This article was originally published on October 4 2019 by Globe and Mail Inc. 

At your company, are you a jack of all trades or master of one? Shakespeare might put it like this: ‘To specialize or not to specialize, that is the question.’ Indeed, it’s a question often asked by business owners, managers and leaders.

Adam Smith, who is often regarded as the father of capitalism, wrote The Wealth of Nations where he described a pin factory with 10 employees who divide the work of making a pin into multiple steps, each person an expert at one step. Think of it as a precursor to the automaker’s assembly line. Using this model, Smith reasoned that pin production is greater than if each employee had performed all the steps in making the pin.

While that might work great for pins, what about something like professional services?

Large professional services firms tout themselves as “one-stop-shops.” At first glance, they appear to be generalists in such areas as audit, tax and advisory services. However, their services are broken down further into highly specialized practices led by experts in their respective functional areas.

For the customer, this can be the best of both worlds – all the expertise they need in one place and a collaborative “team” of people to deliver the goods.

The reality of this model is that experts are rarely the ones doing detailed work. They may serve as client contact or provide sign-off on the file, but the work is done by more junior staff who may be off-site or even offshore.

Such an approach would tend to follow the Adam Smith approach to greater productivity.

I’m familiar with the accounting industry. The Big Four firms employ a model encompassing many service lines for clients to choose from. Oftentimes, individual employees become specialized in one area, which can happen early in that person’s career, limiting exposure to other service lines.

This is great for achieving firm-wide efficiencies and developing experts in many areas, but where does it leave the employee in terms of skill development? Adam Smith identified this as well. He observed that individuals who do only one thing may be very good at it but lose the ability to grow and typically end up stagnating in their career.

In fact, most professional services practitioners want a broad scope. They don’t want to be stuck in the same silo their entire career.

Today professional service firms have specialization within the organization which means professionals are not exposed to multiple disciplines. In the world of tax, which is what I know, very rarely does a transaction or tax event happen in a vacuum. Thus, only by exposure to everything does the accounting professional get to test the waters and see what disciplines they enjoy.

Specializing too early in one’s career can be a liability. Imagine a doctor who skips right to neurosurgery and doesn’t get a foundational knowledge of the human body. The same logic can be applied to specializing in a certain area of taxation.

When the neurosurgeon graduates from medical school and starts a practice, do they incorporate or operate as a sole proprietor? A tax professional who focuses only on corporations would tend to advise to incorporate because that’s what they know. But it may not be the best advice.

If the neurosurgeon is a Canadian who went to medical school in the United States and decides to practice there, they need an accountant familiar with tax complexities south of the border. In my business, I often come across accounting professionals, as well as lawyers and financial advisers, who lack basic foundational skills because they never got this cross-section of experience. In other words, they worked in a silo.

My firm hires cross-border taxation experts, many of them from a Big Four environment who were frustrated with career-stifling silos.

Every business wants to reduce costs and gain market share over competitors. But how do you contribute to those factors and avoid becoming too specialized?

1. Focus on the “big picture” for your career. First, do the foundational work in order to increase the efficiency, accuracy and overall value of specialized work.
2. Think twice about being called ‘expert.’ It looks good on paper but being pigeonholed can be career-limiting. Explore areas that are unfamiliar but related, and work for people who prioritize career growth. Given the chance, you could be more valuable to your company in a different role.
3. Bring your ideas and perspectives to the table and have a say in what you do. Being fully engaged in your job will always produce optimal results.

In today’s marketplace, the value of specialization doesn’t come from being laser-focused on one area. It comes from knowing many things that impact that area.

 

The Canada Revenue Agency (CRA) sent more than 700,000 records to the U.S. Internal Revenue Service (IRS) in 2017 as part of a tax-information sharing deal between the two countries, said a CRA official during a roundtable discussion at the annual national conference of the Canadian arm of the Society of Trust and Estate Practitioners (STEP Canada) in Toronto on Friday. The figure is current as of April 2019.

In 2014, the Canadian government signed an intergovernmental agreement (IGA) with the U.S. to exchange tax information on each other’s tax residents on an annual basis.

Under the IGA, which took effect in 2015, Canadian banks and other financial institutions report information on their American accountholders who have an aggregate balance of US$50,000 or more, excluding balances in some tax-sheltered accounts, to the CRA, which shares the data with the U.S. government.

