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b2ap3_thumbnail_119710123263398684DTRave_Cartoon_Computer_and_Desktop.svg.med.pngIs your business in the process of developing or modifying an acquired technology? This can be machinery, electronic hardware or a software product that needs to be customized. Your end result is a new valuable asset that you own and brings long-term economic utility. In this path, we recognize two costing aspects: (i) isolating development costs up until feasibility or successful prototype stage – you may even be eligible for SR&ED tax credits; and (ii) recalculating your costs for the now “new” asset that will be part of your capitalization process.

Evaluation of your “new” asset has important business impacts, such as:

• Changes to your adjusted cost base and determination of CCA balances or the tax equivalent of depreciation. This balance can be used on a discretionary basis to reduce your tax payable and impacts your cash flow;

• Accurate balance sheet reporting of assets with improved estimate on fair value of your asset;

• Reduce ambiguities with stakeholders who can argue for and against capitalization costs and/or recording operational expense; both impact your tax payable.

Furthermore, there are Federal and Provincial tax benefits. For example, in the case of Quebec’s M&P tax relief program, an accurate recording of your asset will imply:

• Ability to report your true asset cost in an accelerated depreciation class and hence a faster write-off on your asset at the tax level, even if there is a longer life time for the asset;

• Maximize your cash receivable as part of a refundable investment tax credit! 

The process of asset recording can be as diverse as installing equipment or valuation of a software tool. With technological advancements, there are elements of increasing complexity and require inter-disciplinary team of engineers and tax accountants. Here ab2ap3_thumbnail_12362677411367195232AX11_graph.svg.med.pngre a few examples:

Case i: You require additional cost outlay to bring economic benefit from your M&P equipment. This can involve complex engineering analysis, initial tests and compliance, additional electronic hardware installations, extra-ordinary floor preparation, and even initial travel and training for operational needs. These new costs can materially impact your actual asset cost and hence your taxable benefits. Just consider the additional labour costs alone!

Case ii: Your software development employs agile methodology and has products that are increasingly modular. Did you know, one can identify economic benefit associated to individual software modules by itself! On the other hand, waterfall approach has large capital expenses and there can be complexities in identifying the application phase after the initial prototype phase. You still need to be identify various different development phases for asset capitalization!

Case iii: You modified your buildings to support M&P activities. Consequently, parts of your building can be eligible for reclassification into faster depreciation class, leading to increases in your net present value of your future cash flow.

In summary, with technology advancements, increasingly engineering teams cross function with tax accountants! There are already several eye-opening opportunities where your business can benefit useful tax dollars from an accurate asset reporting. In this process, capital asset review is an unsung case in point!

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Is crowdfunding for you? Read below to find out!

The pursuit of creating your own business, nurturing it, and watching as it grows into a successful organization, is perhaps one of the most commonly held career goals amongst many Canadians, and is by in large, the most difficult to accomplish. While there are a multitude of reasons as to why a business may or may not succeed, the simple truth is that many entrepreneurs do not even get the chance to try! Why, exactly? One reason: start-up capital, or to be specific, a lack thereof. No matter how revolutionary the new product you are trying to market, and no matter how brilliant your business plan for your new corporation, at the end of the day if you do not have the funds available to effectively start a business or market a product, you are simply left with - an idea. So, where does that leave all of you entrepreneurs who are anxiously waiting to unleash your creative genius on the consumer market? Enter crowdfunding, a relatively new method of raising the sought after start-up capital that today's entrepreneurs so desperately need; a method so new, that the CRA itself has yet to establish a finite set of guidelines in the current Income Tax Act, and are instead determining how crowdfunding is taxed in Canada on a case-by-case basis.

What is Crowdfunding?

Simply put, crowdfunding is the act of raising funds for a project, business, or charitable organization, by seeking contributions (usually small amounts, although there are no restrictions on the amount one can contribute) from a large volume of individuals; these contributions are typically made online, through any of the numerous crowdfunding platforms that are currently in operation. That being said, there are four models of crowdfunding:

1) The lending model:

Supporters make their contributions based on the expectation that their contribution is treated not as a donation, but rather as an interest-bearing loan.

2) The equity-based model:

Supporters make their contributions based on the expectation that they will receive partial ownership in the organization they choose to fund.

3) The reward-based model:

Supporters make their contributions based on the expectation that they will receive a reward in the end, such as a discount, the right to advance order the product, or any other form of promotional reward.

4) The donation model:

Supporters make their contributions altruistically, with no expectation of receiving anything in exchange for their donation.

