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?

How Far Back can a CRA Reassessment go?

By Randall Orser | Personal Finances , Personal Income Tax

After you file your taxes you will receive a Notice of Assessment which details the amount of tax that you owe or the refund you will receive.  Sometimes you will be asked to do a preassessment review in a situation where the CRA will ask you for additional information or documentation. The CRA can reassess your taxes after they have sent out your Notice of Assessment.  This usually happens later in the same year.  You should respond to the CRA by the deadline (usually 30 days from the date of the letter) with the information requested. 

A CRA reassessment or audit can be very worrying for most taxpayers and a common question is “How far back can the CRA reassess me?”  There are limits as to how far back the CRA can go to reassess someone’s taxes returns and the usual time limit is three years from the date your return was filed.  However, they can extend the reassessment period if they believe that you may have carelessly or willfully misrepresented your tax situation, or if they suspect fraud. In order to reassess the CRA must prove that fraud, neglect or willful fault occurred. This does not mean that you made a simple mistake on your return but that you made a serious misrepresentation such as in reporting your income.  

It is important that you keep all your tax information and documents for six years in case they are requested by the CRA.  Should you be subject to a reassessment or audit it would be difficult to prove your case without supporting receipts.  The CRA must have proof of your financial and tax situation and if you are unable to provide the documentation then you could end up dealing with a lengthy audit.  

If you are being audited there is nothing that you can do to stop it, and the worst thing that you can do is to ignore communications from the CRA.  The best thing you can do is to get organized with your paperwork and receipts and to be as cooperative as possible.  Also, it is advisable to get professional help as soon as you get your audit letter so that you can prepare a better case. 

An audit can be a “desk audit” which is common if you have business income and declared losses, or, if you have real estate transactions reported on your return.  In a “field audit”, the taxman will show up at your home or place of work. 

For more information on CRA Tax Audits visit: 

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4188.html

Who are the Canadians Most Likely to be Audited by the CRA?

By Randall Orser | Personal Finances , Personal Income Tax

Every taxpayer’s nightmare is to get a notice from the CRA that you are going to be audited.  Around 30,000 such letters were sent out in 2018 (according to tax lawyer David Rotfleisch) so we are right to be afraid!  

So, who are the people most likely to be audited?

  • Those who are self-employed.  Tax returns for self-employed people are usually more complicated as there is no paperwork like a T4 for the CRA to confirm the income that you have declared.
  • You work in construction, retail or the restaurant industry.  These industries have been singled out by the CRA as they are often heavily cash based and there are high rates of tax evasion.
  • You keep reporting rental and/or business losses. The CRA will wonder if you are really losing all this money or if you are stashing it away in a tax haven.
  • You report drastic swings in income especially if you are self-employed.
  • Your income does not match your postal code. If you are making less than your neighbours, the CRA might begin to wonder how you can afford to live where you do.
  • You have offshore assets.  Owning assets offshore can lead to unwanted scrutiny.
  • You receive wire transfers from abroad of $10,000 or more.  Since 2015 all financial institutions must report to the CRA all international funds transfers of $10,000 or more. 

It is important to really understand the letter that you get from the CRA if it wants to review your taxes.  A tax review notice is not an audit letter.  

Tax reviews are quite common, and it means that the taxman wants to check the records and receipts that you used to report income and to claim expenses.  Reassessments can be done randomly or because the numbers received from other sources does not match with your numbers.  Usually you show them the paperwork and the matter will be over.  However, if you do not respond to the CRA or they do not like your responses to their questions then your review may turn into a full-on audit.

From an article by Erica Alini on www.globalnews.ca

 

Don’t Miss These Six Home Business Tax Deductions

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

Running a home-based business is just the same as running any other business in Canada for income tax purposes.  If you are making money from your home-based business, then you can claim tax deductions.  However, there are some additional deductions that you can also claim.

