Inspired by a webinar on Retirement Elsewhere: Canadian Sunseekers hosted by my very good friend, Orlando Lopez, we packed our bags and went on a 7-day trip to Belize to explore life on this small and beautiful Central American Island. What a lovely experience we had with a small group of other travelers with similar interests…we made new friends, explored different land and real estate investment opportunities, traveled and visited 10 different cities within the country including popular destinations like San Pedro, Secret Beach, Caye Caulker, Belize City, Placencia, San Ignacio, and Orange Walk. We will certainly return to Belize again and if you’ve not been, I highly recommend it. Check it out. In this issue, I share an article on “The Shocking History of Retirement”. I also share our professional service offerings for corporations looking to achieve more than just tax compliance. Enjoy this issue and please remember to share this with everyone in your network:
1. The Shocking History of Retirement
In his book, Retired + Free, Pedro Adao discusses the shocking (at least to me) and fascinating history of retirement going back to 1880. In 1880, the then German Chancellor, Otto von Bismarck, invented retirement. Otto von Bismarck was a conservative German statesman who masterminded the unification of Germany in 1871. As documented in the historic accounts of BBC, one of the reasons for his invention of retirement was to prevent the spread of socialism and to gain political points by winning the support of workers of the Social Democratic Party. At the time he invented retirement, the life expectancy of the average male working in the industrial revolution was 46 years, and the qualifying age for the retirement benefit was 70. This discrepancy between the life expectancy and the eligibility age to get the retirement benefits created massive wealth for the government. The hard-working men who contributed to the rapid growth of the German industrialization were the big losers as most of them never lived long enough to benefit from their contributions to the government-run retirement plan.
Traditional retirement as we know it is broken in my opinion. We don’t retire because we’ve reached a certain age defined by government legislation. We don’t retire because the corporations we work for think we’re less productive and thus, have little to offer to the world. And, we certainly don’t retire to a continuous life of leisure, void of meaning, and contribution to society.
We retire from all the things we no longer want in our life, so we can be free to enjoy the things we desire and want to do in our life. We retire to create a significant impact and transformation for the younger generations. We retire so the generations coming after us can benefit from our wisdom and knowledge.
It’s time to rethink retirement! Read more here.
2. Are You Prepared For The New Underused Housing Tax?
If you own a residential rental property in Toronto, you may be aware of the new Toronto vacant property tax as you would have received a letter in the mail. This is an annual tax levied on vacant Toronto residences, payable beginning in 2023. What you may not be aware of if the newly introduced Federal Underused Housing Tax (UHT) which imposes a 1% annual tax on the value of residential real estate considered to be vacant or underused that is owned on December 31 of each year. While the government indicated that the tax would target property owned by non-Canadians, the scope of filing requirements extend to many Canadian corporations and individuals, including Canadian Controlled Private Corporations (CCPCs), trustees of a trust and partners of a partnership. The first filings and taxes are due by May 1, 2023. Penalties for failure to file the return (even where no tax is payable) start at $5,000 for individuals and $10,000 for corporations. In the coming weeks, I will share a short survey or checklist you can complete to help you determine if filing is applicable to you and if you have any tax liabilities owing on this. So, stay tuned.
3. Employee or Independent Contractor?
In a September 22, 2022 Tax Court of Canada case (WCT Productions MCT Ltd. vs. MNR, 2018-777(EI)), the court reviewed whether five workers were employees subject to EI and CPP withholdings or Independent Contractors (ICs). The workers provided services related to special effects and animatronics for movie and television productions. The payer was engaged on a project-by-project basis, and similarly engaged skilled workers based on their skill set and each project’s requirements. The projects ranged from a few hours to several months, and workers were often engaged on multiple projects at the same time. The Court first examined whether there was a common intention to enter into an IC relationship, noting the following factors:
- there were no written contracts;
- while there were limited discussions between the payer and the workers regarding their status, the nature of the industry meant that workers were aware of their IC status, supported by the fixed terms and potential cancellation of projects;
- the workers submitted timesheets and invoices and charged GST (with the exception of workers who appeared to meet the small supplier exception); and
- the workers reported business income and deducted expenses in respect of this work on their personal tax returns.
