mackay.newsA publication of MacKay LLP Chartered Accountants and Business AdvisorsSU

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Kelowna | Vancouver | Surrey | Edmonton | Calgary | Whitehorse | Yellowknife

Chartered Accountants and Business Advisors

IN THIS ISSUE

Alberta Flood Relief ..................... 2

Record Retention and Loss .......... 2

OAS Deferral ............................... 2

Personal Use of Business Credit Cards ........................................... 3

Moving Expenses .......................... 3

U.S. Visa and Snowbirds .............. 4

Tuition Credits .............................. 5

When It Rains, It Pours ................ 6

Vancouver (604) 687-4511 Yellowknife (867) 920-4404Surrey (604) 591-6181 Edmonton (780) 420-0626Kelowna (250) 763-5021 Calgary (403) 294-9292Whitehorse (867) 667-7651

A Message from the CEO, Murray Bye, CA

As mentioned in our last newsletter in the spring of 2013, MacKay LLP became a member of the Crowe Horwath International network of firms effective July 1st, 2013.

Recently we have been focused on the rebranding as a result of joining the network and adopting the global brand standard of Crowe Horwath International. This will officially be complete by December 31st, 2013 with the new branding being used from January 1st, 2014 forward.

The rebranding will result in an addition to our current legal name and our new name will be: “Crowe MacKay LLP”

Our current trademark name will change from mackay.ca to:

The colors will be gold for the pinnacle and indigo for Crowe MacKay.

This is an exciting time at MacKay, but yet a difficult time as we move away from the solely MacKay name. Although we have embraced the change it has not been without a lot of emotion.

However, in the words of our founder, Iain MacKay, as he and I discussed the changes, as a firm, “we must make business decisions without emotion.”

The future is bright at our firm and we owe a lot of gratitude to our founder and past CEOs for their vision.

We are excited to embrace new opportunities to be able to support our clients, but as mentioned previously we remain fiercely independent and Northern and Western Canada focused. We continue to be committed to our clients that have grown up with us as well as new clients that see our new resources as an opportunity to become a client of “Crowe MacKay LLP”.

I must emphasize MacKay LLP is not merging and has not been acquired.

The Firm is and will continue to be about the people and the relationships we have with our clients.

We look forward to servicing you for many years to come. Thanks for being a part of our journey as we move to:

“Crowe MacKay LLP, Northern and Western Canada’s unique alternative to the National Firms”

MacKay LLP becomes an independent member of Crowe Horwath International, an international network of independent accounting and advisory services firms.

RELIEF FOR ALBERTA FLOOD VICTIMSMISSED YOUR FILING DEADLINE?If you missed a tax filing deadline due to the flooding in Alberta at the end of June, there is relief available from Canada Revenue Agency and from the Alberta Tax Administration. Any taxpayer may apply to have their interest and penalties reduced if the cause of the late filing was a natural disaster. CRA and the ATA will not automatically apply this relief to anyone affected. CRA has stated in its June 22, 2013 press release that each request will be looked at on a case-by-case basis. To apply for a reduction in interest and penalties use Form RC4288, Request for Taxpayer Relief.

ALBERTA FLOOD RELIEF PAYMENTS

The Alberta government has allocated $1 billion to assist affected Albertans to rebuild homes, businesses and communities. If you have received or receive in the future any government assistance for flood relief, be aware that the CRA has stated, through an advanced ruling, that disaster payments received from a government authority will not be taxable provided they are made to individuals to cover individual losses or expenses. It is important to document what the relief payments were used for and to ensure they were not used for business purposes; otherwise, alternative tax treatments need to be considered with your MacKay LLP tax professional. Any relief assistance received for business purposes or as an employee, may be considered taxable or have other tax treatments such as the reduction of the cost of the replacement asset.

MY RECORDS FLOATED AWAY!WHAT TO DO IF YOUR RECORDS WERE DESTROYED IN THE FLOODS

CRA requires taxpayers to keep records for six years from the end of the tax year in which they relate, and to request permission to destroy records. There are exceptions and in special circumstances the time limit is extended, such as if an amount is under appeal. Records may need to be maintained far longer where they relate to assets you still own.

