Please check the following link for course registration and outline information:
http://ce.uwaterloo.ca/Certified_Management_Accountants.htm#t
Thursday, July 23, 2009
Friday, June 5, 2009
Audit Fees Rise, But Not by Much
The good news is that the hikes trail the inflation rate. The bad: companies are taking on more audit burdens internally.
Scott Leibs - CFO.com US
June 4, 2009
A new survey on audit fees presents CFOs with a glass-half-full/empty test. On the plus side, fees in 2008 increased only 2.2% to 3.7%, a rate that falls below most measures of inflation and is a far cry from the substantial annual hikes of a few years ago.
But muddying that rosy view is the fact that the small increase is due in part to companies absorbing more auditing work internally. That's according to Marie Hollein, CEO of Financial Executives International, whose affiliate, the Financial Executives Research Foundation, performed the study.
The foundation surveyed more than 350 public and private companies and found that audit fees for publicly traded firms rose an average of 2.2% in 2008 from the previous year, while private companies paid 3.7% more.
Half of private companies predict their fees will rise again this year (by 2% to 10%), while a strong majority (81%) of public companies expect fees to hold steady or decrease. In 2008, public companies paid, on average, $216 an hour for audit services, while private companies paid $179.
Although they were more apt to cite service concerns than fee increases, private companies also differed from their public counterparts in another way: nearly one in four have put their contract out for competitive bid, and 6% say they plan to switch auditing firms. Fewer than 2% of public companies anticipate changing auditors.
Public companies, in fact, have been with their current auditors for an average of 16 years, compared to 8 years for private companies. Fully 86% of the public companies responding to the survey use a Big 4 firm, while only 38% of private companies responding do so.
In a statement, Hollein suggested that the modest uptick in auditing fees signals that public companies have gotten their arms around the requirements of the Sarbanes-Oxley Act and have made substantial progress in streamlining the auditing process, while private companies lag on this learning curve.
Scott Leibs - CFO.com US
June 4, 2009
A new survey on audit fees presents CFOs with a glass-half-full/empty test. On the plus side, fees in 2008 increased only 2.2% to 3.7%, a rate that falls below most measures of inflation and is a far cry from the substantial annual hikes of a few years ago.
But muddying that rosy view is the fact that the small increase is due in part to companies absorbing more auditing work internally. That's according to Marie Hollein, CEO of Financial Executives International, whose affiliate, the Financial Executives Research Foundation, performed the study.
The foundation surveyed more than 350 public and private companies and found that audit fees for publicly traded firms rose an average of 2.2% in 2008 from the previous year, while private companies paid 3.7% more.
Half of private companies predict their fees will rise again this year (by 2% to 10%), while a strong majority (81%) of public companies expect fees to hold steady or decrease. In 2008, public companies paid, on average, $216 an hour for audit services, while private companies paid $179.
Although they were more apt to cite service concerns than fee increases, private companies also differed from their public counterparts in another way: nearly one in four have put their contract out for competitive bid, and 6% say they plan to switch auditing firms. Fewer than 2% of public companies anticipate changing auditors.
Public companies, in fact, have been with their current auditors for an average of 16 years, compared to 8 years for private companies. Fully 86% of the public companies responding to the survey use a Big 4 firm, while only 38% of private companies responding do so.
In a statement, Hollein suggested that the modest uptick in auditing fees signals that public companies have gotten their arms around the requirements of the Sarbanes-Oxley Act and have made substantial progress in streamlining the auditing process, while private companies lag on this learning curve.
Internal Auditing: The 24/7 Approach
Not satisfied with monitoring small data samples, more companies are seeking complete automation of the audit function.
David McCann - CFO.com US
June 1, 2009
For Harrah's Entertainment, an effort to fully automate the internal auditing process begun early last year could not have been timed more fortunately.
That's because the casino industry — already subject to stiff compliance demands from state authorities and the payment-card industry — saw its bar raised further at the beginning of this year by new reporting requirements, mostly involving system security, from the Nevada Gaming Commission.
At Harrah's, the heavier compliance crush is eased considerably by its ongoing project to achieve "continuous auditing." Definitions for that term vary widely; the Institute of Internal Auditors, for one, calls it "any method used by auditors to perform audit-related activities on a more continuous or continual basis." Increasingly, though, individual practitioners see the cutting edge as auditing 100% of data relating to transactions, processes, policies, or whatever else is to be audited, rather than reviewing small samplings at longer intervals, as many organizations still do.
Achieving that level of scrutiny generally is accomplished by writing data-analytic scripts for each area to be audited, then integrating them with any database and reporting systems used internally and with off-the-shelf auditing software programs like ACL, Idea, and Microsoft Access.
The integration work was a big undertaking for Harrah's, which has 40-plus properties, including 13 in Nevada. Each property has three key systems that run its slot machines, table games, and sports-book service, and there are also food-and-beverage, ATM, and in some cases hotel management systems. "We're talking about a lot of systems in a casino," says Cheryl Kondra, chief audit executive for Harrah's.
