How Can You Claim Expenses on a Business Loss?

By Randall Orser | Business Income Taxes , Small Business

If you are a sole proprietor or partner and file your income taxes on a T1 you need to fill out a Statement of Business or Professional activities on a T2125.  Should your business expenses exceed your business income then you will record a business loss on this form.

"Using" this business loss depends on whether or not you have other income.  If you do you can use the income from your business to offset your other income. This is an advantage for people who work full time and have a side business as you can write off business losses against your regular income.  If you don’t have other income your business loss will not be a tax advantage for you.

Using Your Business Loss in a Different Tax Year  If you have personal income you can offset your business loss up to three years back or seven years forward from the year of your business loss, therefore it can make sense to use your business loss to offset a larger tax bill in the future or the past.

Beware! you Cannot Write off Business Losses Forever  According to the CRA your business should have a “reasonable expectation of making a profit” and will eventually generate more income, reduce losses and become more profitable.  If you continue to write off business expenses for a number of years, then the CRA will decide that you decide that your business does not meet this expectation and will deny your claim for business losses in the current year and will assess your losses in previous years.  See Canada Revenue Agency Profit Test.

Your Business Must be Legitimate  Your business must be seen to be “clearly commercial in nature”.  If you have a full-time job and start a side business, you must have customers and revenue. Otherwise your business expense claims may be denied by the CRA if they decide that your business is not a sufficiently commercial operation.

Incorporation  If your business is incorporated you cannot use business losses from the corporation to offset your other income, except in some cases where investment losses result may from share dispositions or debt. 

Claim Reasonable Expenses  To avoid raising red flags which may result in a CRA audit you should always be reasonable with your expense claims.

From an article by Susan Ward

What are Input Tax Credits?

By Randall Orser | Business Income Taxes , Personal Income Tax , Small Business

Input Tax Credits are the amount that your business paid, or the allowable portion of the GST you paid.  They allow you to recover GST you paid out on business purchases or expenses.  You must be registered for the GST to use Input Tax Credits.  Once you have done this you need to start keeping track of the GST you have paid and enter it into your bookkeeping system.  As with all expenses you need to keep all your receipts to support your claims.

What qualifies as Input Tax Credit?

Some of the expenses that you can claim as Input Tax Credits include:

  • Rent
  • Equipment Rentals
  • Advertising expenses such as business cards, ads and flyers
  • Accounting, legal and other professional fees
  • Home office and motor vehicle expenses
  • Office expenses including postage, computers, pens etc.
  • Travel including hotels, airfare, car rentals

These capital expenses also qualify:

  • Capital property
  • Machinery and vehicles
  • Furniture and appliances
  • Improvements to capital property

You can only claim Input Tax Credits for anything related to your business not for personal expenses.  The purchase or expense must also be what the CRA deems reasonable in nature as well as cost.  You cannot claim Input Tax Credits on:

  • Taxable goods and services bought or imported to provide exempt goods and services
  • Some capital property
  • Memberships or dues to any club whose main purpose is for recreation – this includes fitness clubs, golf clubs and hunting and fishing clubs unless the membership is bought to resell in 

For more information a full list is available on the CRA website

What Happens if You File Your Income Tax Return Late

By Randall Orser | Personal Income Tax

Are you procrastinating about filing your tax return? Wondering what will happen if you file late?  Well what happens will depend on whether you have to pay this year or whether you will get a refund.

Late Filing Penalties:

Those who file individual tax returns late and have a balance owing to the CRA will be subject to a late filing penalty: 

  • 5% of your balance owing, plus
  • An additional 1% of your balance owing for each month your return is late up to a maximum of 12 months

If you have already been charged a late penalty in any of the three previous years, then your penalties for the current year will increase to:

  • 10% of your balance owing, plus
  • 2% of your balance owing for each month your return is late up to a maximum of 20 months

So, to save yourself money you need to file on time by the 30thof April.