There is no relief available for lost or destroyed records and the onus is on the taxpayer to recreate those records. The sooner you begin to recreate the portion or the records needed, the easier it will be to recreate them, remember what you did and find support if required. You may not need to recreate your full records. The following tips can help you get started

TIPS FOR RECREATING RECORDS

1. Online bank and credit card statements should be available immediately. If you do not use online banking, contact your bank and credit card provider to obtain copies for the period in question.

2. Contact an IT professional to determine if any data can be recovered from a damaged computer or other sources.

PREVENTION

1. Be sure to backup your computer system on a regular basis and store copies of the backups in another location. A water- and fire-proof safe is a great investment and several inexpensive types are available.

2. Consider keeping electronic copies of all paper documents – see point one for backing up system.

NEW OAS DEFERRAL AVAILABLE JULY 1, 2013 Hot on the heels of the CPP deferral effective January 1, 2011 comes the potential to defer Old Age Security (OAS) payments. For every month you defer your OAS payments after qualifying when you turn 65 years old, you will receive a 0.6% increase, to a maximum of 36%, if you defer the payments to 70 years of age. Deferral is as easy as not applying to receive your pension until you wish to receive it. If you have started receiving your OAS within the last six months, you can repay the payments to receive the increase in the future.

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There are multiple factors that impact whether you will benefit from a deferral of OAS and CPP. The key factor could be if you have a current higher income, such as the sale of a business, or if you are still employed during the first year or so of the benefits. If the clawback of OAS applies to you in the current or next few years, the deferral may result in higher future payments to you with little cost. If you are in good health and expect higher than normal longevity, the indexed factor may also favour deferral. If you have a very high and continuing income or a modest income, there may be little benefit to considering deferral. Please consult with your MacKay LLP tax advisor if you are between the ages of 63 and 65 years old this year to determine your best conclusion in the near future.

If you are between 60 or 70 years old this year, you may also want to revisit your CPP contributions and benefits. You can either start receiving CPP benefits early for a small decrease or you can defer your benefits to age 70 for an increase of up to 42% in the monthly benefit if the delay is a full five years. If you start to receive your CPP benefits at 60 years of age and are still working, you are required to continue to make contributions to the plan. If you continue to work past the age of 65, you must continue to make CPP contributions unless you elect out of the contributions. This election is made using form CPT30 and should be filed in the month prior to the month in which deductions stop. Contact your MacKay LLP profession if you think this applies to your employment income.

IS FREE REALLY FREE? (CREDIT CARD LOYALTY REWARDS) Travel miles, store credit, cash back – these days you can get a credit card with pretty much any kind of reward you want. These rewards are even sweeter if your employer pays for the expenses you charge! Unfortunately, CRA has noticed this hidden benefit of employees who earned rewards, either for reimbursed business expenses charged to personal credit cards or on company credit cards.

COMPANY CREDIT CARDS

If an employee redeems rewards from a company credit card, the fair market value of the reward is a taxable benefit. It should be included as employment income on the employee’s T4. If the amounts are redeemed for business purposes there is little concern and no benefit.

PERSONAL CREDIT CARDS

When an employee uses a personal credit card for business expenses and earns rewards on those charges, the value of the rewards may have to be included in the employee’s income for the year they were received. The agency’s administrative policy is that cash rewards of any amount must be included in income. Due to the issues with valuing the non-cash rewards, the agency does not require these amounts to be included in income unless they are significant. If significant, credit card rewards could be considered part of the employee’s compensation package and the agency could treat it as a tax avoidance strategy.

SUMMARY

If an employee wishes to earn and redeem loyalty rewards from a credit card, other than cash related rewards, it is more tax efficient to use a personal credit card and have the employer reimburse the expenses. Unless the purchases lead to significant rewards, the employee will not have to determine which rewards relate to business and calculate the fair market value of the rewards received on a personal card. For big ticket items the use of a corporate card may be more convenient but the rewards should be used for business purposes or added to the T4 tax slip as a benefit of the employee using them.

MOVING? Did you start a new job or business during the year? Did you move to be closer to the new job? Did you or your children move to attend university or college full-time? If your employer did not reimburse you for your moving expenses, you may be eligible to deduct qualifying moving expenses against income from the new location.

