Ontario Apprenticeship Training Tax Credit

The Ontario and Federal Governments have offered the Ontario Apprenticeship Training Tax Credit incentive for a while now and although most dealership owners take advantage of it, there are still many out there that either don’t claim the credit or don’t feel it’s worthwhile.

There is an Ontario and Federal combined credit of approximately $12,000 for every year that a dealership employs an eligible apprentice. The credits are filed in connection with the annual corporate tax filings for the corporation.

There are certain nuisances to the credit that an accountant can work through, yet for the most part, as long as all conditions are met (which is generally the case for an apprentice hired to work in the service department of a new auto dealership), the credit can be quite significant as many dealers hire multiple apprentices over multiple years.

I am an accountant after all so humour me while I do a little math: let’s say a dealership hires 2 apprentices every year for 3 years – that’s approximately a $72,000 credit ($12,000 x 2 x 3), or ~$61,000 after taxes. That must be worthwhile to any dealership owner.

I think what prevents owners from taking action is the fear of time spent and wasted. However, even if you spend an hour or two with an account and it turns out you don’t qualify, you’ll know what you need to do next year to start qualifying moving forward. Or at least you won’t be left wondering if you’re missing out on significant money. Seems like a win-win situation to me.

Also note that if you have not filed credits for prior years, there is an opportunity to amend prior year tax returns and file the necessary paper work for the credit.

As a side note: it’s important that your dealership maintains the required records, including contracts, as it’s quite common for the CRA to request this information following the filing of the corporate tax returns. 

- David

Virtual Showrooms Become Reality

Normally Dave is more geared towards dealership news and I’m more focused on posting financial information that affects the auto industry, but this week our Marketing Manager Jamie Rubenovitch shared some very interesting information with me on a new type of dealership that I would like to discuss today. We’re all used to going online to check out a new car we’re interested in buying and then heading into the dealership next to interact with the salespeople and get the lowdown on our potential new car. This may be a thing of the past as Audi came out with their first virtual showroom in 2012.

My first thought was “what is a virtual showroom?” Well it’s apparently a lot like what we see in the movies – floor to ceiling digital and 3D screens showing customizable vehicle exteriors, interiors, engines and colours. Now that Audi is on to their second of a proposed 20 virtual dealerships (first was London and most recently Beijing), other auto brands/manufacturers are trying to keep up.

BMW is working on bringing “geniuses” to the dealership. Similar to how Apple has a genius bar of technologically savvy people who are available to explain features and answer questions, BMW will have auto savvy, iPad wielding staff available to answer any level of question.

But what are the benefits of a virtual dealership? They enable dealers to have a presence in smaller urban spaces they normally couldn’t have fit in before. If they don’t need sprawling room for 5-15 cars, they can set up shop in a popular mall and reach more people.

Consumers also benefit from being able to see the ins and out of a vehicle without having to drive to the suburbs and climb underneath the hood. On the flip side, could you buy a car without ever actually driving it? I guess that’s what the regular dealerships are for, and they’re not going away anytime soon.

So far virtual dealerships don’t exist in North America, but it will be interesting so see the degree of consumer acceptance. Dealers have significant investments in their buildings and showrooms. Cars still need to be serviced, so that part of the business likely won’t change, however, what happens to the showroom? I believe consumers still want to “kick the tires” and experience first hand the automobile they may purchase. No matter how sophisticated the graphics and websites are, there will be initial reluctance to buy sight unseen. Automobile purchases represent significant investments to most consumers; it’s definitely not like purchasing a cell phone or small electronic equipment. People want to drive the car and see first hand what it has to offer.

So “hats off” to Audi and BMW for their respective efforts to stay competitive and ahead of the curve. However, this accountant feels that we are still years away from automobile dealers shutting down their showrooms and displaying their cars only on digital screens. Mind you, if consumers are offered virtual rides in the future that realistically represent rider experience, who knows what may happen. 

- Jeff

HST-Exempt Financial Services No Longer Exempt

This week I want to address a topic that’s very important for auto dealerships. The CRA made a significant change to HST rules that directly affects dealerships, and in turn, their cash flow. The change was made a while ago yet not everyone seems to be aware of the modification or the new developments surrounding it so I think it’s worth mentioning.

