Archive for May, 2009

Back in March, when the Provincial and budget was announced, it was revealed that the PST and GST would be combined to form the Harmonized Sales Tax (or HST) in Ontario. When it was first announced that Ontario will be switching over to this system, I will admit that I was a little perturbed about it, as it means that the HST will be substituted for items that don’t even have PST on them – such as gas. But what does it mean for businesses? Well, there are some good points as well as some bad ones.

On the negative side, you’ll have to pay 15% tax on items that you did not have to pay for before – such as heating, gas, water, building repair services, plumbing… the list goes on. This means that, yes, we will have to pay more for some items than we previously had to.

There are, however, some good things that businesses can expect to see. Businesses will be able to use input tax credits for HST – so not all of the money a business collects as tax from a customer has to go to the government.

Similar to what businesses did previously with the GST, they will be able to deduct the HST paid on products and services that business purchases in order to run any commercial operations. Due to this, on average most businesses will end up paying less taxes, and theoretically the money that is going through the economy will be taxed less often than it had been previously.

It is also expected that this will result in Ontario becoming more attractive to investors due to these tax credits and rebates.

Ontario is not the only province to have HST instead of GST – currently, the Atlantic provinces have already been using it for a few years. When the harmonized taxes were introduced into the Atlantic provinces, they found that there wasn’t really much of a change as far as business goes – for example, it did not lead to more outsourcing, which is one of the concerns people in Ontario cite. As well, small and medium sized businesses found that the HST was more helpful to them than having to pay both taxes.

So what does this mean for you? Well, as a consumer it still appears that we get the short end of the stick, but if businesses can benefit as much as we’re told they will, then perhaps in this economy it’s not a bad thing.

If you do have any comments that you want to leave the McGuinty government, you can do so through their website.

The Industrial Research Assistance Program that the National Research Council of Canada has (NRC-IRAP) has long been of assistance to companies in Canada who need funding for research purposes. About a month ago, NRC-IRAP announced a new review process: the Small Project Accelerated Review Process.

This process was designed to help grow the business of SMEs in Canada – help small and medium sized businesses not just with R&D efforts, but with market research or process changes that will help benefit and grow your company.

What does this mean for you?

Quite simply, if you are a small or medium sized business, and are only doing a project that requires a maximum contribution of $50,000 from NRC-IRAP then the NRC-IRAP has created a streamlined process to get you your funding FAST.

So what kind of projects are acceptable for the accelerated review process?

• R&D projects that are limited in scope and nature
• Lean manufacturing/productivity studies
• Prototype engineering
• Development of business plans
• Branding creation and enhancements
• Market research studies

There are of course a lot of other types of projects acceptable for the review process, but this is just a small selection to give you an idea of the great variety there is that is applicable. You can get more information about this new funding process here.

Many of our clients have exposure to foreign currencies within their yearly business cycle, but do not utilize the array of foreign exchange tools that are available to manage the risk of fluctuating currency values and the profits associated with those risks. Net Exporters hope for a weak Canadian Dollar in order to maximize revenues from foreign currency sales. Net Importers hope for a strong Canadian Dollar to keep input costs low. There are even clients who need to buy fx for certain parts of the year and then sell fx for other parts of the year. Managing the foreign exchange risk can make the difference between a good and bad year for many of our clients.

The three main tools used for managing foreign exchange needs are:

1. Spot purchases
2. Forward contracts
3. No Cost Forward Collars

These tools are ranked by most often used, but not necessarily in importance. If you are not familiar with more than one type of tool, you may be adding risk and losing profits to your enterprise unnecessarily.

Spot purchases are most familiar to most Canadians. A simple example is when you are planning a trip to the USA, you first visit your local bank and buy an amount of US dollars (in cash or travellers cheques) that you will need and hope that the exchange rate is “good”. The teller looks up the exchange rate , say 1.20, applies the rate to the amount of US funds you need, and then takes your hard-earned Loonies to pay for the exchange. When you get back from your trip, you take your left-over greenbacks to the bank and exchange them back to Loonies, at a rate of say 1.15. The spread between the buy and the sell rate represents the transaction cost for you and a profit for the bank. It is a very convenient method if you have an immediate need for foreign currencies. However, for businesses, you are giving up future fx rate predictability in exchange for today’s convenience. You may be adding risk to your profits unnecessarily.

Forward contracts allow you to choose and lock in an exchange rate at some point in the future. This can be a great method for businesses to lock in profits associated with the exchange rate. Say you get a $100,000 purchase order from a US customer today for shipping in 90 days. This is a good customer who does pay within 30 days. You know that you will receive US$100,000 90-120 days from today. Instead of risking that the exchange rate will be in your favour 90-120 days from today, you can lock in a rate by purchasing a forward contract that will come due 90-120 days from today. And here’s the best part: you can use the forward contract as a risk mitigator by contracting for less than 100% of the expected revenue. You can buy a contract for (say) half the expected amount and spot purchase the other 50%, thereby reducing your fx risk and increasing your known profits today.

The down side of a forward contract is that you must purchase the amount of money by the time the contract expires, whether you need the money or not (orders do get cancelled or delayed). That is why most businesses do not forward contract for 100% of their needs.

No cost forward collars are the least known fx tool to SME businesses. To put it in simple terms (that’s how I like things, generally), it is a forward contract with an exchange range instead of a single point. Your fx broker will buy for you offsetting buy and sell contracts for the same future date that you specify. The difference between the buy and the sell now becomes your fx range. The range will generally increase the further out you get from today’s date.

At that future date there are three possible scenario:
a) The spot exchange rate is somewhere within your fx collar range. The two contracts cancel each other out (at no cost) and you purchase your fx needs at the spot rate. You have effectively managed your fx and your profits within an acceptable range.
b) The spot rate is below your low point collar. You will have to fulfill the low point contract, thereby giving up a small amount of profit vs. the spot rate, but adding a small amount of profit from what would have been the rate of a straight forward contract due on the same day.
c)The spot rate is above your high point collar. You will have to fulfill the high point contract. If you do not need the money, you can sell it back at the higher spot rate and make a trading profit. If you need the money, you will be pleased to have locked in a higher profit than what a straight forward contract would have given you.

Take a second look at your foreign exchange needs and cycles to see if you can utilize these tools to manage your profits upwards and bring your risks down.

Northbridge Consultants are here to assist you throughout the year in managing your profits through SR&ED and general business consulting.