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How to take advantage of major CEWS updates (July 2020)

For many businesses hit by the coronavirus-triggered lockdown recession, the Canada Emergency Wage Subsidy (in short form -CEWS) has been an effective solution to help reduce salary expenses while avoiding costly staff cuts. Last Friday, the Government announced proposed changes to the CEWS. The good news is that the new provisions allow a larger number of small business owners to access financial supports as the economy gradually reopens. In this article, I will give you a high-level view of the changes which will determine how much money you will get back from the Government in the form of CEWS claims.

Under the new rules

  • You can now get the CEWS subsidy until December 19, 2020,
  • Even If you have a revenue decline of less than 30 percent, you might still be able to apply for CEWS
  • If you have been most adversely affected by the pandemic, i.e., if the revenue decline is 50 percent or more, you can get a  top-up subsidy of up to an additional 25 percent.
  • You see, under the new rules, the amounts paid out will be proportional to revenue declines experienced during the coronavirus pandemic which will decrease the base subsidy to all qualifying employers
  • If you are a small business owner with revenue losses of around 30 to 40 percent, you might prefer the current wage subsidy model, as the new version might actually pay out less. In order to provide certainty to employers that have already made business decisions for July and August, the new provisions will still allow you to get 75% for periods 5 and 6, provided you have a revenue decline of at least 30%. This can ensure that you will not receive a subsidy rate lower than you would have had under the previous rules, but you will be forced into the new program at the beginning of September.
  • For example, under the new program, let's say your revenue decrease is 30%, you will multiply this by a factor, there are different factors for each month, for the first two months, i.e. periods 5 and 6, the number is 1.2. So you are going to multiply 1.2 times your revenue decline rate of 30%, which is equal to 36%. So, you take 36% of essentially your eligible remuneration, and that is what your subsidy is going to be. Well, in the past you were looking at a 75%  wage subsidy, so this means, in this example, the amount of subsidy which you actually get falls down starting from period seven which starts from September.

You see, the Cews is helping you to get the confidence to rehire workers, run your business and generate as much revenue as you possibly can and transition from wage subsidy to normal or better revenues as rapidly as possible in the process.

Please remember that the new announcement has made CEWS claims more complicated, with more variability and increased need for more accounting work to track revenues and different type of calculations starting with period five i.e. July 5 to August 1, so, you might want to consult a CPA who can file the claim for you.

I will continue to update you with information as soon as it becomes available. If you have any questions, please let me know in the comments below.

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How to plan for the potential tax hikes! (August 2020)

As the Covid19  lockdown comes to an end, municipal, provincial and federal governments will have to account for the billions of dollars they've spent over the past few months and find a way to start paying for it.

One way is to make the "unavoidable" decision to seek new revenue sources through tax increases.

You see, the big question is, can you do something to protect against any potential increased tax?

You see, tax increases can take many forms, the most noticeable of which is to simply raise overall tax rates, with a focus on high-income earners.

Also, the capital gains inclusion rate might be increased. Currently, if a taxpayer realizes a capital gain, only 50% of that capital gain is included in income. If the inclusion rate is increased to 75% (such type of increase has already happened in the past), more of that capital gain will be included in income. Thus, more taxes will be owed; this can be done even without an increase in the tax rates.

If you are expecting to realize a substantial capital gain soon, such as on the sale of a business, investment portfolio, or real estate, you might have to pay a higher overall tax on your capital gain if the capital gains inclusion rate increases.

You see, there are other measures the federal government could take, such as making part of the gain on the sale of a principal residence subject to tax, eliminating the capital gains deduction on a particular eligible property, increasing corporate tax rates, or even increasing the goods and services tax. There is widespread speculation about how the federal government will proceed, but no one knows for sure.

As a result, you might want to get ready as this government is strategically very well positioned to start implementing massive tax hikes aimed directly at high-net-worth Canadians, small businesses and corporations.

If you want to be proactive, now is a great time to map out your tax strategy. One such strategy is the prescribed loan strategy; you might want to check it out by clicking on the top right of the screen. Your CPA can plan the proactive steps that can be taken now to potentially mitigate the risk of higher taxes in the future.

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How to help your employees claim home office expenses (August 2020)

Working from home (WFH) has become the "new normal" for a lot of organizations, as we all do our part to keep our communities healthy.

As a business owner, you might wonder whether your Employees Claim Home office Expenses against their taxes

You see, to deduct home-office expenses, an employee must be "required by the contract of employment" to maintain such an office as certified by you, the employer on the T2200.

  1. Space must be either: where the employee "principally" (more than 50% of the time) performs their duties of employment. Given that many British Columbia employees started working from home in March and will probably continue doing so until September or even longer than that, it's likely that lots of workers might qualify under this criteria.

OR

  1. Space must be used exclusively to earn employment income and on a regular and continuous basis for meeting clients, customers, or other people in the course of employment duties. You see, physical distancing requirements recommended by governments seem to make this test impossible to meet in the current climate. In the past, the CRA has taken the position that video and conference calls do not count as meetings. You see, the current pandemic is causing the location of work to rapidly change, it is possible that soon Tax Courts will have to reassess this matter.

Reducing taxable income is a real bonus for your employees since it will make a difference in the amount of tax they pay.

For the time being,I recommend that you consider the following Tax Strategy :

  1. Create a WFH policy for your employees which covers:
  • Advising employees that expenses should only be incurred that relate to earning employment income.
  • Documenting the requirement of WFH in writing.
  • Creating WFH terms and conditions such as defining the home workspace as the location where an employee mainly works from.
  • Outlining that it is the employees' responsibility to retain support of claims being made.
  1. Have resources available to employees including FAQs and tax-related information for employees to consider if given the option to WFH.

iii. Consider whether you would bear the additional tax cost for your employees if a benefit is considered taxable.