A lot of employees, too, which is a crucial factor. That's because monitoring workers' access to systems is one of the most important tasks for Kondra's department. Casinos are required to review the access listings each quarter to determine that, for instance, only active employees are listed and that everyone has the appropriate level of access. At Caesars Palace alone there are 5,200 employees, about 2,000 of whom have access to the key gaming systems.
"It was a massive, very manual process to print a report and compare it to an HR listing of employees," says Kondra. "Automating that, and monitoring it continuously instead of waiting until the end of the quarter, makes the audit a lot easier, and we don't find as many exceptions."
System access is so important because of the potential for employee fraud. "It's not just the access to cash," she notes. "You have to have adequate access to systems to get everything to balance so the fraud does not pop out."
For Harrah's, a big benefit of the move to automated monitoring is that it allows the 86 auditors who work at the casinos to spend more time on the gaming floor doing surveillance — another way to catch employee fraud. "I'd rather see them on the floor because that's where the action is, not at their desks buried in paperwork," Kondra says.
Provincial Prudence
For the Office of the Comptroller General of the British Columbia Ministry of Finance in Canada, the 2008 launch of a move to continuously audit 100% of transactions put it well ahead of most governments and other non-profit organizations, for which less-automated processes are still commonplace.
"We've had a lot of interest in what we're doing, from the Florida governor's office to some non-profits in the States, because we're using technology to move forward," says Shyrl Kennedy, executive director of the office since 2001.
That was the year a consultant analyzed the ministry's accounts-payable processes and determined that finance staff spent 77% of their time on processing transactions, 20% more than an efficient company might spend. Before a payment was made, it had to be determined whether the person issuing the payment had the proper spending authority, whether the account coding was right, and whether the goods had actually been received, among other requirements. "It was a very cumbersome process," says Kennedy.
The consultant recommended that instead of auditing 100% of transactions before payment, only a sampling of payments be reviewed post-transaction. The project started small, focused just on travel expenses. In 2004, it was expanded broadly across all government ministries, and savings of about $20 million per year in efficiencies and overpayments have been identified since then.
But with just statistical data samplings being audited, savings were still falling through the cracks. "We were really just hoping to find things, so we could know whether there was a business process or policy that needed to be cleaned up," Kennedy says.
Through extensive use of ACL software, her office last year began to continuously monitor payments made with purchasing cards. While using purchase cards can bring big administrative savings, she notes, there is also significant risk involved, because most purchases are small-dollar items that don't stand out, and many people in the government have access to cards that they could use for unauthorized purchases.
The continuous-auditing system has produced "incredible" efficiencies in identifying inappropriate purchases and people without authority to use cards, Kennedy notes. Now she is gearing up to tackle the rest of the government's spending, related to invoices, contracts, and grants.
The time it takes to roll out such a system is surprisingly short. With the purchase-card module, Kennedy says, developing business requirements and data analytics, having ACL integrate them into its program, and creating business processes for implementing the system took about three months.
Tracking What Counts Most
Last fall, Siemens Financial Services Inc., the U.S. arm of the global financial services firm, was just starting to institute continuous auditing, rather than performing tests every one to three years (depending on the risk level of the thing being audited).
But Jason Gross, who was running the internal audit department, found that he could not go as far as he liked in designing controls for the processes being audited. That was because of the expectation by the audit committee of parent company Siemens AG that auditors be arms-length from the activities they're reviewing as well independent from management. If he were to design audit controls, he would then be participating in the management of the company rather than simply using existing controls to perform an audit. That would go beyond the proper purview of internal audit, as viewed by the Siemens AG audit committee.
So in October the company formed a new department alongside internal audit, called controls management, with Gross in charge as vice president. He created a continuous-controls-monitoring system, which runs every night and uses many of the same elements he'd been working on for continuous auditing.
The difference between internal auditing and controls management, Gross notes, is in the level of granularity. "We're down at the data level, looking transaction by transaction, where typically an audit, depending on its objective, might just review a process and not get as deep into the data details," he says.
But it's the primary focus of the effort that draws interest. "I think we stand out a little bit, because a lot of the buzz you hear about continuous monitoring relates to generic processes such as travel and entertainment and purchase to pay," Gross tells CFO.com. "But we're monitoring our financial services business by developing the program from the ground up, because there was no package we could go out and buy to do that."
What's being monitored, essentially, is "everything that determines the value of a financial asset," says Gross's boss, Matthias Grossmann, CFO of the U.S. financial services unit, which provides financing for healthcare, energy, and industrial companies and manages $6 billion to $7 billion in assets. "Number one, of course, is information on your obligors. Is the entity migrating to different risk classes? Is there the normal underlying collateral? Do any inconsistencies show up?"