1. Vehicle Expenses – You may use your car both for business and personal use, but you can claim the business portion of your car use expenses.  This includes the following:

  • Fuel and oil, registration and insurance.  Supplemental insurance for business use is fully deductible, but if you do not insure your vehicle for business use and have an accident then your insurance company may deny your claim.
  • Maintenance and Repair
  • Interest on money borrowed to purchase a vehicle that you use to earn income, but there is a limit to the amount of interest you can deduct for a passenger vehicle
  • Leasing costs
  • Accident Repairs – if the accident happens while you are driving for business purposes you can claim the entire cost of the repairs.

Important to know:  You can only deduct a portion of your vehicle expenses, so it is important to keep a record of the mileage you drive in order to earn income.   Your expenses are prorated for the business portion of the total kilometers you drive in a year.  For further information see:    What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?

2. Insurance – You should be able to deduct insurance premiums for your home-based business.  However, home-based business insurance is seen as commercial insurance and is entirely separate from your home insurance.   If you are running a business out of your home and you do not have this separate insurance, then you may not be covered at all as your insurance may be invalidated as you did not inform your insurer that you were running a home-based business.

Important to know:  You may also be able to write off part of your home insurance if your home-based business meets the conditions for claiming business-use-of-home conditions.

3. Office Expenses: Even if your “office” is just a desk in a part of your home, you will still be able to claim office expenses, but you will need to separate your office expenses from your home expenses.  You will be able to claim for depreciable assets such as your computer, filing cabinet, phone, printer and other equipment under the rules of Capital Cost Allowance.  As these assets depreciate over time you can only claim for part of their original cost each year.  The CRA has categories for depreciable assets with different rates of Capital Cost Allowance. For more information see: Capital Cost Allowance and  Capital Cost Allowance hub.  

Important to know: You don’t have to claim Capital Cost Allowance in the year that it occurred, you can roll it forward and claim in a year when you have a higher income.

4. Mortgage interest and Property Taxes– As long as your home-based business expenses meet the requirements for business deductions you can claim your mortgage interest.  You must use the work space in your home as your principle place of business to earn income, and you regularly meet clients, or customers there. You can also claim your property taxes or the cost of your rent.  

Important to know: You can only claim a deduction dependent on how much of your living space and time is devoted to business use.  For more information see Calculating the Home-Based Business Tax Deduction

5. Other Business-Use-of-Home-Expenses – these include:

  • Water
  • Maintenance and Repairs
  • Cleaning Materials
  • Telephone
  • Internet Connection

Important to know:  The CRA allows you to deduct “any reasonable expense you incur in order to earn business income” but your expenses must be supported by a receipt or invoice.

Carry Forward of Unused Work Space in Home Expenses – business use-of-home expenses cannot be used to create or increase a business loss.  Should you have more expenses than income for your home-based business then you will have unused Work Space in Home Expenses which like the unused Capital Cost Allowance you can carry forward to use against a higher income in a future year.

It is important that you keep good records and that all your expenses are documented with receipts so that you can claim them against your business income.

How to Maximize Tax Deductions for Your Small Business

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

Like most small business owners, you are probably thinking about your tax return for this year and wondering how you can maximize your tax deductions. The most important thing is to have all your business-related receipts, as all your expenses must be backed up with receipts. You also need to keep receipts for six years in case the CRA ever asks for them. 

Remember to ask for a receipt for any business-related transaction throughout the year and make sure that they are legible with the vendor’s name, the date and what the receipt is for. This information will help you when inputting the receipt into your record keeping system and this should be done as soon as possible so that the purchase is fresh in your mind. 

In addition to your purchase receipts here are some more business expenses that you must make sure not to overlook.

