Noh Review Taxation: Non-Refundable Tax Credits

In this post, Noh Review will cover the non-refundable tax credits for 2012. First of all, it is critical for you to understand where these tax credits go. The basic outline looks like below:

 

Employment Income

+ Business Income

+ Property Income

+ Other Income

+ Taxable Captial Gain

- General Deductions

- Losses                          

= Income

- Division C Deductions

= Taxable Income

* Tax Rate                      

= Tax Payable

 - Division E Credits      

= Net Tax Payable

 

Here, the Division E Credits are non-refundable tax credits that we will discuss in this post today.

 

Non-Refundable Tax Credits for 2012 (Federal)

1. Basic Personal Credit: Every resident of Canada is eligible to claim this credit.

15% * 10,822

2. Married Credit (Spouse or common-law partner amount): If you are supporting your spouse or common-law partner who lives with you, and whose net income for the year will be less than $10,822, you can claim this credit.

15% (10,822-Spouse's Division B Income)

3. Equivalent to Married (ETM): There is a person who lives with you or The person is under 18 or infirm/parent

15% (10,822-Spouse's Division B Income)

4. Child Amount (Dependent Child Under 18 Years of Age): Either parent(not both) can claim $2,191 for each child under 18 who resides with both parents throughout the year. If the child is infirm, add $2,000 to the claim for that child. Any unused portion can be transferred to that parent's spouse/common-law partner.

15% * 2,191

5. Caregiver Amount: If, at any time in the tax year, you maintained a dwelling and your/your spouse's parent/grandparent (resident) aged 65 or older lived with you, you can claim this credit. This credit is reduced when the net income of the parent/grandparent exceeds a certain level.

Federal: 15% [4,402- (Relative's Division B income - 15,033)]

6. Infirm Dependent Amount: If you support an infirm dependent relative age 18+, you can claim this amount.

15% [4,402 + 2,000 Family Caregiver Amount Tax Credit - (Dependent's Division B income - 6,420)]

* Family Caregiver Amount Tax Credit (New in 2012): If the dependent is infirm, you can claim this credit. You can have an increase of $2,000 to spousal amount, equivalent-to-married, child amount, caregiver amount, or infirm dependent amount.

7.  Age Credit: If you will be 65 or older on December 31, 2012, you can claim this credit.

15% [6,720 - 15% (Division B Income - 33,884)]

8. Pension Income Credit: If you will receive regular pension payments from a pension plan/fund (excluding CPP, QPP, OAS), you can claim this credit.

15% * Lesser of $2,000 and pension income

9. Canada Employment Credit: If you are employed in Canada, you can claim this credit.

15% * Lesser of $1,095 and employment income

10. Disability/Impairment Amount: If you have an impairment in physical/mental functions that is severe and prolonged, you can claim this credit.

15% * 7,546 15% * 4,402 for disabled child

11. Tuition, Education, and Textbook Amounts (Full-time and part-time): If you are a student enrolled at a university or college and you will pay more than $100 in tuition fees, you can claim this credit. The university can be both in and out of Canada.

Tuition Credit: 15% * Total tuitions if over $100 Education Credit: 15% ($400 * full-time months + $120 * part-time months) Textbook Credit: 15% ($65 * full-time months + $20 * part-time months) If  you are a part-time student and have mental/physical disability, you receive the tax treatment of a full-time student.

12. Charitable Donations Credit: If you made a charitable donation to a CRA-registered charity, you can claim this credit with official donation receipts.

(15% of first $200) + (29% of next) Maximum donations amount is 75% of net income

13. Medical Expenses: You can claim this medical expenses credit if they were paid by you or your spouse/common-law partner.

15% of medical expenses which exceed the lesser of $2,109 and 3% of Division B Income If medical credit is more than $10,000, deny impairment credit.

14. Fitness for Children: You can claim to a maximum of 15%* $500 per child the fees paid in 2012 relating to the cost of registering your child in a prescribed program of physical activity. Children less than 16 years old

15. Artistic, Cultural and Recreational Activities for Children: You can claim to a maximum of 15% * $500 per child the fees paid in 2012 relating to the cost of registration or membership of your child in a prescribed program of artistic, cultural, recreational or developmental activity. Children less than 16 years old

16. Home Buyer's Amount: You  can claim an amount of 15% * $5,000 for the purchase of a qualifying home made in 2012, if You or your spouse acquired a qualifying home. This is your first home and you are a first-time home buyer.