Exceptional Circumstances That Can Result in Late Filing:

If you are filing late due to circumstances beyond your control, then the CRA may waive the late filing penalty and interest for more information see IC07-1: Taxpayer Relief Provisions. The CRA will considers the following exceptional circumstances:

  • If you have suffered a serious illness or accident
  • You in emotional distress from a divorce or death of a family member
  • You have suffered a disaster such as a flood, fire, or earthquake
  • If you are filing by mail and there is a disruption of service due to a mail strike

You may also be able to avoid penalties when your delay in filing is a result of action by the CRA such as:

  • Processing errors by the CRA
  • Incomplete or incorrect information on the return which has to be corrected or where the CRA asks for additional information
  • A CRA delay in processing which results in a late assessment of your balance owing
  • Delays caused as a result of reviews, audits, objections or appeals

Financial Hardship:

The CRA can also cancel all or some of your penalties and interest if your inability to pay is due to financial hardship caused by loss of employment, loss of business income, medical bills etc.  If you are unable to pay you will need to provide the CRA with detailed financial information including statements of assets, income, liabilities and expenses. 

If you are unable to pay the amount that you owe on your taxes by the filing deadline you should still file your return on time to avoid late filing penalties.  

From an article by Susan Ward

How to File Your Income Tax Return Electronically

By Randall Orser | Personal Income Tax

Out of more than 25 million tax returns filed each year over two-thirds are filed electronically.  This number is going to grow as the CRA is encouraging people to go paperless 

There are two ways to file your return electronically. If you do your own return you can file through Netfile.  If you have your return done for you or you do one for others you need to submit those returns through Efile Online.  

It is important to keep your personal information up to date with the CRA for the best results when filing electronically.  It is a good idea to set up a MyAccount on line with the CRA so that you can check the status of your return as well as sign up for direct deposits of your tax refund and GST payments. 

Service Canada’s My Service Canada Account or MSCA gives you access to your employment insurance, old age security and Canada pension plan information.  It will also give you access to electronic versions of your T4’s for these services.

Netfile only processes tax returns from the current year, so if you are filing for previous years or wish to make amendments to previous returns you will need paper copies of the relevant tax return forms.   You also cannot use Netfile if you have declared bankruptcy or if you have income from a different province to the one where you live.

When you file electronically you need to collect all your T4’s and T5’s which show your employment and investment income.  You should also have last year’s notice of assessment which shows your RRSP limits and deductions you can carry forward.  You will also need all receipts that support claims for deductions and tax credits such as medical expenses and children’s activities.  You need to keep all your receipts in case you have a future review or audit. 

You will need to use certified software such as TurboTax to prepare your return which will also guide you through the Netfile process.  

For more information about filing with Netfile see https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/netfile-overview.html

From an article from Turbo Tax

Tax Strategies to Reduce Small Business Income Tax

By Randall Orser | Small Business

Are you the owner of a small business that is a sole proprietorship or a partnership and you file your taxes using a T1 Personal Income Tax Return? Here is a list of small business tax strategies that you can apply to your return this year to lower your income tax bill.

