2000 Federal budget highlights (top of the page)

• Full indexing is restored to the personal tax system effective January 1, 2000. This change means that the tax bracket and tax credit amounts will now be adjusted for the annual inflation rate every year. The basic personal credit for 2000 will be $7,231 compared to $6,794 for 1999.

• A package of personal tax cuts aimed at the middle and high tax brackets will be phased in over a 5-year period. For 2000, the top tax rate (including high income surtax) will kick in at income of approximately $75,000 ($85,000 in 2001). For 2000, the top marginal personal income tax rate in Ontario is 47.9%.

• A package of business tax cuts will reduce the corporate tax rate over a 5-year period. For 2000, the corporate tax rate on small business income up to $200,000 in Ontario is approximately 20%.

• The portion of capital gains that are taxable has been reduced from 75% to 67%, effective for all dispositions after February 27, 2000. For example: if you realize a capital gain of $1,000, your taxable gain will be $667 (1999: $750).

• Employees may be able to defer capital gains tax on up to $100,000 per year of qualifying stock options until the shares are sold instead of when the option is exercised.

2000 Ontario budget highlights (top of the page)

• Ontario is changing the way personal income taxes will be calculated, effective 2000. Until this year, Ontario personal income taxes were calculated as a percentage of the basic Federal tax. Ontario will now apply it’s own rate of tax directly on the individual’s taxable income. This will give the Province the flexibility to adjust tax brackets and rates and to introduce tax initiatives independent of the Federal government.

• Ontario has followed various Federal budget initiatives such as indexing tax brackets and tax credits, reduction in the amount of capital gains subject to tax and income tax rate reductions for individuals and corporations.

• Ontario is proposing that all regulated professionals be given the right to incorporate their practices. Professionals would be able to enjoy many of the same tax and non-tax advantages of incorporation as other businesses. However, their professional liability would not be limited in any way by practicing within a professional corporation. The Ontario government will be consulting with various associations and groups to develop the legislation. Interesting transitional issues include tax treatment of the remaining 10-year reserve upon incorporation, choice of fiscal year end for the corporation and transfer of the practice assets to the new corporation.

• Ontario will pay a “Taxpayer Dividend” to eligible tax- payers of up to $200 per person, based on individual 1999 tax returns. In effect, consider this payment to be a refund on income taxes paid in 1999.

Company car revisited for the owner-manager (top of the page)

Question: Is it better to take money from your company by way of salary or dividend, pay the applicable income taxes and buy your own car or is it better to get a company- owned car?

Answer: You must compute the potential taxable benefit that arises when an employee uses a company- owned car for personal driving, calculate the income taxes owing on this taxable benefit and compare your posihon to the other option.

Here’s how it works: When a company provides you with a car, a taxable benefit is computed for any time the car is used by you or your family for personal use. The benefit has two components: the value of the car itself, and oper- ating costs relating to it.

The first taxable benefit is called the “standby charge”, and is calculated as 2% per month (24% annually) of the original cost of the car if the company owns it. If the car is leased, the benefit is calculated as 2/3 of the lease payments.

If the company pays the operating expenses of the car (such as gas, insurance and repairs), a second taxable benefit is calculated based on the actual costs of opera- tion relating to personal driving. The operating benefit is 14i~ per kilometer of personal driving, less any amounts the employee reimbursed the company for operating expenses (this must occur within 45 days of the year-end).

Or, where the car is used at least 50% of the time for ~ousiness purposes, the employee may elect to have 50% of the standby charge added to income as an operating benefit, less any reimbursements paid to the company by the employee.
Therefore, 3% a month, or 36% per year, of the cost of the car is calculated on both the company-paid oper- ating expenses and the value of the car, times the num- ber of months it is available for personal use.

If the car is used at least 90% of the time for business purposes, the standby charge could be reduced or eliminated if personal use is less than 1,000 km per month. This provision could wipe out the taxable benefit entirely.

Business travel tips (top of the page)

Here are some ways that business travelers can reduce the costs of pleasure travel. The key is to have a significant part of the trip deductible for income tax purposes, reducing the overall non-deductible cost.