The decision to launch the controls-management department and put the focus on continuously monitoring the financial services operation was an easy one, Grossmann notes. "When we did audits using these techniques, we always found something," he says. "So we thought we could use them in our daily business, using technology we already had that was coming from a different angle. So far it looks good, and I hope we can expand it."
Gross says that, in fact, continuously monitoring controls not only can detect problems but can do so before they've happened. When the company is preparing a new lease financing contract, for example, all elements relating to the transaction and borrower are loaded into the system before the contract is finalized, which can turn up "data mismatches," he notes.
David McCann - CFO.com US
June 1, 2009
For Harrah's Entertainment, an effort to fully automate the internal auditing process begun early last year could not have been timed more fortunately.
That's because the casino industry — already subject to stiff compliance demands from state authorities and the payment-card industry — saw its bar raised further at the beginning of this year by new reporting requirements, mostly involving system security, from the Nevada Gaming Commission.
At Harrah's, the heavier compliance crush is eased considerably by its ongoing project to achieve "continuous auditing." Definitions for that term vary widely; the Institute of Internal Auditors, for one, calls it "any method used by auditors to perform audit-related activities on a more continuous or continual basis." Increasingly, though, individual practitioners see the cutting edge as auditing 100% of data relating to transactions, processes, policies, or whatever else is to be audited, rather than reviewing small samplings at longer intervals, as many organizations still do.
Achieving that level of scrutiny generally is accomplished by writing data-analytic scripts for each area to be audited, then integrating them with any database and reporting systems used internally and with off-the-shelf auditing software programs like ACL, Idea, and Microsoft Access.
The integration work was a big undertaking for Harrah's, which has 40-plus properties, including 13 in Nevada. Each property has three key systems that run its slot machines, table games, and sports-book service, and there are also food-and-beverage, ATM, and in some cases hotel management systems. "We're talking about a lot of systems in a casino," says Cheryl Kondra, chief audit executive for Harrah's.
A lot of employees, too, which is a crucial factor. That's because monitoring workers' access to systems is one of the most important tasks for Kondra's department. Casinos are required to review the access listings each quarter to determine that, for instance, only active employees are listed and that everyone has the appropriate level of access. At Caesars Palace alone there are 5,200 employees, about 2,000 of whom have access to the key gaming systems.
"It was a massive, very manual process to print a report and compare it to an HR listing of employees," says Kondra. "Automating that, and monitoring it continuously instead of waiting until the end of the quarter, makes the audit a lot easier, and we don't find as many exceptions."
System access is so important because of the potential for employee fraud. "It's not just the access to cash," she notes. "You have to have adequate access to systems to get everything to balance so the fraud does not pop out."
For Harrah's, a big benefit of the move to automated monitoring is that it allows the 86 auditors who work at the casinos to spend more time on the gaming floor doing surveillance — another way to catch employee fraud. "I'd rather see them on the floor because that's where the action is, not at their desks buried in paperwork," Kondra says.
Provincial Prudence
For the Office of the Comptroller General of the British Columbia Ministry of Finance in Canada, the 2008 launch of a move to continuously audit 100% of transactions put it well ahead of most governments and other non-profit organizations, for which less-automated processes are still commonplace.
"We've had a lot of interest in what we're doing, from the Florida governor's office to some non-profits in the States, because we're using technology to move forward," says Shyrl Kennedy, executive director of the office since 2001.
That was the year a consultant analyzed the ministry's accounts-payable processes and determined that finance staff spent 77% of their time on processing transactions, 20% more than an efficient company might spend. Before a payment was made, it had to be determined whether the person issuing the payment had the proper spending authority, whether the account coding was right, and whether the goods had actually been received, among other requirements. "It was a very cumbersome process," says Kennedy.
The consultant recommended that instead of auditing 100% of transactions before payment, only a sampling of payments be reviewed post-transaction. The project started small, focused just on travel expenses. In 2004, it was expanded broadly across all government ministries, and savings of about $20 million per year in efficiencies and overpayments have been identified since then.
But with just statistical data samplings being audited, savings were still falling through the cracks. "We were really just hoping to find things, so we could know whether there was a business process or policy that needed to be cleaned up," Kennedy says.
Through extensive use of ACL software, her office last year began to continuously monitor payments made with purchasing cards. While using purchase cards can bring big administrative savings, she notes, there is also significant risk involved, because most purchases are small-dollar items that don't stand out, and many people in the government have access to cards that they could use for unauthorized purchases.
The continuous-auditing system has produced "incredible" efficiencies in identifying inappropriate purchases and people without authority to use cards, Kennedy notes. Now she is gearing up to tackle the rest of the government's spending, related to invoices, contracts, and grants.
The time it takes to roll out such a system is surprisingly short. With the purchase-card module, Kennedy says, developing business requirements and data analytics, having ACL integrate them into its program, and creating business processes for implementing the system took about three months.