WHO CAN CLAIM MOVING EXPENSES?

To be eligible to deduct moving expenses, your new residence must be 40 kilometers closer to your new work location than your old residence. Also, you must have had to have changed jobs, but not necessarily change employers if your new position required you to move to the new location. Both the old and new residence must be located in Canada.

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Students moving 40 kilometers closer to school to attend full-time studies can also deduct moving expenses against income from the new location. This income can include taxable scholarships as well as income from employment. Moving expenses are deducted prior to the use of tax credits. Even if the student is not taxable due to tuition credits, the use of moving expenses can increase the carry forward of tuition credits and the amount available for transfer.

WHAT EXPENSES ARE ELIGIBLE?

There are a surprising number of expenses that are eligible for deduction, including the cost of moving you, your family, and your household belongings to the new location, as well as costs associated with selling your old home, breaking a lease, or storing household goods. Although there are simplified methods available to calculate some expenses, it is important to keep all of your receipts so your tax advisor can determine which method is more beneficial to you. If you are flying to the new location and are considering using travel points for the flights, the cost of these flights will not be deductible; therefore it may not be the best use of your travel points. Some costs can only be claimed if you are selling a home at the old location and other costs may not be deductible. The CRA website or your MacKay LLP tax professional can assist in narrowing these down.

If your employer pays for part of the moving expenses, you may be able to deduct the unreimbursed qualifying moving expenses. If you receive an allowance for moving, you can choose to include the allowance in income and deduct moving expenses. Consult your tax advisor to determine the most tax efficient strategy for your personal situation. This includes cases where the mileage or meal allowances (which are standard rates) may be advantageous.

WHEN CAN I DEDUCT THE MOVING EXPENSES?

Moving expenses can only be deducted against income from the new location. What happens if you moved in November and your moving expenses are greater than your income in December? You can deduct any leftover moving expenses against your income in the next year.

US SNOWBIRD VISA – NOT AS GREAT AS IT SOUNDS Being able to spend an extra 60 days in the U.S. may sound appealing to those of you who like to escape the great Canadian winter, especially with the low cost of U.S. real estate. The new U.S. snowbird visa does allow Canadians to spend additional time in the U.S. without having to deal with immigration, but it does not get you out of dealing with the Internal Revenue Service or U.S. tax requirements. The current tax rules regarding U.S. residency are still in place. It is important to be aware of the consequences of being considered a U.S. resident.

AM I A RESIDENT OF THE U.S.?

Unlike Canadian residency, which looks at intent, U.S. residency is based solely on the number of days spent in the U.S. If you spend more than 183 days in the U.S. in a given year, you are automatically considered a U.S. resident and required to file a tax return for that year.

There is a second test called the “substantial presence test” that can catch you even if you spend less than 183 days in the U.S. during the year. The substantial presence test uses the following formula:

1. If the number of days in the current year is more than 30 days, total the number of days spent in the U.S. for the current year and

2. Add one third of the number of days for the first preceding year and

3. Add one sixth of the number of days for the second preceding year

If the total of these numbers is more than 183 days, you could be considered a resident of the U.S. and required to file a U.S. tax return, unless you can prove you have a closer connection to another country and file Form 8840.

WHAT ARE THE TAX CONSEQUENCES OF BEING A U.S. RESIDENT?

If you are considered a resident of the U.S. for tax purposes, you are required to file a tax return in the U.S. reporting your worldwide income to the IRS. You most likely will also be considered a Canadian resident and have to report your worldwide income to the Canada Revenue Agency as well. In addition, all U.S. residents are subject to Foreign Bank Account Reporting (FBAR) filing requirements. You may be able to go to the Canada-U.S. treaty residency tie-breaker rules to opt out of reporting your worldwide income, which can reduce your tax liability, but you must file a return to claim the treaty relief. The treaty does not allow you to opt out of the FBAR filing requirements, which require you to report details and the highest balance of every financial account (bank, brokerage, mutual fund, RRSP) you own during the year if the aggregate amount of your holdings exceeds $10,000.