Adding a vacation onto a business trip can reduce travel costs. For example, if you have a business trip to a European city and then spend a week on a driving holiday, the airfare remains deductible. Even better, if you have a business trip with two separate destinations and time off in between, the cost of spending the few personal days between legitimate business meetings is deductible, particularly if you can show that it is cheaper to do this than to return home and then fly back to the second destination.

In many cases, having a spouse or other companion travel with you does not double the cost of travel- ling. Hotel and car rental costs are generally the same for one or two persons. If you plan to use airline points earned on a personal credit card, it is general- ly better to redeem points for your spouse’s ticket. However, if you use points earned with business travel for your spouse, this may be considered to be a taxable benefit.

Meals are deductible if the purpose is business. Although the income tax rules limit the deductibility of business meals to 50%, there is no limit on the amount spent on the meal or hotel room. The full cost is deductible (subject to the above limitation) if the purpose is business.

The point is that even if two cannot travel as cheaply as one, the cost does not double. Many opportunities to cut travel costs may present themselves by linking the vacation with legitimate business travel.

Funding your retirement (top of the page)
Universal life insurance is a modified whole life insurance policy. The additional premiums in excess of the actual cost of insurance can be invested in a series of investment options, from term deposits to mutual funds. Therefore, part of the premiums pay for life insurance coverage and part are invested for retirement.

It is the growth of the investment component that can generate income for retirement. You have the choice to invest up to the maximum premiums allowed (governed by age, size of the face amount of insurance coverage and each life insurance company’s actuarial figures) and the growth of this accumulation fund will done on a tax-deferred basis. Upon the policyholder’s death, the beneficiaries of the policy receive both the face amount of the life insurance coverage plus the accumulation fund.

This accumulation fund can be used to provide income during retirement. The accumulation fund can be pledged as collateral to provide either a lump sum loan or a series of annual loans. Up to 75% of the accumulated policy value can be usually lent out by a financial institution. These loans act as a stream of non-taxable income as the person is not actually withdrawing funds from the insurance policy, but simply borrowing from the bank. The financial institu- tion will capitalize the loan, meaning that repayment of the loan plus interest is required only upon the death of the policyholder, with the balance of the accumulation fund and original insurance death benefit still going to the original beneficiaries—all on a tax-free basis.

Alternatively, income can be drawn directly from the cash surrender value of the life insurance policy. Some of this income may be deemed to be taxable, depending on the policy’s adjusted cost basis.

Ideal candidates for using universal life insurance are those who have maximized their RRSP and pension contributions, paid down their mortgage, are in their top earning years (and therefore can afford to pay meaningful additional premiums), have at least 10 to 15 years left until retirement, are insurable and have life insurance needs. This concept is an insurance policy with the related insurance expenses and is therefore not a pure savings vehicle.

The risks involved with using this concept to provide tax-free retirement income revolve around possible future changes to the Income Tax Act. Currently. receiving an income stream in this manner is not considered taxable income.

Contractor payments — new reporting system (top of the page)
Effective January 1, 1999, a business whose primary activity is construction has to file a report to the government which lists amounts paid to subcontractors for goods and services related to construction activities. The definition of construction is very broad. The contractor must report each subcontractor’s name, Business Number or S.I.N., and the amount paid to each subcontractor by the company. The first reporting deadline is June 30, 2000 for fiscal years ending on December 31, 1999.

News in the firm (top of the page)
Saul Judelman (Neill’s son) joined the firm in November, 1999. Saul became a Chartered Accountant in 1997. RoberLPreisz~has been appointed as a Commissioner for Taking Affidavits, by the Lieutenant Governor of the Province of Ontario.

Elaine Pantel was interviewed on CBC Newsworld’s “The Money Show” which was televised on May 20, 2000. The discussion focussed on the tax issues relating to grandparents providing babysitting services for their grandchildren and also saving for their grandchildrens’ future.

Special thanks (top of the page)
On a personal note, Danny would like to thank all the friends and clients for their concern and their best wishes during his recent illness. Danny is feeling much better and is back in the office on a full-time basis.

See previous issue

Fall 1999
Summer 2000
January 2001
Fall 2001
December 2003
February 2004
December 2004
December 2005
June 2006
December 2006
August 2007
December 2007