An industry that, globally, grew to be worth in excess of $5.1 billion in 2013 alone, crowdfunding has since enjoyed a solid rate of growth due to its rapidly mounting popularity, the momentum of which seemingly shows no signs of slowing down. So what is it exactly that makes crowdfunding so attractive to the entrepreneurial market? That would be the model by which crowdfunding is based on, as well as the platform that it operates on. What is this platform, you ask? None other than social media! Yes, that's right, million dollar start-up campaigns are being brokered not in a boardroom, in a bank, or behind closed doors at venture capitalist firms, but rather, online through such crowdfunding platforms such as KickStarter, IndieGoGo and Fundageek. With the project initiators also tapping into their other social media accounts to further endorse and draw public attention to their campaigns, such as Facebook, Twitter, and YouTube, one thing has become apparent: social media is quickly becoming a heavy hitter in the venture capitalism industry. So that leaves the all important question: how exactly, will the proceeds of my crowdfunding campaign be taxed in Canada?

How Will Crowdfunding be Taxed in Canada?

Now here is where crowdfunding gets tricky. Not because the tax laws are inherently intricate, but rather because crowdfunding is such a new concept, that the CRA has yet to identify a definitive set of tax laws surrounding the treatment of funding received through such means.

In April, the CRA stated that it "understands that crowdfunding is a way of raising funds for a broad range of purposes, using the Internet, where conventional forms of raising funds might not be possible;” as such, the agency's position will be to "evaluate each situation on a case-by-case basis.” Aurele Courcelles, the director of tax and estate planning at Investors Group in Winnipeg, believes that crowdfunding is still a relatively new method of raising capital, and as a result of this, "the tax treatment of crowdfunding is evolving."

While it is the position of the CRA that funding generated by crowdfunding is in fact a taxable source of business income, as per subsection 9(1) of the Canadian Income Tax Act, the Canadian Tax Foundation is confident that, "the CRA's opinion is unlikely to have negative effects on crowdfunding campaigns."

So in the absence of CRA guidelines, how exactly does one make the educated decision as to whether this methodology is in line with their business goals? Your best option would be to talk to your accountant about an Advanced Income Tax Ruling. Read more about CRA Technical Interpretations and Advanced Income Tax Rulings. Tax Interpretations, an organization that specializes in judicial and CRA interpretations of Canadian tax law and transactional interpretations, recommends that entrepreneurs proceed with requesting an advanced income tax ruling before starting their crowdfunding campaign. By doing so, the individual will receive an advanced income tax ruling based strictly on the nature of their specific proposed transactions from the Directorate; this will outline to the individual how their crowdfunding income will be taxed in Canada, and as such, enables the entrepreneur to decide whether this is their best option for raising capital, or whether they should consider pursuing other means.

That said, crowdfunding is not as simple as opening up a campaign website, sitting back and watching the donations roll in. Rather, this specific form of raising capital leaves a lot to be considered, the tax implications of which being just the start. Overwhelming, right? Thankfully, the accountants at MadanCA can help you understand crowdfunding, its Canadian tax implications, and assist you in mapping a strategy that is best inline with your business goals!

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Posted by on in US Taxes

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If you are a Canadian citizen who has properties you want to give away in the United States, and if you know anyone who is deceased and thinking of transferring property, you may want to know about the tax implications surrounding how U.S. gift tax and estate tax affects Canadians. U.S. gift tax system creates complications and affects Canadian taxpayers.

The article “U.S. Taxes for Canadians with US assets” discusses the implications of gift tax, estate tax, and generation skipping transfer tax.

Gift Tax

Transfers of property in the U.S. are subject to U.S. tax law. A Canadian who owns U.S. Situs property is also subject to U.S. gift tax but do not include intangible assets like U.S stocks, bonds, and trusts. Exemptions to the taxable gifts are U.S. Citizen Spouses, non-citizen spouses up to U.S. $147,000 annually and anyone else up to $14,000 per recipient annually.

Canada and the United States impose different methods of taxation for U.S. Gift Situs property with unrealized capital gains. The varying methods are how U.S. gift tax affects Canadians. Donors with unrealized gains are not affected under the U.S. gift tax law. The recipient acquires the property at the adjusted cost base. The receiver will incur the capital gains tax on the growth of the entire life of the asset during disposition. With the Canadian tax system, a gift is a transfer that requires the donor to realize a net capital gain when the gift is made. The contrasting methods can cause double taxation.

