Tidbits – What information do I need from a new hire?

By Randall Orser | Small Business

Hello I am New Nametag Sticker Rookie TraineeYou’ve taken the plunge and brought on your first employee. Congratulations! Now, the fun starts. There is certain information you must get from every new employee before they get their first paycheque. It’s vital to have this information so you can ensure they are authorized to work in Canada, and you take the correct deductions. The two vital pieces of information to obtain are the Social Insurance Number (SIN) and a TD1Personal Tax Credits Return.

Social Insurance Number (SIN)

Every person who is working in Canada must have a Social Insurance Number (SIN) card, and must present this to an employer upon request. Ensure that the name on the card matches the name they have given you (don’t laugh as this has happened to a client), and take a photocopy of the card (front and back) and keep it in their employee file. Also, ensure you make a correct note of the SIN in your accounting files, or payroll service provider has the correct number. This is important for future when the employee goes on employment insurance, retires, or for his RRSP contributions each year.

What if the employee refuses to give you his or her SIN or to apply for one? You should be able to show that you made a reasonable effort to get it. What is a reasonable effort? After asking your employee for his SIN many times, you decide to contact him in writing to request his SIN. Record the dates you asked him, and keep a copy of the written request and any other related correspondence. If after all this the employee still refuses to give you a SIN, then I’d terminate them. You must also file an ROE and a T4 for this person, and indicate, when you file either form, that the employee refused to give his SIN. An employee who refuses to give his or her SIN may also be subject to a penalty of $100 for each failure.

If the employee doesn’t have a SIN, then you have to tell the employee how to get a one. Refer them to their Service Canada Office within three days of the day they start work and ask them to provide you with proof of application as well as to show you their SIN card once they receive it. Again, photocopy the application and put it in their file along with a copy of the SIN card once it arrives.

Even if you cannot get your employee’s SIN, you are still responsible for calculating deductions and filing an information return by the due dates.  If you fail to deduct or file your information return, Canada Revenue Agency (CRA) may assess penalties.

TD1 Personal Tax Credits Return

TD1, Personal Tax Credits Return, is a form used to determine the amount of tax to be deducted from an individual’s employment income or other income, such as pension income. There are federal and provincial/territorial TD1 forms. Individuals complete the forms and give them to their employer or payer who should keep the completed forms with their records. Do not send CRA a copy.

Who should complete this form? Individuals who have a new employer or payer have to complete the federal TD1 and, if more than the basic personal amount is claimed, the provincial or territorial TD1. Individuals do not have to complete a new TD1 every year unless there is a change in their entitlements to their federal, provincial or territorial personal tax credit amounts. If a change occurs, they must complete a new form no later than seven days after the change.

If your employee has more than one employer or payer at the same time and has already claimed personal tax credit amounts on another TD1 form, he or she cannot claim them again. If his or her total income from all sources will be more than the personal tax credits claimed on another TD1 form, he or she must check the box on the back of the TD1 form, enter “0″ on line 13 ‘Total Claim Amount’ on the front page and should not complete lines 2 to 12.

Ensure that the employee fills out the form completely and accurately, and signs the form. The employee can use the TD1 to request additional tax be taken off, especially if they have other income.

Once you have these two important pieces of information, you’re good to go and can now start paying your employee. Remember, if there are ever any changes to ensure the employee tells you, that you get the required copies, and get everything in writing.

Tidbits – I’ve incorporated, now what?

By Randall Orser | Small Business

revampingIncorporation is a big step in the progress of your business, and there are new things to consider. A corporation is now a separate entity from you, and everything is new again. You now have to re-register for all those programs, such as GST/HST. It’s a brand new ball game.

Were you a proprietorship before incorporating? If so, you must close your proprietorship and all corresponding accounts. You can pick the day before the date of incorporation or a date sometime after that.

Year End

The first thing you need to do is decide on is a year-end for your new corporation. Please, please do not choose December 31st. That date absolutely sucks for any tax planning on what to give the owners wages and/or dividends for the year. There’s not enough time to figure out wages and the corresponding deductions, as any deductions are due by the 15th of January. That means you have to figure out wages and deductions within two weeks after the year-end. That’s impossible. Talk to your accountant as to what you year-end should be. Popular year-ends are the months of July to September.