Tracking What Counts Most
Last fall, Siemens Financial Services Inc., the U.S. arm of the global financial services firm, was just starting to institute continuous auditing, rather than performing tests every one to three years (depending on the risk level of the thing being audited).
But Jason Gross, who was running the internal audit department, found that he could not go as far as he liked in designing controls for the processes being audited. That was because of the expectation by the audit committee of parent company Siemens AG that auditors be arms-length from the activities they're reviewing as well independent from management. If he were to design audit controls, he would then be participating in the management of the company rather than simply using existing controls to perform an audit. That would go beyond the proper purview of internal audit, as viewed by the Siemens AG audit committee.
So in October the company formed a new department alongside internal audit, called controls management, with Gross in charge as vice president. He created a continuous-controls-monitoring system, which runs every night and uses many of the same elements he'd been working on for continuous auditing.
The difference between internal auditing and controls management, Gross notes, is in the level of granularity. "We're down at the data level, looking transaction by transaction, where typically an audit, depending on its objective, might just review a process and not get as deep into the data details," he says.
But it's the primary focus of the effort that draws interest. "I think we stand out a little bit, because a lot of the buzz you hear about continuous monitoring relates to generic processes such as travel and entertainment and purchase to pay," Gross tells CFO.com. "But we're monitoring our financial services business by developing the program from the ground up, because there was no package we could go out and buy to do that."
What's being monitored, essentially, is "everything that determines the value of a financial asset," says Gross's boss, Matthias Grossmann, CFO of the U.S. financial services unit, which provides financing for healthcare, energy, and industrial companies and manages $6 billion to $7 billion in assets. "Number one, of course, is information on your obligors. Is the entity migrating to different risk classes? Is there the normal underlying collateral? Do any inconsistencies show up?"
The decision to launch the controls-management department and put the focus on continuously monitoring the financial services operation was an easy one, Grossmann notes. "When we did audits using these techniques, we always found something," he says. "So we thought we could use them in our daily business, using technology we already had that was coming from a different angle. So far it looks good, and I hope we can expand it."
Gross says that, in fact, continuously monitoring controls not only can detect problems but can do so before they've happened. When the company is preparing a new lease financing contract, for example, all elements relating to the transaction and borrower are loaded into the system before the contract is finalized, which can turn up "data mismatches," he notes.
Setting Up A Personal Business Corporation?
What you need to know from an income tax perspective
By Alladin Versi, CMA, FCMA
In the past few years, and even more so in the current economic environment, it has become common for individuals to set up their own corporations, which can then be used to contract out the services of the principal (or often the sole) shareholder of the corporation to one or more businesses. There are some benefits to this arrangement from an income tax perspective, such as lower corporate income taxes, deduction of business expenses and the ability to pay salaries or dividends to family members, to name a few.
A low corporate tax rate is generally available to a Canadian-controlled private corporation on its active business income earned in Canada, up to its federal and provincial small business limits. Effective January 1, 2009, the federal limit is $500,000 (previously $400,000). The provincial limit varies from province to province – in British Columbia, the limit is $400,000.
Consider the example of Jane Doe. Jane is a business consultant who recently lost her job, and is looking at setting up her own corporation, JaneCo, to provide consulting services. She has already lined up some work with a large firm, LargeCo, and is considering setting up a corporation to provide her services.
Is it a “personal services business?”
In setting up JaneCo to provide her services, Jane should be mindful of the “personal services business” provisions of the Income Tax Act (ITA). Income from a personal services business is excluded from active business income, pursuant to section 248 and subsection 125(7) of the ITA. As such, income from that business is not eligible for the lower corporate income tax rates. Instead, such income is taxed at the highest federal/B.C. corporate income tax rate of 30 per cent, rather than the lower rate of 13.5 per cent for 2009.
A personal services business provides the services of an “incorporated employee” to an entity, where the incorporated employee would otherwise reasonably be regarded as an officer or employee. Therefore, we have to determine whether JaneCo is providing the services of an incorporated employee or an independent contractor.
Contract of services or contract for services
Is Jane considered to be an incorporated employee or an independent contractor? The critical issue is A contract of service generally exists if the person for whom the services are performed has the right to control the amount, nature and management of the work to be done and the manner of doing it. A contract for services exists when a person is engaged to achieve a defined objective and is given all the freedom required
to attain the desired result.
The Canada Revenue Agency has an excellent guide, RC4110, Employee or Self-Employed, that assists in determining the nature of the contract. Some factors to consider are:
• Did Jane have a set number of working hours each day?
• Did Jane have to account for her time?
• Was Jane given specific job instructions?
• Was Jane a member of LargeCo’s benefit plan?
• Did Jane have use of LargeCo’s computer equipment and offi ce supplies?
• Did LargeCo provide an offi ce to Jane?
• Was Jane given a specific title and business card on LargeCo’s letterhead?
