My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, May 25, 2015

Financial & Tax Planning for the Terminally Ill - Part 1 - Getting Organized

Many of us do not consider our own mortality. Yet, if you or someone you know has been diagnosed as terminally ill, you are forced to face the reality of your/their impending passing. While the emotional and health issues are first and foremost, to lessen the burden for your family, friends and/or executor(s), it is very important to undertake both financial and tax planning.

A diagnosis of a terminal illness quite bluntly means that you are probably going to pass away in the near term. The near term for a terminal illness is defined by different medical practitioners and medical organizations as anywhere from 6 months to two years. Most likely you will not be able to work full-time (or you will want to stop working at some point) and may incur additional medical or nursing care related expenses that are not covered by the Canadian health care system.

Consequently, you may need to liquidate investments, retirement assets or draw on insurance policies to fund your day to day living and medical expenses. For the purposes of this post, I am going to assume you are lucky enough to have sufficient liquid resources to live comfortably until that fateful day.

If you have stress tested your death, as I have suggested in prior blog posts, the anxiety related to getting your financial house in order will at least be minimized. However, for today’s blog, I am going to assume you have done little to plan for your demise, and I’ll provide a comprehensive list of things you need to organize and consider.

Legal Documents to Prepare, Update, Review or Gather


1. Will(s) – Have an updated one in place

Hopefully you already have a will(s). If not, ensure you immediately have a one drafted. If you live in a province that allows you a second will (i.e.: In some provinces you are allowed to have a second will for the shares of your private company in order to minimize probate taxes; although the new rules for inter vivos trusts must be reviewed) consider whether a second will is applicable to your situation.

Where you have a will in place, ensure you review your will one final time to determine if it is up to date and reflects your current wishes. If you have not designated personal property such as jewelry and art in your will, you may now want to specify how that property is allocated; rather than leaving it to your family to sort out, possibly creating issues for your executor.

Although most terminal illnesses do not affect your mental capacity, I have seen circumstances where lawyers are concerned about the mental capacity of their clients and your lawyer may request a capacity test prior to allowing you to change your will.

2. Personal documents – Organize and store

Once you pass away, many financial institutions and government bodies will request legal documents (passports, birth certificates, drivers licence, etc.). You will therefore want to store all these documents in one place (safety deposit box) and make your executor or family aware of the location of these documents.

3. Powers of Attorney (“POA”) – Get your financial and personal care wishes down on paper

If you do not already have POA’s in place for both financial and health decisions, you will want to have both documents drafted as soon as possible. Whether you are just drafting a POA or reviewing a previously granted POA, ensure you are comfortable with your attorney (the person you have appointed) selection.

You will want to make your attorney for personal care (health) aware of your wishes for medical purposes.

4. Funeral Arrangements – Inform your executor or family about your preferences

You may have already prepaid your funeral or have specific wishes. You need to ensure any outstanding payments are made on prepaid plans and discuss your funeral wishes with your family or executor so they are aware of any specific wishes. Banks will typically allow your estate to pay for your funeral from your bank account; however, you may wish to give the money while alive to your executor so they do not have to deal with the bank.

If you were undecided about organ donations, this would be a time to make a final determination.

5. Insurance – Create a folder and summary with all your documents together with contact information

You may have life, disability, critical illness or any number and types of insurance in place. In order to assist your family and/or executor, you should create a file with all your policies, the amount of insurance and the contact information of your insurance agent where applicable.

In some cases your beneficiary designations under your insurance policies may be outdated (for example, many people still have their ex-spouse as a beneficiary) and need to be reviewed and changed. Many people also do not have updated beneficiaries for their RRSPs and RRIFs.

6. Real Estate – Organize all your deeds in a single file for easy reference

To assist your executor(s), you will want to create a file of title and purchase documents relating to your home, cottage and/or rental properties you own.

7. Information Check List – provide a list of helpful contacts

To help alleviate additional stress for your loved ones, I strongly suggest putting together an information checklist of:
  •  your key contacts (lawyer, accountant, insurance agent, investment advisor, banker etc.)
  •  location of assets (your bank accounts, investment accounts, and retirement account), credit cards
  •  location of safety deposit box etc.
If you do not have something in place, this would be the time to prepare your list, as a courtesy to your executor(s), so they are not playing a game of hide and seek with your assets.

You will also want to summarize and provide documentation regarding any liabilities you have, such as mortgages, bank loans and lines of credit.