You can look at when your busy time starts and maybe end your year-end just before that date. Usually one picks the end of the month for a year-end cut-off. You can have a short year for your first incorporated year.

Reporting Requirements

There are more stringent reporting requirements now that you’re incorporated. You must keep a minute book of the share activity, resolutions, year-end information, etc. You must also file an annual report every year with your province. Unless you’ve filed as a federal corporation then you must file one with the federal government, and with your provincial government.

You must now file two income tax returns, one for the corporation (called a T2) and you’re personal return (called a T1). Your bookkeeping also go a bit more complicated, as you must keep a real set of books. As a proprietorship you could get away with just sorting everything by category and adding it up at the end of the year. With a corporation, the government expects you to have a set off books using some kind of accounting software. I also find that banks, with which your corporation has loans, also require financial statements either monthly or quarterly.

Bank Account

You must open a new bank account for the corporation. You can use your existing bank or go to a new bank. Don’t let your bank just convert your proprietorship account to the corporation, as this creates havoc for the accounting.

Don’t forget to add any ‘doing business as’ names to your bank account. If you’re bank won’t add another name, change banks. I’m with VanCity and I have three dba’s.

Government Programs

You must register your corporation for the applicable programs. You’ll need a GST/HST account, provincial or retail sales tax account, workers’ compensation account, importer account, payroll account etc. Some provinces automatically alert Canada Revenue Agency (CRA) about new incorporations and you’ll get a letter from CRA stating your corporation account number. This number is the business number (9 digits) followed by RC0001 (123 456 789 RC0001). This will be the same number for all your federal government accounts, such as GST/HST. In BC, this number will be used for opening a PST account.

I find it easiest & fastest to call CRA and open up your GST/HST, payroll accounts, etc. Ensure you have your business number and other incorporation information handy when you call.

Other Matters

Do you have assets that were in a proprietorship/partnership? If so, you must transfer those to the corporation. You would transfer these into the corporation at the fair market value at the time they are transferred. You won’t have to charge the corporation GST/HST as you can transfer taxable supplies into the corporation GST/HST free by filing GST44 — Election Concerning the Acquisition of a Business or Part of a Business

You can also transfer assets into the new corporation provincial or retail sales tax free, as you already paid the tax on them and are not technically ‘selling’ them to the corporation. Check with your provincial tax authority.

If there is more than one shareholder, you must have a shareholder agreement. This is absolutely imperative. This agreement covers ownership and voting rights, control and management of the company, making a provision for the resolution of any dispute between shareholders, protecting the competitive interests of the company, what happens upon the death of a shareholder, etc. I have seen many corporations go to hell when there’s no shareholders’ agreement in place. And, in the end, if a shareholder dies or there’s some other dispute, would you rather buyout the shares, or be stuck with a shareholder you don’t want.

Tidbits – What Happens If I Rent My House Out?

By Randall Orser | Personal Income Tax

Red estate FOR RENT sign isolated on white background 2You’ve decided to take the big leap and have a rental suite. This is a big step and may end up costing you a bit of money in order to comply with local by-laws, etc. If you’ve every watch the show on HGTV called Income Property you’ll realize that it’s not all sunshine and rainbows, it’s work and getting the right tenant can be a challenge. We’re not talking about the mother-in-law suite here; any rental to an immediate relative (parent or sibling) is not considered a rental and the income is not reportable for tax purposes.

The first thing you need to do is ensure that you’re suite is legal. You need to check with your municipality and register the suite. Yes, this is a cost, however, in the end it may end up costing you way more by not registering the suite. You may have to do some updates on the suite to make it fit to code for your municipality. Any updates you do to the rental suite would be part of the cost of getting the rental ‘rentable’ so you can write off those costs; just ensure you keep receipts and get a receipt for any work you have done to the rental suite.

Second, get a good tenant agreement ready. Get it in writing is very important when it comes to landlord/tenant relationships. There are standard agreements you can get from your office supply store or online. Ensure that any agreement meets your provinces tenancy laws. You should also check out your provinces tenancy laws. For BC, check out the Residential Tenancy Branch website. Here you’ll find all the rules regarding tenancy, and what you can and cannot do as a landlord.

Third, you need to decide what the rent will be. You can go online and search for rental properties in your area. Don’t be the lowest, as you’ll just attract the dollar shoppers, and they’ll leave the second they find something cheaper. Look at suites that are similar to yours and what amenities they have and what amenities are close to those properties.