Whether Jane can be “reasonably regarded” as an employee or as an independent contractor is a question that requires an analysis of all factors surrounding the terms and conditions of her contract with LargeCo. In general, to be considered an independent contractor, JaneCo must have agreed to provide a service with no commitment regarding the number of hours worked. Jane should also be performing the service with little or no supervision. JaneCo must issue its own invoices and receive cheques for work completed. In addition, Jane should not receive any benefits from LargeCo, and should operate from JaneCo’s own office and use its own equipment.
Shareholder requirements
In addition, for JaneCo to be considered a personal services business, the incorporated employee (Jane), or a person related to Jane, must be a “specified shareholder” of the corporation providing the services. Specified shareholder generally means that Jane, or someone related to her, directly or indirectly owns 10 per cent or more of the issued shares of any class of JaneCo.
There are additional rules that include ownership in a related corporation, and similar rules apply for shares owned through a partnership or trust. However, a corporation will not be regarded as carrying on a personal services business in a taxation year if throughout the year it employs more than five full-time employees for that business, or if the amount was received for services rendered to an associated corporation.
Deduction limitations
In addition to a personal services business being excluded from the definition of an “active business,” paragraph 18(1)(p) of the ITA also limits deductions in computing the income from such a business. All deductions are disallowed, except: • salary, wages or other remuneration, and any benefits or allowance paid or provided to an incorporated employee;
• selling and similar expenses that would have been
deductible in computing employment income if
the individual had expended them; and
• legal expenses incurred in collecting amounts
owing for services rendered.
Income from a personal services business is also not eligible for a tax refund on the basis of taxable dividends paid. It will therefore be taxable at the highest corporate rate.
Tax planning considerations
Under new rules introduced in 2006, any dividends paid by a corporation from its personal services business would be considered eligible dividends, which are subject to a lower personal tax rate than noneligible dividends. The maximum tax on eligible dividends received by a B.C. resident is currently 19.9 per cent, compared to a rate of 32.7 per cent for non-eligible dividends. As such, it is no longer essential that all income earned in a personal services business be paid out to the incorporated employee as a salary.
Tax planning can be undertaken such that family members become shareholders of the personal services business corporation, so that dividends can be paid to them. However, it should be noted that the ITA contains various anti-avoidance provisions, such as subsections 56(2) and 56(4), or the General Anti-Avoidance Rules, that could result in such dividends being taxed in the hands of the principal shareholder. As such, care should be taken to ensure that any payments to someone other than the principal shareholder are appropriate.
In summary, while Jane may see some advantages from setting up JaneCo, she should be aware of the tax limitations if JaneCo is considered to be a personal services business. A careful review of her relationship with LargeCo, and any other contracts she obtains, is necessary to determine whether she is an incorporated employee or an independent contractor. Anyone considering incorporation should obtain professional advice before proceeding. ■
By Alladin Versi, CMA, FCMA
In the past few years, and even more so in the current economic environment, it has become common for individuals to set up their own corporations, which can then be used to contract out the services of the principal (or often the sole) shareholder of the corporation to one or more businesses. There are some benefits to this arrangement from an income tax perspective, such as lower corporate income taxes, deduction of business expenses and the ability to pay salaries or dividends to family members, to name a few.
A low corporate tax rate is generally available to a Canadian-controlled private corporation on its active business income earned in Canada, up to its federal and provincial small business limits. Effective January 1, 2009, the federal limit is $500,000 (previously $400,000). The provincial limit varies from province to province – in British Columbia, the limit is $400,000.
Consider the example of Jane Doe. Jane is a business consultant who recently lost her job, and is looking at setting up her own corporation, JaneCo, to provide consulting services. She has already lined up some work with a large firm, LargeCo, and is considering setting up a corporation to provide her services.
Is it a “personal services business?”
In setting up JaneCo to provide her services, Jane should be mindful of the “personal services business” provisions of the Income Tax Act (ITA). Income from a personal services business is excluded from active business income, pursuant to section 248 and subsection 125(7) of the ITA. As such, income from that business is not eligible for the lower corporate income tax rates. Instead, such income is taxed at the highest federal/B.C. corporate income tax rate of 30 per cent, rather than the lower rate of 13.5 per cent for 2009.
A personal services business provides the services of an “incorporated employee” to an entity, where the incorporated employee would otherwise reasonably be regarded as an officer or employee. Therefore, we have to determine whether JaneCo is providing the services of an incorporated employee or an independent contractor.
Contract of services or contract for services
Is Jane considered to be an incorporated employee or an independent contractor? The critical issue is A contract of service generally exists if the person for whom the services are performed has the right to control the amount, nature and management of the work to be done and the manner of doing it. A contract for services exists when a person is engaged to achieve a defined objective and is given all the freedom required
to attain the desired result.