Finally, it’s a good idea to introduce your key contacts to your executor and/or spouse so they have familiarity with them.

8. Digital Information – provide a protected list of your passwords

As discussed in my blog Alzheimers and Death in the Digital World you will want to consider how you deal with the issue of passwords in respect of your online financial accounts and Internet/social sites.

I am going to stop here today. Next week I will discuss financial and tax planning issues you will want to consider if you or anyone you know is terminally ill.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 18, 2015

Can a Shareholder Be an Independent Contractor to Their Own Company?

If you perform services for a business, it is extremely important to determine whether you are an employee, a self-employed individual (i.e. independent contractor) or a Personal Service Business (if you contract through your own corporation).

I have discussed these controversial income tax issues a couple of times in “I am a Contractor Unless the CRA Says Otherwise” [see the second part of this post updating employee/contractor status] and in “Is Your Corporation a Personal Service Business”.

However, how about the situation where a shareholder of a corporation (whom you would typically consider to be an employee) wishes to treat themselves as an independent contractor and pay themselves a consulting/management fee instead of a salary? As I have been asked this question several times by readers, today, I will discuss a 2012 court case that "sort of" addressed the issue.

Pluri Vox Media Corp


In the 2012 court case, Pluri Vox Media Corp.v The Queen, 2012 FCA 295, the sole shareholder of Pluri Vox took the position that he was an independent contractor (not an employee) to his own company for the following reasons:

1. He was not paid a predetermined salary, but was paid a fee between $3,000 and $8,000 per month based on the commercial activity Pluri Vox undertook.
2. The company asserted that the varying compensation was indicative of the financial risk the shareholder undertook.
3. The shareholder was not directed on how to perform his duties and was able to hire assistants without Pluri Vox’s consent.

Nonetheless, the court ruled the shareholder's status to be that of an employee. As a result of this, the company was liable for payroll source deductions that were not remitted in the past.

This ruling was founded in part on the finding that there was no contract between Pluri Vox and the shareholder and that the shareholder did not invoice Pluri Vox for his services and did not charge GST (despite being registered for GST with the CRA).

However, Justice Webb made an important comment in respect of whether a shareholder can be a contractor to their own company. He stated:

"It would also seem to me that, while this would be unusual, an individual could enter into more than one contract with his or her own company and therefore could provide services in different capacities. It follows that the simple fact that an individual is a director or an officer of a company does not, in and of itself, exclude the possibility that other services may be provided by that individual as an independent contractor. When that occurs, it will be necessary ..... to apportion the amounts paid between the services performed in one capacity and the other."

Thus, the court provided for the possibility a shareholder could be an independent contractor to their own company in certain circumstances.

Justice Webb also commented that where applying the "control" test often used by the courts, “[t]he importance lies in the corporation's legal power to control the employees, not whether the employees feel subject to that control”.

Unfortunately, while the court actually addressed two important concepts, it failed to provide clarity for employee/contractor situations involving a shareholder of a company. Thus, if you own your own corporation and pay yourself as a contractor or through management fees, understand the CRA may come knocking at your door.


Employee vs Contractor


The link above to "I am a Contractor Unless the CRA Says Otherwise" is now almost four and a half years old. I may update this topic in the future, but until then, it should be noted a 2013 Federal Court of Appeal hearing, 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85, has placed a new strong emphasis on the role of “intent” in the determination of whether you are an employee or contractor. In the case the judge applied a two-step approach:

1.The intent of the parties

2. Does the actual reality of the working relationship confirm the intent of the parties?

To reach a definitive conclusion, both steps must be consistent. In examining intent, the courts will examine the contractual relationship or the behavior of the parties, such as were invoices issued and whether or not the worker registered for GST/HST purposes and made various other filings as an independent contractor. The second step will involve a review of the same tests applied in the Weibe Doors and Sagaz Industries cases I note in the "I am a Contractor" post.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 11, 2015

How Your Birthdate Can Impact Your Financial Affairs and Retirement

Have you ever wondered if you had been born a few years earlier (or alternatively, a few years later), what effect it would have had on your financial affairs and retirement? I personally have pondered this issue; specifically wondering whether my housing and stock market returns would have improved if I had been born two or three years earlier.

Retirement


Based on my contemplation above, I was intrigued when I read a recent article by Ian McGugan in The Globe and Mail on the perils of early retirement, in which he noted that “there’s not much justice when it comes to retirement. Two people born a few years apart can follow identical investing plans and yet wind up with radically different results, simply because of the way the market performed over the course of their investing lifetimes”.

