Can I write Off Tax Preparation Fees?

By Randall Orser | Personal Income Tax

Taxes On Calculator Shows HMRC Return Due TNThis is a question I get a lot from my clients. Most people believe that since someone else is preparing their taxes, that the fee can be used as a deduction, as accounting fees do show up on the tax return. However, this is not necessarily the case.

Employees

If you are employed, you cannot deduct accounting fees. There are exceptions (isn’t there always). If you are employed on a commission basis or have employment expenses then you can write-off accounting fees for the preparation of the numbers for the return as well as preparation of the return. Basically, you can deduct a reasonable amount paid during the year to comply with the requirement to file a tax return.

As an employee, you may also deduct accounting fees relating to:

a)     An assessment of tax, interest or penalties under the Income Tax Act or a similar provincial law,

b)    A decision of the Canada Employment and Immigration Commission, the Canada Employment and Insurance Commission, or a board of referees or an umpire under the Unemployment Insurance Act or the Employment Insurance Act,

c)     An assessment of income tax, interest or penalties levied by a foreign government or political subdivision thereof, if the tax is eligible for a foreign tax credit, or

d)    An assessment or decision under the Canada Pension Plan or a similar provincial plan.

You may deduct amounts expended in connection with accounting fees (legal fees too) incurred for advice and assistance in making representations after having been informed that the taxpayer’s income or tax for a taxation year is to be reviewed, whether or not a formal notice of objection or appeal is subsequently filed.

Business or Property Owners

For the small business person or property owner, accounting fees are allowable deductions where they are incurred in connection with normal activities, transactions or contracts incidental or necessary to the earning of income from a business. A deduction may therefore be taken for accounting expenses in connection with a broad range of routine business functions, such as

a)     Preparing contracts in relation to the sale of inventory,

b)    Obtaining security for and collecting trade debts owing,

c)     Preparing financial records and minutes of shareholders’ and directors’ meetings,

d)    Making annual corporate filings,

e)     Routine or regular audits of financial statements,

f)     Conducting appeals in respect of, for example, sales tax including Goods and Services Tax/Harmonized Sales Tax, excise, municipal, or property taxes, and

g)     Watching legislation (including customs and other regulations) affecting the business operations of the taxpayer.

In addition to the above, you can deduct accounting fees (and legal) incurred in connection with

h)    (a) Issuing bonds, debentures or mortgages,

i)      (b) Borrowing money for certain business or property purposes,

j)      (c) Incurring indebtedness that is an amount payable for certain business or property purposes, and

k)    (d) Rescheduling or restructuring a debt obligation

For the business and/or property owner, generally any accounting fees incurred to facilitate in the bookkeeping, preparation of government remittances and tax returns, filing information with the government, and other accounting related activities of the business are deductible for income tax purposes.

Tax Preparation and Filing Help for the Home Business Owner

By Randall Orser | Small Business

One Thousand dollars, Tax Showing Expensive Taxes TNHome business owners can easily prepare their own tax return but many choose to have it done by someone else. They find it easier that way; besides, many home business owners in Canada and the United States think that their country’s income tax laws are complicated and so they prefer not to mess with them. In fact, you have a much higher chance of being audited if you file your own small business income taxes.

Who Can Help in the Tax Preparation and Filing?

When preparing and filing their income tax returns, taxpayers often seek the services of professionals such as attorneys, certified public accountants, tax preparers, or enrolled agents. Alternatively, they can use tax preparation software and online services. Using professional tax preparation services or paid preparers, however, is not entirely foolproof. Not only are their fees expensive but also you, the taxpayer, remain responsible for all the content of your tax return including errors, if there are any. You are liable for any deficiency, interest, and penalties that may result because of erroneous items in your return. For this reason, it is important that you review your tax return for accuracy before signing it.

Other than the honest mistakes, what you will also need to watch out for are the unscrupulous tax preparers. Their fraudulent practices can cause you grave legal and financial problems even if you are not aware of them. Such practices include manipulation of income figures, inflating personal or business expenses, claiming bogus deductions or unallowable credits, and overstating exemptions that allow them to prepare and file falsified tax returns in behalf of their clients.

How to Choose a Tax Preparer

Choose a tax professional who is experienced, honest and reputable. Ask questions about the length of his experience and any training in tax laws that he may have received. Ask people that you know who have used the services of the preparer. Find out if they were satisfied with the kind of service they received.

Choose the preparer who would most likely be available to answer questions about the preparation of your tax return in case of audit. Do remember that tax professionals must sign your tax return and provide you with a copy for your records. Beware of the preparer who does not want to sign your tax form. On your part, never sign a blank tax form and neither should you sign in pencil.

Avoid tax preparers who guarantee a refund or promise larger refunds than anyone else. Only the CRA, after reviewing your return, can determine if you are entitled to a refund. Also, if they prepare your tax return properly, the resulting figures will be similar to what other preparers can get. You may also want to consider the tax professional who can offer you electronic filing or other payment options you may choose.

Make sure to discuss the fees before you allow the tax preparer to work on your return. Fees are usually based on the complexity of your tax return. It follows that you will have to pay a higher fee if your return is complicated or if the tax preparer will need to spend longer hours in its preparation, such as going over a significant number of claims and supporting documents that still need to be sorted out. Avoid a preparer whose fee is based on the amount of refund you are expected to receive.