The Canada Revenue Agency has an excellent guide, RC4110, Employee or Self-Employed, that assists in determining the nature of the contract. Some factors to consider are:
• Did Jane have a set number of working hours each day?
• Did Jane have to account for her time?
• Was Jane given specific job instructions?
• Was Jane a member of LargeCo’s benefit plan?
• Did Jane have use of LargeCo’s computer equipment and offi ce supplies?
• Did LargeCo provide an offi ce to Jane?
• Was Jane given a specific title and business card on LargeCo’s letterhead?
Whether Jane can be “reasonably regarded” as an employee or as an independent contractor is a question that requires an analysis of all factors surrounding the terms and conditions of her contract with LargeCo. In general, to be considered an independent contractor, JaneCo must have agreed to provide a service with no commitment regarding the number of hours worked. Jane should also be performing the service with little or no supervision. JaneCo must issue its own invoices and receive cheques for work completed. In addition, Jane should not receive any benefits from LargeCo, and should operate from JaneCo’s own office and use its own equipment.
Shareholder requirements
In addition, for JaneCo to be considered a personal services business, the incorporated employee (Jane), or a person related to Jane, must be a “specified shareholder” of the corporation providing the services. Specified shareholder generally means that Jane, or someone related to her, directly or indirectly owns 10 per cent or more of the issued shares of any class of JaneCo.
There are additional rules that include ownership in a related corporation, and similar rules apply for shares owned through a partnership or trust. However, a corporation will not be regarded as carrying on a personal services business in a taxation year if throughout the year it employs more than five full-time employees for that business, or if the amount was received for services rendered to an associated corporation.
Deduction limitations
In addition to a personal services business being excluded from the definition of an “active business,” paragraph 18(1)(p) of the ITA also limits deductions in computing the income from such a business. All deductions are disallowed, except: • salary, wages or other remuneration, and any benefits or allowance paid or provided to an incorporated employee;
• selling and similar expenses that would have been
deductible in computing employment income if
the individual had expended them; and
• legal expenses incurred in collecting amounts
owing for services rendered.
Income from a personal services business is also not eligible for a tax refund on the basis of taxable dividends paid. It will therefore be taxable at the highest corporate rate.
Tax planning considerations
Under new rules introduced in 2006, any dividends paid by a corporation from its personal services business would be considered eligible dividends, which are subject to a lower personal tax rate than noneligible dividends. The maximum tax on eligible dividends received by a B.C. resident is currently 19.9 per cent, compared to a rate of 32.7 per cent for non-eligible dividends. As such, it is no longer essential that all income earned in a personal services business be paid out to the incorporated employee as a salary.
Tax planning can be undertaken such that family members become shareholders of the personal services business corporation, so that dividends can be paid to them. However, it should be noted that the ITA contains various anti-avoidance provisions, such as subsections 56(2) and 56(4), or the General Anti-Avoidance Rules, that could result in such dividends being taxed in the hands of the principal shareholder. As such, care should be taken to ensure that any payments to someone other than the principal shareholder are appropriate.
In summary, while Jane may see some advantages from setting up JaneCo, she should be aware of the tax limitations if JaneCo is considered to be a personal services business. A careful review of her relationship with LargeCo, and any other contracts she obtains, is necessary to determine whether she is an incorporated employee or an independent contractor. Anyone considering incorporation should obtain professional advice before proceeding. ■
The 2009 Federal Budget: Answering the Call
By Don Nilson, CMA, FCMA
As professional accountants, we must remember that we are an important part of the broader financial services industry. We have a public that we serve with our expertise, be that the general public (as public accountants)
or specific parties (as industry participants). Interestingly, the 2009 federal budget is now calling for general financial education for Canadians. We ought to be doing our part to answer the call. I believe there are two parts to this.
First, we ourselves must be financially educated. “What did he say? Is he kidding? Of course we are financially educated – we are accountants!” As a lecturer for 30 years in the continuing education field for professional accountants, I am not quite sure I am prepared to agree with you. Despite the mandatory CPLD model in our profession, I find that, on average, we are not on the front edge of pushing out our current depth and breadth of expertise, and instead tend to trade on old expertise. I believe the profession needs to raise the bar of our average professional, and achieving this requires every member to contribute to that process, not deflect the responsibility to our professional bodies. As I recently said to one of my junior staff , “It takes a lot of energy to really be someone.”
We must invest our learning time wisely. Unplug the boob tube, cancel the cable and start reading. We must be wary of the misinformation and disinformation we receive in the daily media as our knowledge source. William Bernstein, the physician turned money guru, describes the business press as “financial pornography.” His advice is to avoid it, with two exceptions: The Wall Street Journal and Th e Economist. My recommendation is to educate yourself – form a financial book club with friends and colleagues. In the financial field, start with Bernstein’s Intelligent Asset Allocator. On corporate strategy, read Dudik’s Strategic Renaissance. To raise your IQ a few points, read Beinhocker’s Th e Origin of Wealth.