  • Annual membership dues for business-related organizations 
  • Interest you have paid on money borrowed for your business, you can also deduct related fees such as one that you might have paid to reduce the interest on your business loan.
  • Insurance premiums that you might have paid on the building or equipment you use in your business
  • All relative maintenance and repair expenses for your business 
  • Office business expenses and supplies 
  • Home business expenses such as a portion of your utilities, home maintenance and property repairs, a cleaning service or cleaning materials, house insurance. You can also deduct a portion of your property taxes and your mortgage interest.  
  • Capital cost allowance – this is an expense for depreciation on business property such as furniture, computers.  
  • Automobile expenses – the cost of fuel, the license and registration fees, insurance, maintenance and repairs, and the interest on your car loan can all be claimed as business expenses.  However, you need to distinguish between business use and pleasure use because you can only claim for the business use of your vehicle.  To help you with this it is important to keep a mileage log.
  • Travel - if your travel was related to earning business income then you can deduct part of the cost of meals, entertainment and the cost of transportation and accommodation.  You can deduct the cost of attending two conventions per year as long as they are directly related to your business.
  • Employing a spouse or child in your business – this would make them an employee and you can deduct their salary as a business expense just as any other employee and you will need to issue them a T4.
  • Advertising – you can only claim for advertising in a Canadian newspaper or on a Canadian tv station or radio station, and only in an E-zine or website that originates in Canada.
  • Accounting and legal fees are all tax deductible, and this includes getting professional advice about maintaining your books and records.

For more information on tax deductible expenses visit https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html

Can you Amend Your Tax Return After Filing?

By Randall Orser | Personal Finances , Personal Income Tax

There are many things in life that you cannot change, but luckily your tax return is not one of them.   If you have made an error, it is quite easy for you to correct it, but the most important thing is to not file another tax return for the same year.

You should wait for your Notice of Assessment before requesting any changes to be made and you can only request changes as far back as 10 years.   

There are two ways to request amendments to your return: it can either be online or by mail, and both have their own rules and limitations.

Online:

This is usually the easier option all you have to do is to log into your CRA My Account and click “change my return”, however you cannot make changes to any of the following:

  • A bankruptcy return
  • A tax return where there are 9 reassessments for a particular tax year
  • A tax return that has not been assessed
  • A tax return prior to the year of bankruptcy
  • Carry back amounts such as capital or non-capital losses
  • An elected split pension amount
  • A return of an international or non-resident person (including residents of Canada, newcomers to Canada and individuals who left Canada during the year).
  • A return where you have income from a business which is permanently established outside your province or territory of residence

The processing time for an online request is usually two weeks unless it is sent in spring or early summer, or if it needs further review, or the CRA has to contact you for more information or documentation.

By Mail:

You will have to complete a T1-ADJ T1 Adjustment Request. You can download a copy of it from the CRA website.  Alternatively, you can submit a signed letter with the following details:

  • The years of the returns to be changed
  • Your social insurance number
  • Your full address
  • A telephone number where you can be reached during the day

The processing time for a mailed in request is usually eight weeks unless the same conditions apply as with an online request. 

Once your review is complete you will receive either a Notice of Reassessment from the CRA or a letter explaining why the changes that you asked for were not applied. 

So, you don’t need to worry if you have made a mistake on your tax return, it is relatively easy to make any changes.

 

 

Why you Should Always File Your Income tax Return on Time

By Randall Orser | Personal Finances , Personal Income Tax

Every tax season, we see a number of new clients who have several years of returns to file. Often, they have not filed their returns because they think they owe money but if this is the case avoiding your taxes will do you more harm than good.

The CRA views overdue items in two distinct ways – a) compliance and b) collections. The first option requires you to file your return on time. The second results in two different charges – late filing penalties and interest.  If you are late filing and owe money you could be liable for both.

  • 5% of the balance owing as late filing penalty

  • 1% of the balance owing as additional penalty for every full month you’re late (up to a maximum of 12 months)
  • Interest charged on the above penalty
  • Additional compound daily interest on the balance owing based on prescribed rates by the CRA.

