M. Todd Achen, C.A. Chartered Accountant

Todd’s Tax Tips and Traps

PCFAC PresentationTuesday, October 19, 2010

Todd’s Tax Tips and Traps

• Every individual or company is unique, as are their planning goals

• Please seek your own expert financial advise prior to implementing any good tax plan

• Avoid tax schemes, as if it sounds to good to be true, it likely is and should be avoided

• Plan and understand your tax and enjoy the more effective after tax cash flow

Credit Professionals

• Booking of a bad debt – specific write off and use of a contra AFDA– Tip: get cash back for your company, as tax

deductible if done correctly @ over 25% cash offset

– Trap: Completely writing off the books, loses place maker for debt on books. General provision is not tax deductible. Long term nature, and reversals.

Credit Professionals

• Recovery of 5% GST from a bad debt write off• As GST was remitted on the invoiced amount, you can

claim a GST ITC to get 5% tax back to assist with the mitigation of your bad debt

• Book keeper may book it wrong unless asked, as $50k GST to claim on every $1 Million bad debt– Tip: Ensure that accountant books correctly, as not to

offset your loss with a 5% cash back– Trap: must be properly booked into regular GST returns,

and ITC claimed within 2 years (4 years for smaller co’s)

Credit Professionals

• Crossborder Performance or Financial Guarantee Fees should be charged for at FMV rates

• Larger credit spread, so of higher value now• Canadian corporate tax 10% less than USA• CRA Precedence setting GE Case here in Canada,

where an inherent guarantee is discounted– Tip: Work with Tax Professionals to get 10% cash flow for

company if US guarantees, as Canada’s tax rate is lower– Trap: Could be a CRA tax penalty for your company, had

the crossborder transfer price should have been in place

Small Business

• If you are a Canadian Private Controlled Corporation, there is up to $0.75 Million in free capital gains exemption:

• 750k Capital gain = $375 Taxable capital gain = up to $150k cash savings

– Tip: Seek professional assistance, as need to perfectly “purify” the company for sale at least 2 years prior

– Trap: Small self-employees contractors may not qualify as a professional corporation needs at least 5 employees

Small Business

• Use of a Health Plan, for extended coverage, and seeking expanded coverage on a wider list of medical items for family member employees– Tip: Tax deductible, can extend to Health Spending

accounts (see next section)– Traps: Managing administration and premium costs,

seek experienced advice

Individual Tax Tips• Health Spending Account (HSA):• Allows you to spend pre tax dollars, instead of tax

paid cash, saving the effective tax value of up to 40%• Just like the CRA tax deduction for medical expenses,

but no minimum threshold to surpass• E.g. 2 kids with braces

• 2 Xs $7.5k = $15k, less $2.5k X 2 max benefit cap, less $4k HSA (40% tax savings on remaining $10k), = $6k actual net cash outlay, not $15k

– Tip: Save 40% tax value by having large medical events covered by topping up your employment HSA limits

– Trap: Have a plan to deposit monthly for estimated amounts, only have 1 year to catch up

Individual Tax Tips

• Spousal RRSPs:• Attribution of income between spouses, if not

done in proper format E.G. buy shares• Tip: Get caught up one year, usually put in Feb/11

for 2010, should be putting in the 2011 value too• Trap: While PM Harper now allows certain pension

and RRIF income to be shared, it is not until the youngest spouse is 65. So need to plan to take out RRSP’s before 65 if planning to retire early

Individual Tax Tips

• 1% Spousal Loan• Do for life or 20 or 25 years• Once in a life-time opportunity, as first time ever

this rate has been so low• CRAs approved rate– Tip: Just like gifting tax free earning potential to your

spouse– Trap: Attribution of income between spouses, if not

done in proper format, so interest MUST be paid by Jan 30 of the year following each year

Individual Tax Tips

• CPP Double Dip• Collect early at age 60, and also then cease

future CPP contributions– Tip: CPP values or age limits are sure to change, so

double dip your CPP as you deserve it. – Trap: Ensure that you are not working for at least 2

full months, 1 before applying, 1 after• Get your personal CPP update with on line

request

Individual Tax Tips

• TFSA:• New, but if you have not started, you should:• 2009/10/11 = $15k Xs 2 = $30k TFSA• A rare gift from the government as no tax

attribution to split with spouse or kid >18– Tip: Top up amounts to wife, or start a fund for

your kids to buy a house, as grows over time– Trap: only redeposit the annual limit “once per

year” to avoid over contribution penalties

Individual Tax Tips

• RESP:• Top up if not already done so, as free 20%:– Tip: Have the grandparents fund the RESP via gift to the

parents, as education is a great gift to give and tax efficient

– Tip: If kids are in high school, now is the time to consider changing over to secured investments like GIC’s to protect capital to ensure that you have cash for them

– Trap: Lots of paper work for RESP withdrawals, so plan a head and have GIC’s mature in the summer prior to school starting

Individual Tax Tips

• The Forgotten Tax Credits• Worth thousands if qualified, as the government has

them there to support their policies:– Tip: If separated from spouse, ensure that you use the

“equivalence to spouse” credit as better than a child credit– Tip: If disabled spouse, child or parent, seek a medical

certificate “one-time” for disability credit– Tip: If parent has new medical and living costs, seek

disability credit and medical costs e.g. apportioned nurse care on monthly bill. Up to $10k per child is deductible, so good to have a tax efficient plan

Individual Tax Tips

• Self-Directed RRSP house mortgage. Not a tax deductible mortgage or HELOC on investment income.

• Why have the bank lend to you, if you can lend it to yourself?• Why be concerned to be in the market, if you can not afford

market losses?• Every major bank does it, but not ATB. Some CMHC fees• Tip: great way to get premium (twice a GIC rate) returns, and

consolidate service providers and safeguard assets (as loan is to yourself)

• Trap: ensure to reinvest the RRSP once it is cash RRSP on the portion of the loan paid.

Individual Tax Tips• If it sound too good to be true, it is:

– E.g. Offshore Swiss bank accounts– E.g. Artwork Charity donations– Canadian government is closing the door on tax avoidance schemes

with new 2010 anti-avoidance reporting requirements and penalties– Matter of policy, as still allow for flow through shares. But remember

just having a tax shelter does not make it a good investment

• Do your research for what fits you, understand it.• Everyone has the right to efficiently manage your tax affairs• Have a Tax Plan as Taxes are likely your highest living expense

@ 40% and a good plan can lead to better after tax cash flow

• Questions ??

M. Todd Achen, CA• Been a Chartered Accountant for over 20 years• Graduated of U of Saskatchewan, BComm w Majors in

Accounting and General Business• Articled with PwC Calgary and also E&Y Toronto• Crossborder comptroller, credit and risk management, and

taxation experience in natural gas, oil, NGL’s, electricity and services, while at companies like:

• Novagas, ATCO, TransAlta, and Encana for the last 10 years• Loves international travelling ever since a year long honey-moon

around the world (in part from taxes saved from RRSP’s), • Gives international travel tips and also saves individuals with:• Todd’s Tax Tips and Traps.

• Todd.Achen@Encana.com 403 645-6542