Mark: Welcome to Unsuitable On Rea Radio, the unique financial services and business advisory show that challenges your old school business practices and the traditional business suit culture. You'll hear from industry professionals who think beyond the suit and tie, offer meaningful modern solutions to help you enhance your company's growth. I'm your host Mark Van Benschoten. We have some very special guest joining us today. On today's episode of Unsuitable we have Michael Daren, Eli Gembom, and Andrew Shalit who are partners with Segal, LLP an accounting and business advisory firm located in Toronto, Ontario, Canada.
Recently the trio provided some of our local business owners with insight into the Canadian market and what they should expect when doing business with our neighbors to the north. Great idea aye? Gentlemen thank you for joining us on Unsuitable today and before we get started just a little something off topic, any snow in Toronto yet?
Andrew Shalit: Not yet, but we're hoping for a cold frosty winter.
Mark: Hoping Andrew? You want a cold frosty ...
Andrew Shalit: Yeah, we love the snow.
Mark: I don't know if to take my brother to the north seriously or they're being facetious there.
Eli Gembom: I'm going to go for the record and say I don't like the snow.
Mark: Oh thank you Eli. I'm glad you see that the same way. To get started, Michael maybe you can set the tone for us. What is the business climate in Canada right now?
Michael Daren: You just heard there's no snow. Oh, you mean the business climate?
Mark: The business climate yes. Yes.
Michael Daren: It's very good. We managed to come through the recession of 2009 pretty much unscathed and we minimally felt it. Since then the economy's been rebounding. The Canadian dollar is weak because all prices are weak, commodity prices are weak. That actually serves to really help us export products to the United States because we can be super competitive with a 75 cent dollar. It's sort of hurts when we want to come to outlet malls in the United States but in terms of business it's a very positive thing. What's going on in Canada right now, the eastern part of the country is doing extremely well, there's lots of growth. There's enormous amounts of construction in Toronto. In fact in Toronto there are more high rise condominiums being built than any other city anywhere in the world, that's including Mexico, China. We have over 130 condo projects and it's been that way now for about 8 to 10 years. It looks as though it's just never going to end.
Partly it's because we have tons of immigrants, we have roughly 100,000 immigrants a year who come to Toronto alone and they are driving economic force. Eastern Canada's doing very well. Western Canada is suffering because of the oil price. It's pretty tough in the west but in the east it's very, very good.
Mark: I know it's not a political show but we had the recent Keystone pipeline decision here in the States, does that have some impact? What's the sense of that up in Canada with our president not allowing that to go forward?
Michael Daren: It depends on your point of view and some people in Canada were extremely happy because they share the environmental concerns that your administration put up front and center. Obviously people in western Canada who are directly impacted by Keystone and other pipelines, it's not just Keystone, they're pretty miserable about it because it was going to create a ton of work at a time when jobs are needed. As you know we have a new prime minister, you're going to have a new president in ... What is it, less than 18 months now? A little over a year I suppose and I think the thinking is in Ottawa that, "Well we got a new prime minister, new president, maybe it's not a dead issue." I guess it really depends which administration you guys end up with, we're going to have to wait and see on that one.
Mark: Thank you for that insight. I find that to be very enlightening to me just to get a different perspective. You know we tend to read the same ... I tend to read the same news sources over and over again just to get that perspective I appreciate you giving that to us. Andrew on the doing business, actual doing business in Canada, how would you ... Down here you say you work for the IRS very negative, you tend to run ... I don't know if any neighbors or friends who would work for the IRS. How would you, your counterpart the CRA, how would you compare them?
Andrew Shalit: I think that they do a pretty good job. I think they do try to be helpful to the taxpayers in Canada. It's a difficult job for them because for them by its very nature, they're going to be dealing with a bunch of unhappy customers. However, it is important job and they have to take it seriously and they do treat pretty much everybody fairly. It seems, however, that when it's you they're picking on they're not treating you fairly. In my view they do a fine job.