If you avoid filing your taxes on time it could actually make the charges increase rather than minimize them. For example, if you file 12 months late, you’ll be charged 17% on the balance owing, plus interest on penalties dating back to the original deadline. 

If this is your second offence and you have been late filing in either 2013, 2014, 2015 or 2016, the current penalty may go up to 10% of your 2018 balance owing, as well as an additional 2% for every month you’re late up to 20 months maximum.  Payments that you do make will be applied to the previous years that you owe first.  If you have a balance owing for 2018, your payment has to be received by the Canada Revenue Agency on or before the tax deadline in Canada on April 30, 2019. 

If you do miss the April 30 Tax Deadline but don’t owe any taxes, you won’t have any late filing penalty or interest to pay, but that still means that the CRA will hold your refund until you actually file.

So even though you may dread owing the CRA money, do not avoid filing on time so that you can save yourself from having to pay more.

Should you Claim Business Expenses without a Receipt?

By Randall Orser | Business Income Taxes , Small Business

Claiming business expenses on your income tax when you have lost the receipt is not a good idea.  All business expense claims need to be supported by original documents such as receipts.  If you are not able to prove the expense, then the CRA will disallow it and reduce the amount of expenses that you have deducted.   

Nowadays most people file their taxes online and do not send their expense receipts to the CRA, however you still need to be able to produce them if asked.   It is not correct to assume that that a bank or credit card statement is proof of an expense, all a statement proves is that a payment was made.

What is Your Chance of Being Audited?

The CRA audits a certain number of income tax and GST/HST accounts each year to monitor compliance and as a quality check on the tax system. This means that your small business could be selected to be audited just by the luck of the draw.  

Your chances of being audited are higher if you are self-employed or a sole proprietor and if you are running a construction, retail, accommodation or food sector business.  This is because the CRA considers them to be the most likely to be participating in the underground economy, taking cash payments from customers and not reporting the income. 

So as a small business owner your chances of being audited may be quite a bit higher than you think.  Therefore, it is a good idea to have complete and accurate business records which are also a requirement for running a successful small business. 

In General, No Receipts equals No Deduction

For detailed information on claiming meals and vehicle expenses see The Rules for Entertainment and Meal Expenses on Canada Income Tax.

Do you Know the Difference Between Tax Havens and Tax Shelters?

By Randall Orser | Investments , Personal Finances , Personal Income Tax

Though both tax havens and tax shelters are used by wealthy people to reduce their income tax payments there is a big difference between the two.

Tax Haven is a locale anywhere in the world that has lax tax laws.  This country will often charge very low or very reduced tax rates.  Many multinational corporations take advantage of the benefits of tax havens creating subsidiaries to shield their incomes from taxation. Tax havens can also provide offshore banking services to non-resident companies and individuals.  Foreigners can easily form an international business corporation or offshore corporation which will often be given tax exemption for a set period of time.  

Because of the strict privacy laws enforced by most tax havens owners of these “shell” companies often remain unknown.  Although tax havens are technically legal the CRA frowns upon them and the public has a poor view of companies carrying out offshore banking activity.  Switzerland is the most well-known tax haven, but others include the British Virgin Islands and Luxembourg.

Tax Shelters are commonly used by all taxpayers as a method of legally reducing their tax burden through the use of specific investment types or strategies.  These are often temporary and require a future income tax payment, but they are useful for those wanting to reduce their tax payments during the years when their earnings are highest.  The two most popular tax shelters in Canada are Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). 

The TFSA was started by the government in 2009 and it allows anyone over 18 to earn investment income tax free up to a set maximum per year.  In 2009 you could contribute up to $5000 which increased to $5,500 per year in 2013 with and $10,000 for one year in 2015.   This allowance is cumulative so that if you had not contributed by 2017 you could invest up to $52,000 and in 2019 your total investment allowance Including an increase to $6000 per year will be $63,500. You can withdraw from your account anytime during the year, but you cannot replace it until the following year unless you have sufficient contribution room for it to be considered an additional contribution.

