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.

What Is The Disability Tax Credit (DTC)?

By Randall Orser | Personal Income Tax

DollarsThe disability amount is a non-refundable tax credit used to reduce income tax payable on your income tax and benefit return. This amount includes a supplement for persons under18 years of age at the end of the year. All or part of this amount may be transferred to your spouse or common-law partner, or another supporting person.

The disability amount is for those individuals who have a severe and prolonged impairment in physical or mental functions. You do have to file a form, of course, it is government and they thrive on paperwork. You file a T2201 Disability Tax Credit Certificate with Canada Revenue Agency (CRA); a qualified practitioner must fill out the medical portion of the form.

You are eligible for the DTC only if CRA approves the T2201 form. A qualified practitioner has to complete and certify that you have a severe and prolonged impairment and its effects. To find out if you may be eligible for the DTC, check out the self-assessment questionnaire which is on the T2201 form.

Do you receive Canada Pension Plan disability benefits, workers’ compensation benefits, or other types of disability or insurance? If so, this does not necessarily mean you will qualify for the DTC. These other programs have other purposes and different criteria for qualifying, such as your inability to work. You may not be able to work, however, your daily living may not be severely affected.

The DTC starts from the day the physical or mental impairment began. You can apply at anytime and re-file any tax returns for years that the DTC would apply. For example, you apply for the DTC in 2013 for an impairment that began in 2010; CRA approves the DTC for 2010 and future years. You can now apply for an adjustment for tax years 2010, 2011 & 2012.

Some Definitions

Inordinate amount of time – is a clinical judgment made by a qualified practitioner who observes a recognizable difference in the time required for an activity to be performed by a patient. Usually, this equals three times the normal time required to complete the activity.

Life-sustaining therapy – You must meet both the following conditions: the therapy is required to support a vital function, even if it alleviates the symptoms; and, the therapy is needed at least 3 times per week, for an average of at least 14 hours per week.

Markedly restricted – You are markedly restricted if, all or substantially all of the time (at least 90% of the time), you are unable or it takes you an inordinate amount of time (defined above) to perform one or more of the basic activities of daily living, even with therapy (other than therapy to support a vital function) and the use of appropriate devices and medication.

Prolonged – An impairment is prolonged if it has lasted, or is expected to last, for a continuous period of at least 12 months.

Qualified practitioner – Qualified practitioners are medical doctors, optometrists, audiologists, occupational therapists, physiotherapists, psychologists, and speech-language pathologists. The table below lists which sections of the form each can certify.

Significantly restricted – means that although you do not quite meet the criteria for markedly restricted, your vision or ability to perform a basic activity of daily living is still substantially restricted all or substantially all of the time (at least 90% of the time).

Type of impairment each qualified practitioner can certify:

Qualified practitioner: Can certify: 
Medical doctor All impairments
Optometrist Vision
Audiologist Hearing
Occupational therapist Walking, feeding, dressing, and the cumulative effect for these activities
Physiotherapist Walking
Psychologist Mental functions necessary for everyday life
Speech-language pathologist Speaking

If you find yourself with any kind of a severe impairment, you need to look at the DTC. Currently (2013), the disability amount is $7697, which can be significant. Also, with the amount of children being diagnosed with autism, you can have your child file a T2201 and will more than likely qualify for the DTC, which can then be transferred to one of the parents. Look at other potential disability credits that you may qualify for tax purposes too.

Do I have A Business?

By Randall Orser | Small Business

bowlingYou may find you must register for the PST, but not the GST/HST due to your sales volume. Of course, You’ve been doing something on the side, such as mowing lawns or doing home repairs for people or you’ve got something you love to make and sell it at craft fairs or flea markets on the weekend. You really enjoy making the extra money and are having fun. You’re only cutting a few lawns in the neighbourhood or making wedding cakes a few times per month, so what’s the big deal. You’re thinking those flea market finds you find and then fix up and sell later are no big deal and really it’s all for fun.

Well, you may actually have a business, as Canada Revenue Agency (CRA) says a business is an activity that you intend to carry on for profit and there is evidence to support that intention. Now, if you have absolutely no expectation to ever make a profit and every year will be a loss, CRA could disallow this as a business.

A business includes: a profession, a calling, a trade, a manufacture, an undertaking of any kind, and an adventure or concern in the nature of trade. Your venture more than likely falls somewhere within these inclusions.