17. Public Transit Passes Credit: You can claim an amount of 15% * total public transit passes expenses.

Amounts transferred from your spouse/common-law partner: If your spouse will not use all of his/her age amount, pension income amount, tuition, education and textbook amounts, disability amount or child amount on his/her income tax return, you can claim the unused amount. Cannot transfer medical, charitable donations or CPP/EI amounts

Amounts transferred from a dependent: If your dependent will not use all of his/her disability amount on his/her income tax return, you can claim the unused amount. If your dependent child/grandchild will not use all of his/her tuition, education and textbook amounts on his/her income tax return, you can claim the unused amount.

It is interesting to note that some of these non-refundable credits have a clear purpose, and they are for the benefit of the society. For example, home buyer's amount credit is available in hopes of encouraging more people to buy their first houses. The public transit passes credit is another great example. You can basically take back 15% of what you paid for your bus fares. This could be interpreted as the Canadian government's efforts in attempting to reduce air pollution and greenhouse gas emissions. Increasing the use of public transit, including buses, subways and commuter trains, will help ease traffic congestion and reduce air pollution. This tax credit makes public transit more affordable for Canadia residents.

 

But if you are a student, these non-refundable credits are not as meaningful because your net income is likely low anyways. Again, these are non-refundable credits for the year, so you cannot technically get these back as cash. In other words, you can only deduct these amounts from your net income, and if your net income is low, these credits are useless realistically. My assumption is that once you start working full-time, you are going to be looking for every possible non-refundable tax credit in order to minimize the tax that you pay to CRA.

Noh Review Taxation: Residency

As some accountants are getting ready for the tax season, this post will help clarify some of the Canadian taxation concepts regarding residency.

Residency for Individuals

• The Canadian Income Tax Act imposes taxes based on Residency. This means individual who currently reside in Canada, who may or may not be citizens.
• Individuals who are not residents of Canada but are employed in Canada, carry on business in Canada or dispose of taxable Canadian Property are subject to Canadian taxation.
• Canadian Residents are taxed on their worldwide income, regardless of which country the income was earned in. To avoid double taxation, Canada has negotiated a number of international reciprocal tax agreements.
• Key Principle: The country in which income is earned has priority in taxing that income and the country of which the payer is a resident allows all or some part of the foreign tax paid as a credit against the domestic tax.

1) Full-time resident: taxed on his worldwide income for a full year

• Deemed: Sojourned in Canada for 183 days or more OR Have the characteristics of a non-resident
• Common Law: Continuing State of relationship with Canada

• Maintaining a dwelling
• Immediate family remaining in Canada
• Maintaining personal property and social ties in Canada
• Furniture, clothing, cars, medical insurance, seasonal residence, employment/investment with Canada, retirement savings plans, credit cards and securities accounts, landed immigrant status, passport, license, membership, retention of Canadian mailing address, telephone listing and newspaper subscriptions

2) Part-Year Resident: Taxed on his worldwide income earned during the part of the year he was resident in Canada

• Clean Break: Leaves Canada during a year and severs all ties with Canada (with a spouse and dependants)
• Fresh Start: Comes to Canada during a year after permanently severing all ties with the previous residence

3) Non-Resident: Taxed on his Canadian-source income

• Employed in Canada [Continuous business activity: Carried on business in Canada or Disposal of taxable Canadian Property]
• E.g. A non-resident selling something in Canada through a salesperson = carrying on business in Canada
• Through an independent contractor (Canadian retailer/wholesaler) = not carrying on business in Canada = not taxable in Canada on business income earned in Canada
• “A person who is a non resident for the whole year cannot be a part-time resident. To be a part time resident, there must be a period in which the person was resident, in the sense of a full-time resident, and a period in which the person was non-resident.”

Canada-U.S Tax Convention: Exists to avoid double taxation or tax avoidance. Exempts a CDN resident from U.S taxation on salaries, wages, and other remuneration if:

• Remuneration < $US 10,000
• Present in the U.S. for <183 days

Only Taxed in U.S if he had a permanent establishment in U.S:

• More than 50% of gross active business revenues in U.S
• Or business is for U.S. customers
• Defined as a fixed place of business through which business of a resident of (a country) is wholly or partly carried on.
• Places of management,  a branch, and office, a factory
• Individual who is resident in Canada, would only be taxed in the U.S if the individual has or had a “permanent establishment” regularly available to him or her in the U.S. The tax amount is capped at the income attributable to the permanent establishment in the U.S.