Mark: You're not under audit are you? I mean you seem to be complimentary terms there. As I said here, I'm an audit partner so taxes scare me, US taxes scare me. You say Canadian taxes scare me even more. If I was contemplating going into Canada I would be quite nervous. What would be the first thing I should do? If I'm contemplating doing business in Canada what should I do first?
Andrew Shalit: I think the most important thing you need to do is to plan ahead. That would mean talking to people who understand the business environment, deal with professionals who have experience, speak to industry trade groups and associations to do your homework. There's a lot of helpful information you can find on the internet, even on the Canada Revenue Agency website, there's a lot of helpful information. Do your homework first, plan ahead, and you'll be in good shape.
Mark: Thank you very much. In the States we have taxes and we have a lot of different taxes. We have sales and used tax, we have an estate tax, we have payroll taxes, income taxes, capital gain taxes. Are they all applicable? Eli you want to try this one? Are they all applicable in Canada?
Eli Gembom: The Canadian system is completely different from the US system. We have some things in common. We have income tax, we have a certain amount of tax on death. It's different from your estate tax. From that point there is some similarity but there are significant amount of differences. To Andrew's point, you can not be an expert in every field so if you have significant Canadian tax exposure you should speak to the right professional that can help you navigate that minefield.
Mark: Great. Andrew, previously off mic you had mentioned this concept of that you might be able to do business within Canada and not pay any tax. That just seems very foreign to me because I think in the United States, in the State of Ohio, even in my municipality if I do business that, even one day, maybe even one hour, I'm going to owe an appropriate amount of tax. Can you just very at a high level talk about this within Canada versus doing ... with Canada and in Canada, that concept you explained to me before?
Andrew Shalit: If you're going to do business with Canada from outside of Canada you should not be subject to taxes in Canada. On the other hand if you're going to do business in Canada and have an actual presence there whether it's operating in Canada with boots on the ground or having your own premises or importing product into Canada, then you'll find you're liable to tax in Canada. The next step however would be to look at the Canada/US tax treaty and see if there's any protection that you can get and you might find you don't owe any tax after all.
Michael Daren: If I could just ...
Mark: Please Michael.
Michael Daren: ... jump in there Mark. Anything that is not familiar to us is scary. We don't like things that we don't anticipate and we're not comfortable with. I've looked at many US tax forms and they scare the living daylights out of me because I'm not used to them. I would say that our forms are probably as complex as yours. To me they're not because I'm used to them. It's going to some of the terminology like GST and HST, it's going to sound so alien to someone that's not used to doing business in Canada, but in fact they're just different acronyms. CRA stands for Canada Revenue Agency. IRS stands for Internal Revenue Service. It's all the same, it's the taxing body and you want to deal with people who not only know the compliance rules but can look at the form and say, "Yeah, well we don't need that, we don't need that, but we do need that." It's simply a question of familiarity. Very few business people that I know, and I've been in business a long, long time. Very few people that I know understand the income tax act. It's very, very complicated, it's very large and to even attempt it is probably very foolish. Don't be intimidated by it, just find a professional who is immersed in it and yeah you'll pay a professional fee but it's done and you'll be on side and you'll be able to sleep at night.
Mark: Great point, great point. Do you have a lot of business, Canadian companies going into the States or do you have more people from the States going into Canada?
Michael Daren: Really depends how you define that. Roughly 80% of Canada's exports go to the United States, so tremendous amount of cross border activity. In some cases it's merely a Canadian company selling into United States. In other cases it's Canadian companies doing business in the United States. I couldn't measure that. I think the trade from our selling products to you as a percentage of what we do is very, very high. In dollar terms we actually buy more from the United States then we sell. I have noticed in the last maybe 4 or 5 years enormous number of US companies coming into Canada for a couple of reasons. First of all we didn't have the recession as I mentioned earlier. Canada in terms of its buying power is similar to the State of California. Now I can't imagine many US business saying, "Ah, let's not bother dealing with California." If they don't deal with Canada they're actually making the same statement because we at about 35 million people. An enormous middle class. We don't have the disparity of incomes that you have in the United States, so it's a pretty good place to be doing business. A lot of American companies, I think, have recognized that.