You have to look at what you’re doing, and if you expect to make money doing it, then you have a business and need to file your taxes accordingly. You need to keep track of your revenue and expenses for the year and report those on your personal income tax return. You may not have to register a business name, as you can just operate under your personal name.

You must know the date when the business can be considered to have started. Generally, CRA considers your business to have started when it begins some significant activity that is a regular part of the business or that is necessary to get the business going. CRA look at each case on the merit of its own facts.

For example, you decide to start a merchandising business and you buy enough goods for resale to start the business. At this point, CRA would consider the business to have started. You can usually deduct expenses you have incurred to earn the business income from that date. You could still deduct the expenses even if, despite all your efforts, the business ended.

You also need to look at whether or not you need to register for the GST/HST (your worldwide sales are over $30,000) or for your provincial sales tax (PST), here in British Columbia you don’t have to register if your sales are under $10,000the type of business may determine whether or not these small supplier exemptions even apply.

There’s also the situation where someone starts with one of those multi-level marketing (MLM) companies and basically buys product on auto-ship every month. The product that you use personally cannot be written off as an expense. I know, you’re going to say ‘but it’s for research’ well that may work for the first couple of months, but after that ‘no’. Also, if you’re not really trying to sell the product, then how can you justify the expense in the first place?

One thing that CRA has been looking at the last few years is someone working full time, and running a business too; however, that business only has losses and never makes money. In this case, don’t be too surprised to get a call from CRA wanting to ‘review’ your business.

You may be running a business and not even realize it. You may think it’s nothing, just a few bucks a month, but CRA may not see it that way. And, anyway, who’ll find out? CRA may, doing just a routine audit on your personal taxes. When in doubt seek professional help and talk to someone about your ‘hobby’.

How Do I Get Help Preparing/Filing My Tax Return, As I’m Low Income?

By Randall Orser | Personal Income Tax

BeratungIf you find yourself in the situation of having a low income, you can get help filing your income tax return. You can file online for free, get a paper copy of the tax return (though that option may be gone soon), or use the Community Volunteer Income Tax Program (CVITP). The CVITP is great for those that just don’t feel comfortable doing it themselves or don’t have access to the Internet.

File Online For Free

Every year Canada Revenue Agency (CRA) certifies software programs for preparing tax returns, some of those are available online and are free (though with limited restrictions and/or exclusions). Check out this link for the available software for your tax year; click ‘Online’ to see the online offerings. There is even an iPad app available for filing your return.

The free filing online services are usually restricted to personal returns (no business filings), some even to only a few slips and no medical or donations, and some based on your income level. Check out the privacy policy of the online services, as you don’t want any of your personal information getting out there. CRA does not accept any responsibility for programming errors that affect the calculation of your tax payable. Note that NETFILE® is not available after November 30th so you will have to print the return and file it, so make sure the online version can also print a return.

Check out which one will work for you. And, CRA does not test for spelling or grammatical errors or user friendliness.

Community Volunteer Income Tax Program (CVITP)

CRA has developed the Community Volunteer Income Tax Program (CVITP) to help eligible taxpayers who are not able to prepare their own income tax return. CRA does this by partnering with community organizations that host tax clinics, and arrange for volunteers to prepare tax returns for taxpayers with low income and simply tax situations. Over ½ million taxpayers are help through this program.

Of course, with all things government there are limits. As a guideline, CRA has these suggested maximum income levels:

  • · Single person                                up to $30,000
  • · Couple                                         up to $40,000
  • · One adult with one child                       $35,000

Community organizations have the flexibility to adjust or set eligibility criteria for tax filers based on the local economic environment, the population they serve, and their own capacity.

The people volunteering in this program do not always have tax knowledge so the CVITP does not prepare tax returns for the following situations:

  • · Returns for deceased persons;
  • · Individuals who file for bankruptcy;
  • · Self-employed individuals;
  • · Individuals who report capital gains or losses; or
  • · Individuals who report employment expenses, or business or rental income and expenses.

Who is best served by the CVITP?

  • · Low-income individuals and social assistance recipients;
  • · Newcomers to Canada;
  • · Seniors; and
  • · Students

Volunteer tax preparation clinics are generally offered between February and April each year at various locations across Canada. This link will take you to the page on CRA’s website where the clinics are available.

If you’re in a situation where you’re unable to prepare your own return, it’s good to know there are options on which you can rely.