Residency for Corporations: Depends on resident vs. non-resident

Corporate Residence depends on:

• Deemed Resident if incorporated in Canada after April 26, 1965
• Common Law: Central management and control are in Canada; Real business is carried on in Canada; Permanent establishment in Canada
• If incorporated before 1965, still deemed resident if it was resident by the common law principle of control management and control; it carried on business in Canada after 1965

 

 

 

 

Noh Review's Special Edition: The United States of America

The United States of America - Empire?

There is a hot debate going on about whether or not America is an empire. This special edition will cover what I think about this certain topic.

America is currently the world’s most influential country, and it is deemed the global hegemon of today’s world. Aside from its power, political and economic influence, it has a hegemonic hyperpower because of its unilateral military actions worldwide. America has been successful in bringing order to the globe and has been able to order the world in favour of its own state. It has brought western values as an ideal standard to the world, through its experiences in colonialism, war and civilization. As such, America has the upper hand in this world and is fully capable of taking control of the world. But, there has been an immense amount of controversy in whether America is considered an empire, and whether the current world order is actually one of American empire. Many critics have carefully analyzed this topic and have been unable to conclude on a definite position to this argument. In my view, although America’s influence on the world does not perfectly fit into the definition of a formal empire, America’s power and impact on the world makes them an informal empire.

The European definition of an empire is a contemptuous state, whose primary aim is for power and status.  An empire is a system of governance forged by military conquest as part of a policy of colonialism. In an empire, there is an imperial core, and it has the colonies which are the dependencies on the periphery of the empire. The characteristics of an empire include substantial inequality, domination and subjugation. As the empire provides the benefits of military protection and potential citizenship rights to the colonies, the conquered people within the colonies must offer back the political allegiance, taxes, financial tributes, local troops to help out with the protection and defence of the colony as well as natural resources. This ties into the ideas of imperialism and colonialism which is the authority of an empire over foreign countries, where one has control over another country, territory or people. Realistically, America does not fit into this definition of a formal empire because such characteristics or relationships of dependency and exploitation do not exist between America and the other countries. America does have a bit of aspects of a formal empire because they currently operate 700 military bases outside its own borders. But, America does not suck resources from the colonies, and does not really have such formal relationships with countries outside its own borders. An empire is perceived to be a cynical, old-world game played by other people, and it is all about power and status. But, the US was formed on a non-cynical, optimistic moral vision of a political community. America was created in 1776 to be a political society that secures individual rights to life, liberty and the pursuit of happiness. It is definitely different from the European imperialism and colonialism. There is also very strong resistance for this view because American schools teach their citizens that they are not an empire. America justifies this argument by stating that the term “empire” is seen in a negative light and for that sense, people are jealous of America’s wealth and power and want to publicize a pessimistic image to America’s name. 

 

Although America does not have a formal empire as discussed above, they have an informal empire. It is true that America has no formal, legally declared links between core and periphery, nor formal, publicly-declared links of dependency. But, America can still set up the ground-rules of the world system in its favour. America chooses not to formally declare that they are an empire, but America still meets the conditions of being an informal empire. America has the biggest economy and military as well as the most political influence in the world. On top of these, America has the biggest consumer base and brings in tons of population for both foreign investment and immigration. Accordingly, America meets the criteria of being an imperial core. It is also important to revisit America’s history as they may have been an imperial project since its founding in 1620. America claimed land and power from East to West and down to Texas and Florida. As indicated on a historical map of the growth of America, there is a clear sign of relentless expansion of territorial control which extended into Alaska, Hawaii, Germany and Japan as well as into the Middle East.