I have also seized on the fact that they can buy a dollars worth of assets for 75 cents, now that's pretty attractive. We're seeing Nordstrom's coming in, we saw Target come in and yes they came and they went. It's not that their initial strategy was wrong it's that their execution was pretty poor. Sachs is coming, Bloomingdale's is ... All of these major, major retailers. Nothing's obligating them to come and do business in Canada they've just figured out it's time to make that play.
Mark: Our clients aren't as large as Target and Nordstrom's, and Bloomingdale's, but I feel that there's a tremendous sense for here in Ohio, just across the lake to Canada, that they should be taking advantage of these. I really liked your point Michael about not being intimidated. It's a lack of familiarity that causes the angst and you can educate yourself, you can pay a professional, and you can get that accomplished. It sounds like people might be missing at an opportunity that they don't need to do. They could be doing business up north and doing it very well.
Michael Daren: Even if you start off by saying okay Canada's a huge country where do I start? If you started in the City of Toronto, you're dealing with the 4th largest city in North America. You've got New York, Los Angeles, Mexico City and Toronto. It's not tough to just put your toe in the water and say, "Well, why don't I start trying to do some business in Toronto and from there I'll go to Province of Ontario." Province of Ontario alone is 14 million people and maybe next is Quebec with 8 million people. In 2 provinces alone you got a market of 22 million people, you got a highly educated workforce, there a law abiding citizenship. We speak, well I guess we'd call it a similar language. Okay, same language. It's not a hard place to do work in and don't be intimidated by taxes.
Mark: Eli, is there any cultural differences that we would need to be concerned about as we do business in Canada?
Eli Gembom: I think for the majority of Anglo Canada they grew up watching American television. They follow closely American politics, they're very up to date on American pop culture. I think for the most part, and especially if you're dealing with a province like Ontario, you're going to feel like you're talking to an American. There are some differences but we're very south really focused. Now of course there are some regional differences, for example like Quebec. There's a high [Francophone 00:13:28] population. It's a Francophone province and they have their own culture. If you're looking at Eastern Canada, I think you're going to find it very similar.
Mark: Do you notice any differences ... Not to answer the question I'm going to ask you. Do you see any differences when you come down to the States to do business? Michael's shaking his head.
Eli Gembom: Michael's shaking his head yes. I'll tell you this, me and my wife took a trip to California a couple years ago and that was our favorite trip because we felt like we were at home. We were in wine country, we were on the 101, it was gorgeous. We didn't really feel like we were ... We felt at home but with some new scenery. I even say one hand a vacation where everything is the same. What kind of vacation is that? We really enjoyed ourselves. Now Michael may have an opposing view.
Michael Daren: No not at all. I'm a big fan of the US. I have a vacation home in the US and I spend, I don't 16 weeks a year here. Your question was actually about business and not about travel and there are, I think, some really significant differences. For example, you have something like, I believe, 4,000 banks. We have 6. Right there, huge difference in how business is done. The legal structure is very, very different. I've done a number of transactions in the United States. The terminology is different, that's why [crosstalk 00:14:57] when I said we speak the same language, well we sort of do but there's very big but. There's a huge difference in the way business is done. Some of the legal concepts are very different between the 2 countries.
Mark: Interesting. On your banking I understand that the banks are open on Sundays in Canada, is that correct?
Michael Daren: That is true and some of them open until quite late at night. We have had chips in our credit cards for the last 5 years. We go down into the US and there's the old stick it in there and you get a piece of paper and you sign it, we're like, "What?" We're ahead of you guys in some ways but it's not because we're smarter, it's because we've got 6 banks not 4,000. It's a heck of a lot easier for that chip system to be working. Andrew was talking earlier about Canada Revenue Agency, the ability to conduct business online in Canada with the tax department is amazing, it's brilliant.
Mark: We don't have that here.