Now it’s time to market your property. You can do this yourself on Craigslist, newspaper ads, etc. You can also hire a property management company. These companies can take care of finding tenants, collecting rents, maintenance, etc. They charge a fee, and this fee is tax deductible. Check online for your area, and if you know any landlords ask them you they are using as a property manager.

There are other considerations for a rental suite. What will be the effect on the price or saleability of your home in the future? Will it increase my assessed value? Or decrease it? If you’re the only rental suite in the area, it may be attractive to buyers later on. However, if you’re in an upper class neighbourhood, it may be frowned upon to have a rental suite. You have to decide if it’s worth the extra income to have a rental suite.

For tax purposes, any income you receive from a rental (even room and board) is considered taxable income. You must report it on your personal tax return using the form T776 Statement of Real Estate Rentals. Here you state your rental income received and any related expenses. You can claim advertising, insurance, interest, office expenses, legal/accounting/professional services, management fees, maintenance & repairs, salaries/wages/benefits of employees, property taxes/city utilities, travel (if rental is out of town), and automobile expenses. You must keep receipts in order to get the deduction.

If you have a loss from the rental suite, you can deduct that from other income you have for the year, thereby, reducing your tax burden. However, don’t buy a rental property or put in a rental suite to produce a loss. You have to think of rental suites/properties as a business, and most businesses exist to make a profit, not produce a loss.

A rental suite or property can be a great way to make additional income, however, like anything it’s not as easy as it looks and there are tax implications of doing so. You have to look at all the facts and then decide whether or not a rental suite/property is right for you.

Don’t File Late, Watch That Date!

By Randall Orser | Personal Income Tax

tax-return-tnToo many people today are filing their tax returns, GST/HST returns, and other government remittances late. This is costing Canadian taxpayers millions of dollars every year. The government loves it, and, though I can’t confirm it, does probably make as much from penalties and interest as they do from the taxes collected.

You must pay attention to due dates for when returns and other remittances are due. Your personal income tax return is due by April 30th of the next year, so if you’re filing for 2013 the return is due by April 30th 2014. For self-employed/partnerships then the return is due by June 15th of the following year. Remember though that any income taxes or Canada Pension Plan amounts owing are due by April 30th. This is why it’s best to make installments.

For the businessperson, there’s GST/HST, payroll, corporate tax (for those who are incorporated), and PST (Provincial Sales Tax or sometimes referred to as RST—Retail Sales Tax). These all have different due dates and penalties that accrue when they are not filed on time. We’ll talk about GST/HST and payroll.

GST/HST

For GST/HST you file either annually, quarterly (every three months) or monthly. For annual filers, the return is usually due by June 15th for self-employed/partnerships (though any amount owing is due by April 30th); for corporations the GST/HST return is usually due 3 months after the cut-off. For quarterly and monthly filers, the return and any amount owing is due by the end of the following month.

If you’re self-employed/partnership, and you file quarterly, you generally follow the calendar year. You’re returns are January to March due April, April to June due July, July to September due October, and October to December due January (the returns are due by the end of that month).

As an annual filer, if you owe more than $3,000, you must pay installment payments during the year. This is done quarterly, and the easiest solution is to take the prior year and divide by four. If you believe your balance owing will be less or more you can adjust the installment payments accordingly.

There are penalties for failure to file, failure to file upon demand, failure to file electronically if you are required to do so, and failure to accurately report information. These can add up.

Payroll

Well, this is where the penalties can really add up. You not only can get a penalty for failing to remit your regular payroll remittance every month, but also you’re T4s.

The penalty for remitting your regular payroll remittance late is:

  • 3% if the amount is one to three days late;
  • 5% if it is four or five days late;
  • 7% if it is six or seven days late; and
  • 10% if it is more than seven days late or if no amount is remitted.

This can add up if your payroll remittance is in the thousands. Your payroll remittance is due the 15th of the month following deductions taken. CRA goes by when the payroll is paid, not the cut-off date. For example: You’re payroll is cut-off on the 28th of September but not paid until October 4th. In this case, the deductions are considered paid in October not September, so the remittance is not due until November 15th.