Moving forward with the argument that America indeed has an informal empire, there are definitely advantages and disadvantages for the world. The world lacks a universal government or entity which protects citizens globally and keeps the globe in order. And, America is the only country on earth capable of bringing some order to the globe and preventing an un-governed, chaotic condition of complete fighting and conflict between various groups, also known as anarchy. Due to America’s capabilities and high economic status, American empire is a source of stability which all nations can benefit from. Benefiting from the values of capitalism and free trade, America can run profitable businesses and a productive free market economy which has generated more money and a higher standard of living. America is a prime and ideal country that stands for great values of human rights, individual freedoms, democracy, free and fair elections, separation of church and state and the grown of science and technology. As these values get spread, America does the world a favour by strengthening these values across the globe. However, many see America’s informal empire as a bad clause. Noam Chomsky is the leading critic of the American empire, referring to it as the “ultimate conspiracy theory.” According to his theory, America was originally formed with respectable ideals, but has now turned into a corrupt society which is run to benefit the rich and powerful elites. The government is focused on its own self-interests, which uses the customary people in securing benefits and only rewarding social peace when necessary to hold onto society. America primarily uses their military to offer entertainment from Los Angeles to keep the powerless people happy and stunned.  This view conforms to the belief that any form of empire is a violation of democracy and forbids people in the ability to choose their own preferred form of governance.  The American empire is one of the worse in history because Americans are ignorant, know minimal information and do not care about the rest of the world. Chomsky relates this to a historical analogy of the Roman Empire, which started out adequately with benefits for its people but became an empire motivated by power and money due to corruption. In fact, America may be moving towards the same pact of the Roman Empire in its time.

America holds the biggest power across the globe and has a large contribution to the success of the world as a whole. As America contributes to the core of all international relations and the upbringing of international law, many countries across the world benefit from this single power. Since America does not officially engage in relationships of dependency and exploitation, they are not a formal empire. However, America’s enormous influence on the world coupled with their history of territorial control makes them an informal empire. American empire can benefit the world by bringing stability and order and increasing the standards of living. American empire can also be a dangerous one due to its massive corruption as per Chomsky’s conspiracy theory. Whether or not America will declare an empire in the future, America’s supremacy will reign for many periods to come.

Noh Review on Companies & Industries - September 19, 2012

Harvard Business Review "Morning Advantage: Is Apple Too Focused on Profits?" by Sarah Green

Summary:

• Although Apple always talks about their innovation, Apple only spends 2% of revenue on R&D (Google and Microsoft 14%, Samsung 6%)  
• But, does this tell us anything about the effectiveness of their R&D spending? Apple may simply spend their R&D dollars more wisely than the other companies. Or it could be that their brand and marketing are doing the job.
• The smartphone market consists of 68% of Androids and 17% of iPhones. Apple has luxury products and their product market focus is the upper end of the economic spectrum. Their pricing is relatively high, so the lower end consumers cannot afford to buy their products. This explains why Apple's phones are losing market share.

Noh Review:
In my opinion, the argument raised by Dan Lyons (MIT Technology Review) is flawed.
1) It is not wise to talk about Apple's dedication to R&D while comparing the percentages. It is true that Apple devotes the least percentage of their revenue to R&D. But, it is important to realize that Apple's net revenue (denominator) beats many other companies' revenues by a clear mile. Let's look at some numbers here.

Apple in Fiscal Year 2011:
Revenue: US$ 108.25 billion
R&D Spending (2%): US$ 2.17 billion
Net income: US$ 25.92 billion

Samsung in Fiscal Year 2011:
Revenue: US$ 148.94 billion
R&D Spending (6%): US$ 8.94 billion
Net income: US$ 12.06 billion

Google in Fiscal Year 2011:
Revenue: US$ 37.91 billion
R&D Spending (14%): US$ 5.31 billion
Net income: US$ 9.74 billion

When Dan Lyons said 14% for Google and 2% for Apple, we all thought "Wow, that's a big difference." But, the difference seems more reasonable now that we see the actual numbers: $2.17 billion for Apple and $5.31 billion for Google. It is true that compared to Samsung and Google, Apple's R&D expenditure is quite low. But, they still spent $2.17 billion on R&D last year, which is still one of the highest in the industry.

2) The R&D expenditure amount does not indicate the effectiveness of R&D. Maybe, that $2.17 billion is the most optimal amount that Apple can efficiently handle. Just because the R&D spending is relatively low, it does not necessarily mean that the R&D payoffs are low.

3) Apple knows how to properly operate their company. With a major boost coming from their high pricing strategy and efficient spending, Apple's profit margin was at about 24% in 2011 fiscal year. This is quite comparable to Samsung's 8% profit margin. With Apple's proven efficiency, it is hard to doubt that they are not being efficient with their R&D expenditure.

Actually, everything has been working out fine for Apple. Regardless of what kind of products they release, a large portion of their consumers will always love their products. Just when the iPhone5 was announced, some critics and analysts were disappointed with the new features of the phone. They all said the new iPhone5 is far from being "innovative." But, it still broke the sales record. It was sold out within the first hour of availability, and the projected sales stand at about 58 million units. This tells us something: Apple has successfully established their brand.

