Immediate Expensing Rules: Good Tax Policy?

Over the course of the last two federal budgets (April 16, 2024 and November 4, 2025), the rules for claiming Capital Cost Allowance (CCA) have been uncertain. The proposal to extend immediate expensing rules for certain acquired assets were paused for over a year and then re-introduced in a series of four complex measures which together with new rules for Scientific Research and Experimental Development have become known as the “Productivity Super-Deduction”.  A backdrop appears below. The key question: will this complexity be effective as an economic stimulator?   

On June 18, New Brunswick farmer and second-time offender Merlyn Anderson was sentenced to 15 months in jail and fined $37,212 for tax evasion. This case is a good example of how repeat offenders under the Income Tax Act generally receive harsher sentences than first-time offenders. From Jan. 1, 2006, to Dec. 31, 2009, Anderson filed false harmonized sales tax (HST) returns for his farming business and claimed fraudulent input tax credits totalling $74,425 to which he was not entitled. In 2007, he had been fined $56,300 for similar offences. Since this was Anderson's second offence under the Act, and the first was a similar charge, his sentence was aggravated. Says the Canada Revenue Agency (CRA): "Taxpayers who claim false expenses, credits or refunds are liable not only for corrections to their tax returns and payment of the full amount of tax owing, but also to penalties and interest. In addition, if convicted of tax evasion, the court may fine them up to 200% of the tax evaded and sentence them for up to a five-year jail term.î Anderson's inability to learn from his first run-in with the CRA opened him up to a harsher penalty ó 15 months in jail ó the second time around. The CRA reminds taxpayers who have made errors or omissions on their tax returns, that they can came forward and obtain some relief under the Voluntary Disclosures Program.    

Aggrieved Canadian corporate taxpayers are much more likely to get cases heard in the highest court of the land than their American counterparts. And a recent study shows the Internal Revenue Service (IRS) ó the U.S. equivalent of the Canada Revenue Agency (CRA) ó has a better chance of succeeding than corporate taxpayers, for a few reasons. The study, conducted by two U.S. tax scholars, Joshua Blank, faculty director of the graduate tax program at New York University Law School, and Nancy Staudt, a tax scholar at the University of Southern California Gould School of Law, looked at more than a century of tax-abuse cases that went to the U.S. high court. The 69-page study, entitled "Corporate Shams,î will be published in the New York University Law Review in December. According to Reuters news agency, which reported on the study, from 1909 to 2011, 919 income tax cases reached the U.S. Supreme Court. Of those, 364 involved corporations. In cases involving blatant abuse of the governing act, the IRS won 61% of the time. In all other circumstances, the IRS prevailed 68% of the time. A look at Canadian statistics tells a similar story. From 1920 to 2003, the Supreme Court of Canada (SCC) heard 356 corporate income tax cases; the CRA won about 66% of the time and corporations a third. SCC cases from 2004 to 2012 reveal no significant change. But these numbers do not tell the whole tale. In the U.S., the study tells us, only about 2% of all applications to the U.S. Supreme Court are granted, indicating how hard is the road aggrieved corporate taxpayers must travel. In Canada, the SCC's leave-to-appeal statistics tell another story. The SCC statistics reveal that slightly more than 12% of leave applications in Canada are granted ó a far cry from 2%. That means, ultimately, corporations ó as well as other aggrieved taxpayers ó are up to six times more likely to succeed in their cases before the SCC than in cases before the Supreme Court of the U.S. Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.  