For T4s, it can get real nasty when you file these late. Here’s what you can be fined for not filing your T4s on time:

Number of informationreturns (slips) Penalty (per day) Maximum penalty
1 – 50 $10 $1,000
51 – 500 $15 $1,500
501 – 2,500 $25 $2,500
2,501 – 10,000 $50 $5,000
10,001 or more $75 $7,500

 

If that doesn’t scare you, I’m not sure what would. This can be costly for a small business.

As you can see filing your remittances on time is very important. You need to know when you’re remittances are due, or at least ensure your bookkeeper/accountant knows when they are due. You are much better off to file your remittances one time, and have a balance owing, than to just wait until you have the funds. I have found that CRA can be accommodating when it comes to balances owing. I just helped a client get is large balance of GST/HST owing spread out over 8 months. Unfortunately, he waited to long to get help filing and will end up owing thousands in penalties and interest.

Rental Income, Yeah or Nay?

By Randall Orser | Personal Income Tax

For sale sign, vectorMany people today are getting a mortgage helper, a rental suite in their home or a mother-in-law suite. Or are deciding to buy a rental property or properties to make some extra income. It can be a big decision and requires some thought about the tax implications, but also time, management and other implications. Do you have what it takes to be a landlord? Do you have the funds to finance the property if there are no renters? Is it an easily sellable property if you get into trouble? We’ll mostly talk about the tax implications.

Tax Implications

As with anything we do today, what are the tax implications is one thing we need to think about. If you rent out a part of your home, and earn income from doing so, then you may have to include those funds as income on your tax return. However, if you rent to an immediate relative, such as a parent or sibling, then you won’t have to include this in income, as you’re not dealing with them at arm’s length (used to describe a transaction between unrelated parties; each party acts in his or her own self-interest). You also won’t have to include in income, monies received from ‘homestay’ exchange students, as you’re being reimbursed for costs and not really renting.

You are allowed to deduct from rental income expenses used to earn that income, within reason. The amount you can deduct will depend on whether the rental property is part of your principal residence or a separate property. If it’s a separate property and you do not use it personally, then you can deduct 100% of the costs associated with renting it out. If it’s your principal residence, then you can deduct a percentage based on the square footage of the rental and the total square footage of your residence.

Some of the expenses you can deduct include:

  • Hydro
  • Gas
  • City Utilities
  • Insurance
  • Property Taxes
  • Mortgage/Loan Interest
  • Maintenance & repairs (includes landscaping)
  • Management & administrative fees (contracted out property manager)

One thing I don’t recommend is taking the capital cost allowance (depreciation) deduction. Yes, you get to deduct an expense from your rental income; however, this also reduces the book value of your property. When you go to sell your property you will incur a capital gain based on the value of the property when you bought, plus any additions you added along the way, and the value at the time of sale. If you’ve been deducting CCA then the book value is much less and now your gain is that much more. If you’re renting out part of your principal residence, then CCA only affects the portion you’re renting out not the whole home. In the end, this deduction is not worth it.

Rental income can be a great way to make extra income, help pay for your existing home, or maybe even become a ‘Donald Trump’ type (perhaps with less attitude). You just have to realize that it’s as much a business as opening up a restaurant, etc. You need to think about what you’re doing, and whether or not you can really handle being a Landlord and deal with the tax implications.

What Is Considered Barter?

By Randall Orser | Small Business

Payment for Doctor's ServicesThe subject of barter came up at a networking meeting I was attending and I thought it would be an interesting subject for Tidbits. Barter is where you exchange your product or services for someone else’s. For example, you sell widgets and happen to need a website, and fortunately, there is a website person that needs your widgets. In this case you trade your widgets for a new website.

Of course, Canada Revenue Agency has their take on barter too:

In its simplest form, bartering consists of trading by exchanging one commodity for another. Recently, however, the practice of bartering for goods and services has evolved into a sophisticated computer-controlled system of commerce proliferated by franchised, member-only barter clubs, where credit units possessing a notional monetary unit value have become a medium of exchange.

A barter transaction is effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. In a barter transaction between persons who are dealing with each other at arm’s length, it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefor.

Your best scenario is to trade invoices: you invoice the website developer for your widgets, and they invoice you for the website. If the amounts are not quite the same, that’s okay, either of you just pays the difference.