This issue of varying financial returns is known as “sequence of returns”. The sequence of returns you experience can cause a dramatic difference in your retirement funding, especially when you have negative market returns early in your retirement vs later in your retirement. This is because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. However, based on the data discussed below, you also face a sequence of returns risk when saving for retirement, which is birth year, retirement year and market return correlated.

Those of you who read my six part series on retirement, “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” will recall I discussed the concept of sequence of returns in Part 5 of the series, when I talked about the various factors that can impact both the funding of your nest egg and your withdrawal rate in retirement. In that post, I discussed some comments made by Wade Pfau, a retirement researcher who has a Ph.D. in economics from Princeton and is currently Professor of Retirement Income at The American College and the Director of Retirement Research for McLean Asset Management and inStream. Wade has a popular blog, called appropriately, Wade Pfau's Retirement Researcher Blog .

In Mr. McGugan's article, he notes a new tool created by Wade that reflects variances during the accumulation phase of your retirement. The tool, called The Retirement Wealth Index, reflects how many years of income someone would have accumulated if they had started contributing 15 per cent of their salary to a balanced stock-and-bond portfolio at 35 and continued until they hit 65.

The Globe and Mail article goes on to say that “Prof. Pfau estimates that someone reaching 65 this year would have accumulated 10.7 times their annual salary by following the strict investing regimen described above. That's among the poorer outcomes of the past 20 years. In contrast, an investor who turned 65 in 2000 would have had more than 18 times their annual salary. Even in 2005, a new retiree would have built up a nest egg worth more than 14 times their salary.”
This empirical evidence supports my intuitive observation. What a difference your year of birth can make in your investing nest egg.

Housing


I don’t have any empirical evidence for the affordability of housing, but obviously based on the price of homes in Toronto, in which the average cost of a detached home recently hit one million dollars, it is a huge issue for many, especially younger people.

I have personally observed that similar to the sequence of returns for investing, even a year or two can affect your housing returns. When I look back at friends and family who had comparable financial situations to me, but were either two to three years older or two to three years ahead of me in purchasing their first homes, they always seemed to buy when the Toronto market was weak or stable and to always be selling when the market had risen (and I was buying). As a result, they leapfrogged ahead of my housing affordability simply by virtue of timing and/or date of birth and ended up in areas I could not afford (unless I was willing to take on substantial debt). Of course, I realize I should not be complaining, as my housing experience pales in comparison to today's generation who face a monumental challenge in purchasing a starter home.

I am grateful for where I am financially in my life (although I do have some regrets based on non-birthdate decisions). I do however feel, that my own stock market and home buying experiences re-enforces how the luck of your birthdate can impact your financial future.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 4, 2015

Topics of Interest

I am burnt out from personal income tax season and trying to get out my various December corporate year-ends. So I am taking a break from writing this week.

During the year I jot down topics to write about and draft blogs. It’s a process; from just an idea, to a draft, to a complete blog that just needs revisions. My ideas for this year take me until the summer when I hit the golf course. At that point I’ll be re-posting the “Best of The Blunt Bean Counter”.

However, I could use a few suggestions for future blog post topics for next fall. So if you have an idea or topic you would like me to discuss, leave a comment on this post, or feel free to send me an email to bluntbeancounter@gmail.com

See you next week, when I write about how your birth date affects your financial position.

Bloggers note: Sorry, by accident I closed the comments section for this post. However I have received many suggestions for future topics to my email.  Thank you. The comments section is now available. 

Monday, April 27, 2015

TFSAs - Ease of Access, Discipline and Retirement

Last week’s budget confirmed the badly kept secret that the Tax Free Savings Account (“TFSA”) contribution limit would increase. The Conservative government proposes to increase the limit from $5,500 to $10,000 (although, TFSAs will no longer be indexed) effective January 1, 2015. Although I can’t say I fully understand this from a public policy perspective, I think the increased limit is great from a purely financial perspective.

As there have already been numerous articles discussing the advantages of the increased limit and who will benefit the most (here are links to two very good articles by Rob Carrick of The Globe and Mail  and Adam Mayers of the Toronto Star), today I thought I would take a different tact and discuss how the increased TFSA limit will test our human behavioural traits.

Ease of Access, Discipline and Retirement


Ease of Access - A Good Thing or a Bad Thing?