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Form 8840 only applies if you were in the U.S. for less than 183 days during the year. If you spend significant time in the U.S. each year, but less than 183 days, consider the assistance of MacKay LLP to help file your Form 8840 as a precaution to ensure you are not mistaken as a U.S. resident and subject to scrutiny by the IRS. In certain cases U.S. taxes, including the Medicare “Super tax,” can apply at levels above the Canadian income tax you owe.

Regardless of whether you are considered a U.S. resident or not, you may be subject to U.S. estate tax on assets situated in the U.S. if your worldwide assets exceed $5.25 million at the time of death. Worth getting sound advice on this issue and not assuming “Uncle Sam” and the IRS will be understanding!

YOU’RE NOT OLD ENOUGH TO HAVE A CHILD AT UNIVERSITY...Do you have a child going off to university in September? Are you going back to school? Did you know there are tax credits available to help ease the blow to your wallet? They do not require your very responsible child to keep and mail home every receipt they collect for books and school supplies, but are preset amounts.

THE BASICS

There are three different tax credits available that relate to advanced education. The first is the tuition credit which is approximately 20% of the amount of tuition paid. For $5,000 of tuition fees, the corresponding reduction in taxes is about $1,000. In addition to the tuition amount, there are also education and textbook amounts which are based on the number of months of the program and whether the student was full-time or part-time. These two credits do not require receipts and are allowance based.

WHAT IF MY CHILD DOES NOT HAVE ANY INCOME?

There are two options available if the student is not able to use the tax credits during the year because their income is too low. The first is to carry the credits forward to use in future years. To carry forward the unused credits, the student must claim the tuition on their tax return in the current year and the unused portion will carry forward to future years. There is no time limit for when the tuition credits must be used and the unused amount will be tracked each year on the student’s Notice of Assessment.

The second option is for the student to transfer up to $5,000 to their spouse, common-law partner, parent or grandparent (spouse’s or common law partner’s parent and grandparent are also included). This generally leads to immediate tax savings as students may not be in a position to use them for several years.

WHAT TUITION APPLIES?

Generally, tuition greater than $100 paid to an educational institution for courses at a post-secondary level or to an HRSDC-certified institution for courses to provide occupation skills, including a professional organization are qualifying. Most but not all University and College tuition will be qualifying unless it is for short courses or personal interest items.

Every eligible institution in Canada is required to provide students with a tax certificate (Form T2202A) indicating the amount of tuition paid and the number of months of full-time or part-time study. This certificate is all the documentation that is required to claim the tuition, education and textbook amounts. Most institutions make these certificates available to students by the end of February through their online portals. Your child should print the certificate as soon as it is available and provide it to you, along with other supporting documents, for preparation of your family’s tax returns. If the tuition is to be transferred to another person, make sure the student signs the bottom of the form authorizing the transfer.

Tuition paid to education institutions outside of Canada may also be eligible for the tuition, education and textbook credits. If your child is attending post-secondary school outside of Canada, contact your tax advisor to determine if the tuition is eligible and what documentation is required.

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WHEN IT RAINS, IT POURS: INSURANCE RECOVERY FOR EARNINGS LOSS This article was originally published in Crowe Soberman LLP’s quarterly business newsletter – Comments Summer ‘13 Issue.

As I write this article, Toronto is recovering from its biggest rainfall since Hurricane Hazel. Two weeks ago, downtown Calgary was affected by days of heavy rains following which the Bow River burst its banks. And while the initial focus should always be on the personal safety of those affected, in short order this focus will give way to dealing with the financial consequences of the events which have occurred. As “forensic accountants,” who specialize in insurance and litigation claims, our group knows the “financial” questions that may surface when natural disasters occur. The first question may be, “Are we covered by insurance?” This question is followed by, “What exactly are we covered for?” If you are unsure as to whether coverage applies, you should consult with your insurance counsel or insurance broker. If you determine that coverage is available, the next question may be, “How much can I claim?”

If your business has been affected by the recent flooding (or by any other insured event), and the business has or will suffer an earnings loss, you may wish to check with your insurance broker to determine if you have coverage for earnings loss. Often this is called coverage for “business interruption.” Whatever name is used, the coverage allows you to claim for the earnings loss resulting from the damage caused, subject to the policy terms and conditions.