CRA considers barter transactions to fall within the scope of the Income Tax Act. Therefore, barter transactions result in income or expense for your business. This applies if you happen to barter capital equipment you’re not using for another piece of equipment too.

The barter transaction could also result in a personal draw, if you buy something that is not for the business. For example, you sell your widgets for the use of a cabin for a vacation. In this case, the cabin vacation is personal, and, therefore you cannot claim it as an expense. However, you will have to claim the sale of the widgets as income.

I bet you’re now wondering about sales taxes, do I charge GST/HST or PST? Yes, you must treat a barter transaction as a regular transaction and charge the appropriate sales taxes. For example, you sell your widgets to the website developer and you agree on a $500 exchange, we’ll say this takes place in British Columbia. You must charge the website developer the GST/HST (5%) & PST (7%), which is $60.00 for a total of $560.00. The website developer would charge you just the GST/HST (5%) $25 equals $525.00.

Wait, there’s a difference here of $35.00 as you must charge higher taxes than the website developer. You could have to have the website developer pay the $35.00. Or, the website developer could just charge you $560.00 and break out the GST/HST (5%) and his invoice would be $533.33 plus $26.67 GST/HST. This could happen even if you’re trading service for service, as some services must charge PST (here in BC).

There could be the situation where you are bartering with someone in another province. You would charge them sales taxes based on location and they would do the same to you. For example, if you are in Ontario and the other business is in British Columbia, then you would charge them GST/HST (5%) & PST (7%) and the BC business would charge GST/HST of 13%. [Note: you could just charge GST/HST if you’re not registered for the PST in BC and you don’t sell to BC very often and the BC business would self-assess the PST].

From the example above, you’re in Ontario and the website developer is in British Columbia. You would charge $500 plus GST/HST & PST = $560.00 and the website developer would charge $565.00, a difference of $5.00. The website developer could just write off this difference or one of you could adjust the invoice to match the other. If you’re not registered for the BC PST, then you’d just charge $525 and we’re stuck with a difference of $40.00. In this case, it’s best to adjust your invoice up to the $565 of the website developer.

Barter can be a great way to help your business along in tough times, or when you’re first starting out. However, as with anything, too much of a good thing can hurt you. If you take too much barter, you may find your cash flow suffers greatly, and in some cases it’s caused a business to go under. I recommend you take no more than 10% per year for barter transactions.

How Do I File My Tax Return?

By Randall Orser | Personal Income Tax

Tax return papers lying next to folder and calculatorThere are a couple of ways you can file a tax return today. You can still paper file, though that is going to disappear within the next 5 years, I believe. You can electronically file using Netfile® for individuals. And, you can hire a tax preparer, such as Number Crunchers®, to prepare and Efile® your return. Note that tax preparers are now required by Canada Revenue Agency (CRA) to electronically file all returns, unless stated otherwise by CRA.

Note that personal tax returns are due by April 30th of each year for the prior year’s filing. Self-employed, or proprietorship/partnership, returns are due by June 15th; however, any taxes owing are due by April 30th. I believe making installments is the smarter way to handle you taxes each year. Yes, the government gets your money early, however, you won’t have a whopping balance on April 30th that you may not be able to pay.

Be Prepared!

That’s not just a Scout slogan, but what you have to be before you file your taxes.

Gather up all your slips T4s, T5s, etc., a copy of last years return, donations, medical receipts, etc. You can register for My Account which gives you online access to your notices of assessment, allows you to make any adjustments to an already filed return, and more. If you need to change your address or direct deposit information (or want to set it up) makes sure you have all that information handy including: old address, new address, bank information, etc. Also, look at the various tax credits and find out if you qualify, and if you do then have all necessary information for those available. For a comprehensive list of what you’ll need to prepare your taxes ask for a copy of our Tax Info Needed sheet.

Paper Filing

You can still paper file (2013) and I believe it will be phased out over the next five years. You can get a copy currently at any Canada Post outlet or go online to CRA’s website and make sure you pick the return for your province. You must fill out the return as required and attached an original copy of all slips (T4s, T5s, etc.), donation receipts, medical receipts, arts credit and fitness credit, public transit receipts (monthly fare card as well as proof of payment), and any other slips/receipts for which you are claiming a deduction or income.

You must either mail or drop off your tax return to your local tax services office. CRA does not accept returns by email.

