Price Monitoring Structure Under GST in the Pipeline

According to the dictionary, meaning monitoring means to supervise activities in progress to ensure whether the objectives and the targets are met. Price-Monitoring means to observe and check the prices over the duration of time and to keep a systematic review of the pricing.

GST is a bill passed by the parliament to remove the various indirect taxes like VAT, and other taxes and to subsume it into a unified tax structure. This benefits the country in having a streamlined tax collection process that is less time-consuming and more efficient.

The business owners and working professionals now benefit from tax relief provided to them under GST based on different qualifying criteria.

In addition, working professionals and business owners must get their GST Registration done to get the GST number if they have not applied for the same.

A price monitoring structure has been proposed by the government under the GST regime to ensure various benefits of the reforms or changes in any unjustified price disturbance.

With the effects of the bill, it tends to provide a push or boost to the economy. The GST is expected to put in place latest by April 1st, 2017, where taxes on goods are expected to fall sharply after its effect.

The GST regime is undoubtedly the biggest tax reform post-independence. The main aim of the bill is to remove or eradicate all the unnecessary or indirect taxes into a unified tax structure, which would result in a sharp decline in logistics and taxes as well.

Keeping in consideration the federal structure of the country must work flawlessly. The centre and the state will collect the GST. The tax collected by the centre is called CGST and taxes collected by the state are called SGST.

There are some similarities and differences between the CGST and SGST’s in individual states. The CGST and SGST are applied on products, goods, and services on the destination principle. Thus, making the exports will become zero-rated and the imports will attract tax in the same manner.

As far as the interstate trade of goods and services is concerned this will attract an Integrated GST. A price monitoring structure without sufficient legislative backup may from the legislature be ineffective and an additional compliance shall necessarily be imposed.

The government does not want any increase in price or inflation after the implementation of the GST, so it does not ensure its effectiveness without the proper backing of the legislature. This could lead to intricate paper works and it shall ensure that the GST rate is feasible enough thus making a smooth credit system.

It is evident that after the implementation of the GST, regimes in many countries have actually added up inflation and by the price, monitoring structure the government expects to avoid a similar situation by lowering the tax rate.

By the price monitoring mechanism, the government tends to abstain frequent dabbling of rates to make a steep specific sector.

It would be more suitable if the GST rates were lowered in the beginning.

This would definitely make sense due to the variation in VAT across the country. It has also been said that the center will compensate for any revenue loss for five years post GST implementation.

The price monitoring includes the standardization of rates along with levying on goods. The GDP of 2%increase is expected and any other benefits are expected. The price monitoring structure of the government tends to remove the doubts on whether it would result in negative impacts or not.

The structure ensures that there is no downside of the bill and with proper implementation and the backing of the central government. It is expected to bring a positive impact of the implementation of the bill.

A price mechanism is necessary and many are of the opinion that it is better to have multiple rates as a large part of the economy.

This is similar to the EU where VAT rates change across the states, keeping a SOP to the minimum tax base would lower the rate of GST.

A wider tax base gives a wider scope to lower the rate of GST that allows credit for input taxes that are paid across the value chain, which would result in efficiency, and overcast the retail prices as well.

Mid-Year Tax Planning – Do You Need to Add an Entity?

Do you need to add an entity to your tax structure?

This is such an important question for mid-year planning because knowing the right time to add an entity to your tax strategy can often save as much as $10,000 per year in taxes!

What entity should you consider adding to your tax structure?

Many of you want to know what entity you should consider adding to your tax structure. There are 2 levels of tax planning to consider in answering this question.

** Level #1 **

This level is for those business owners or investors who are either just starting their business or investment or are in the “ramp-up” phase of their business or investment. The ramp-up phase may mean you are a few months in to your new business or investment, or perhaps even a few years depending on the type of business or investment. The ramp-up phase means your business or investment has not yet produced a profit. Now, without profit, taxes are likely minimal or even non-existent, which is why the focus of this level is building a strong foundation for your tax structure so once there is profit, your tax structure is already in place to immediately minimize your taxes.

I often get asked the question “When should I form my entity for my business (or investment)?”

Many of the people I talk to are unsure if they should get their business up and going first, and then worry about the entity, or if they should have the entity in place even before starting the business or investment.

The answer to this depends somewhat on the type of business or investment, however, if I have to give an answer, I recommend setting up the entity first. This is because the right entity can grow and change with you as your business or investment grows and changes. Plus, outside of the tax benefits, many entities offer some level of asset protection which most people rank as an important planning factor.