Gift and estate tax rates are cumulative and start at 18% and rise up to 40%, the 40% rate only applies when the total gifts made over the lifetime exceeds one million dollars. You can find unified tax credits are available for Americans and Canadians under the Canadian and U.S. tax treaty. TaxTips discusses the tax brackets in more detail.

The treaty address issues of how U.S. gift taxes affect Canadians. For gift tax purposes, Article XIII-7 of the Canada-U.S. treaty lets the donor elect the Canadian owned asset as if it was sold and repurchased before the gift transfer. Furthermore, a Canadian taxpayer would use foreign tax credits to reduce taxable amounts.

Canadian taxpayers who own a vacation home may be interested in reading more here at Madan Chartered Accountants.

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Estate Tax

All U.S. properties left behind are assessed at fair market value and deductions applied may reduce the value. The U.S. situs assets for estates include intangible assets. Primary examples are shares of U.S. Corporations. Additionally, intangible assets that are exempt for estates are specific holdings with life insurance firms.

There is a $13,000 estate tax credit up to an allowable maximum at $60,000 on U.S. situs assets. Up to this threshold the executor is exempt from filing a U.S. estate tax return. Professional advice can be found on Madan to provide additional tax advantage to individual tax situations, such as using two tier partnership.

When the executor is required to file an estate tax return, the tax purpose is assessed on provisions of the treaty. Canadians with exposure to U.S. estate tax can benefit from the treaty with the unified tax credit which is based on the value of the deceased’s U.S. situs assets that bears to the value of their worldwide estate.

Like gift tax, U.S. estate assets that have capital gains are generally taxed on the entire value of the property upon death while a deemed disposition occurs under the Canadian tax system, which results in double taxation.

The treaty grants foreign tax credit for any U.S. estate tax imposed on disposition under the Canadian law. According to the treaty section P.6 (a) (ii), a relief from double taxation may arise for U.S. situs properties if the value is greater than $1.2 million. Additional credit is obtained under treaty section P. 6(a) (i) towards US estate tax on US situs properties used in a business. Canadians can also take advantage of foreign tax credits that exists for specific provinces to reduce overall tax liability.

A deceased Canadian’s estate is subject to death taxes within specific states in America. Inheritance tax exists in seven states.

Generation Skipping Transfer Tax

The United States imposed the generation skipping transfer tax is taxed at 40%. The 2015 exemptions limit is $5.43 million. This tax and exemptions apply towards any gifts and estate beneficiary who is at least two generations younger than the transferor. The $5.43 million is allowed separately from the unified credit.

The Canada-U.S. tax treaty provides fundamentals on preventing double taxation on U.S. owned assets for Canadians. Raising adequate revenues for the U.S. federal and states is an ongoing procedure that emphasizes the importance of being unexpectedly subject to U.S. Taxation.

Various methods can be used to reduce taxes; however, a clear understanding is needed to apply them. As a primer, there is an article provided by the Globe and Mail which summarizes the possible tax implications. You can learn more by reading this article titled “How Canadians, too, can fend off the long arms of the IRS”.

US gift tax have major impacts on Canadian citizens who have transferrable property, so proper planning can identify individual tax situations and reduce the risk of over taxation!

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Posted by on in Personal tax

If you live in a major metropolitan area, you have probably heard the term ‘uber’ slowly drifting into everyday conversation. Instead of people saying “let’s grab a taxi”, people are saying “let’s grab an uber” instead. If you have never heard of uber, it is essentially a ride sharing program that is operated from the Uber mobile app or a web browser. You simply signup and pay with a credit card and the app connects you with the closest uber driver using your mobile phone’s GPS location. In most cases, Uber fares are generally cheaper than that of a local taxi service. There are different types of Uber services, with the most popular being the standard UberX drivers. Anyone over the age of 21 with a four-door sedan vehicle and personal auto insurance can sign up to become an UberX driver. Basically, this would make UberX an unregulated taxi service.

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In terms of tax implications for Uber drivers, the question is when does Uber stop being a hobby and start becoming a business? The Canadian Revenue Agency, in determining if something is categorized as a business, looks at the amount of time someone devotes to the endeavour and whether there is a reasonable expectation of profit. According to the CRA, in this case Uber is considered a business and thus considered taxable. Therefore, Uber drivers are taxed as sole-proprietors in Canada.