  • Always collect receipts for business related activities – it’s amazing how quickly those receipts for parking to meet a client, or having coffee or lunch with a client, mailing letters and picking up coffee for the office can add up especially over a year. Make sure you record and keep all business-related receipts.  The CRA does not normally accept credit card statements as proof of expenditures– you need to keep your original receipts in case you are audited.
  • Manage your RRSP and TFSA contributions – these are both good income tax deductions for small business owners.  As the tax savings are based upon your marginal rate tax it is a good idea to carry forward any allowable tax deductions to subsequent years when you are making a higher income.  A Tax-Free Savings Account allows you to shelter savings and investment income from taxes. If you are maxed out on your RRSP contributions this is a good choice to put tax free cash or investments.
  • Maximize your non-capital losses – When your expenses exceed your income in any year you can use this loss to decrease your income tax bill.  Non-capital losses can be used to offset other personal income in any given tax year and can be carried back three years or carried forward for up to seven years. It makes sense to figure out when it will be to your biggest tax savings advantage to use your non-capital loss. It could be to recover back taxes already paid or to offset a future larger tax bill.  For more information see: Claiming Expenses on a Business Loss on Canadian Taxes
  • Maximize your charitable income tax credits – charitable donations earn you tax credits but those over $200 give you more credit as they are assessed at a higher rate.  Before you donate more of your income be aware that non-registered Canadian charities, American charities, and political parties do not count as charitable income tax donations.
  • Maximize your Capital Cost Allowance – in Canada small businesses deduct the cost of depreciable property over a period of years.  However, some business owners may not be aware of this and that they don’t have to claim in the year that it is purchased.  You can actually use it in a future year to offset a large tax bill rather than in a year when you have little taxable income.  You should also make sure to buy and sell your assets at the right time. New assets before the end of your fiscal year and sell old assets after the current fiscal year.  Lastly be aware of the 50% rule - in the year that you acquire an asset you are only able to claim 50% and sometimes under the “available for use” rule you cannot claim until the second year after you acquired an asset.  Two links for further information – Learn about calculating and claiming Capital Cost Allowance and How to Claim CCA on a Vehicle Bought for Business Use.
  • Split your income – By transferring some of your higher marginal rate income to a family member with a lower income you can reduce the marginal tax rate on your income.  For example, employing your wife or child in your business and paying them $10,000 per year would mean that they pay very little tax and you will decrease your income for tax by $10,000.  You do however have to make sure that you keep accurate records for their employment as you would any other employee.
  • Take full advantage of all income tax deductions available to home-based businesses– for more information see Business Use of Home Deduction and 6 Home-Based Business Tax Deductions you Don’t Want to Miss.
  • Incorporate your business – Incorporating a business has tax advantages such as the Small Business Tax Deduction where the income of Canadian held corporations is taxed at a special reduced rate.  However, incorporation is only effective if your business has grown enough to make it worthwhile as you need significant income to offset the costs of incorporation and you need to leave enough of your business earnings in the corporation to benefit from corporate tax deferral.  See Should You Incorporate Your Small Business for further information.

Now you can start to think about tax planning and strategies to reduce your tax bill

From an article by Susan Ward

10 Red Flags That Can Trigger a CRA Audit For Your Small Business

By Randall Orser | Small Business

All businesses dread getting a letter notifying them that they are subject to a CRA audit.  Business returns are especially scrutinized by the CRA and it is impossible to avoid an audit. However, here are 10 red flags you should pay attention to which will increase your risk for an audit.

  1. Revenue Discrepancies – your revenue will be compared across all tax forms. The revenue declared on your GST forms will be compared to that on your income tax form, your spouse’s return, and information on tax returns provided by employers, financial institutions, and other third parties.  If they don’t match, then it’s a sure-fire way to attract a CRA audit.
  2. Declaring Income That is Far Below or Above the Norm for Your Industry Will Draw Attention.  The CRA knows what the income and profit margin for your industry should be and will compare your return to what is the norm.
  3. Deducting Large Business Expenses – being able to deduct business expenses is a big tax advantage of running a small business.  However, expenses for advertising, promotions, meals and entertainment, travel, miscellaneous, and interest expenses will be scrutinized by the CRA.  Claiming large deductions in any of these areas can attract attention. 
  4. Claiming the Home Office Deduction – if you qualify for the home office deduction it is a great deal as you can deduct a percentage of your rent, real estate taxes, utilities, phone, insurance etc.  However, you must only use this work space in your home to earn income and to meet with clients regularly.  If you are not doing so then you should not claim this deduction.
  5. Claiming 100% Business Use of a Vehicle – this is a big red flag for the CRA as they know that it is very rare for an individual to use their vehicle 100% of the time for business.  It is also a very easy expense for auditors to disallow as few people keep the required logbook to actually record their mileage.
  6. Changes in Shareholder Loans and Large Balances – changes in shareholder loans or balances are red flags to the CRA.  They look for personal expenses recorded as business expenses and loans taken from the company.
  7. Running a Cash-intensive business – businesses that deal in a lot of cash such restaurants, hair salons, bars or other retail have the opportunity to take cash and not report all of their taxable income so you should expect extra scrutiny from the CRA.
  8. Reporting Several Years of Business Losses in a Row – is likely to earn you an audit especially when those losses are used to offset other incomes.  The CRA expects all businesses to have a reasonable expectation of profit and the CRA’s idea of that may differ from yours.
  9. Making Large Charitable Donations – the CRA knows what taxpayers at your income level usually give to charity so if your donation exceeds that amount it can cause a red flag to pop up.
  10. Not Following the Rules for Employing Your Spouse or Child in Your Business – this type of income splitting is legitimate, but businesses not following the rules may become a target for the CRA.