These factors indicated a common intention to form an IC relationship, despite one worker’s testimony that he considered himself more an employee than a contractor. That worker collected and remitted GST, and reported business income, deducting various expenses. The Court then turned to the traditional factors in their working relationship and considered the following objective factors:
- Control factor: The workers could and did decline work and work at other shops. Two workers worked full-time and nearly exclusively for the payer on various projects. They were not required to work specific hours and were often absent during regular work hours, sometimes taking several days off. The workers were skilled artists engaged for their specific areas of expertise. The methods and techniques used were chosen by the workers, with the payer ensuring the appropriate results were achieved. On balance, the Court concluded that the control factor favoured IC status.
- Ownership of tools: The payer provided the workshop and both heavy and smaller tools. Some workers used their own tools based on their personal preferences. The supplies and raw materials were provided by the payer. The workers were not charged for use or maintenance of the workshop or tools, or for the materials. The workers were engaged for their unique skills, often expressed by using their personal tools. The Court concluded that this factor was both minor and neutral.
- Hiring of helpers: The workers were required to perform the work personally. This was explained on the basis that they were selected for their personal expertise, resulting in this factor also being both minor and neutral.
- Opportunity for profit: Although being paid hourly limited the workers’ opportunity for profit, their ability to work on other projects for the payer or other shops provided the ability to generate greater income. The fact that some workers derived substantially all of their income from the payer was not conclusive – that was their choice. They had the freedom to work for other payers and had no guarantee of ongoing work from the payer. This supported IC status.
- Risk of loss: Similarly, the lack of holiday, vacation or sickness pay and the absence of medical and dental benefits indicated risks associated with IC status. Further, they had no guarantee of ongoing work from future projects or even from current projects as these could be cancelled at any time. These risks similarly led the payer to engage ICs rather than hire employees. This was true regardless of whether the risk materialized and also supported
The Court concluded that the workers were ICs, consistent with the parties’ common intention. The key objective facts, being the freedom of the workers (to accept or reject work from the payer, to work for other parties and to determine how to complete their tasks) and the workers’ exposure to financial risk were all consistent with this intention.
So, if you want to cut the cost associated with payroll when you hire independent contractors, make sure that you design the relationship in such a way that both the common intention and objective factors favour an independent contractor relationship.
4. Tax Deduction vs. Tax Credit – What’s The Difference?
While a few people may be familiar with tax credits and tax deductions, most people don’t understand the difference between these two terms. More importantly, I find that taxpayers don’t always take advantage of the various tax credits and deductions that are available to reduce their income taxes. As a result, they end up keeping less of their money. So what are the differences between a tax credit and a tax deduction, and why does it matter? A tax deduction (or “write-off”) reduces your taxable income, on which your federal tax is calculated. If you’re paying some taxes, a deduction is worth about 25% to 50% of your taxable income depending on your tax bracket. A tax credit, on the other hand, is a direct reduction in tax; $100 of a credit such as the credit for political contributions is worth exactly $100 to you. If you want further details on this and how you can take advantage of the tax code to accumulate both tax-free and tax-efficient wealth, then I encourage you to get a copy of my book, Tax-Efficient Wealth.
5. Do You Own A Corporation With A December 31 Year-end?
As some of you may know, we provide a number of services for corporate clients and it’s that time of the year when corporations with a December year-end should start organizing their documents to compile their financial results, estimate taxes, plan their cash flow for the new year and a number of other things. While we obviously help corporations with the tax compliance work of filing their annual corporate tax returns, we do provide other additional value added services such as:
- Streamlining and automating majority of your bookkeeping processes
- Doing a cash flow and budget analysis for your corporation
- Estimating corporate tax liability and developing a plan for installment payment of your taxes
- Corporate tax planning including how to invest corporate dollars and how to properly use insurance within your business to mitigate risk and plan for retirement
- Corporate restructuring to ensure you’re organized in the most tax efficient way
- Remuneration planning to ensure you’re taking money out of your corporation in the most tax efficient manner
- How to use your corporation as a nest egg for your retirement in a tax efficient manner.
- And many more…
If you’re looking for solutions for your corporation consider working with me and my team at GMS Professional Corporation. Check out our standard service offering for corporations here. And when you’re ready to have a chat, book a time with me here.