Netfile®

The Netfile® transmission service allows an individual to file your personal tax return directly to CRA, usually via a tax preparation software. You must use a CRA accredited software, and there are some free ones, check CRA’s website. With Netfile® you do not have to send your slips and receipts with the return. CRA will look at your return initially and send you a notice of assessment with your balance owing or refund. Since CRA does not get your slips/receipts with the return, they do ‘reviews’ either during the tax season or after the season (usually September onwards). Generally, CRA just wants proof of any deduction you’re claiming or may want to validate your income.

Netfile® is only for filing the current year tax return (2012 at the time of writing this). You cannot change your address, name or direct deposit information through Netfile®, do that before you file (see Be Prepared!).

The advantages to filing electronically are: faster refunds, it’s generally fast and easy (if you have a simply return), you can file for free (again, if you have a simply return), your information is secure and safe as CRA uses security levels equal to your bank, and filing electronically does not increase your chance of an audit.

Hire a Tax Preparer

The third option is to hire a tax preparer, and one that we recommend for those with a more complicated return, or you just don’t have the time to figure out the software or the paper return and file yourself.

Your tax preparer will have the software to be able to Efile® your return, and has the knowledge to get the job done right. Your tax preparer won’t need your Netfile® access code either as they would have their own account access for filing.

I have found many times deductions for clients they had no idea they were entitled, sometimes saving them thousands of dollars on their taxes. For what it costs to have someone prepare and Efile® your return, can be saved just in the hassle of filing and possible deductions you may have missed by filing it yourself.

Be prepared (see paragraph above) applies even more so with a tax preparer. Please ensure you have all your slips and receipts ready as anything you forget delays your return getting processed. Ask us for a copy of our Tax Info Needed sheet, which covers everything we’ll need to do your taxes.

For proprietorships/partnerships, I believe, it’s more imperative to get a professional tax preparer to prepare your tax return. A professional tax preparer will know what you can and cannot write off for tax purposes, or what deductions are only partially a write off. The three main things CRA looks at with proprietorships are automobile expenses, meals, and home-office expenses. So, you want your tax return to be as accurate as possible.

Filing your tax return is important and you want it to be accurate. Electronic filing is the best way to file your return. I find many people don’t file because they are going to owe taxes. That is a big mistake and can hurt you worse than filing and owing. As long as you file on time, you won’t be penalized, and you will only be charged interest on the balance owing. That is why it is better to make installment payments so you won’t have to worry about a balance owing at tax time.

If I give a gift to an employee, is that taxable?

By Randall Orser | Personal Income Tax

Shopping cart with giftsYour employees are doing a great job, and you want to reward them with some kind of gift. However, you wonder if anything you give them will have to be considered income, and you are probably right. It’s pretty sad really that the government has to get its dirty paws on everything we earn.

A gift has to be for a special occasion, such as a religious holiday, birthday, anniversary (marriage or day started as an employee, wedding or birth of a child.  You may also give awards (employment-related accomplishments), such as for outstanding service, employees’ suggestions, or meeting or exceeding safety standards. Don’t confuse this with a reward, such as performing well in the job or exceeding production standards; these are performance related reasons. You can give an employee a gift, award or reward, and you can give it to them in either cash or non-cash, however, it’s still a taxable benefit.

This also means that as it’s a taxable benefit, Canada Pension Plan (CPP) and Employment Insurance (EI) may also apply to the gift, award or reward. If it’s a taxable benefit, it is also pensionable, so CPP applies. For EI, if the taxable benefit is paid in cash, then it’s insurable and EI applies. If the benefit is non-cash, it is not insurable, and EI does not apply. Remember, tax applies all taxable benefits.

You may be thinking, what about gift cards? Sorry, gift cards are considered an equivalent to cash, and, as such, are a taxable benefit to the employee. This also applies to items that are not cash, but cash be converted into cash, such as securities or precious metals.

There is hope though. You can give non-cash gifts and awards with a combined total of $500 annually. The fair market value of the goods must not exceed $500, and if they do, then the difference is considered a taxable benefit. For example, you bought an employee a couple of gifts over the year and the total was $750. In this case, the difference of $250 ($750 – $500) would be added to their income and taxed accordingly.  You can also give gifts or awards for long-term service every five years, so at the 5, 10, 15 etc. years of service marks, and up to $500.