I got an email from CRA, is it legit?

By Randall Orser | Personal Income Tax

spam-emailYou opened up your email today and there was an email from Canada Revenue Agency (CRA). You look bewildered, as you haven’t had any other correspondence from them, not even a phone call. And, you know you didn’t subscribe to receive any emails from CRA either.

This email is bogus, especially if it’s requesting ANY personal information from you such as your social insurance number, birthdate, address, etc. First, CRA doesn’t use email to contact taxpayers like you when it relates to your tax filings, refunds, credits, etc. Second, CRA already has your personal information so why would they be asking for it. Never respond to such emails as the sender is on a phishing expedition to get your personal information and commit identity fraud.

When in doubt, ask yourself the following:

  • Am I expecting additional money from the CRA?
  • Does this sound too good to be true?
  • Is the requester asking for information I would not include with my tax return?
  • Is the requester asking for information I know the CRA already has on file for me?
  • How did the requester get my email address?
  • Am I confident I know who is asking for the information?

Whenever you get an email from CRA, look at it and think twice before you respond. If you can print the email to a PDF, send it to CRA, as they want to know what’s going around as far as these fraudulent email. You can also contact your local police department too. Here are some samples of emails that have been going around the past few years.

Some Samples of Fraudulent Emails

Our first example uses something many are familiar with and that’s the INTERAC e-Transfer. I’m sure some of you have had someone send you money via this means I know I have. However, you get an email from that person’s bank and you go do the INTERAC e-Transfer website, not CRA’s website. Also, CRA NEVER uses INTERAC e-Transfer, and would direct deposit the funds right into your account (as long as you signed up for direct deposit, otherwise, you get a cheque).

Sample 1

From: notify@payments.interac.ca
Sent: Monday, June 25, 2012 5:23 PM
To: undisclosed-recipients:
Subject: INTERAC e-Transfer from Canada Revenue Agency System

Dear customer,

Canada Revenue Agency has sent you an INTERAC e-Transfer.

(Previously INTERAC Email Money Transfer).

Amount: $120.00 (CAD)

Sender’s Message: A message was not provided

Expiry Date: 25 June 2012

Action Required:

To deposit your money, click here: (web link)

Trouble with the link? Type it into your web browser address bar.

Need help? (web link)
——————————————————————————-
What is an INTERAC e-Transfer? (Previously INTERAC Email Money Transfer). If you use online or mobile banking at a participating financial institution, you can send and receive money quickly and easily.

Email or text messages carry the notice while the financial institutions securely transfer the money using existing payment networks. If your financial institution does not yet offer INTERAC e-Transfer, you can still deposit transfers to any bank account in Canada.

Click (web link) for details.
——————————————————————————
Pour voir les d?tails du virement en fran?ais, cliquez sur le lien ci-dessous: (web link)

 

Here’s a good one! Really, do you think CRA is going to send you an email if they think you’re committing tax evasion? More than likely you’ll get a knock at the door from a process server with a subpoena to turn up at tax court.

Sample 2

Dear business affiliate,

A criminal complaint has been filled against you and the company you are affiliated with. 
Your Company is being accused of trying to commit tax evasion schemes.

The full text of the complaint file (PDF format) can be downloaded from the CRA website, by visiting the following link: 
(web link)

For more information, please check our business information section, 2nd paragraph, and “Authorizing a representative”: 
(web link)

An official response from you is required, in order to take further action. 
Please review the charges brought forward in the complaint file, and contact us as soon as possible by:

Telephone: 800-267-6999
Email: complaints@cra-arc.gc.ca

Thank you,

Canada Revenue Service

 

Sample 3

You gotta love this one! Not only do they take the logo off the website, they actually use official looking numbers in the email address. CRA does have identification numbers for staff but they vary from department and have letters in them. The officiality (not sure if that’s a word) of the writing is pretty funny too. Really, ‘fiscal activity’, even CRA doesn’t sound that official. If you are getting a refund and it’s late, you will get a letter from CRA requesting further information, not this stupid looking email.

From: Canada Revenue Agency (CRA) <memberID-63692@cra-arc.gc.ca>
Date: 24 November, 2011 6:59:00 AM EST
Subject: [Bulk] Tax Refund (776752) $320.50
Reply-To: memberID-85140@cra-arc.gc.ca

cralogo

Dear Canada Revenue Agency customer,

After the last annual calculation of your fiscal activity we have determined that you are eligible to receive a tax refund of $320.50.