Over the years, I have given away hundreds of copies of what is my seminal vehicle for helping friends and
clients embrace sound personal fi nancial management: Stanley and Danko’s The Millionaire Next Door. In short summary, personal fi nancial management draws from sports analogy – wealth accumulation is about offence and defence. The former is about the making of money, or more specifically “disposable income” (income after tax). As public practitioners, we are effectively members of the offence team, mostly by helping narrow the gap between before-tax and after-tax income.
As industry members, we may also contribute to the overall success of the money-making process itself.
Defence is about keeping the money generated on offence; i.e. it is about how money is spent. The authors
say that financially successful people run a balanced team. They don’t rely on a glittering offence that piles
up the score, while the defence meanwhile is allowing almost as many points to be scored by the opposition.
The authors also classify people as “prodigious accumulators of wealth” (PAWs) and “under-accumulators of
wealth” (UAWs). PAWs spend a lot of time on defence. Their attitude to what constitutes a baseline of life’s
entitlement is not what the low and middle class associate with wealthy people. Eighty per cent of them
spend less than $35,000 on a new car!
Once we have succeeded in “up-educating” ourselves, we can now turn to the second thing that we should be doing as accountants in order to answer the federal budget call to financially educate Canadians. We need to be an active part of that educating process. Those of us in the financial services industry need to take a deep breath and enter the half-time locker room of the defence, and talk with our clients about how they are spending their money, and how they are inculcating money values to the children they are raising. And we must lead by example ourselves. A financial services firm recently moved into offices across the hall from us. One of the chaps drives a Porsche. A client of mine walked into the office the other day and asked, “Is that your Porsche in the parking lot?” Ouch! Not!
Many of us in public accounting have been educating our clients for years. If you haven’t – if you treat the work you do for them as a “black box” – then it is time for a paradigm shift. Don’t let their financial ignorance, and need for you, stand in the way of advancing their financial education.
In the workplace, senior financial professionals need to think about the role model they advertently – or inadvertently – play to those around them.
For those in industry, it may also be time for a paradigm shift. Your HR strategies perhaps should include educating employees with in-house seminars on personal financial/debt management, access to related resources on the web or company newsletters, group savings plans (RRSPs or TFSAs) or employer sponsored
personal financial planning (not a taxable benefit, by the way).
Finally, as accountants, we need to actively ensure our kids are being educated in financial matters. Social scientists have proven wrong my long-held belief that attitudes towards money are formed by age 15 – they say it is age 10. The 10-year-olds in western society today have grown up in the most broadly distributed middle-class wealth in the entire history of this planet. The successive generations of financial comfort in the last hundred years have significantly raised the bar of baseline expectations. “Affluenza” is the modern neologism to encapsulate this phenomenon. The term gained notoriety in the high-profi le divorce case of Canadian fashion mogul Peter Nygard, whose defence lawyer cited the risk of affluenza in awarding child-care costs of $68,000 per month. That’s right… per month!
We also need to lobby our school districts to incorporate more, and better, financial education at the high school level. As professional organizations, we need to identify ways to fill all of these knowledge gaps. The Financial Planners Standards Council, for instance, has long been involved in the financial education of our youth.
To misquote, paraphrase and modernize a saying of the 16th century’s Sir Francis Bacon: family finances, to be commanded, must be obeyed. It takes a lot of energy to really be someone. ■
As professional accountants, we must remember that we are an important part of the broader financial services industry. We have a public that we serve with our expertise, be that the general public (as public accountants)
or specific parties (as industry participants). Interestingly, the 2009 federal budget is now calling for general financial education for Canadians. We ought to be doing our part to answer the call. I believe there are two parts to this.
First, we ourselves must be financially educated. “What did he say? Is he kidding? Of course we are financially educated – we are accountants!” As a lecturer for 30 years in the continuing education field for professional accountants, I am not quite sure I am prepared to agree with you. Despite the mandatory CPLD model in our profession, I find that, on average, we are not on the front edge of pushing out our current depth and breadth of expertise, and instead tend to trade on old expertise. I believe the profession needs to raise the bar of our average professional, and achieving this requires every member to contribute to that process, not deflect the responsibility to our professional bodies. As I recently said to one of my junior staff , “It takes a lot of energy to really be someone.”
We must invest our learning time wisely. Unplug the boob tube, cancel the cable and start reading. We must be wary of the misinformation and disinformation we receive in the daily media as our knowledge source. William Bernstein, the physician turned money guru, describes the business press as “financial pornography.” His advice is to avoid it, with two exceptions: The Wall Street Journal and Th e Economist. My recommendation is to educate yourself – form a financial book club with friends and colleagues. In the financial field, start with Bernstein’s Intelligent Asset Allocator. On corporate strategy, read Dudik’s Strategic Renaissance. To raise your IQ a few points, read Beinhocker’s Th e Origin of Wealth.