In addition to these red flag triggers individuals who claim self-employment status are also liable to scrutiny from the CRA especially if you do not follow the self-employment rules.  Although the CRA does conduct a certain number of audits each year just to check compliance, you can somewhat control your chances of being chosen if you pay attention to these red flags.  In any case it is prudent to keep meticulous bookkeeping so that you have all the information to support your tax claims.

For more information see:  The Tax Advantages of Self-Employment and Independent Contractor vs Employee: Which One Are You?

From an article by Susan Ward

Who Should File a Tax Return in Canada?

By Randall Orser | Personal Income Tax

Even if you have no income there are good reasons as to why you should or are required to file an income tax return; 

  • You owe tax to the government or have to repay any of your Old Age Security or Employment Insurance benefits.
  • You are self-employed and have to pay your Canada Pension Plan employment insurance premiums.
  • You are your spouse want to split your pension income.
  • You are a participant in the Home Buyer’s Plan or Lifelong Learning Plan and have repayments due.
  • You disposed of capital property for example you sold your home.  In this instance you must file a return even if you don’t have to pay capital gains on the sale under the principal residence exemption.
  • You have received a Working Income Benefit advance or payments in 2018.
  • The CRA has sent you a Request to File, or a Demand to File in which case they are serious about your lack of filing, so you had better get on it!

Whatever your residency status in Canada, you have to file a return especially if any of the above criteria apply to you.  

If you live abroad but receive income from a business that you own, investments or property you own in Canada you will need to file an income tax return.

There is no age exception - if you meet one of the criteria above you need to file.

Students are not exempt, if you earned over $3500 in 2018 you will need to file a return even if you are still in school.

Even if you are not required to file it is usually in your best interest to file anyway;

  • If you want to claim a refund
  • If you are eligible for certain benefits programs.  Even with no income you may qualify for GST payments.
  • Your RRSP contributions limit increases as soon as you have any income which may benefit you in the future when you are able to contribute.
  • If you want to claim tuition credits you need to declare the amounts on your tax return.  It may not result in a refund this year, but you can apply these unused credits to a future return.

From an article by Turbo Tax Feb 2, 2019

 

What’s New for the 2019 Tax Season?

By Randall Orser | Personal Income Tax

Did you know that according to a report on Global news we pay 42.5% of our income in tax?  That's a sobering thought so we need to make sure that we know about any new deductions that can be claimed on our return. 

The 2019 tax filing season was off and running on February 19th, the official day when the CRA began processing returns. According to the CRA, improvements have been made to ensure that tax-filing is a user friendly, fast, easy and secure process.  There have been improvements to their call-centres, featuring improved accessibility for callers.  When you call you will now get an estimated wait time, so you can decide to wait, call back or use the self- serve options that are available.  Call-centre agents have also received improved training to enable them to better answer questions from callers.

For most of us the filing deadline is April 30th but If you are self-employed you usually have until June 15th to file. However, as this date falls on a Saturday, you get two extra days! Returns are due by midnight July 17th; however, any balance owing is still due by April 30th.

So, what else is new for individuals and families in 2019?