TFSAs allow you to withdraw your money at any time for any reason. The reason could be financial, for example to help purchase a house, or purely for personal indulgence, such as to go on your dream vacation or buy that sports car you always wanted.

One of the great things about a TFSA is that you have the option to re-contribute any money you withdraw from your TFSA beginning January 1st of the following year. However, my concern is once that money is withdrawn, many people will not re-contribute, especially in respect of discretionary withdrawals where the money provided personal gratification.

I have written a couple times that one of the indefinable benefits of a Registered Retirement Savings Plan (“RRSP”) is that it acts as an invisible barrier to protect you from yourself, as some (not all) people treat their RRSP as sacrosanct and only consider withdrawing money for emergencies, or income smoothing purposes. In contrast, TFSAs are inviting with limited barriers to protect you from yourself.

Discipline - Do You Have It?


The easy accessibility of TFSAs will require us to be disciplined if we are not to squander the funds we sock away. It has been my observation that many of us do not have that financial discipline. I have said this before and will say it again; with respect to accessible monies, the path of least resistance generally ends at the cash register.

Retirement - Are TFSAs the New RRSPs?


Over the last few years, more and more Canadians have decided to fund their TFSAs in lieu of their RRSPs. Many people seem to prefer the flexibility and tax-free status of TFSAs and are willing to forsake today’s tax refund (generated by RRSP contributions), for tax-free withdrawals in retirement (to avoid taxable withdrawals from their RRSPs/RRIFs in the future). While this change in retirement funding makes sense where your marginal tax rate today is lower than it will be in retirement, it does not make income tax sense where your marginal rate is higher today than you anticipate at retirement.

Whether the trend of moving to TFSAs and away from RRSPs makes financial sense or not, assuming the budget proposal becomes law, I can foresee the day where TFSAs will become the dominant retirement vehicle in Canada. 

This brings us back to discipline. Much has been written about how poorly many Canadians have saved for retirement and how we need government pension plans (see Ontario) to save us from ourselves. Yet now, it can be argued, the government has in a way incentivized us to not use our RRSPs and is expecting us to be disciplined and use the money in our TFSAs to fund our retirements.

As the expression goes, I am from Missouri on this issue; you will need to show me that Canadians will be disciplined enough to always choose their retirement over the trip to Tuscany.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Wednesday, April 22, 2015

2015 Federal Budget

The Federal Minister of Finance, Joe Oliver, yesterday presented the 2015 Federal Budget. It is a good thing Joe was giving away tax goodies, because announcing a budget with 9 days left in income tax season does not make many accountant friends :)

There was much to like in this budget. The proposed increase in the Tax-Free Savings Account ("TFSA") limit, the proposed reduction in the minimum withdrawal for Registered Retirement Income Funds ("RRIF") and the proposed reductions in small business tax rates. It will be interesting to see if these changes ever get to see the light of day.

As I am in the home stretch of tax season, I don't have the time for a detailed analysis of the budget, so I will just offer some brief comments.

TFSAs


As rumoured, the contribution limit for TFSAs will be increased from $5,500 to $10,000 per year effective January 1, 2015. However, the new limit will not be indexed. This proposed change has the potential to drastically alter the way Canadians save and plan for retirement. On Monday, since everyone has already told you how great this is, I will discuss the downside to this change.

RRIFs


The government proposes to lower the annual required withdrawal from your RRIF. Currently at age 71 the required withdrawal rate is 7.38%. The budget proposes to lower that rate to 5.28% as of January 1, 2015. Withdrawal rates will still increase every year, but instead of topping out at 20% at age 94, that cap is reached at age 95. RRIF holders who at any time in 2015 withdrew/withdraw more than the reduced 2015 minimum amount will be permitted to re-contribute the excess.

This change appeases seniors who felt they were being forced to draw more money than they required to live and takes into account the longer life expectancy of Canadians.

The Matching Penalty


Readers of this blog will know that one of my major pet peeves is the excessive 20% penalty for unreported income (that is often inadvertent or the result of lost slips in the mail) that is picked up each year by the CRA's matching program.

The penalty currently can be levied even if you owe no income tax. I.e.: If someone in Ontario fails to report a T4 slip with $10,000 of employment income and the slip has reported $4,900 of income tax deducted, they would owe no income tax, at the maximum marginal income tax rate. However, if you had failed to report income in any of the three prior years, the penalty under subsection 163(1) would be $2,000 (20% x $10,000), even though you owed no income tax and the CRA was provided this information by your employer.

