Archive for the 'Frank McCrea' Category
February 18th, 2011 by Frank McCrea
Employees get paid a salary plus benefits. If they are fortunate to work for an employer that offers a pension (i.e. the federal gov’t), they get the benefit of that too. At the end of years of work they can retire, if the company has stayed solvent and has not been the victim of a changing economy, downsizing or any of the numerous risks of the private sector.
Alternatively, if one is able to offer specialized services, they can make a career offering those services, under contract, at a premium, thus monetizing (i.e. get paid for) all the benefits which they might otherwise realize as an employee. They get paid today and assume the risk of discontinuous engagements, along with the responsibility for the management of whatever funds they earn for their retirement.
Thirty years ago, when the definition of a Personal Services Business was introduced, the income tax rates were much higher than they are today. At that time, in a limited number of instances, individuals restructured their employment from being an employee that is paid a salary, to one of contractor being paid through a corporation. The number of people who actually had relationships with the powers that be within their employers to actually structure such a change is not known, but I suspect that number was very low.
Fast forward 30 years, and we see progressive tax rates that have reduced effective income tax rates. The contracting industry has exploded to a level where virtually every major company, every federal department and every provincial ministry in virtually every province across Canada has incorporated contract labour into their staffing model.
Canadian business has embraced the model, and it has been good for everyone concerned including the tax man who received higher tax revenues due to the fact that tax rates are being applied against a bigger income number. By comparison, the situation in the US is much different. The US passed bill 1706, which assumed that contract workers were evading tax (sound familiar) and mandated that they all had to be employees. The model in the US changed considerably, most feel that the change was for the worst. It was bad for contractors, bad for agencies and bad for the IRS.
One has to wonder, who benefits? Surely it is not the clients who find themselves denied access to a fluid market. Clearly it is not the contractors, who lack the ability to build up reserves, defer income or do any of the things that would convert what they are doing into a career. Clearly it is not the IRS which finds itself embroiled in seemingly endless investigations, audits and litigation in preference to doing more meaningful and significant things.
This raises the question as to why the Canadian Government is taking this route?
February 11th, 2011 by Frank McCrea
IT workers recruited offshore represent an excellent source of new Canadians. They come to Canada with jobs that leverage their developed expertise, while helping our economic infrastructure. They earn income and pay taxes from day one, never placing a burden on our social service infrastructure.
This leads me to question why (and why now?) programs are being implemented that hamper both domestic corporations and staffing suppliers who want to source labour skills globally, while exempting global and offshore corporations.
I feel there is a consistent message that Canada needs immigration. This leads me to question why this exemption has been taken away, thereby complicating and drawing out the process. The goal of business is not to build up a body of resources, but rather to obtain a resource that they can use. The timeline is a factor. Simply put, processes such as the LMO take too long, especially when the need is readily apparent and growing.
One has to wonder why there are unnecessary hurdles for well paid, productive, contributing ICT workers to be a part of our immigrant population, preferring instead individuals with skills which we commonly hear cannot find a job appropriate to their abilities. This makes no sense to me; does it make sense to you?
February 8th, 2011 by Frank McCrea
Effective Oct 1, 2010, IT workers will no longer have the benefit of exemption from the requirement to include a Labour Market Opinion (LMO) as part of their work permit application. Furthermore, The Government announced that they will initiate audits of foreign worker applications going back 2 years, in an effort to identify situations where the rates, or the jobs, being performed differ from those specified on the applications, as well as a number of other possible abuses of the process. This initiative starts in April 2011.
Where they find an abuse, the employer will be effectively ‘blacklisted’, and prevented from making any other foreign worker applications for 2 years.
The only known exception to this rule, relating to IT, is that global and/or foreign companies will be able to skip the LMO process, provided that they want to transfer workers who have worked for them for more than 1 year offshore. I would view this as good news for:
1) Global System Integrators
2) Companies based offshore that want to get workers to Canada to research possible outsourcing opportunities (i.e. take Canadian jobs off shore)
3) Companies that support clients who have a domestic need (i.e. supplant Canadian workers) before heading home.
Unfortunately for those in the IT industry, this initiative comes at a time when the domestic demand for IT workers is increasing. In addition, the supply of new grads remains at unfortunate lows, following years of talking about off-shoring and outsourcing, which has tarnished the concepts of a career in IT.
Due to increased domestic demand coming into play, as well as corporations competing for IT talent, the fully loaded cost of IT services around the globe is rising. As one senior Canadian executive once commented, ‘perhaps other companies can manage a $5m/year IT budget off-shore, we have simply determined that we cannot.’