  • Increases to the Canada Workers Benefit– for an individual this increases to $1355 for a single person and $2335 for a single parent or couple, this is an increase of between $300 and $400.
  • Climate Action Incentive– an extra tax credit for Canadians living in Saskatchewan, Manitoba, Ontario and New Brunswick to offset the cost of the carbon tax in provinces that have not established a carbon price of their own. 
  • Medical expense credit for service animals – Canadians suffering from severe mental impairment are now able to claim the cost of caring for a service animal as a medical expense.
  • Accelerated capital cost allowance rates – If you are a business owner or are self-employed you may be able to get more money back for the cost of your business equipment and office furniture bought after November 2018.  The former amount you can claim in the first year has increased by 50%. Unfortunately, this change will only apply until the end of 2023 and will be phased out between 2024 and 2027.
  • Lower Tax Rate for small businesses – The federal small business tax rate which applies to business incomes up to $500,000 has dropped from 10.5% to 10% in 2018 and dropped to 9% in January of 2019.
  • Pay your taxes with an app – You can now pay your taxes through your phone.  The        MyCra web based app lets you view and pay your tax balance with Interac, or Credit card or by pre-authorised debit.

For more information about filing your taxes in 2019 see the CRA website at https://www.fin.gc.ca/n18/data/18-123_1-eng.asp

Common Income Tax Business Deduction Myths

By Randall Orser | Business Income Taxes , Small Business

If you think that running your own business means you can write off all your expenses well sorry to disillusion you but that is a common myth about Canadian Income Tax.  In reality you can only write off business expenses if you meet all the requirements as defined by the CRA.  If you do not comply with all the requirements, then you could find yourself with a hefty bill.  Here are some other tax myths you might want to consider:

Your volume of sales does not determine if you have a business or not – NOT TRUE

You may think that making and selling a few things or do some things as a hobby does not mean that you have a business.  The CRA does not see it this way, they define a business as “any activity that you do for profit” so you need to file your taxes to include any additional income you make from your hobby. 

If you run a business from your home, you can write off all your home expenses – NOT TRUE

You can write off some expenses specific to your home-based business, but there is a limit.  If you claim excessive expenses, it might cause the CRA to take a closer look and disallow some of them.  You can basically claim for home-business expenses under the same rules as for any other business.

You can write off all your entertainment expenses – NOT TRUE

There are very strict rules for business tax deductions for entertainment.  You can usually only claim up to 50% of the cost of meals or entertainment, and club membership fees are not deductible when the main purpose is for dining, recreation or sporting activities such as golfing.

You can write off all the equipment that you buy – NOT TRUE

The CRA sees the equipment that you buy as being depreciable.  When you purchase these items, you cannot deduct the total cost of the item, you will deduct the cost of the item over the several years of its life through a Capital Cost Allowance claim.  How much you can claim each year depends how the item is classed for more information see Capital Cost Allowance for Depreciation (CCA).


Rather than believing the myths, make sure you are up to date on all the income tax rules pertaining to your home-based or small business.  Your accounting professional will be able to help you with this or you can consult the Revenue Canada Website at:

https://www.canada.ca/en/services/taxes/income-tax/business-or-professional-income.html

 

 

How to Keep a Mileage Log for Business Vehicle Expenses

By Randall Orser | Business Income Taxes , Small Business

If you have used your vehicle to earn business income over the past year then you can claim the related expenses on your income tax. However, you must be able to verify your claim with evidence in the form of a mileage log book which is maintained for the entire year. 

You need to record the following information in the log book each time you use your vehicle for business purposes:

  • The date
  • The starting point
  • The destination
  • The purpose of your trip
  • The vehicle starting mileage
  • The vehicle ending mileage
  • The total kilometers driven

Mileage log books are available at office supply stores or it is easy to make one up yourself.  Alternatively, there are apps available for Apple and Android smartphones such as:

Business Use vs Personal Use 

Claiming excessive use of your personal vehicle for business purposes is a sure way to attract extra scrutiny and possibly an audit from the CRA.  So, it is important that you know how many non business-related kilometers you drove in a year.  The best way to calculate this is to record your odometer reading at the beginning of the year and at the end of the year, this will give you your total mileage for the year.  When you deduct your recorded business mileage this will leave you with the total for personal use.  

Employees who use company vehicles must also keep track of the mileage driven for business vs personal use.  Mileage for personal reasons is a taxable benefit that must be included in employee income.  Mileage recorded between home and place of business is considered to be commuting and is classed as personal use.

For more information about claiming business expenses related to the use of your vehicle to earn business income see What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?