  1. Consider buying the equipment directly for your employees rather than giving them an allowance or reimbursing them for their expenses. Incorporate a requirement to return the equipment upon the termination of employment.
  2. Continue to monitor the CRA and our youtube channel for updates.

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How to take advantage of the opportunity of saving taxes through Income Splitting (June 2020)

I hope that you and your family are safe during this difficult time.

During this pandemic, I have seen a number of couples, where one is now earning significantly less than before Covid-19, with the result that he or she is going to be in a lower tax bracket this year. It could make sense to shift income to a lower-income spouse who can make an investment and pay tax on the investment returns at their low level.
This article covers the topic of income splitting through spousal investment loans, you see, income splitting is an extremely useful tool when a spouse has different levels of income, for example, someone at the highest tax bracket is paying taxes at somewhere around the 50 percent mark whereas someone with no income is paying no tax.
Now if this is done incorrectly the attribution rules of the income tax act are going to kick in and deem that investment returns were earned at the higher income earning spouses' level and tax it in their hands so how do we get around this? We get around this by doing an investment loan, so the high income earning spouse takes their money- loans it to the lower-income earning spouse and charges interest at what is called the prescribed rate.
The higher-income earning spouse claims this interest as income and pays tax on it at their marginal rate
then the lower-income earning spouse will be able to claim be actual investment returns on their income tax return paying tax presumably at a lower rate. This is a really good strategy especially in the current pandemic environment as the prescribed rate will be at a historically low level of 1% from July 1 2020,so even modest returns are going to provide the family with a tax benefit overall.
For Example
A husband (who is in the top tax bracket) lends his wife (who has very little income) 1 million dollars that is currently earning a 6% return. The money is loaned at an interest rate of 1% i.e the interest is 10,000 dollars. The wife would report income of 60,000 dollars on her return with a deduction for the interest of 10,000 dollars leaving 50,000 dollars of taxable income. On the other side, the husband would report the $10,000 of interest income – versus the 60,000 dollars reported in previous years.
Effectively, the benefit of this strategy is that it shifts 50,000 dollars of income (or 5%) from the husband's return to the wife’s return where it is now taxed at lower marginal rates. This tax savings can be achieved on an annual basis as long as the arrangement is properly maintained.

You see, obviously, it's not as simple as this you should contact a tax lawyer or a tax accountant who's familiar with this strategy.

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How to use Holding Company for your advantage (August 2020)

As a small business owner, You may have heard of holding companies, but you aren't sure what they are or why someone would incorporate one.

Well, let's start with a discussion of what is a holding company, you see, in simple words, it is a company that doesn't produce goods or services but holds shares of an operating company.

The holding company is simply inserted between you, the business owner and the active business that allows profits to be flowed up as tax-free dividends and retained in the holding company or Holdco in short form. That income can be held inside that Holdco until, perhaps, a later year when you, the business owner, actually need the money. You see, this gives you more control to plan when you want to receive the money and pay tax. This flexibility is also beneficial where multiple shareholders hold shares in the operating company, in short form Opco, through their individual holdcos.

Please beware, new anti-avoidance rules may treat inter-corporate dividends paid in excess of retained earnings as a capital gain, So, you will need expert tax advice from A CPA  to determine the number of dividends that may be safely paid.

Another reason you might want to use a holding company is for asset protection. "If a creditor of your opco decides to sue your opco, [the creditor] could have access, theoretically, to all of the Opcos assets."

You see, to prevent these assets can be protected by removing excess cash or investments not needed for business operations to a holding company.

You might also wonder whether the investments which you already own personally should be transferred to a holding company for tax purposes. The answer is generally no, as

There's actually a tax cost from earning investment income inside a private company compared to earning that same investment income personally.

Moreover, as the Small Business Deduction dollar limit must be shared among associated corporations.

Passive Investments in Holdco affect an associated operating company's ability to claim the small business rate.  You might want to watch the video on the top left to get more details.

As a small business owner, if you are interested in creating a holding company, you might want to first seek assistance from a lawyer and a CPA.

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How to take advantage of Interest-Free CEBA Loan (July 2020)

This is Aman from Cloudiverse CPAs.I sincerely wish that as a small business owner you can survive this crisis with minimum damage to your financial well being. Did you know that you can receive a 40k dollar interest-free loan under the  Canada emergency business Account or CEBA in short form.

The Ceba was launched initially on April 9 for small businesses that had employees on the payroll within certain limits, you see, that left out a number of other business structures such as owner-operated business and sole proprietors and those who pay themselves with a dividend.

The good news is that the government recently announced an expansion to the eligibility criteria for the CEBA. As of today i.e June 19th, businesses with less than 20,000 in payroll can also apply for Ceba loan through their bank directly. You need the following to be eligible

A business operating account at a financial institution that was opened prior to March 1 2020 and likely if you  have one , you might have already got an email from your bank about the CEBA

A  CRA business number and you must have filed either 2018 or 2019 tax return and you must have eligible non-deferrable expenses between 40k and 1.5 million dollars and this could include items such as Rent, Insurance, Utilities, Property Taxes, Employment Cost and the government website does have a list of other expenses as well.

Once you get the loan, please make sure that the funds from the loan shall only be used to pay non-deferrable operating expenses.

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