High net-worth (HNW) families in Ontario and their advisors will want to review the province's new tax rate that takes effect July 1. Anyone whose taxable income exceeds $500,000 ó 25,000 high-income earners or 0.4% of Ontario taxpayers ó will see his or her tax rate go up by 2%. But concerns are mounting that the new tax, which was meant to boost Ontario's lagging tax revenues and reduce the deficit, may have unintended consequences. The top 1% of Ontario taxpayers already provides 27% of Ontario's income tax revenues. (The bottom 75% provides only 12% of Ontario's tax revenues.) Yet, as of July 1, high-income earners will pay more. Once the 56% provincial surtax is applied to that 2%, the increase comes to 3.1 percentage points, boosting the combined federal/provincial tax rate to 49.5% from 46.4%. Half those amounts will apply in 2012, as the tax takes effect July 1. But a June 13 report by the C.D. Howe Institute, entitled Ontario's Tax on the Rich: Grasping at Straw Men notes the tax may have unintended longer-term results. Although only a small percentage of Ontario taxpayers, writes the report's author Alexandre Laurin, associate director of research, the targeted HNW families are very important to the personal tax system. If they were lost to other tax jurisdictions, all Ontario residents would feel the impact. And this is a definite possibility. Economic studies citied in the report note that taxes have a significant effect on behaviour. Given that skilled, high-income individuals are highly mobile, they can respond to higher taxation by moving to lower-taxed jurisdictions (provincial or international). In addition, HNW families can afford to work with professionals who can initiate more aggressive tax planning, and reduce tax loads by modifying the type and timing of compensation and sources of investment income. The chart below illustrates the difference a move can make; note the double-digit, after-tax return from eligible dividend income, for example, when compared to Alberta. Income modification can also reduce tax burdens.     Prov. 2012 taxable income range Ordinary income   (%) Capital gains   (%) Dividends: Small bus. corps. (%) Eligible dividends   (%)   BC More than $132,406 43.70 21.85 33.71  25.78   AB More than $132,406 39.00 19.50 27.71 19.29   SK More than $132,406 44.00 22.00 33.33 24.81   MB More than $132,406 46.40 23.20 39.15 32.26   ON $132,407 to $500,000 46.41 23.20 32.57 29.54   NS More than $500,000 47.97 23.98 34.52 31.69   $132,406 to $150,000 46.50 23.25 31.83 32.23   More than $150,000 50.00 25.00 36.21 36.06 Source: Knowledge Bureau, Inc. All rights reserved. The numbers tell the story: effective tax planning can preserve wealth from this new tax. The C.D. Howe report estimates that, with proper planning, high-income earners will probably reduce their taxable income by about 2% in the short term and by more than 10% in the long run, as planning kicks in. These responses may affect federal tax revenues as well. Most significant, the report concludes, if high-income earners respond by reducing their labour supply and earning less over the longer term, this tax will be ineffective, putting our fragile economic recovery at risk and robbing tax treasuries rather than supplementing them. It's Your Money. Your Life. Arranging your financial affairs within the framework of the law to pay the least taxes possible is your legal right and duty under the Income Tax Act. Astute tax and wealth advisors will want to work closely with their HNW clients to determine the right response to this new tax and thwart its eroding effect on their incomes and capital. The more effective the planning, the more wealth will be created and preserved, adding to future tax revenues and fighting the eroding effects of inflation and other unforeseen economic events. Evelyn Jacks is president of Knowledge Bureau, best-selling author of close to 50 tax and personal finance books and keynote speaker at the Distinguished Advisor Conference in Naples, Florida, Nov 11 to 14.   Additional Educational Resources: Client Relationship Toolkit; DFA-Tax Services Specialist designation  

Wondering where to make your next investment? You're not alone. The current investment climate is stormy and that makes decision-making difficult. However, two important clues come from recent reports: first, taking a global view is critical in today's environment and, second, debt management is key to positioning your investments for future growth. The G20 leaders meeting in Mexico recently confirmed that Greece should stay in the euro zone. But that doesn't mean the euro zone crisis is resolved. The World Bank believes Europe's struggle will continue as it shoulders its way through a prolonged financial crisis, dampening global growth. Nor will developing countries offer relief, as the World Bank warns that they, too, face a long period of financial market volatility and weaker growth. Against this reality, the World Bank has lowered its forecast for global growth in 2012 to 2.5%. IHS Global Insight, whose Country Intelligence report provides daily analysis of world events, shares the World Bank's pessimism. It has downgraded the euro zone's outlook to a recessionary -0.1% for 2013. Continued uncertainty on whether Greece stays in the euro zone, which analysts at HIS Global Insight doubt, extends concerns that the break-up of the euro zone could trigger yet another global financial crisis. The IHS Global Insight report, moreover, puts a strong emphasis on debt management. A good way to position for growth in this climate, it says, is to focus on building strong balance sheets. This is important advice for individual households, as well. In today's fragile economic recovery, debt management is as important as choosing the right investments. It may well be that paying down potentially unmanageable debt is a smarter use of your money than investing in unpredictable markets. There is another important risk-management tool used to protect accumulated wealth that is not making the headlines today: tax efficiency. Taking a tax-efficient approach to investing ó splitting income, using losses wisely, transferring assets to family members at the right time, managing tax on accrued gains ó all can add significantly to the ultimate returns on your investments. So, if you are venturing into the marketplace, or considering ways to protect your wealth, position your investments properly for tax efficiency. That way, when the markets return to normal, your portfolio will be ready to reap after-tax results. It's Your Money. Your Life. When making plans to grow your personal wealth, put as much focus on your debt-to-asset ratio as you do on your return on investment (ROI). Then, employ a tax-efficiency strategy to move forward in these stormy seas. Evelyn Jacks is president of Knowledge Bureau and founder of the Distinguished Advisor Conference, now in its ninth year. This annual event attracts hundreds of top advisors from across Canada to discuss recent trends in economics, tax, investment and retirement and estate planning. Additional Educational Resources: Debt and Cash Flow Management Course, Distinguished Advisor Conference and Financial Recovery in a Fragile World.  