Items of small or trivial value will not be considered a taxable benefit. These items are not included when calculating the total value of gifts and awards given in the year for the purpose of the exemption. Examples of items for small or trivial value include: coffee or tea; T-shirts with employer’s logos; mugs; plaques or trophies.

You may be thinking, well why don’t I just throw them a party. That won’t be taxable, right? Well, maybe. If the social function costs less than $100 per person, then it won’t be taxable. However, if you cover the cost of transportation home (taxi fare or other transportation) or accommodation this must be included in the $100 per person. If the total exceeds $100 per person, then the entire amount is a taxable benefit. For example, you throw a huge party for staff and the cost comes to $125 per person, then you must add to each employee $125.

If you want to do something for your employees on birthdays or anniversaries, then start a social committee. The social committee would be set up by, contributed to, and controlled by the employees. They could put so much per week into a fund that would then go to pay for cake, gifts, etc. for the birthday person. The employer should not contribute any funds to this social committee, as then it becomes a taxable benefit for the portion that the employer contributes. Now, you, as the employer, could have some say in when, where, etc. the party takes place, you just can’t contribute any monies towards it.

Sadly, in this day and age of taxing us to death, you need to check that what you’re giving your employees won’t become taxable to them. It’s always advisable to check with your bookkeeper, accountant, or even Canada Revenue Agency, before you give anything to an employee.

Can I Get Penalties/Interest Waived?

By Randall Orser | Personal Income Tax

rote karteCanada Revenue Agency (CRA) may either ‘waive’ or ‘cancel’ a penalty and/or interest. ‘Waive’ refers to a penalty or interest amount that is not yet assessed or charged for which relief is granted, in whole or in part, by the CRA. ‘Cancel’ refers to a penalty or interest amount that is assessed or charged for which relief is granted, in whole or in part, by the (CRA). You may never be charged penalty/interest as it’s too small or maybe you’ve been really good in the past and this one slip-up is forgiven.

What circumstances warrant relief?

Extraordinary Circumstances

You may have you run into a situation that is completely beyond your control. There could be extraordinary circumstances that prevented, or may prevent, you from making a payment when due, filing your taxes on time, or filing a government remittance on time.

These extraordinary circumstances could be:

  • Natural or human-made disasters, such as a flood or fire;
  • Civil disturbances or disruptions in services, such as a postal strike;
  • Serious illness or accident; and
  • Serious emotional or mental distress, such as death in the immediate family (sorry your third cousin twice removed doesn’t count).

CRA Errors

There could also be circumstances where penalty/interest are waived because CRA made an error, and yes they do make mistakes, they’re human too [don’t laugh]. This could be because of processing delays and you’re not informed in a reasonable time that you have an amount owing. You followed a CRA guide, or website material, that led you to file a tax return or make a payment based on incorrect information. You called CRA and the representative gave you incorrect information (note that CRA representatives now give you an ID number, so write that down). Errors in processing also happen and information may have been entered incorrectly by CRA; I had a client have income go missing because CRA misfiled a T4A.

Financial Hardship

If you’re going through a financial hardship and can show your inability to pay amounts owing, CRA may waive or cancel any interest in whole or part so you can pay the amount owing. Financial hardship doesn’t apply to waiving or canceling a penalty, unless an extraordinary circumstance prevented compliance, or an exceptional situation existed. For example, when a business is experiencing extreme financial difficulty and enforcement of such penalties would jeopardize the continuity of its operations, the jobs of the employees, and the welfare of the community as a whole, consideration may be given to providing relief of the penalties.

CRA may consider waiving or cancelling interest in the following situations:

  • A collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship;
  • A taxpayer is unable to conclude a payment arrangement because the interest charges represent a significant portion of the payments; or
  • Payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical help, transportation, or shelter; consideration may be given to cancelling all or part of the total accumulated interest.

If you’ve found yourself in a pickle with CRA, don’t panic and don’t procrastinate in filing your tax returns, government remittances, etc. It is much better to file and owe than not file and owe. You may have a balance owing, however, if you file on time you won’t face a penalty just interest on the balance owing. Currently (Sep 2013), the prescribed rate of interest on balances owing to CRA is 5%.

