Why many tech startups are cheering a broken Liberal campaign promise

On March 22, Prime Minister Trudeau’s Liberal government unveiled its first federal budget since capturing a parliamentary majority in the 2015 election. Among the components of the budget that have attracted attention in the press are the fiscal stimulus measures, infrastructure investments, and a deficit projection of close to $30 billion. But the budget is also notable because of something it does not contain: changes to the taxation of stock options.

In general, Canadians who are likelier to receive compensation in the form of stock options tend to be at the high end of the earnings scale. Large firms often reward their executives with stock options in lieu of salary, partly because stock option gains benefit from preferential tax treatment, and partly because ownership of claims on their own company’s stock provides a material incentive for corporate executives to optimize that stock’s performance.

The Liberals’ original proposal was to place a cap of $100,000 per year on gains from exercised stock options that can qualify for a tax deduction. (Under the current rules, only half of gains from cashing in stock options are subject to taxation, and there is no cap.)

Why didn’t the government follow through on its pledge? And what are some of the implications of this non-change?

Startup compensation a concern

“As I was out on pre-budget consultations I heard from many small firms and innovators that they use stock options as a legitimate form of compensation for their employees, so we decided not to put that in the budget,” said Finance Minister Bill Morneau. Indeed, startups typically do not enjoy the kind of cash flow that large, profitable, established firms generate. Thus, it is common for startups, particularly in the tech sector, to try to lure talent away from major players by offering stock options as compensation. This practice has allowed some startups to attract highly skilled personnel who might otherwise have accepted a more immediately lucrative position at a reputable, old-guard company.

The Liberals were not the only federal political party to float a proposal for altering the preferential tax treatment accorded stock options in the run-up to last year’s election. Thomas Mulcair’s New Democrats actually went a step further, advocating wholesale elimination of the special deduction. But tech entrepreneurs pushed back; Hootsuite Media founder Ryan Holmes even predicted that the NDP plan would “kill the Canadian startup ecosystem.”

At a time when Canada’s economy is experiencing lacklustre growth and job creation, many leading politicians understandably don’t want to be seen as undermining one of the country’s most vibrant growth industries. Moreover, the Liberals have marketed themselves as a party that plans to green the economy through technology and innovation; a policy change to the detriment of the tech startup sector would seem out of step with that brand image.

The downside: loss of federal revenue

Of course, incumbents in many industries would be delighted to receive special subsidies, protections, and preferential tax treatment, and can mount convincing arguments in their own favour. Every policy yields costs and benefits, and it’s the task of policymakers to weigh these in order to identify the most socially beneficial option.

Preferential treatment for stock options imposes a cost on Canadian taxpayers by undercutting the amount of revenue that makes its way into federal coffers. In turn, this compromises the government’s ability to offer public services and invest in infrastructural upgrades and innovation—all of which can lower the cost of doing business and boost productivity—without increasing the deficit. Even relatively conservative tax specialists, like Jack Mintz of the University of Calgary, have argued that the status quo around stock option taxation is inefficient, and unfairly favours employees who receive stock options as compensation.

Trudeau and Morneau broke their promise because they have calculated that the status quo delivers more benefits for startups than costs for Canadians who don’t hold stock options. For now at least, a lot of tech startups will breathe a sigh of relief.

The Benefits of Giving Back

There are few satisfactions in life that can match the feeling of helping to make the world a better place. And while there are many ways to accomplish this, ranging from modest to ambitious, supporting a cause you believe in can bring a tremendous sense of fulfillment, in addition to improving the lives of others. But that’s not all—involvement with charitable work can be a boon for your business too.

Read on to find out why.

1.  Goodwill. Which business would you rather patronize and support: one that participates in community-building projects, sponsors events and fundraisers, and sends volunteers to help out—or one that does none of those things? All else being equal, most people would choose the former. By showing an enthusiasm for helping and giving back, you demonstrate that you are invested in the success and welfare of the community. This will not go unnoticed or unappreciated by local residents, and may help to secure and expand a loyal customer base.