Please submit the tax refund form on Canada Revenue Agency (CRA) website and allow us 3-5 business days to process the information.

A refund can be delayed for a variety of reasons.

For example submitting invalid records or applying after the deadline.

To access the form for your tax refund, please Click Here.

Thank you,

Canada Revenue Agency Online Security Department.

Where Am I Tax Wise?

By Randall Orser | Personal Income Tax

corporation-Tidbits-2013-10-30-300x188It’s already December and along with New Year’s resolutions we will be thinking about our taxes.  Ideally, we already know what to expect and will have it all organized, however, we still may want a more clear idea of where we stand based on 2012 income and expenses.  Some  may need to set a date with their “shoebox” to make sure all is well.  The earlier the better!!  Estimating what we owe and budgeting for future installments along with exploring our options is easier to do when we still have the time to plan and organize our financial position.  Here is a guide for 2012 to help determine your bottom line.

You’ve been working hard in your business all year long and before you know it’s almost the end of 2012, and now is a good time to figure out whether or not you’re going to owe come April 30th (for self-employed individuals the return itself is not due until June 15th). If you’ve been doing your books on a regular basis (quarterly at the minimum) then you roughly know how much money you’ve made so far this year. From that we can guestimate what you’ll owe for the year taking into account depreciation and other factors if necessary.

Estimating the taxes owing

How can you estimate your taxes owing for the current year? If you use a tax preparer, then come late January they should have a draft copy of their tax software. They can help you get a pretty good idea about what your tax situation will be come April 30th. They may charge you for doing this but in the end it would be worth it

You can also do a simple calculation by taking into account where your net income fits into the tax brackets* for 2012. The brackets for the provinces vary greatly so this calculation will be based on British Columbia’s rates (that’s where we’re based). We also took into account the basic personal exemptions for 2012: Federal $10,822 and B.C. $11,354.

Also, don’t forget CPP, which is 9.90% for the self-employed (employee and employer portions) up to a maximum for 2012 of $4,613.40.

Up to $42,707 income         20.47%

Up to $85,414 income         25.56%

Up to $132,406 income       30.66%

For example, you have a net income from your business of $67,350, which is greater than the maximum CPP level of $50,100. You fall within the middle rate of 25.56% so you’re estimated tax bill is $17,214.66 and CPP would be $4,613.40 for a total owing of $21,828.06.

Now this is just a guestimate and should not be used as a final calculation for any tax amount owing, as that will depend on many factors, such as RRSP contributions, etc. Plus we have based this calculation on just your business income. This is just a guide so you have a rough idea of what you’ll owe come April 30th.

Installments

If you owed more than $3,000 (including taxes and Canada Pension Plan for self-employed individuals) last year then you should have been making quarterly installment payments based on the amount you owed. For example, if you owed $5,200 last year, then that’s $1,300 you should have been paying quarterly. Canada Revenue Agency (CRA) has been charging penalties and interest on missed, or late, installments, so make sure that you are making those installments.

Now, if you believe your taxes owing will be less than last years, you can lower the installment payments or eliminate them if the net amount owing will be under $3,000. If you believe your taxes owing will be higher than the previous year then you can also increase your installment payment so as not to have a high balance owing come April 30th.

You could use your current tax amount owing to figure out what you should make for an installment come March 15th.

Installments are due March 15, June 15, September 15, and December 15.

Tax Brackets for 2012

Federal: 

15% on the first $42,707 of taxable income, +

22% on the next $42,707 of taxable income (up to $85,414) +

26% on the next $46,992 of taxable income (up to $132,406) +

29% of taxable income over $132,406.

British Columbia

5.06% on the first $36,146 of taxable income, +

7.7% on the portion of taxable income more than $36,146, but not more than $72,293, +

10.5% on the portion of taxable income more than $72,293, but not more than $83,001, +

12.29% on the portion of taxable income more than $83,001, but not more than $100,787, +

14.7% of the amount of taxable income over $100,787.

tax

What records do I have to keep for my business?

By Randall Orser | Business Income Taxes

As a business owner, there are certain records that you need to keep. The obvious being your receipts for expenses you incur and your invoices for your sales. There are other records that you may not realize that you have to keep, such as employee information and payroll documents, contracts, leases, and more.