Our firm has varied experience in the assessment of business interruption losses, where businesses have been affected by an insured peril.

Often an insurance adjuster will advise business owners that the insurer will retain an accountant to quantify the business interruption loss that can be claimed. Based on our experience, business owners would be wise to consider retaining their own accountants (with the necessary specialized knowledge) to develop business interruption loss calculations. In fact, your insurance coverage may include a provision (or endorsement), that will reimburse the cost of retaining your own “forensic” accountant. This, of course, is subject to the limits of any coverage provided, and is often referred to as “professional fees coverage.”

Generally, an accountant that has been retained by the business will develop calculations, which subsequently (along with supporting documents and information) may be provided to the insurer’s accountant for review. While the insurer’s accountant may not always agree with the approaches adopted, areas of agreement may be identified and areas of disagreement can be further explored. Further, with this process, the business owner knows of the approach their accountant is considering for developing loss calculations, and is able to ensure that the business information provided is correctly understood and fairly used. Although forensic accountants should not become “advocates” for their clients, it is important to be aware that the persons who best understand the affected business are the business owners and employees, not the accountants!

There can be many pitfalls involved in developing business interruption loss calculations. Some of these relate to the actual coverage itself, and the specific wording will impact the calculation of recoverable loss. For example, what are relevant time limits for the “indemnity period?” Is the business covered for losses until damage is repaired (or could have been repaired), or until sales return to normal (normally, with a maximum of 12 months)? Is the business covered for continuing “ordinary payroll” – being the lower level employees who would normally be laid off during an interruption? Is there a “co-insurance” clause (“co-insurance” is a term which suggests that responsibility for compensating a loss may be shared between the insurer and the insured person or business)? If there is a co-insurance clause, this could mean that some of the loss will not be paid if insufficient insurance was purchased. This aspect is complicated and may give rise to a reduced payout even though the calculated loss is less than the actual limit of insurance.

Other pitfalls arise when dealing with the estimation of the financial results that would have been expected, minus the damage. For example, usually, there will need to be a projection of the sales, which would have been made, had the damage not occurred. While it may be reasonable to simply project sales by reference to sales for the corresponding period in the prior year, this approach may overlook specific circumstances or recent trends that affected the business outlook. For example, were new markets or products being developed? In today’s changing world, it is easy to see how both external factors and business initiatives may be expected to affect sales or profit trends.

A question often arises under circumstances where a business is not covered for “ordinary payroll” (the lower level employees) but lower sales are achieved once business operations resume. Based on the policy wording, the lost “margin” on lost sales may be determined (on a percentage basis), after subtracting “ordinary payroll” costs. However, there may have been no saving in payroll during the “start-up” period following the interruption, even though below-normal sales were achieved.

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Under the circumstances described above, it may be necessary to consider both: (a) lost profit on lost sales, and (b) the labour “inefficiency” during the “start-up” period (following resumption of operations). Our group usually takes the approach that labour “inefficiency” is an additional cost incurred (during the post-interruption start-up period) to achieve some (albeit below-normal) sales during this period. As such, the cost of the labour “inefficiency” may be claimable as an additional cost that reduces the loss that would otherwise have been incurred, had no sales been made at all during the start-up period.

Complicated? Without question. However, an experienced forensic accountant may be able to assist you when navigating the challenges of business interruption loss calculations.

Crowe Soberman is a public accounting firm. Contact your insurance broker or agent for professional advice regarding coverage.

ABOUT THE AUTHOR

Daniel Edwards is a partner in Crowe Soberman’s Valuations | Forensics | Litigation Group. Daniel is a chartered accountant who has been designated as a specialist in Investigative and Forensic Accounting and a Certified Fraud Examiner.

Crowe Soberman LLP is an independent Toronto firm, which, like MacKay LLP is an independent member of Crowe Horwath International, an international network of independent accounting and advisory service firms.

For further information regarding professional services in this area, contact Sam Kaketsis, managing director for our Calgary office at: SamKaketsis@cal.mackay.ca or 403.294.9292

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MACKAY LLP PARTNER’S FALL CONFERENCE 2012

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