RRSPs - You can contribute to your RRSP each year up to a limit based upon your income and deduct it from your taxable income.  You will only pay income tax on your investment and the interest it earns when you make withdrawals from your RRSP.  If you have a properly structured investment portfolio you will be able to take advantage of the low tax rate on capital gains and dividend income outside of your RRSP while it shelters your higher taxed investment income.

RRIFs - A Registered Retirement Income Fund is a tax-deferred retirement plan for your RRSP. RRIFs are used by those who do not plan to withdraw their RRSP as a lump sum when they retire but take smaller withdrawals.  RRIFs offer more flexibility and tax savings than lump sum withdrawals, but you must withdraw a minimum each year and report it for tax purposes.  You may withdraw more if you wish at any time.  The CRA will set your minimum withdrawal for each year according to a schedule which will start at 5.28% at age 71 in 2019.

For more information about TSFA’s, RRSP’s or RRIF’s consult your investment advisor or the CRA website 

 

Common Tax Mistakes that Small Businesses Make

By Randall Orser | Business Income Taxes , Small Business

Tax time can be a headache for many small business owners, mainly because they have let their accounting slide over the year.  It is important to set up a system for tracking information and to update it during the year rather than leaving everything to the last minute and worrying about it.  Another solution is to hire a bookkeeping company such as NumberCrunchers® to do the work for you.

Business owners need to go through their books regularly at least monthly or quarterly, so that they understand their yearly earnings position, key revenue and expense trends, and to make sure that they are putting enough away for tax time.

Here are Some Expenses that can Cause Problems at Tax Time:

Meals and Entertainment

Many people throw a bunch of receipts into a shoebox or wait until tax time to see what receipts they have, and these can take a long time to find and sort.  Expenses paid for with cash or a personal credit card can be particularly difficult. You should always write the name of the customer and other details on the back of the receipt.  Ideally, business owners should use a separate credit-card account.  Many people mix their personal and business expenses together not realising that in Canada the onus is on the business owner to prove that the transactions are justifiable business expenses.

Business use of Vehicles

To prove the business use of your vehicle for the CRA it is highly recommended that you keep a mileage log, however very few people do so.  Should the CRA ever requests proof of the business use of your vehicle you will be able to provide it. Business owners should also think twice about designating a vehicle as a company car if you use it for personal use as well, sometimes it is better to charge the company for mileage which becomes tax free income for you and an expense for the company.

Home Business Expenses

The Income Tax Act does not give us firm, hard rules and explanations for claiming home business expenses, but there are two overriding principles.  One is, did you incur the cost in order to earn income, and two, is it reasonable under the circumstances? For example, extensive maintenance in your backyard, if it has nothing to do with your home office, may not pass the reasonability test. But maintenance in your front yard, particularly if you have clients regularly coming to your home office, may be seen as being reasonable. Another test for home office is if you actually do see clients at your home office, you want to answer yes whenever this question is asked.

GST and HST

If you are registered for GST, then you need to record the GST on an expense so that it can be separated out from GST applied to company sales. Some GST will be reported for income tax purposes and some will be reported for GST purposes. Many clients especially those who do their own bookkeeping turn up at their accountant’s office with just a list of their deductible expenses where the GST has not been separated out.  This can be challenging and time consuming for the accountant to figure out, and you are going to pay for his time.  So, it is better that you record GST correctly throughout the year to save time and money.

Some business owners and self-employed people can be confused about when to pay their GST. The deadline to file taxes is June 15, but the deadline to pay GST is April 30, so they are sometimes surprised that they are charged interest.

Another big mistake that company owners, especially those first starting out, make is to use GST or payroll tax money to run the business, rather than putting it into a separate bank account or making payment instalments to the CRA.  This can cause them to submit late because they don’t have the money to pay their tax bill.

From an article by Augusta Dwyer Globe and Mail 2017