2.  Networking. Advertising and marketing have certainly evolved over the decades, but few offer better results than does the oldest medium around: word-of-mouth. Volunteerism is a great way to spend time with like-minded people, many of whom may be able to offer referrals, or become prospective clients themselves. There is also some overlap with item 1. (above): the more you show enthusiasm for assisting and empowering others, the more likely they will be to do the same for you.

While devoting your time to a worthy cause, keep your eyes open for talented and proficient volunteers. Charity events are a great way to meet skilled, ambitious professionals who care deeply about the health of their communities, and are comfortable with both individual tasks and teamwork. These are qualities that typify excellent colleagues and employees too.

3.  Association with reputable causes. Again, this point partially ties into items 1. and 2., respectively. A business that associates itself with well-regarded causes is likely to attract clients and customers with shared values. Furthermore, organizations will often show appreciation for the support of their donors by mentioning the names of those benefactors at their events.

4.  Employee morale. Some companies earmark a few hours of each week for employee volunteerism, and (in the case of a team-oriented project) allow employees to vote on which charity or non-profit organization they would prefer to serve. Not only will this enhance the perception of your workers toward their employer, it also has the potential to attract new, community-oriented prospective employees to your business.

5.  Tax deductions. In many jurisdictions (including Canadian provinces), funds donated to charity by individuals and businesses may be eligible for tax breaks. If you host a fundraising event, and cover the cost of meals or other expenses for that event, those costs can also be written off in some cases. Make sure to obtain and hold onto all receipts!

6.  Personal growth. Charity work can be an enriching experience for you as an individual as well. You’ll have the opportunity to hone a wide range of skills, and undertake duties that would not normally be part of your day job. By helping those less fortunate than yourself, you’ll be reminded that your own challenges, important though they may be, pale in comparison to the problems other people face—and we could all use a bit of perspective sometimes. You may even be inspired by individuals who have dealt with tragedy, confronted significant obstacles, and succeeded at overcoming long odds in life.

Why Should You Incorporate Your Company?

There are many reasons for incorporating but the most important to consider are the benefits of incorporating and the implications that it may have for your business. A quick examination of all the benefits to be derived from incorporating will reveal that the best time is when you are actually taking your startup business from inception to reality. Consider all of these corporate advantages:

1.      Limited Liability

Incorporating your business is really about protecting your personal assets. Anyone who starts up a business will find it taking up a major portion of their time but that doesn’t mean you have to assume a total risk with everything you own. By incorporating your business you are drawing a clear line between your personal asset and the assets of the company. That way if anything should go wrong with the company, you’ll still have your personal property. It’s important to keep those two aspects of your life separate.

2.      Attracting Investors

When you incorporate your business you’re also telling potential investors that you’re serious about your company’s future. That is going to make getting money from investors a lot easier. Any investor will be taking a risk by giving you capital. You can make them feel more confident with a professional approach to your business plan through incorporation.

3.      Tax Issues

Just as incorporating your business will protect your personal assets it can also help improve your tax filing status. With a corporation, you have the ability to defer paying taxes to a time during the fiscal year which will be more beneficial. This also applies when you accept an income. The goal should be to work with your accountant to find a proactive way to reduce your tax burden which can ultimately allow you to reinvest in the business. There are also a wide range of small business tax deductions which can help you make improvements but they would only apply to a business that has been incorporated.

4.      Better Client Prospects

If an investor feels better investing in a corporation then a potential client will also share those feelings of confidence in your business. Incorporating your business projects a level of stability to customers. They know they’re not dealing with some “fly-by-night” organization but someone who is in for the long haul of providing service.

5.      Corporate Legacy

For all practical purposes, a corporation is a legal entity that can far outlive the lives of its founders. When you can move your company into the realm of Fortune 500 type of businesses then the hope is that they’ll be around long after the original board has gone onto greener pastures. A corporation is about longevity which is exactly what you should be focused on for your new business.