The CRA has narrowed the definition of HST-exempt financial services. What does this mean for dealerships? Most auto dealerships have a finance department that helps customers arrange a lease or loan with a financial institution. In return, the dealership receives a commission from the financial institution. This commission, or fee the dealership receives, is no longer always an exempt financial service – under these new rules the fee may now be considered taxable and subject to HST.

This means you have to be careful how you structure the agreement with your financial institution of choice and be mindful of the added tax you may have to pay. Keeping these factors in mind will ensure you’re not surprised in a tax audit.

The CRA made this change a while ago, however, the Canadian Automobile Dealers Association (CADA) is working to overturn the legislation and make dealership’s arranging financial services tax exempt. There are possible circumstances which could enable a dealership to object to an audit assessment from the CRA; I highly suggest you speak with your accountant to check if your particular circumstances apply. Meanwhile, keep in mind that if your dealership has already received an audit assessment, you have 90 days from the date of assessment to file an objection.

Have you been hit by the new HST changes? If you have I’d be interested in hearing your story in the comment section below.

- Dave 

Auto Industry Statistics

Recently Dave has talked a lot about the state of the automotive industry in Toronto and Ontario, specifically through the lense of the auto clients we work with, which gave me the idea of using today’s post to look at the big picture of what’s going on with the auto industry across Canada. The following are some interesting facts* about the industry:

• Canada is the world’s sixth-largest exporter of road vehicles.
• We account for 16% of North America’s vehicle production.
• There are 1,300 auto companies in Canada with revenues totaling over 70 billion dollars.
• Annual exports total over 50 billion dollars.
• There are over 111,000 Canadian autoworkers skilled in engineering, machining, welding, metalwork, manufacturing systems and services, robotics, tool-and-die making, etc.
• Ontario alone has over 300 parts manufacturers and 88,000 skilled workers.
• In the 10 year period leading up to 2011, more than 3 billion dollars in annual capital investment and more than $450 million in annual R&D spending was invested in Canada’s automotive industry.

That shows a lot of vehicles being built in Canada, and a number of sales to be broken out over the various dealerships located throughout Ontario. If you own a dealership or are a controller at a dealership, there are a number of tax planning strategies you should be taking advantage of. To list a few: holding companies, family trusts, purifying your dealership of its redundant assets, creditor proofing your dealership, share for share exchanges and planning considerations for business sale and/or succession.

Leave a comment below for more information or if you have a question, or check out this page for additional information on tax planning.

                              

*Facts are taken from the Canadian Government’s “Invest in Canada” website.

- Jeff

Suzuki Canada Follows American Suzuki Automotive Shut Down

In spite of protests that Suzuki Canada was going to remain in the automotive industry after their US counterpart American Suzuki restructured to focus on motorcycles and ATVs, I had suspicions that the Canadian branch would soon follow suit. I was unfortunately right.

Suzuki Canada has now officially announced the end of their auto division. The will be discontinuing auto sales after their 2014 model to refocus, like the US, on motorcycles, ATVs, and their marine branches. This could give dealerships anywhere from 12 months to the end of 2014 to either shut down or sell Suzuki’s other products.

While Suzuki Canada sold over 13,000 cars just 5 years ago, they sold only 5,500 last year, and American Suzuki ended last year with 25,350 cars sold – a definite year-over-year decline for both.

Suzuki made this statement a few months ago in response to concerns that Suzuki Canada would follow American Suzuki’s lead: “Suzuki Canada Inc. is a completely separate entity than American Suzuki Motor Corporation. We are completely independent of one another, and you will not see a rollback in dealerships for Canada.”

This latest quote shows Suzuki Canada’s reasoning behind their decision to in fact shut down their auto division: “[We have] been monitoring market conditions carefully and, after reviewing the long-term viability of automotive production for Canada, [we] concluded that it was no longer feasible to produce automobiles for distribution and sale in the Canadian market.”