January 11th, 2011 by Frank McCrea
The topic of Generation Y (Gen -Y), and what it takes to integrate them into your company seems to have Human Resource professionals scratching their heads at the moment. One approach is to construct a physical environment which integrates the concepts of work and play, with lounges, pool tables, games rooms, etc. Others look down upon their apparent focus on money, and lack of gratitude or commitment to their employers.
When I was approaching the end of my second year of fulltime employment, my performance was reviewed and my boss offered me a 12% increase. Unfortunately, I had to tell him that I had decided to resign and take a position with another company. When he presented his counter-offer, the second raise in a month, I commented that 100% of nothing is still nothing. I loved my first job and it was really difficult to come to the decision to leave people who I thought of as close friends, some of whom are still friends 40 years later, but my decision was the correct one for me. Perhaps I was just a head of my time, a Gen -Y want-to-be!
I was task oriented. I wanted to work hard. I wanted money. I wanted independence. And, I wanted a career based upon my technical skills and expertise. I did not want the responsibility of management. In fact, I still don’t!
The more I think about Gen –Yers, and the characteristics ascribed to them, the more I come to the conclusion that they are the generation which will take the working relationship based upon a contract to a whole new level. As the world’s economy moves from a FTE based relationship to a contract based one, the attitude and preferences of Gen -Y are more and more suited to it. The only responsibility they want is for themselves – to work hard, focus, prioritise work and personal time, demand pay for vale and manage their own resources.
As the baby boomers move into retirement and governments struggle with the economic consequences of inadequate pensions, health care, and the economy, Gen -Y ers are facing a brave new world. I expect that they will have a hard road but I wish them well as they reject the norms of old and demand what is rightfully theirs.
January 7th, 2011 by Frank McCrea
In December, I attended a conference where one of the speakers, a VP of Human Resources for a rather large company, talked about what his company was doing to retain Generation Y (Gen -Y) personnel. His description of the individuals that his firm had targeted for retention included words like ‘Top Performers’, ‘Preference for Shorter Talks’, ‘Project Orientation’, ‘Interest in Social Issues’ and ‘Balanced Lifestyle’.
Early in my career as I experienced the first of a number of recessions, I came to the conclusion that security is what I have in my head and what I have in the bank, with everything else being an illusion, as I touched on in previous posts. This perception was one of the motivators behind my decision to build a career in contracting, in preference to one within an organization. (A simplistic view is that there are only two ways to retain individuals.)
My view is that contracting is ideally suited to all the characteristics that typify an individual from Gen-Y. They love technology and are prepared to work hard, especially where there is a focus. One negative comment I noted was that they want more money for less work and want it now. Personally, I do not see that as being a negative. If they have the required skills and they can do the job efficiently and effectively, perhaps all they want is to be compensated fairly, while being given the freedom to apply their skills elsewhere on the next challenge when your needs are well met.
There are a lot of aspects of full time employment that suit a lot of people. As it turns out, I am now a full time employee and over the years I have witnessed many people evolve within their jobs moving into roles that they had not anticipated when they began their journey in the work place. However at the same time, at an early age, I took the risks of going out on contract and leveraging my skills to pursue that career. Doing so gave me financial security at an early age because I wanted money and I wanted it then. It gave me flexibility and a degree of control over the path that I choose for my career.
Over the next few weeks, I am going to talk further about the synergy that exists between Gen-Y individuals and contracting. My view that these two concepts are very much in sync.
January 4th, 2011 by Frank McCrea
Each year presents us with challenges and opportunities, and 2011 promises to be no exception.
I once heard a quote that “good luck is the result of hard work and planning”. With that in mind, I expect Procom to benefit from a lot of good luck as a result of the hard work, effort and perseverance of the past 12 months.
As we enter 2011, the company has never been in a better place. The economy is recovering, our infrastructure and our ability to deliver operational excellence is getting better every day. We have a great team of people with strength and depth in every aspect of your operation.
Where clients may have found alternative ways to work in the past, there are tell tale signs that these same clients are beginning to recognize and appreciate the added value that we had been able to deliver to them. Of course, that means that Procom will be sourcing the best consultants in the marketplace to fill even more opportunities than in 2010. Exciting times indeed!
I would ask each and every person to look upon each day as an opportunity to do great things and achieve great results. My hope springs eternal.
December 23rd, 2010 by Frank McCrea
With the holiday season fast approaching, thoughts turn to getting together and/or reaching out to family and friends wherever they may be. It is a time to wish a safe journey for those who are travelling and safety for those who are in service in distant lands. It is a time to think of others and share the good fortune which we may have enjoyed.
With the end of the year approaching it is also a time to accept that the events and experiences of the past one are behind us and recognize that the challenges and opportunities of the next year are ahead.