So for those of you in Level #1, the entities to consider adding to your tax structure are:

Limited Liability Company (LLC). LLCs are the most flexible entity for tax purposes. LLCs can start off being taxed one way and then elect to be taxed differently. This means your LLC can adjust to the tax planning needs of your business or investment because your LLC can be taxed as a sole proprietorship, partnership, S corporation or C corporation. This flexibility is key in building a strong foundation for your tax structure and to minimize future taxes. S Corporation or Partnership. If your LLC will be formed in a state that assesses a separate tax on LLCs, then you should consider adding an S corporation or partnership instead of an LLC.

** Level #2 **

Level #2 is for those who already have a strong foundation in place for their tax strategy, and whose business or investment will soon be exiting the ramp-up phase or has already exited the ramp-up phase and is producing income. At Level #2, the focus is minimizing the tax liability created by your business or investment.

Consider a C Corporation if you are in the Level 2 planning group

One way to eliminate – not just reduce taxes – is to shift income to a taxpayer in a lower tax bracket. A C Corporation has initial tax brackets of 15% and 25%. If you are in an individual tax bracket of 25% or higher, then there could be an opportunity to reduce your taxes by shifting some of your income to a C Corporation.

For example, if you are in a 35% tax bracket individually and are able to shift $50,000 of income to a C Corporation, then your income tax is reduced by $10,000! And this can be an annual savings of $10,000!

BUT…

I know from experience that any time I suggest a C Corporation in a tax strategy, people panic! They think of all the bad things they’ve heard about C Corporations:

But what about the double tax?
But what about the personal service corporation tax?
But what about getting money out?
But what about the accumulated earnings tax?

What most people don’t know (including many CPAs) is how to legally avoid these tax traps…BUT I do! In fact, some of them are not even tax traps at all – I have found ways to use some of these so-called traps to save taxes!

Is a Corporate Class Mutual Fund Structure Beneficial For You?

A corporate class structure for mutual funds is when all of your funds are under one umbrella for tax purposes. You can switch between funds that issue all forms of income (interest, dividends and capital gains) and not pay taxes until you withdraw the money from the whole structure. Any withdrawals would be taxed as capital gains even if the original income was in the form of interest or dividends. The timing of when the gains are incurred, as well as when the taxes are paid is up to you. There is also a possibility of receiving a “return of capital” ahead of your capital gains, which is not taxable. A return of capital is receiving the money you invested rather than the money earned on the investment. This would defer your capital gains taxes until all of your capital is returned to you, which would defer your overall tax bill. This sounds good doesn’t it?

There are many factors to consider before utilizing this structure to see if it is beneficial for you and they are described below in more detail. Some of the factors are: the type of income generated by the mutual funds, your income tax bracket, the amount of money you invest, the fees outside of this structure compared to within the structure, frequency of your trading between funds, your past and future capital gains or losses and your risk tolerance. Keep in mind that this is a type of tax shelter, much like an RRSP or TFSA, but the rules are different. You need to know how they all work so you can utilize them as best that you can in the situation that serves you best. You also need to know when it is not worth it for you to utilize the tax shelters.

Income Generated By the Mutual Funds

If you are buying investments that only provide capital gains, like small cap funds or commodity funds, this structure will not make a difference for you with the exception of receiving a return of capital earlier rather than when “the sell event” occurs. If you sell a portion of your funds yourself, you will receive some return of capital nonetheless, but the timing would be different. The corporate class structure allows you to claim a return of capital first, followed by the capital gains. If you are primarily invested in securities that generate interest, like fixed income (bonds, mortgages, GICs etc.), the idea of having them taxed as capital gains may be useful to you. If you have equities that create dividends, the structure may also be useful because capital gains are generally taxed more favourably than dividends. If you have dividends from foreign corporations, the tax rules are more complicated as the foreign governments may withhold part of your income to pay foreign taxes before the money gets to you. This will depend on the type of investment you have (based in Canada or elsewhere as an example), the type of account you have (retirement, registered or not) and which country the dividends come from. The reference to dividends in this article is assuming they come from eligible Canadian corporations that would receive the dividend tax credit.

Your Income Tax Bracket

The corporate class structure is designed for people who pay a lot of taxes and who do not have other avenues or tax shelters to reduce their tax burden. If your tax bracket is low, the incentive to invest in something more complex and which requires more planning will not be as appealing. The fact remains that taxes for all the forms of income (interest, dividends and capital gains) will be higher in the high tax brackets and lower in the low tax brackets. The structure is beneficial if the tax rates are high and will remain the same throughout your investment horizon. If tax rates are lower at some particular point in your income stream, this structure may be of less value than originally planned. Another thing to consider is the higher your income tax bracket, the more beneficial it is for you to receive capital gains. You may have a lot of assets but not a lot of income, as opposed to a low amount of assets and a high income. The strategy in these two cases would be different from a tax perspective.