The government will amend this penalty to prevent situations such as the above where there is a disproportionate penalty to the actual income tax. The budget proposes that the penalty will now only apply if a you fail to report at least $500 in income and more importantly; the penalty will now be equal to the lesser of 10% (penalty is 20%, as there is also a 10% provincial penalty) of the unreported income and 50% of the tax unpaid. Thus, in the example above, there would not be any penalty under the proposed legislation, as no tax would be owing.

T1135 Foreign Reporting Form


The government proposes to simplify the reporting requirements where the cost of a taxpayer's foreign property is less than $250,000. While this change is welcome, it falls short. Most accountants and taxpayers were hoping the form would only require reporting of foreign income earned outside of Canada and would exclude the detailed reporting required for accounts held with Canadian institutions.

Small Business Tax Cut


It is proposed the 11% Federal small business tax rate on active income for qualifying Canadian Controlled Private Corporations will be reduced by .5% annually beginning January 1, 2016 and will drop to 9% by January 1, 2019. The dividend gross-up and credit will be adjusted each year to reflect the lower corporate tax rate.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, April 20, 2015

Transfer Pricing - Common Issues & New Documentation Requirements

One of the most nefarious concepts in corporate taxation is transfer pricing. Today I have a guest post by Dan McGeown, an expert on transfer pricing discussing new Organisation for Economic Cooperation and Development  ("OECD") documentation guidelines that Canadian companies are expected to follow.

What is Transfer Pricing?


Before we get to Dan’s post, a quick primer on transfer pricing. Transfer prices are the prices charged between related parties for goods, services, assets and/or the right to use intangibles. Transfer prices also include interest on related party debt, guarantee fees and factoring fees. When a transaction involves related parties in two or more different tax jurisdictions, the tax authorities become interested, with the focus being on whether the parties are paying their fair share of tax in each jurisdiction (there are often huge disagreements between countries as they fight over what they consider their share of tax dollars being shifted to another country).

Simply put, transfer pricing revolves around the the setting of the price for goods and services sold between controlled (or related) companies. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price.

As a result, transfer prices must be set following the arm’s length principle. The arm’s length principle requires that all transfer prices, and the related terms and conditions, must be established on the same basis as would occur if the parties were not related, i.e., the prices, terms and conditions should reflect what two unrelated parties would agree to in similar circumstances.

Penalties and Traps


In Canada, failing to follow the arm’s length principle exposes the Canadian entity to a 10% penalty on any transfer pricing adjustment made by the CRA. The CRA may not impose that 10% penalty when the entity has made reasonable efforts to determine and use arm’s length prices, as evidenced by preparing and maintaining Contemporaneous Transfer Pricing Documentation.

Dan advises me that some of the common issues that most often trip up Canadian companies include the following:

1. Either no analysis/documentation to support a conclusion that transfer prices are arm’s length, or self-serving analysis/documentation for transfer prices not considered arm’s length;

2. Operating losses incurred in one or more years, with no documented loss justification based on business and/or economic reasons;

3. Fluctuating operating results that are not sufficiently analyzed and documented;

4. Inappropriate cost allocations used in the determination of management services fees, i.e. costs included that would not benefit the recipient of the services; and,

5. Royalty payments being made but lower than acceptable operating results do not justify charging a royalty.

A company’s Transfer Pricing Documentation is its first line of defense in any transfer pricing audit and, therefore, it needs to be prepared from that perspective.

Speaking of documentation, Dan’s post provides an update on changing expectations in respect of transfer pricing and he briefs us on some specific Canadian requirements. I thank Dan for his blog on this controversial income tax issue.

TRANSFER PRICING DOCUMENTATION: CHANGING EXPECTATIONS

By Dan McGeown

ERODING TAX BASES


The prolonged recession, and the difficulties many countries were and are still having in balancing budgets and managing debt loads, caused them to focus on the perception that each country’s tax base was being eroded by companies entering into activities that created tax deductions in higher tax jurisdictions with the offsetting income being reported in low tax or no tax jurisdictions, i.e., Base Erosion. In addition, many companies were moving valuable intangibles and/or value-adding activities to low tax or no tax jurisdictions to reduce the company’s overall effective tax rate, i.e., Profit Shifting strategies.