Over the years, I have given away hundreds of copies of what is my seminal vehicle for helping friends and
clients embrace sound personal fi nancial management: Stanley and Danko’s The Millionaire Next Door. In short summary, personal fi nancial management draws from sports analogy – wealth accumulation is about offence and defence. The former is about the making of money, or more specifically “disposable income” (income after tax). As public practitioners, we are effectively members of the offence team, mostly by helping narrow the gap between before-tax and after-tax income.
As industry members, we may also contribute to the overall success of the money-making process itself.
Defence is about keeping the money generated on offence; i.e. it is about how money is spent. The authors
say that financially successful people run a balanced team. They don’t rely on a glittering offence that piles
up the score, while the defence meanwhile is allowing almost as many points to be scored by the opposition.
The authors also classify people as “prodigious accumulators of wealth” (PAWs) and “under-accumulators of
wealth” (UAWs). PAWs spend a lot of time on defence. Their attitude to what constitutes a baseline of life’s
entitlement is not what the low and middle class associate with wealthy people. Eighty per cent of them
spend less than $35,000 on a new car!
Once we have succeeded in “up-educating” ourselves, we can now turn to the second thing that we should be doing as accountants in order to answer the federal budget call to financially educate Canadians. We need to be an active part of that educating process. Those of us in the financial services industry need to take a deep breath and enter the half-time locker room of the defence, and talk with our clients about how they are spending their money, and how they are inculcating money values to the children they are raising. And we must lead by example ourselves. A financial services firm recently moved into offices across the hall from us. One of the chaps drives a Porsche. A client of mine walked into the office the other day and asked, “Is that your Porsche in the parking lot?” Ouch! Not!
Many of us in public accounting have been educating our clients for years. If you haven’t – if you treat the work you do for them as a “black box” – then it is time for a paradigm shift. Don’t let their financial ignorance, and need for you, stand in the way of advancing their financial education.
In the workplace, senior financial professionals need to think about the role model they advertently – or inadvertently – play to those around them.
For those in industry, it may also be time for a paradigm shift. Your HR strategies perhaps should include educating employees with in-house seminars on personal financial/debt management, access to related resources on the web or company newsletters, group savings plans (RRSPs or TFSAs) or employer sponsored
personal financial planning (not a taxable benefit, by the way).
Finally, as accountants, we need to actively ensure our kids are being educated in financial matters. Social scientists have proven wrong my long-held belief that attitudes towards money are formed by age 15 – they say it is age 10. The 10-year-olds in western society today have grown up in the most broadly distributed middle-class wealth in the entire history of this planet. The successive generations of financial comfort in the last hundred years have significantly raised the bar of baseline expectations. “Affluenza” is the modern neologism to encapsulate this phenomenon. The term gained notoriety in the high-profi le divorce case of Canadian fashion mogul Peter Nygard, whose defence lawyer cited the risk of affluenza in awarding child-care costs of $68,000 per month. That’s right… per month!
We also need to lobby our school districts to incorporate more, and better, financial education at the high school level. As professional organizations, we need to identify ways to fill all of these knowledge gaps. The Financial Planners Standards Council, for instance, has long been involved in the financial education of our youth.
To misquote, paraphrase and modernize a saying of the 16th century’s Sir Francis Bacon: family finances, to be commanded, must be obeyed. It takes a lot of energy to really be someone. ■
Wednesday, February 25, 2009
Balance Sheet Presentation under IFRS
The link below points to an article prepared for the Financial Post by Karine Benzacar, CMA which is a quick primer outlining the Balance Sheet presentation suggested on the adoption of IFRS in Canada.
http://www.cmabc.com/index.cfm/ci_id/14089/la_id/1/document/1/re_id/0
You will note that it is substantially different than the presentation currently used and breaks up the balance sheet into the following components:
Net operating assets
Investing assets
Financing assets
Financing liabilities
Income taxes
Assets held for sale
Equity
Karine also wrote a more detailed article on IFRS financial statement presentation which is in the February edition of CMA Magazine.
http://www.cmabc.com/index.cfm/ci_id/14089/la_id/1/document/1/re_id/0
You will note that it is substantially different than the presentation currently used and breaks up the balance sheet into the following components:
Net operating assets
Investing assets
Financing assets
Financing liabilities
Income taxes
Assets held for sale
Equity
Karine also wrote a more detailed article on IFRS financial statement presentation which is in the February edition of CMA Magazine.
2009 Federal Budget Report
This is an abridged version of the budget report of BDO Dunwoody and has been prepared for our members with their permission. It addresses solely the taxation initiatives in the budget.
Please click on the link below to see the report.
http://www.cmabc.com/index.cfm/ci_id/14090/la_id/1/document/1/re_id/0
Please click on the link below to see the report.
http://www.cmabc.com/index.cfm/ci_id/14090/la_id/1/document/1/re_id/0
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