The countdown is on

The countdown is on


Tax time is almost here – are you ready?

THERE’S A REASON why a simple Google search for income tax comes back with millions of results on how to reduce stress: missteps, after all, can be costly. The number one way to avoid mistakes and calm your anxiety? Preparation. This issue, two financial experts help you get in the right frame of mind by sharing their insights on tax strategies for high income earners as well as investment tools that can strengthen your local economy.

High income earners beware
Do you make $200,000-plus a year? If so, you’re in for an unpleasant surprise on your 2016 tax return: your federal tax rate on income beyond the $200,000 level has gone up four per cent. Nova Scotia now has the highest tax rate in the country, at 54 per cent. Luckily for New Brunswickers, their 2016 provincial budget lowered their provincial tax rate by 5.45 per cent; however that still leaves them at a combined rate of 53.3 per cent.

That’s not the end of the bad news. Bill Budgell, partner in Grant Thornton’s St. John’s, N.L. office, says we shouldn’t expect the high tax rates to go down anytime soon. “You can thank the provincial deficits for that,” he says.

Fortunately, there are some things you can do to mitigate your immediate exposure — particularly if you’re a business owner. “Business owners,” says Budgell, “can opt to retain their money at the company level.” He explains that they can defer dividends or reinvest in their company rather than take out the money as income. With proper planning they can also split the income among family members whose income falls under the $200,000 threshold. (Note: minor children are the exception to the rule. “The so-called ‘Kiddie Tax’ prevents business owners from devolving their income to minors, as children will be automatically placed in the top tax bracket,” notes Budgell.)

For employees with incomes in the highest tax bracket, Budgell admits that they have less flexibility. “You’re not to going offer to take a lower salary in order to avoid paying higher taxes. You can, however, do things such as maximize RRSP contributions.”

Still, says Budgell, the best defence is a good offense. “Careful long-term planning with a knowledgeable tax expert will ensure you’re well prepared to deal with any surprises — like a four per cent jump in the tax rate. For instance, if you decide to open a business tomorrow, and you have a stay-at-home spouse, it may make sense for both of you to be equal owners. Two people earning $200,000 each per year will be taxed less than one person making $400,000.”

“Too many people try to do their taxes on their own,” cautions Budgell, “and they end up getting penalized for errors, or they lose money because they overlook deductions. It’s a complicated process, and it’s changing all the time. We have 13 people in our Newfoundland office alone who are dedicated to income tax planning. How can someone who’s working 50 to 60 hours a week also find time to stay up to date on the tax system? Bottom line — they can’t.”

Invest local for maximum benefit
With RRSP season upon us, Dianne Kelderman – president and CEO of the Nova Scotia Cooperative Council – suggests you might want to consider utilizing your contribution as a local investment tool.

“Access to capital is an ongoing issue for businesses in Atlantic Canada,” she says. “Approximately $1.6 billion is exported out of the region annually through RRSP investments, with less than two per cent coming back to help grow our local economy. You can be part of the solution by directing some of the money you have earmarked for RRSPs into an equity tax credit.”

Dianne Kelderman, president and CEO, Nova Scotia Co-operative Council

Dianne Kelderman, president and CEO, Nova Scotia Co-operative Council

Open to residents of the three Maritime provinces, the tax credit is calculated at 35 per cent of the amount invested. That’s a significant and immediate ROI, notes Kelderman. “How long would I have to put money into an RSP to reap that same return? I’ve been putting money into local businesses through the equity tax credit for 10 years now and I haven’t lost any money yet. Plus, it’s a nice way to keep money in the region.”

Point of fact, there has only been one loss to date in Nova Scotia, out of 52 funds and approximately $60 million invested overall.

Asked to explain how it works, Kelderman said investors can invest in a specific company – such as Just Us Coffee Roasters – or a general blind pool such as community economic development agency New Dawn Enterprises in Cape Breton. Investors receive the immediate benefit of the tax credit, and may or may not receive annual dividends as well. “Some of mine pay dividends in the four per cent range, others don’t pay anything.”

Equity tax investments are required to be left untouched for five years, and can be rolled over for another five years – which will be rewarded with another 20 per cent tax credit. “The value of your investment doesn’t change,” says Kelderman, “unless the business gets really successful or it fails. And you can only take your money out of the company if it has the capacity to pay. So yes, this is a long-term investment and there are no guaranteed returns other than the tax credit.

“The focus is on keeping money at home and using our investments as an economic development tool. You have to have a bit of a ‘buyer beware’ mindset going into it.”

Asked why she is a loyal advocate of the equity tax credit, Kelderman says she is making a deliberate philosophical commitment to her community by investing locally. “Businesses here are worthy of the investment. There’s no more risk to investing locally than if you send your money somewhere else – and it’s a heck of a lot more satisfying.”

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