What Is The Scientific Research And Experimental Development (SR&ED) Tax Incentive Program?

By Randall Orser | Personal Income Tax

Quantum ComputerWe’re getting a little sciencey with this Tidbits post, but don’t worry, we’ll keep it simple (lord knows I need to do that). So what is Scientific Research And Experimental Development (SR&ED) [pronounced ‘shred’] Tax incentive program? It’s a federal government tax incentive program administered by the Canada Revenue Agency (CRA) that encourages Canadian businesses of all sizes, and in all sectors to conduct research and development (R&D) in Canada. It is the largest single source of federal government support for industrial R&D. The SR&ED Program gives claimants cash refunds and / or tax credits for their expenditures on eligible R&D work done in Canada.

With SR&ED there are two benefits. The first lets you deduct SR&ED expenditures from income for tax purposes. Second, you get a SR&ED Investment Tax Credit (ITC), which you can use to reduce Part I tax payable (corporations). And, you could a refund if the ITC is greater than your taxes owing.

You can be a Canadian-Controlled Private Corporations (CCPC), other corporations, proprietorship(s) or trusts. Partnerships are treated quite differently, as they are not considered a taxpayer, and, as such, cannot earn Investment Tax Credits (ITCs).

SR&ED Investment Tax Credit (ITC)

Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable ITC of 35%, 100% refundable on qualified SR&ED current expenditures and 40% refundable on qualified SR&ED capital expenditures, up to a maximum threshold of $3 million of qualified SR&ED expenditures for SR&ED carried out in Canada. A CCPC can also earn a 20% non-refundable ITC on any amount over that threshold. However, for a CCPC that meets the definition of qualifying corporation, the 20% ITC on any amount over that threshold is refundable, 40% refundable on qualified SR&ED current and capital expenditures.

For other corporations, the ITC is 20% of qualified SR&ED expenditures. The ITC can be applied to tax payable and is not refundable.

For individuals (proprietorships) and trusts, the ITC rate is 20% of qualified SR&ED expenditures, only 40% of which is refundable. After applying the ITCs against tax payable, individuals and trusts can get a refund for part of the ITCs.

What work qualifies for SR&ED tax incentives?

To qualify, the work must meet the definition of Scientific Research and Experimental Development (SR&ED). “Scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:

a)     Basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

b)    Applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

c)     Experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,

And, in applying this definition in respect of a taxpayer, includes

d)    Work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,

But does not include work with respect to

e)     Market research or sales promotion,

f)      Quality control or routine testing of materials, devices, products or processes,

g)     Research in the social sciences or the humanities,

h)    Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

i)      The commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

j)      Style changes, or

k)    Routine data collection;

How do I calculate my SR&ED expenditures and investment tax credit?

If you have done work that qualifies for Scientific Research and Experimental Development (SR&ED) tax incentives, you can claim the following expenditures:

  • SR&ED salary or wages
  • Expenditures for materials for SR&ED
  • Contract Expenditures for SR&ED Performed on Behalf of a Claimant (policy)
  • SR&ED Lease Expenditures (policy)
  • SR&ED overhead and other expenditures (traditional method only)
  • Third-party payments
  • SR&ED capital expenditures

To calculate your SR&ED expenditures, you have to choose between the traditional method and proxy method. The traditional method involves claiming all of the SR&ED overhead and other expenditures you incurred during the year. The proxy method involves calculating a substitute amount for overhead and other expenditures, called the prescribed proxy amount.

Your SR&ED expenditures are accumulated in a pool of deductible SR&ED expenditures. This pool is your current and capital expenditures carried out in Canada, which you can deduct when calculating the income from your business. Any payments you get whether government, non-government or contract, such as research and development tax credits from a province or territory, will reduce this pool of deductible SR&ED expenditures and the total qualified SR&ED expenditures.

Are you using equipment both for SR&ED and commercial purposes? If so, you can claim a partial ITC for this shared-use equipment. However, if you dispose of this equipment and used it for a SR&ED ITC then there could be a recapture of the ITC and you may have to repay back part of it.

SR&ED is a great way for those businesses doing research and development for a product, whether physical or intangible, that they want to bring to market. If you think your R&D could fall into SR&ED then you need to talk to a professional that specializes in SR&ED. It can be very complicated, and needs to be done by someone specializing in this area.