Income and Expenses

You must keep all your invoices you’ve sent to clients, and even those that you voided. It is best if your invoices are consecutively numbered (1,2,3, etc.). You can keep these electronically or through your accounting software. If you’re going to keep a paper file, sort them by invoice number, and make sure there are no gaps between numbers.

For expenses, keep all receipts for your debit, credit card, cheque, and cash purchases. That means keeping all your telephone bills, cell bills, vendor purchases, meals, advertising, etc. Make sure that for every entry into your accounting system, or showing up on your tax return, there is a matching receipt. Most audits crash and burn because the receipts are not there. You can keep receipts in what CRA calls ‘electronic imaging format’, which basically means a scanned document.

Government Remittances

You must keep all of your government remittance forms you’ve filed including: payroll remittances, GST/HST returns, provincial sales tax returns, workers’ compensation, and any other government agency remittances you need to make. Plus you must keep all documents that support your remittance and any calculations you did to come up with your remittance amount.

Format

You keep records in the format in which you received them whether paper or electronic, plus scanned documents (though at the moment it’s best to keep the paper copies). If you’re using accounting software you must keep a backup for each fiscal year in a safe and secure location (safety deposit box or online is best). For online accounting software, you should do a backup, usually to a spreadsheet, each fiscal year or a printout (paper or PDF). If you’re using a spreadsheet, you should have one for each year and also kept safe and secure. If you’re using a manual system, then we need to talk.

You must also keep all records in Canada unless granted permission to do otherwise by CRA. And, you must make all records available to CRA upon request. Note that CRA can take a backup of your accounting software and run it through their system; from my understanding of the system they use this to flag items they want to look at.

Other Documents

There is other documents that you need to keep that relate to your business and most will relate to your expenses you’ve incurred, some can relate to your sales too.

Payroll documents are the first thing that comes to mind. You must keep employee information (SIN, address, wage rate, etc.), TD1s filled out, employment agreements, ROEs, and paystubs (these will show the hours worked and deductions taken). The best way to keep this information is in a folder per employee; can also be electronic.

Contracts for leased equipment, vehicles, property (your office outside the home), and service contracts for consulting, marketing, etc. Make sure you keep copies, as most of these contracts will state the total value of the contract, the monthly payments, and the sales taxes.

If you have sales agreements, or other agreements/contracts, with your clients, make sure you keep copies, especially for those sales that are a monthly recurring amount.

As you can see, there are many records that you have to keep, for that just in case time that CRA, or some other government agency, comes calling and wants to check over your records.

Tidbits – How Much Tax Will I Pay?

By Randall Orser | Personal Income Tax

Wordcloud of Income taxThat is the question, isn’t it? And one I get asked a lot, especially from small business people. It’s also a loaded question because no matter what I say it may end up being wrong as there are many factors that come into play. You may not just owe tax, but Canada Pension Plan too (many people see this as a tax as much as they see income tax as a tax).

Factor #1: Your Income

How much tax you pay will depend on your taxable income, which is the amount used to calculate your tax on Schedule 1 (federal) and Form 428 (provincial). Taxable income is your net income earned during the year less RPP contributions, RRSP contributions, childcare expenses, union dues, carrying charges & interest, and more. We won’t get into provincial rates as they vary quite a bit from province to province.

For 2013, the income tax rates (federal) are:

  • 15% on the first $43,561 of taxable income, +
  • 22% on the next $43,562 of taxable income (on the portion of taxable income over $43,561 up to $87,123), +
  • 26% on the next $47,931 of taxable income (on the portion of taxable income over $87,123 up to $135,054), +
  • 29% of taxable income over $135,054.

You are taxed incrementally on your income so if you’re in the highest bracket you don’t just pay 29% on the total income, but incrementally from $0 to whatever is your income.

Example: You are earning $150,350.00 per year. The tax on that would be $33,015.69:

$ 6534.15 on the first $43,561

$ 9583.64 on the next $43562

$ 12462.06 on the next $47,931

$ 4435.84 on the final $15,296

Now this is just the tax calculation, as we’ll discuss in a little bit, there are credits you receive against this amount.

Factor #2: Type of Income

Another factor that affects the amount of tax you pay is the type of income. Employment, business, interest, pension, rental, RRSP, and most other incomes are taxed at 100%. This means that the total amount of those incomes is subject to tax.