Suzuki is by no means the only automotive manufacturer having troubles in this economy, but they seem to be struggling especially hard as Suzuki Motor Spain also closed its motorcycle plant in Spain as of March 2013. Suzuki sold more than 10,000 motorcycles and marine vehicles in Canada last year, but this development in Spain signal the imminent end of Suzuki motorcycles and Suzuki as a whole? Only time will tell.

-Dave

Watch Out for the Taxman and Restrictive Covenants

What do you get when you use an elephant gun to kill a mosquito? You get the Canada Revenue Agency attempting to close what they perceive as a loophole and catching a lot of other innocent taxpayers.

Let’s bring some context to my statement. A number of years ago, 2003 to be precise, tax legislation was proposed to close the perceived abuse that might transpire as a result of the Fortino and Manrell cases.

The Fortino case involved the sale of Fortinos Supermarket Ltd. to a competing grocery store chain. The transaction involved the sale of shares and a non-competition agreement. An amount was allocated to the share sale as well as the non-competition agreement. The non-competition agreement stipulated that the vendors would not compete with the purchaser for a certain number of years.

The taxpayers reported the share sale in their respective tax returns but did not report the proceeds from the non-competition agreement. They argued the amount received represented personal goodwill, not income from a source, and constituted a windfall. The Minister of National Revenue disagreed and first reallocated the non-competition as additional proceeds on the sale of shares then later as just income. The Fortinos objected and won their case at the Federal Court of Appeal.

To close this loophole, the CRA recently drafted legislation that states the taxation of amounts received pursuant to non-competition agreements are taxed as income, not capital, and stipulates that an election must be filed to recharacterize the amounts as proceeds from the sale if certain conditions are met.

The draft legislation is extremely complex and burdensome. Needless to say, if you are contemplating selling your dealership in the near future, you should contact a tax advisor to ensure you don’t fall into any tax traps as a result of this proposed legislation.

- Jeff

The Vanishing Margins

I wish I had the all the answers, but I unfortunately don’t. The automotive industry is going through a tough time right now and after speaking with a number of my automotive clients, I decided to write an industry overview this week.

Auto dealers, much like other franchisees, are being put in a difficult position as the large brands are charging dealers more to purchase their vehicles, yet dealers can’t charge the same amount more to customers as many people are earning less than they did 5 or 10 years ago. It’s reminiscent of the aviation industry where fuel prices rose and rose and the airlines had to fight with consumers and the media to justify their increased surcharges.

Furthermore, while only a few airlines fly to certain cities, there are currently a vast amount of choices available to consumers when it comes to choosing a vehicle to purchase. The result has been that each auto dealer is fighting even more than before for a small percentage of the dwindling consumer purse.

Let’s look at a few of the major issues facing automotive dealerships and the solutions some sharp dealers have come up with.

·        Market share is driven in large part by vehicle quality and corporate marketing, but there are a number of external factors that can’t be controlled by dealer owners, such as consumer taste and the economy. This can make it feel like dealers have few options available to them when trying to maintain market share, profitability and sustained growth.

·        To complicate matters further in this scrambling market, manufacturers have a number of programs that dealers have no say in but have a direct impact on dealers.

·        Many dealers have combatted this trend by acquiring numerous dealership points as a way to spread overhead amongst the different dealerships. The end result is similar margins, lower overheads and thereby same or higher net income. This is a strong model and likely sustainable for the short term. However, this too will eventually become ‘old news’ and dealers will have to become even more creative.

·        Other standalone dealers have explored the idea of offering additional services at their dealership such as a collision center, used car department, stronger F&I department, etc. The additional services offered at the dealership allow for diversification of risk in times when new car sales are not as strong.

·        The government also has a number of programs that can help dealerships – corporate tax rates have been coming down consistently, apprentice tax credits have increased, HST harmonization has improved cash flow

·        Auto dealers can also take advantage of various tax planning arrangements in order to maximize their corporate and personal after tax returns, for example the family trust (a formal discretionary family trust governed by a trust agreement drafted by a lawyer, not to be confused with an “in trust” account provided by your bank).

If my overview leans toward the dreary side, let me know what you think – will margins increase again in the future? Will the cost to produce automobiles stop increasing or decrease?

- Dave