No one could have predicted the unsettling events of the past four years. Yet, many people blame their financial advisors and, as a result, have lost confidence in them. At this year's Distinguished Advisor Conference (DAC) Nov. 11-14, image consultant Catherine Bell will tell advisors how they can regain their client's trust and build loyalty by projecting a professional image. Bell, who is a president of PRIME Impressions, maintains that communications, behaviour and appearance all play vital roles in allaying the fears of clients battered by the uncertain global economy. What clients see, experience and hear all carry tremendous weight when they decide to whom they will entrust their wealth, says Bell. The dynamic speaker and author joins a lineup of respected and knowledgeable speakers in Naples, Florida, for the ninth annual DAC. This year's theme is the role planning plays in "Navigation: Charting a New Course.î A Day 2 speaker, Bell is one of only 14 Certified Image Professionals in Canada, an Association of Image Consultants International (AICI) Hall of Fame inductee and AICI's Ethics Chair. A frequent guest on Canadian television and regularly quoted in newspapers and magazines, Bell is well aware of how to communicate her professionalism successfully. To view the agenda, click here. To take advantage of early bird pricing, click here.  

The recent passage of Bill C-25 or the Pooled Registered Pension Plans Act brings PRPPs one step closer to becoming another option for retirement savings. But there are still significant hurdles to clear, says Douglas Nelson, Winnipeg financial planner and author of Master your Retirement, and numerous variables to consider before their value as a planning tool can be assessed. "It is difficult to know exactly how PRPPs fit into the range of retirement options,î adds Nelson, "until we see an actual product with real pricing.î Envisioned as a low-cost retirement savings option for Canadians who do not have access to workplace pension plans, PRPPs will pool employee and employer contributions under the administration of a qualified third party. These licensed administrators will be subject to a fiduciary standard of care, explains the federal government, ensuring that funds are invested in the best interests of plan members. "Since these plans will involve large pooled funds, plan members will also benefit from lower investment-management costs,î said Minister of State (Finance) Ted Menzies in a press release. The Act now proceeds to the Senate for approval. Then, it will be up to provincial governments to enact enabling legislation based on the federal framework. After that, licensed administrators ó probably financial institutions and investment counselors ó will launch PRPPs. As Nelson points out, there are numerous unknown variables that will become clear as the process develops. There are a number of things for which Nelson, who is a Real Wealth Managementô specialist in retirement and business succession planning, will be watching: ï Costs. Many pension options for mid-sized to large companies charge annual fees around 1%, vs. 2.5% for a mutual fund. Will fees for PRPPs be closer to 2.5% ó or 1%? ï Employer contributions. PRPPs will be available to employees with or without a participating employer. If employer contributions to PRPPs are optional, are small business owners likely to opt out? If so, what impact does this have on an employee whose employer does make contributions? Also, with many large pension plans today, employers have underfunded their contributions; what happens if employer contributions to PRPPs are underfunded? ï Taxation. PRPPs will allow for greater income splitting at an earlier age, but what happens if the pension payout amount is less than a retiree would have received from a group RRSP? The pensioner would probably transfer his or her money to another income option, so as to have more control. Then the pensioner would be back where he or she started ó with income from a life income fund (LIF) that can't be split prior to age 65. ï Survivor benefits. Will PRPPs have better-than-average survivor benefits for the surviving spouse and heirs? "It will be interesting to see what happens to other product offerings,î says Nelson. "Will the pricing for group RRSPs decline so they are more competitive, allowing a small-business owner to offer a lower-cost group RRSP, in which employees choose where to invest their money?î Still, PRPPs could be a great enhancement to the Canadian retirement savings system but it comes down to implementation. And for that, we will no doubt have to wait some months to see how things evolve.   Additional Educational Resources: Master Your Retirement 2012 Edition and Elements of Real Wealth Management Course.