The kind of income you really want is that income which is not taxed at 100%. That would be capital gains, which are taxed at 50%; this means that for every $1 in capital gains you have you’re only taxed on 50¢. For example, you have a capital gain from selling shares of $10,000; you’re only taxed on ½ of that or $5,000.

The other kind of income you want is dividend income as you get the dividend tax credit (DTC), which reduces the amount of tax you have to pay on dividends. There are two kinds of dividends: eligible and other than eligible. An eligible dividend is any taxable dividend paid to a resident of Canada by a Canadian corporation that is designated by that corporation to be an eligible dividend. A corporation’s capacity to pay eligible dividends depends mostly on its status. Other than eligible, or ordinary, dividends are any dividends issued by a Canadian corporation, public or private, which are not eligible for the enhanced dividend tax credit.

Dividends have a gross up whereby the amount of the dividend is increased by 38% for eligible dividends and 25% for other than eligible dividends. The dividend tax credit is 15.02% for eligible dividends and 13 1/3% for other than eligible dividends. If your corporation issues a $10,000 dividend then for eligible dividends are taxed at $13,800 with a DTC of $2,072.76. Other than eligible dividends would be taxed at $12,500 and a DTC of $1,666.67. Currently, in BC, you can make up to $35,000 in dividends and pay no tax; as long as the dividends are your only income.

Factor #3: Your Refundable and Non-Refundable Tax Credits

Individuals are entitled to claim certain non-refundable tax credits in calculating taxes payable for a taxation year. These credits reduce the amount of income tax an individual owes. The most common credits are the basic personal tax credit; the spousal tax credit; the equivalent-to-spouse tax credit; the dependent tax credit; and the age tax credit. These amounts change every year, so check with your tax preparer how much they are and to which ones you are entitled.

From our tax example above, you actually don’t pay the $33015.69 as you have non-refundable tax credits, which come off of this amount. As an employee (and single) the basic credits you get are:

Basic Personal Exemption   $11,038.00

CPP Contributions                 2,356.20

EI Premiums                           891.12

Canada Employment Amount  1,095.00

$15,380.32

Of this amount you get 15% (lowest federal rate) or $2,307.05. This amount comes off the tax amount above for a total tax bill of $30,708.64. That’s a lot of tax, which is why it’s good we have other deductions, such as RRSPs, medical expenses, donations and more.

A refundable tax credit is a tax credit that is treated as a payment and thus can be refunded to the taxpayer by Canada Revenue Agency. Refundable credits can be used strategically to help offset certain types of taxes that normally cannot be reduced, and they can produce a federal tax refund that is larger than the amount of money a person actually paid in during the year.

Some of these refundable credits are RRSP, childcare expenses, working income tax benefit, CPP or EI overpayments, GST/HST rebate on employment expenses, refundable medical expense supplement, non-capital losses of prior years, net capital losses of prior years, and many more.

As you can see calculating your tax payable is not an easy process as there are many factors that affect the tax you are going to pay. For the self-employed person, I’d keep aside at least 15% of your gross income as a good cushion for your tax bill the next year. Of course, don’t forget you need to make installment payments if your tax bill the prior year was over $3,000.

Tidbits – I’ve Registered for the GST/HST. Now What?

By Randall Orser | Personal Income Tax

TaxesYou’ve decided to take your business seriously and have just registered for the GST/HST. You’re now wondering what’s next? Let’s go over what you need to do now that you’re registered for GST/HST.

You have two sides of the GST/HST of which you have to keep track. The first is what you are charging to your customers called GST/HST Collected. The second is your Input Tax Credits (ITCs), which is the GST/HST you paid on purchases and other business expenses. Note that GST/HST becomes due once it’s invoiced, whether or not you’ve been paid by your customer is irrelevant. The same goes for the ITC side; it’s when you were invoiced, not when you paid the bill.

Invoicing

Your 15 digit GST/HST number (123456789RT0001) must be shown on all invoices, receipts, or other documents you use to invoice customers. If you’re using accounting software, such as Sage 50, the first thing you must do is put that into your accounting software. It will now show up on all your invoices. This is important, as CRA will not honour your client’s Input Tax Credit without your business number on the invoice.

You must indicate whether or not an item is taxable, the GST/HST amount must also be shown separately on your invoices or receipts, and the rate of GST/HST applied. If you are charging HST, show the total HST as well as the rate; do not show the federal and provincial amounts separately.

Other items you must include on your invoice are the business/operating name, invoice date, buyers name/operating name, brief description of the goods, and terms of payment.