How to Master Canadian Taxes Before Next Year

If you compiled a list of Canada's greatest complexities, chances are very good that the Canadian Income Tax Act would command a respectable spot on that list. In recent years, it has expanded incredibly, becoming a quagmire of confusion to the average citizen. It is no wonder that more than half of all Canadians now secure professional help to prepare and file their tax returns.

Have you tried to hold a conversation with a tax preparer during tax season? It is limited to several words as most tax professionals literally work around the clock to prepare as many returns as possible. If you are one of the clients, appreciate that your expectations are linked directly to your level of cooperation. In other words, your accountant cannot use information, sometimes basic and crucial, if you don't supply it. Due to the tremendous workload and seasonal pressure, the accountant may not ask every question. Therefore, be prepared to supply certain information, along with your receipts and T4's or T5's.

The amount of tax you pay depends on a number of key facts that your accountant should know. Marital status and exact age are crucial as these affect possible tax credits or deductions. Your children, depending on their ages, create numerous tax credits and deductible expenses. Accuracy is essential; there is no room for approximation.

If you were employed at several jobs, be sure that each employer is listed in your return, even if you did not receive a T4. You are responsible for paying taxes on earned income and your accountant must be aware of every dollar that you earned.

If you own a business, compile a detailed list of every possible expense and revenue. Your accountant can decide which are not relevant, if any. Don't make assumptions by yourself; let the professional decide.

List all your financial holdings, including any overseas investments. With all the pertinent information available, your accountant can determine your tax liabilities. Similarly, don’t forget to list "non-employment" income such as rental income, capital gains from sale of property, etc.

Finally, don't forget medical expenses. Keep all your receipts for treatments, medications, insurance, etc. You paid dearly for your health and some of the expenses may return to you.

Spend some time researching tax credits and benefits. If you're not sure whether you are eligible, ask your accountant. It is better to err on the side of caution. It's easier to remove some numbers but much harder to add them if they were never included.

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Canadian Tax Deductions to Keep in Mind

Get ready, Canada – April 30th is rapidly approaching. As most Canadians are aware, this auspicious date heralds the end of the tax season for the previous year. It is your last opportunity to make any adjustments to your taxable income and, hopefully, reduce the tax due.

Tax deductions exist within the legal system to allow a degree of parity amongst taxpayers and create a balance between earned income and the relevant taxes. However, as most accountants will point out, although the government will allow you legal deductions on your tax return, they will not contact you to point out possible deductions that you missed claiming. Therefore, research and consulting may be worth money in your pocket.

Here are a few sample deductions you may have missed:

Certain adult family members living at home can reduce your taxable income. If you have a relative over 18 with a physical or mental disability, and they live with you, you can deduct more than $4,000 of your taxable income for the expenses incurred for them.

Do you work from home in your rented apartment? If you have dedicated workspace at home, and work there at least 50% of your time, a portion of your rent and maintenance expenses may qualify as a tax deduction

If you are required to use your own car for business purposes, and do not receive a nontaxable allowance from your employer, you can deduct a portion of your auto expenses including lease payment, loan interest, maintenance, licence and repairs.

Who ever thought that your hobby may be tax deductible? If you earn some side income from your hobby and travel in order to do so, a portion of the travel expenses can be claimed against your taxable income.

A person who drives for a living can claim a portion of their food expenses while traveling. Similarly, when you travel for work, it is expected that you need lodging and showers. These, too, are deductible expenses.

If you are filing a simple return, it may not be necessary for you to incur the expense of a professional tax preparer. The Canada Revenue Agency maintains a highly informative website. On the other hand, if you feel you may be missing something, consult with a professional. After all, as honest hardworking Canadians, we all pay our taxes. But, we wouldn't mind paying just a little less.

Incorporate in Canada with CorporationCentre.ca
Click. You're incorporated ®