In effect, the IGA implements the U.S. Foreign Account Tax Compliance Act (FATCA), a law passed in the U.S. in 2010 that compels global banks to report on their U.S. clients to the U.S. government. FATCA was designed to prevent offshore tax evasion by U.S. taxpayers.

So far, the U.S. government has not requested any further information in respect of the data sent by the CRA, said panellist Marina Panaourgias, an industry sector specialist in the trust section of the income tax ruling directorate of the CRA.

Terry Ritchie, director of cross border wealth services at Cardinal Point Capital Management in Toronto, suggests he isn’t surprised that the IRS has made no further inquiries about the exchanged data.

“Now that they have that information, what is the IRS likely to do with it? Probably nothing,” Ritchie says. “They have more problems in their own backyard that they should be more attentive to than to be chasing non-compliant U.S.-resident taxpayers in Canada.”

In recent years, global governments have made it an increasing priority to clamp down on offshore tax evasion.

For example, in 2017, Canadian financial institutions began identifying accounts belonging to individuals who are tax residents of foreign countries and reporting that information to the CRA under the Common Reporting Standard (CRS) regime, which was developed by the Organization for Economic Co-operation and Development. Canada began exchanging that information with foreign countries under the CRS the following year.

This article was originally published on June 7 2019 by The Advisor’s Edge (www.advisor.ca)

What is Subpart F Income?

Generally, the taxation of earnings and profits in the U.S. of a controlled foreign corporation (“CFC”) are deferred until repatriation through the distribution of dividends. A CFC is a foreign corporation that is owned more than 50 per cent of vote or value by a U.S. person or persons (i.e. U.S. citizens, resident individuals, U.S. partnerships and corporations, non-foreign estates and U.S. trusts) who each own at least 10 per cent of vote or value. However, there are exceptions to the deferral with respect to passive and certain types of active business and personal services income. These types of income, under specific circumstances, are taxable in the hands of the U.S. person whether or not distributed to the shareholder. The deemed income inclusion is what is referred to as “Subpart F” income. The Subpart F rules are anti-deferral provisions to prevent U.S. persons from delaying the recognition of taxable income through the use of foreign entities.

What are the changes?

Beginning in 2018, a US citizen resident in Canada, who is required to accrue passive income (or other subpart F income) on his US personal tax return under the subpart F provisions of the CFC rules, will exclude the income from his US tax return if a Canadian corporate tax of over 18.9 per cent is paid on the income. This is what is commonly referred to as the “high-tax exception”. In Ontario, investment income is taxed at 50.17 per cent to the CFC (including capital gains taxed at 25.09 per cent), therefore, the high-tax exception would apply to exclude the investment income from being taxed currently as subpart F income. The current provisions ignore any subsequent reduction to the corporate tax as a refundable dividend tax on hand (“RDTOH”) once the income is distributed to the shareholder as a dividend for purposes of the high-tax exception.

Why were the changes enacted?

Treasury is aware that certain jurisdictions use a tax integration system where the corporate income tax paid by the CFC is refunded when the income is distributed, even if the shareholder is subject to little or no tax on receipt. This has raised concerns where CFCs are formed specifically to exempt passive income (or other subpart F income) from US taxation under the high-tax exception. To address this perceived abuse, proposed regulations were released on November 28, 2018 that modify the high-tax exception. Now, if foreign taxes paid or accrued are reasonably certain to be refunded to the shareholder on a subsequent distribution, such foreign taxes are not treated as paid or accrued for purposes of the high-tax exception.

What about capital gains?

As previously noted, Ontario’s tax rate on investment income is 50.17 per cent. After the RDTOH, the tax is reduced to 19.5 per cent on a subsequent distribution and the high-tax exception should apply. However, the high-tax exception with respect to capital gains will not be available due to a reduced tax rate of 9.75 per cent after the credit for the RDTOH. There may be situations where accumulated RDTOH can reduce the effective tax rate to below 18.9per cent. In this case, the high tax exception will not apply.

The regulations are still in proposed form and may change after the IRS receives comments from the public. If enacted in its original or revised form, it will be effective for tax years ending after December 4, 2018.