Michael Daren: No and because you're 350 million people and we're 35 million people so it's a lot easier for us. I can go online and look up any one of my accounts, my company, myself, my wife. I can see the status of tax returns, how much we owe, what we don't owe. What my last carry forward balances are and blah, blah, blah. My lifetime this and my lifetime that. Very sophisticated technology. These are some of the differences, I think the biggest differences though is one of size. You guys are still by far the largest economy in the world, we're the size of California and clearly that creates differences.
Mark: Good point. Michael before you had mentioned GST and HST, Andrew can you quickly just go through that technical subject as what those are?
Andrew Shalit: The GST stands for goods and services tax and it's our federal system of sales tax. It's a 5% sales tax rate and it applies to all goods and services. The HST is the harmonized sales tax and that's the provincial component added on to the federal component. Every province, that's their own provincial tax rates. Some provinces participate in the HST system, some provinces do not participate in the HST system and they have their own independent provincial sales tax. Some provinces I think only one Alberta, has no sales tax at all.
Mark: Thank you for that and the reason I keep asking that question of you because I asked you before is hopefully to gain my familiarity, so I'm not intimidated by it, but I can figure it out at some point through repetition. One thing that we haven't discussed today is exempted organizations. I have a large tax exempt organization and our exempt organization clients have to file an information returns IRS form 990 and there's certain transactions that a not for profit can enter into in the United States that cost tax and it's not illegal, there are profit motives. Do you have something similar in Canada for you exempt organizations?
Andrew Shalit: There are similarities in Canada, there's different status of entities that are exempt from tax. They could be charities for example. There's a whole separate set of rules applicable to these tax exempt organizations and they have to abide by them and if they go offside they may actually lose their tax exempt status and find themselves subject to tax.
Mark: Scary thought there. Eli, question for you I know you're an audit partner. Any differences between we have US Gap and we think that should be worldwide Gap, are you [inaudible 00:18:34] or are you Canadian Gap?
Eli Gembom: We actually do a combination of both. In Canada we have a concept know as Gap for private companies. If you're a private company and you're primarily producing your financial statements for bank reporting, you have a special set of accounting rules for this sort of company. They're basically [inaudible 00:18:56] IFRS and there's less disclosure and the financial statements are smaller, and in some cases the accounting is simpler. The purpose of this is to say look I'm a private company, I don't need all this sophistication, most of the users of my financial statements could get additional information if they need it and that's Private Company Gap, it's called ASPE, accounting standards for private enterprises. However, in Canada if you are a public company or if you're for example an investment fund and you report to a certain securities commission, you do have to report an IFRS and then you're looking at substantial financial disclosures and I would say more difficult accounting rules.
Mark: Sure. For the smaller or the private companies, is that a Gap based statement or we would call that another comprehensive ... other comprehensive basis of accounting, OCABOA statement here in the States. We have the FRF for SME's so for small, medium enterprises.
Eli Gembom: For us regardless of which of these frameworks you use Gap, Gap is Gap, it's just that you have a 2 tiered system depending on what kind of organization you are. Yeah.
Mark: Again, you're simpler. For some reason we confuse it I don't know why we do that. Gentlemen before we wrap up, I appreciate you taking the time. We have a question for each of you. This is for all of our guests, you're not being singled out here. If you could have one super power what would it be and Andrew we'll start with you?
Andrew Shalit: I would wish to have the ability to go back in time.
Mark: Back in time. That's interesting. Michael?
Michael Daren: That's interesting you said that. Can I have 2?
Mark: Please.
Michael Daren: I want a magic wand to create world peace. That's one and the second I would like to go forward 500 years.
Mark: Very interesting, well thought out there. Eli?
Eli Gembom: Yeah, I think I'd like to be able to read minds because I think that would help me in my married life.
Mark: Gentlemen thank you for joining us today and a big thank you to our listeners for tuning in. This was an informative conversation but I think that we've only just scratched the surface. To our listeners if you have more questions about doing business in Canada you can send questions in your feedback to podcast@reacpa.com. We'd love to hear from you. You can also find some great resources at www.reacpa.com/podcast. Until next time, I'm Mark Van Benschoten for Unsuitable on Rea Radio encouraging you to loosen up your tie and think outside the box.