Just like in any other business, Uber drivers must register for an HST account number if they are making more than $30,000 annually. As a GST/HST registrant, you usually have to collect the GST/HST on amounts you charge for taxable supplies of property and services. However, tax is usually already included in taxi and limousine fares. For more information on this, please refer to the CRA website.

Uber drivers are not considered employees of Uber but are considered independent contractors. This means that the individual is responsible for all taxes and it is not withheld from their pay cheques. The individuals will be responsible for paying the full amount of taxes when it comes to filing their tax return at the end of the year. Uber drivers need to declare the cash value of the services on their T2125 on their tax return. This is the statement of business or personal activities. If the CRA discovers that a taxpayer has not reported income, the individual will face interest and penalties. Follow this link for assistance on how to complete Form T2125.

Like any other business, self-employed individuals are allowed to declare expenses to deduct against their income, which also means they need the right documentation to back-up those claims. For Uber drivers, a detailed car mileage log is a must. The mileage log must include the destination, reason and distance for each business trip. Drivers must also log all their personal trips taken in the same vehicle so they can calculate the business portion of their car insurance and other deductible costs. The Madan Chartered Accountant website provides more information on tax write-offs for small businesses.

Uber drivers are taxed on their net income. You figure out your net business income by subtracting the business expenses from the business income. As mentioned before, an independent contractor is responsible for all the expenses that arise when using their car. Then the net income is taxed and based on that amount, the portion of tax payable is calculated.

The biggest issue for these people becoming self employed is keeping documentation. Many people who begin using Uber part time do not consult an accountant or other tax professional to get their accounts set up correctly. Or they do not separate between business and personal use. If by chance the individual gets audited, they will need to provide proof of the expenses they are claiming. If the CRA discovers unreported income, the person will face interest and financial penalties.

If someone realizes they've been neglecting to declare income, it's best to get ahead of the CRA and offer up the information through the voluntary disclosures program. The individual will still be charged interest, but no financial penalties will apply. For more information on the voluntary disclosure program, please visit the following website http://www.cra-arc.gc.ca/voluntarydisclosures/.

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A tax incentive for Canadian manufacturers is accelerated depreciation of manufacturing assets and corporations can maximize via a true valuation of its capital asset. In this sequel we quantitatively highlight how accurate asset capitalization involves your engineer and accountant.

Consider a fictional Canadian corporation, ABC with the following simplified expense. Over two year period, ABC had manufacturing equipment acquisition totalling $500K. Yr1: $200K, and Yr2: $300K. At end of year 2, ABC will have up to $200K of CCA balance (tax equivalent of depreciation). Based on management discretion, this amount can be applied towards reducing tax payables arising from taxable income.

Is there an issue? Unsure of the asset reporting, prior to year 2 filing, ABCs accountant decided along with an engineer to conduct a walk-through of ABC facility and discovered $300K was reported in year 2 was solely based on invoice amount of equipment purchase!

In year 2, ABC recorded costs worth $100K as below:

Companies like ABC have internal accounting system that report costs based on an input – often an invoice item that relates to equipment such as in this case. This does not replace human intervention required to consider complex engineering or associated costs. Additionally, in a busy shop floor, errors and omissions of such kind is not unusual.

The accountant decided the following actions:

• Use engineering assistance to review and identify all direct and indirect costs required to bring the equipment for operational and economical use;

• Ensure new added costs can be associated as a long term expense towards an asset;

• Collect engineering documentation that substantiated the new cost at $400K in year 2 and reversed the expenses (operational to capital) appropriately.

The action items resulted in increase of $50K in to the CCA balance for Year 2! Further this ensured accurate balance sheet reporting of assets.

Summary remarks:

• Capitalization process involves engineers and their input towards an important assertion: identifying associated costs that are essential for the asset to become economically useful;

• Based on your establishment, there are additional refundable tax credits. For example, if you are a Quebec establishment, an inclusion of $100K could mean refundable tax credits anywhere from $10K to $50K (depending on the geographical region of operation). There is a decrease in this valuation following Quebec June 2014 budget announcement, but the main concept is materially intact;

• If you are eligible to receive tax credits, the asset purchased has to be new and considered to be “qualified new property” as per Federal Income Tax Act. However, if you purchased an old or a refurbished asset, it can be considered for refundable tax credits as long as its new purpose is distinctly different from the original old asset. Otherwise, your capitalization process will be based on the fair market value of acquisition and addition of all costs required to make the asset useful.

An interesting outcome can be SR&ED process and additional tax credits. If so, your asset capitalization has to consider careful cost segregation, and even potential recapture. This analysis can be involved.

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