Article: http://blogs.hbr.org/morning-advantage/2012/09/morning-advantage-is-apple-too-focused-on-profits.html
Apple - Press Info: http://www.apple.com/pr/library/2012/09/17iPhone-5-Pre-Orders-Top-Two-Million-in-First-24-Hours.html

Noh Review on People – September 17, 2012

Bloomberg Businessweek "The More We Automate, the More People Matter" by Harold Sirkin

Summary:

• It only took 45 minutes for Knight Capital Group to lose $440 million from a computer glitch. Maybe, companies are paying too much attention to electronic technology instead of the professional development of people.
• “Everything always works just like it’s supposed to work, except when it doesn’t.” - There could always be a power outage, a fire, an accident, a computer error, a human error, a storm, a crime, a revolution or a financial meltdown. Risk management is about recognizing all of these possibilities that might disrupt your business. This includes backup plans and protocols as well as testing and training in case something happens. For proper risk management, we need the right people with proper training.
• Companies which invest in recruitment, training, and job satisfaction of their employees outperform other companies by a substantial margin, which indicates that people matter more than technology.

Noh Review: People say that later in the future, there will be more automation. And, they say that due to the automation, many people will lose jobs. Basically, we are talking about a world where technology replaces humans. But, what people are forgetting is that the more machines we have and the more we automate, the more people matter. More automation means more dependence on machines and equipment. But what if the machines fail? Machines cannot protect themselves. Automation alone cannot manage all sorts of risk of failure or risk of loss. We need people to protect the organization along with the machines. And in order to do that, recruitment, training and job satisfaction are required.
Morale of the story: When you know that your company will start to automate, start investing money on the people, not just on the technology.

Article: http://www.businessweek.com/articles/2012-09-05/the-more-we-automate-the-more-people-matter

Noh Review on Companies & Industries – September 10, 2012

Bloomberg Buisnessweek "Netflix Would Like Very Much to Change the Channel" by Nick Summers

Summary:

• Netflix has lost more than 80% of the value since their peak in 2011. 
• Amazon is Netflix's main competitor, and they are taking subscribers away from Netflix.
• Netflix has no hardware sales or advertising revenue, so their best bet is making steady subscription revenues. (current domestic streaming subscriber rolls at 24 million)
• Netflix's library of movies and TV shows is getting gradually replicated by their competitors, such as Amazon, Redbox Instant, Hulu and iTunes. If all of them offer the same content, the only realistic way to stay competitive is by having competitive prices. But, Netflix's subscription costs about $96 per year while Amazon's costs $79.
• As Cable Network AMC made a breakthrough with a single hit with Mad Men, Netflix is trying to change and become the HBO of the Internet with 5 original series by early 2013. At least until then, Netflix's stocks do not seem to have a bright future.

Noh Review: I bet when Netflix first came out, Blockbuster was scared. Netflix offered online video service while Blockbuster tried to compete with their video rental service. Basically, new technology declared a war against old technology. In the end, new technology won the battle. I wouldn't be exaggerating when I say Netflix bankrupted and demolished Blockbuster. Needless to say, Blockbuster ended up going on sale for the embarrassing starting price of $290 million, and they were bought by Dish Network at auction for $233 million. Analysts say that Blockbuster's fall resulted from poor strategic planning and mismanagement aside from the fierce competition. I say that they failed to keep up with the changing times and trends. Consumers are getting lazy. They do not want to physically get up and go to a store to rent a DVD when they can simply watch it on their computer. Only a portion of them do. Netflix was destined to win this battle because their strategy matched better with the social trend.

But now, Netflix needs to look around and realize that they have other competitors in the video rental/streaming market. Amazon is threatening their position. Something needs to be done with Netflix's price. If it cannot get any cheaper, they need to figure out another creative way to boost their subscriptions. In 2011, Netflix made total revenues of $3.2 billion, but they only ended up with a net profit of $226 million, which amounts to about 7% of that. Based on other factors considered, they need to cut down on some of their unnecessary expenditures. Most importantly, Netflix should learn from Blockbuster's mistakes and focus on not falling behind the times. In that sense, it is good to see their plan to reinvent themselves as the HBO of the Internet by 2013. Regardless of what they say, Netflix is constantly moving.

Article: http://www.businessweek.com/articles/2012-09-04/netflix-would-like-very-much-to-change-the-channel