petitions overly simplify the situation, making it much easier for busy executives to “just say yes”.

I have reproduced their most recent online questionnaire below:

I cannot in all conscience respond to this survey. It appears that my only option is to reply “Yes”. Any attempt at a “nuanced” response, will presumably be ignored, since they have already determined what their proposals are.

SO WHO IS CATA and WHO DO THEY REPRESENT?

The small, early stage companies that I typically represent are very seldom members. Large CPA firms are well represented. In fact, CATA’s key spokesperson is Dr. Russ Roberts, a former partner at Deloitte, LLP.

So while CATA’s views are certainly worthy of consideration, they do not represent my clients or their needs. I therefore urge you to tread carefully when conducting your review.

SHOULD OUR START-UP OUTSOURCE THE BOOKKEEPING?

Start-ups often ask:

Which Online Bookkeeping Software Should We Choose?

Comparison of Accounting Packages – Implication that one of these is right for you to do your own bookkeeping

The future of all software – including bookkeeping software – is online. This allows for much better information sharing and connectivity with distributed teams. With better connectivity and distributed teams, outsourcing many activities becomes possible.

If you outsource your bookkeeping function, it doesn’t make sense to choose the bookkeeping software. You won’t be using the software, probably don’t understand how to use it, and shouldn’t inflict it on someone else who already knows how he or she wants to go about doing the job.

SO THE QUESTION IS REALLY:

SHOULD OUR COMPANY OUTSOURCE THE BOOKKEEPING?

Every startup has limited resources – and a helluva lot to do. With so many critical things to do, startups need to focus on core functions like ‘getting out of the building’ and developing a ‘minimum viable product’.

IS BOOKKEEPING ONE OF THOSE CRITICAL CORE FUNCTIONS?

The short answer is “No”!

Bookkeeping isn’t a core function, but recordkeeping and banking are both core functions. Unfortunately many entrepreneurs consider recordkeeping and banking part of the bookkeeping function. This leads to 1 of 2 very common mistakes:

  1. Understanding that banking and recordkeeping are critical, core functions they set about trying to do the bookkeeping themselves – and typically spend too much time doing a very poor job.
  2. They outsource everything to the bookkeeper, including the recordkeeping and banking functions. In so doing they put the assets of the company at risk and can make the job of the bookkeeper almost impossible – where records weren’t properly kept from the outset.

BANKING IS A CORE FUNCTION

Don’t get someone else to do your banking for you. You are already taking lots of risk starting a small business. Don’t pointlessly add to your risk by giving someone else access to your bank accounts.

RECORDKEEPING IS A CORE FUNCTION

You’re probably already using online banking. Online banking functions automatically generate records. It is a simple matter to ‘keep’ records as you generate them. You can even go online after the fact and download banking records. But don’t wait too long. Your bank will probably archive the records after a few months. Once that happens, it becomes time-consuming, expensive and difficult (or impossible) to retrieve them.

When you deposit customer cheques to your bank account, you won’t be able to tell by looking at the bank statement whose cheque was deposited. Six months after the fact you’ll be left a confusing mess. If you deposit customer cheques it makes sense to use a deposit book – and keep details as to what cheques were deposited.

Similarly when you write cheques it makes sense to order cheques with a stub attached (and fill it out when you write the cheque). Otherwise take a picture of it with your phone and email it to yourself.

When you buy something online, print a copy of the invoice or receipt to a PDF file and store it where it can readily be found later.

If your recordkeeping system consists of “just ask me and I’ll get it for you”, you’re forcing the bookkeeper to document the missing records, inform you what he or she needs and then wait until you get around to getting the relevant records. This approach is very common – and hopelessly inefficient.

Fake News and Fake Expertise:

Misinformation in a “Post-Truth” World

We’ve all seen the proliferation of lists and comparisons designed to grab our attention on the internet:

 
3 Things Every Entrepreneur Needs to do this Holiday Season (Forbes.com)

Someone in the communications department makes a short 3,5 or 7-step list of things to do and points to a blog post on their website. The notion is that if you can reduce planning and decision-making to a simple list of to do items, the strategic planning required for your business or personal life, can be simplified.

The value of the advice is implied by the placement of well-known corporate logos on the website. This would seem to imply that the advice has been ‘blessed’ by all of the large companies whose logos grace the website.

fake-news

 

http://grasshopper.com/ is an online service that “lets you run your business using your cell phones!

They offer a resources section on their website that provides comparisons of popular online services designed for startups. Let’s take a look at their evaluation of Business Income Tax Software.

tax-software-comparison

Take a quick read of the article and I’m sure it will become quickly apparent that it took more time to build the accompanying graphics than it did to write the content.

After more than 30 years as a tax accountant and a tax auditor, I’ve learned that the most important thing to do when asking questions of a small business owner, is to ask the right questions.

So how would a tax professional start in determining a business’ need for tax software?

1.       Determine what jurisdiction the business operates out of. Almost all online resources assume that the business is US-based. This is true because they are operating from the centre of the universe – and noone else matters.

2.       Determine the nature of the business. Is the company operating a small retail store or a contractor providing painting and drywalling services? Is it a Canadian technology startup creating digital electrical metering systems?

3.       Determine what kind of entity business is. There are a variety of different types of entity. Grasshopper.com sells to small, home-based businesses.  So they’ve written this guide for their customers. The US Small Business Administration distinguishes between 6 different types of business organization:

US Small Business Administration

a.       Sole Proprietorship

b.       Limited Liability Company (LLC)

c.        Cooperative

d.       Corporation

e.       Partnership

f.         “S” Corporation

It’s pretty clear to us at least that “Grasshopper isn’t a tax expert” – but they write a very attractive post!