As result of this base erosion, the Organisation for Economic Cooperation and Development (“OECD”) is now calling for three distinct levels of documentation, being: a Master File; Local Country Files; and Country-by-Country Reporting (“CBCR”). For Canadian companies both the Master File and CBCR are new requirements.

Master File


The Master File will provide: a high-level overview of the group of companies; the value chain and value drivers; a description of intangibles and where they are located; financial arrangements; where functions are performed, risks are borne and assets are employed; and the consolidated financial and tax position for the group.

Local File


The Local File for a Canadian company is the Study prepared to comply with section 247 of the Income Tax Act, focusing on the specifics relating to intercompany transactions with other companies in the group. The Base Erosion and Profit Shifting (“BEPS”) impact on Local Files is that there must be more detailed analysis and documentation regarding risks, intangibles, financing and capital transactions, and high risk transactions.

Country-by-Country Report


CBCR is effectively a risk assessment tool for the tax authorities around the world. CBCR reports jurisdiction-wide information regarding the global revenues and income, taxes paid, assets employed, number of employees and retained earnings.

There is no small business exemption relating to the requirement to prepare the Master File and Local Country File. For CBCR, only groups of companies with global revenues in excess of Euros 750 million are required to complete and file the CBCR Template.

What Does This Mean to Your Canadian Company?


If your company is the parent of subsidiaries in other countries, you will be required to complete a Master File to be shared with your subsidiary companies for filing with their respective tax authorities, and you will also be required to complete a Local File to be maintained, along with the Master File, to be provided to the CRA if and when requested by the Agency at the commencement of an audit. Whether you need to complete the CBCR Template will depend on whether your global revenues exceed Euros 750 million or approximately CA$1 billion. If so, this Template would actually be filed with the CRA no later than one year after the end of the tax year in question. The CRA would share this information with the other relevant tax authorities.

If your company is a subsidiary of a parent company elsewhere in the world, you will be responsible for preparing and maintaining the Local File, while relying on your parent company to provide you with the Master File. The CBCR Template would be filed by the parent company with its local tax authority, to be shared with the CRA and other tax authorities in accordance with the guidance put forth by the OECD.

CANADIAN SPECIFIC REQUIREMENTS


The CRA issued three Transfer Pricing Memorandum (“TPM”) to provide its guidance with respect to certain transfer pricing issues: revised TPM-05R, Requests for Contemporaneous Documentation; TPM-15, Intra-Group Services and Section 247; and, TPM-16, Role of Multiple Year Data in Transfer Pricing Analyses.

From your perspective TPM-05R, clarifies the CRA’s expectations regarding your company’s response to a CRA request to provide your contemporaneous documentation to the Agency. The main take away for you and your company is that the CRA expects that some level of documentation will be prepared and maintained for each taxation year. Even if your company has a Study for its 2014 taxation year, the CRA will expect some form of documentation for 2015. That may mean the preparation of a Memo that confirms there have been no material changes in 2015 to all of the factual information in the 2014 Study, and testing the 2015 results against any benchmarks use in the Study.

TPM-15 elaborates on certain requirements for the analysis of intra-group service charges as set out in the Information Circular on transfer pricing, with more discussion about the use of mark-ups to reflect how arm’s length parties would charge fees for a given service to recover their costs plus an element of profit. Your company’s documentation may need to be revised to justify and support charging or paying a services fee that includes a mark-up.

TPM-16 confirms the CRA’s long held position that when you are setting your company’s transfer prices, and later testing and documenting them, the CRA expects you to use the results of a single year of data from comparable company information, as opposed to averaging multiple years of data.

WHAT SHOULD YOU DO?


Given the increasing focus on transfer pricing, both here in Canada and around the world, now is the perfect time to take stock of how your company sets its transfer prices for all of its intercompany transactions, and what support you have on file to support a conclusion that your company made a “reasonable effort to determine and use arm’s length prices or allocations.”

Note: I have disabled the comment/question feature of the Blog. I just do not have the time to answer questions during income tax season (this includes emails to my BBC or business email accounts). If you have questions or wish to engage Dan, his information is below.

Dan McGeown is a transfer pricing specialist and the National Practice Leader of BDO’s Transfer Pricing team, a team comprised of accountants and economists providing transfer pricing planning, compliance and controversy management services to a wide variety of companies having cross border transactions with related parties. You can reach Dan by phone at 416-369-3127 or by email at dmcgeown@bdo.ca.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.