If you are finding that people are always trying to get you to just take ‘cash’, don’t. This can come back to bite you in the butt. If you are finding the ‘cash’ conversation coming up a lot, then just include the GST/HST in the price when you quote it. If they ask about the GST/HST, just say ‘Don’t worry about it, it’s all included’. That, in most situations, seems to alleviate this problem. On the invoice, you’d just separate it.

Filing Your GST/HST Return

You must file your GST/HST return based on the period you were given upon registration. Most businesses are set-up as annual filers with installments payments 4 times per year. You can change this to monthly or quarterly if you find it hard to make installments. Installments are generally due April, July, October and January, which is the same timeframe for filing your quarterly returns. I have had clients go monthly, as this alleviates that big bill every quarter, and allows them to get a better handle on their GST/HST.

CRA will send you a return (GST34) prior to your filing period. Generally, CRA prefers people to electronically file their returns, and CRA has ensured this by not having the line numbers or boxes on the return. You can do electronically file via CRA’s website using GST/HST Netfile® or via your online banking.  I generally file the return electronically for the client, and then they just pay it through online banking.

Your GST34 return comes with an access code, which is used to confirm your identity when using GST/HST Netfile®. If you happen to lose this code, you can retrieve it using CRA’s GST/HST Access Code Online service. You will need your prior return’s information or access code to make this work.

The line numbers you will have to worry about most are: 101 – Sales, 105 – GST/HST collected, 108 – Input Tax Credits, and Line 109 – GST/HST Owing (Refund).

Records

You have to keep all records that support your filing of your GST/HST return. This means your invoices, supplier bills/receipts, cash register tapes, POS reports, etc. If you don’t keep these then your claim for ITCs will be denied; however, CRA will be happy to take the GST/HST collected as they can go by your deposits for that amount. I have seen CRA completely deny the expense side and keep the revenue side; even going into the persons personal account and including any deposits in there as income. Needless to say this person should have kept all his receipts and been organized. A bookkeeper, like us, will help you do that. Remember you have to keep records for six (6) years after the end of the tax year. For 2013, you’d have to keep the records until the end of 2019.

So, the GST/HST does become a big pain in the butt to keep track and remit; however, in the end, it will make you much more careful about keeping your records. And, really, people will take your business more seriously if you’re charging GST/HST as you look like a legitimate business.

What should I do if I haven’t filed taxes for a few years?

By Randall Orser | Personal Income Tax

Rip Van Winkel has not filed taxesWell, the first thing is don’t panic. If you are employed and haven’t been contacted by Canada Revenue Agency (CRA) yet, then it’s more than likely you don’t owe them money and will be getting refunds. CRA has already done an estimate on your return based on the slips that were filed by your employers, and others.

If you’re self-employed and haven’t filed since starting the business, you more than likely have been asked to file by CRA, especially if you have to file GST/HST returns. CRA knows you’re sales based on what you filed with those GST/HST returns. If you haven’t been asked to file, then you’re just not on their radar yet, and it’s best to get caught up before you do.

Of course, it also depends on how long you haven’t filed your taxes. A couple of years probably won’t be as big a deal as, say 10 years, however, it will depend on how much you owe. If you haven’t filed in 10 years, then you definitely need to look at the voluntary disclosure program which allows you to come forward and file taxes or adjustments to prior years without incurring penalties or being prosecuted. This program applies to income tax and GST/HST.

If you have been assessed by CRA for your income tax or GST/HST, then it’s best to get everything caught up ASAP. As far as CRA is concerned you’ve filed and are now owing this balance, whether it’s right or not. You will more than likely not owe as much as CRA thinks.

The first thing to do is contact a tax preparer/accountant, as I’m assuming you’re behind because either you don’t want to do it or am just not able to do them. The good ones, such as myself, won’t chastise you (well not too much) and will guide you through what they need to get your taxes done.

Now, if you are employed and can’t find your slips, then call CRA (1-800-959-8281) and you can get copies of your slips for the years you need to file. You could also go back to your employer(s), etc. and get copies from them. Once you have all that information you can get all the returns prepared. Also, let CRA know that you are getting all the information together so you can file the back returns and get caught up on all your taxes.

For the self-employed person, it’s a little more complicated. You can also go to CRA and get all slips filed, however, you also have to gather up all your receipts for the business, and, hopefully, you have all of those.