December 20th, 2010 by Frank McCrea
My experience is that contract labour is the lubricant of a modern economy. It enables the market to optimize the allocation of scarce resources to clients or organizations where the need for those resources exists. Like any other resources, the price fluctuates with the quality and the availability of supply. Expertise with a new or emerging technology demands a higher price.
There are those within the government who hold the view that people who work on contract are avoiding their tax responsibilities unfairly. The feeling is that contractors are somehow benefitting from tax loop holes which enable them to pay taxes at 11% as opposed to more common income tax rates at 37%. This report was actually put in writing in a report under the title of Government’s Response to the Standing Committee – Finance report of June 2010.
Not being an accountant, there is always the possibility that I have got this wrong. But consider the following:
1. The report refers to Small Business Income tax, instead of Small Business Corporate tax rate. Income tax is what you pay on taxable income in order to get what is left into your jeans. Corporate Tax is what you pay on excess funds in a company in order to get Retained Earnings, inside the company for the company to use.
2. The report says the Small Business Income tax rate is 11%. The Small Business Corporate tax rate has two parts to it. The Federal rate is 11%. The Provincial rate is additional with Ontario’s rate being 5.5%. Quite possibly, they provide this clarification in the foot notes, but who reads the foot notes. As of December 1st 2010, only Manitoba have a provincial rate of zero with British Columbia planning to eliminate its small business tax rate in April of 2012.
3. The report compares the 11% rate, which we now know should have been at higher percentage to the income tax rate of 37.5%. Thanks to government efforts over the pat years the income tax rate has been reduced. It is also progressive in that the effective rate at lower income levels is lower with the tax rate increasing as the income level increases. An individual earning $80,000 per ear and taking maximum advantage of the ability to shelter income in an RRSP (to a max of $14,400 per year), will pay $16,808 in taxes for an effective tax rate of 21%. One then has to ask where this 37.5% tax rate comes from, unless 37.5% is just a better number to compare than 21%.
In my personal opinion, these points all question the validity of this document.
December 16th, 2010 by Frank McCrea
In 1981, the government changed the Income Tax Act in response to a situation where an employee terminated their relationship with their employer, formed a corporation, and then contracted back to their now ex-employer through their new corporation. By doing so, of course, the individual no longer paid income taxes. In fact, as explained in my last blog post, they were now able to deduct expenses and then had two further options.
They could either take the money out of the company, as a salary, and pay income tax on that amount. Alternatively, they could leave it in the corporation, paying corporate taxes in that current tax year to create ‘after tax retained earnings’ inside the corporation. Whenever these retained earnings were subsequently taken out, the applicable dividend tax would be applied.
At that time, the apparent motivation was the high income tax rates which then applied. One must also assume that any individual who was able to implement such a strategy had close co-operation and support from their ex-employer.
In more recent times, the CRA has expanded the application of the PSB rule in an effort to assess individuals who are now described as Incorporated Employees. This suggests that you do not need to have been an employee of the corporation; you just have to look like you were an employee. This can open up a can of worms.
December 13th, 2010 by Frank McCrea
As in my last post, I have to start by stating that I am not an accountant and this is just my opinion and understanding. I also recommend that consultants always get professional advice in all accounting and tax matters.
Retained earnings are funds excess to a company’s owner’s needs, which we can choose to leave in the company. Are they tax free? Absolutely not! There is a cost which begins with corporate tax.
Before earnings can be retained, the company has to pay corporate tax on any excess funds. Most commonly, it is at the small business tax rate. Once the government receives this payment, the “after tax” dollars are considered to be retained.
However, these funds are still inside the company and have only gone through the first level of taxation. They are not ‘in your jeans’, and the second level of taxation has only been deferred until they are taken out of the company. These funds are, however, now available to the company for its use in the generation of future income and this is what I understand to be the intent of the Income Tax.
At sometime in the future, whenever they are taken out of the company, they are then subject to a second level of taxation, in the form of a “dividend tax”. This tax rate varies by province and in Ontario it is 30.5%. It is only after you have paid this tax on dividends that the money is in your jeans for personal use.
To put things in context, if you pay the small business tax rate, 16.5% in Ontario (11% federal plus + 5.5% provincial for Ontario) on excess funds, the after tax amount is termed “retained earnings”. Thus, these retained earnings will equal 83.5% of the excess funds. Once these retained earnings are distributed, the recipient is subject to a tax on those dividends. In Ontario, the tax rate is 30.5%, which equates to 25% of the original excess funds – for a combined tax remittance of 40.5% (the 25% + 16.5% small business tax rate).
While this tax rate, most commonly at least, is higher than what one might have paid if the funds were taken out as salary and income tax was paid, one has to consider that the retained earnings were available within the company after only paying the corporation taxes. Thus, they represented cheap money for the corporation to use in its efforts to secure revenue.