The Amount of Money You Have in the Structure

The more money you have to invest, the more likely you will have used up RRSP room, TFSA room or other common registered tax shelters. On the flip side, the more money you have to invest, the more tax options you have that should also be examined such as corporations, trusts, charitable giving or investing overseas. As the amount that you invest increases, the fees will decrease, which will make the cost of the structure more attractive. The more money you have invested, the more flexibility you would have to diversify funds and spread the income types between many funds. If you have assets of a million dollars or more to invest, fees can be negotiated in some cases. There doesn’t appear to be a minimum or maximum threshold amount for investment for most companies. Questions about minimum or maximum assets should be asked before you commit to investing to see if there any restrictions that may impair your investment strategy.

Fees

These corporate class products tend to be more expensive than comparable products of the same type. The fees inside the corporate class structure tend to be about 0.2 to 0.4% per year higher than a typical mutual fund. This is only the Management Expense Ratio for the fund. There are also sales charges at the front or back end (when you buy or sell) that can add significantly to the cost. The average increase in cost is over 1%. To go along with the fees, there are usually fewer choices in a structure verses being able to buy whatever product you want. There may also be restrictions on alternative asset classes or specific niche products. These structures tend to assume that active management (having someone pick the stocks or holdings) is better than passive management (investing in an index). This is usually not true unless you have a good portfolio manager with a consistent record. Lastly, if there are products that having selling restrictions or minimum holding periods, this may impair your ability to switch funds even if the time is right to switch products. The conditions may allow you to switch products, but penalize you with extra fees. As the amount of your assets increases, fees should go down and can be negotiated as noted earlier. Make sure you understand the rules for entering and exiting the structure so that you can evaluate before committing.

The assumption in investment literature is that gains generally are more common than losses, but the timeframe may have to be extended for 10 or more years before the averages are in your favour. The S&P 500 return history from 2000 to 2010 is an example of this, as is the NASDAQ over that some period, gold companies during the 1990’s or Japan in the 1990’s. If you have to wait for this length of time and the fees are higher, you will generally lose more money if all else is equal. If you have no gains or losses for a period of 10 years, yet the fees are 1 to 2% higher each year for the same investments, this will mean a loss of a fair amount of capital.

The key question to ask is: “Would I invest in the same products inside and outside of the structure and be happy with the results?”

Frequency of Trading

If you are a buy and hold investor, this structure will not provide as much benefit as a frequent trader. One of the selling features of this corporate class structure is that you can switch funds as often as you like without incurring any tax consequences. You may however incur sales fees every time you switch funds. Unless you are very good at market timing, this advantage does not exist for you, as switching will create losses which can be done outside of this structure as well. If you trade infrequently, but rebalance your portfolio every so often with large swings in the market, this may be beneficial for you as these large gains would not be taxed until sometime in the future. If you trade very frequently (buying and selling the same funds within 30 days of each other), you may be able to avoid a tax rule that tags frequent trading as income or creates superficial losses. If you intend to be a trader on the other hand, you may want to examine trading as a business and declaring relevant expenses. These topics should be discussed with a tax consultant.

Accumulated Capital Losses

If you have accumulated capital losses from the past, this structure may not provide much benefit for you because any gains you receive can be offset against these losses, resulting in no taxes payable until your losses are used up. On the other hand, if you have accumulated capital gains, this structure may provide you with tax savings right away. If you have unused RRSP or TFSA room, you may be better off using these tax shelters instead of a corporate class structure because you are not paying taxes on your gains. In the case of a TFSA, you will not pay taxes on any money that you make regardless of how you make it. There are limitations with contribution room with both of these products which would not exist with a corporate class structure.

Risk Tolerance

Risk tolerance should also be considered before making any investment decisions. In this particular case, there is a tendency for people to let tax decisions override the quality of the investment. There is also a tendency to try to time the market or take more risk since the results will be treated as capital gains. The thinking is “I have an opportunity to take advantage of the tax rules, so I will increase my trading to try to maximize my tax savings”. The other line of thinking is “I wouldn’t normally be switching between funds, but since there are no consequences, I will do it more often.” These lines of reasoning need to be balanced against whether you are in fact successful at market timing, or whether you are making the same amount of money when all is said and done compared to your usual investment pattern. This issue needs to be examined by understanding what your psychology is in terms of trading, and where your weaknesses are. If you use a gambling analogy, you may be a very skilled poker player, and consistently win against other poker players. However, if you start betting on horses, you tend to overdo it and lose large amounts of money because you think you will succeed as often as in poker. Tax structures change the rules of the investment game, so you need to factor that in with the investment strategies that work for you and see if the combination of the tax shelter and your investment style is successful.

As with any investment idea, the advantages and disadvantages must be examined for your individual situation. This analysis should also be revisited when changes occur like tax bracket, income, investment preferences or personal changes. This should be done looking at your entire money situation so that you weigh all the alternatives and choose which one serves you the best.