Keep in mind that your tax return does not have to be prepared by a tax professional. You can request a knowledgeable friend or relative to help you out. Or, you can even make use of the free tax preparation services that are available nationwide, for basic returns only. Check the free programs of the CRA and its industry partners.

However you prepare and file your return, the important thing is for you to file and pay your income tax. If you willfully fail to file and pay your taxes, you risk having major penalties and interest applied against any balance owing, plus the penalty can increase because you were neglectful over too many years for not filing.

6 Economic Questions Business Owners Should Ask About Their Company

By Randall Orser | Small Business

Question Marks Over Man Shows Confusion And Uncertainty TNThe business cycle is important for business owners because the ups and downs in the economy affect the ability of a business to stay afloat financially. Changes in the business cycle are measured against long-term trends.

This article offers an introduction to why managers and business owners need to understand the business cycle and a list of six questions that business owners should consider regularly to keep their pulse on the business cycle. Following changes in economic factors such as supply and demand in the local, regional, national, and global economies is essential for sound business planning.

According to Dr. William B. Conerly in “Businomics,” managers need to know two key things about the business cycle. First, “The manager would like to know when downturns—and upturns—in sales are coming.” For example, in an economic downturn, sales may drop and potentially hurt company profits. Second, “Managers would also like to know when their costs are going to rise or fall.” For example, inflation may cause the cost of goods to rise, resulting in the need for the company to raise the prices for its customers.

If you are a manager, you need to acquire an elemental understanding of economics to assist you with studying changes in your market and in the economy in general. What kinds of questions can you ask yourself to guide your monitoring of the economy? Just waiting for the news media to draw your attention to significant changes in the business economy may not be enough to protect your company.

Here are six questions about the relationship of your company to the business cycle to consider:

1. How have my business costs changed over the last four quarters? If you look at your costs over time for supplies, labor, services, and so on, you can identify trends either upward or downward based on fluctuations in the economy. Decreasing costs may increase your profits, whereas increasing costs may decrease your profits without adjusting your prices.

2. How have my sales been for the last year? Just like studying cost trends, you can study sales trends. You should know on any given week or month how your products are selling overall and how the major categories of products are doing. If you have a flagship product, you might need to prepare more detailed sales figures for that product.

3. How can I decrease my expenses to create more profit? Deciding whether you need to decrease expenses is a difficult issue. If you are hit with an economic downturn, you may be forced to cut your expenses quickly. Knowing when to trim the overhead of doing business is a skill that you build over time.

4. How have my profits changed in the last year? Because your costs are always changing, you can choose not to view profits as fixed amounts and study their trends upward or downward from quarter to quarter and year to year. You can study profits as a percentage of total sales for a constant measure of profit trends over time.

5. Do I need to increase the amount of savings for my business? Savings is an important consideration. Just like many households, many smaller businesses have nominal savings. Often smaller businesses rely upon credit to get cash when needed. If you set the amount you will save out of your monthly or quarterly profits as a percentage, you can adjust that percentage based upon changes in the economy.

6. Do I need the ability to borrow more money to support my business? Sometimes your business will be short on cash. For example, if you spend a lot on purchasing inventory and then you have a drop in sales, your business may take in less money than you were counting on to meet all monthly expenses. The ability to borrow as much as you need for unforeseen economic changes is crucial for keeping the company solvent. You can study your business to determine how much available credit your business might need to climb out of a monetary hole when changes in the business cycle hurt your financial position.

There are many other factors to consider when you study your business activities in relation to the fluctuating economy. The foregoing six questions serve as a starting point for exercising your business mind constantly about the business cycle. The more you study the trends of your business, the better you will become at making strategic moves to adjust business activities such as spending, saving, and setting prices.

How to spend your tax refund?

By Randall Orser | Personal Income Tax

Tax Refund TNIf you are expecting a large tax refund this year, it can be exciting to think about everything you can do with it. A few hundred dollars could buy you new clothes, a few thousand dollars could be a down payment on a new car, or the money could be put toward retirement or future emergencies. When should you save your refund and when can you splurge?

Never splurge your entire tax refund if you aren’t financially secure. A financially secure individual will have no debt besides a modest mortgage and will have a healthy emergency fund set aside. A good emergency fund will have a minimum of 3 months of living expenses, but preferably 6 to 8 months worth of living expenses.

If you have any debt besides a mortgage, first set aside $1,000 in a savings account. This is a short-term emergency fund that is necessary to have until your debt is paid off. It should be enough to take care of many small emergencies that may arise until your debt is paid off. After that, the rest of your refund should be put toward your debt.

If you don’t have any debt, the refund should go toward your 6 to 8 months of living expenses. This emergency fund will keep you covered for at least 6 to 8 months if you lose your job, or it can cover emergency expenses such as car problems, medical expenses, and other emergencies. Everyone should have an emergency fund, no matter how high their income level.

Tax refunds are commonly used for large expenses or upgrades. For example, if your water heater breaks, use your tax refund. If your car is barely hanging on to life, use your tax refund to get a good used car. If you have a sizeable refund, it may be enough to put down on a new house.

What about splurges? Should you always use your tax refund for boring necessities? From a perfect financial standpoint, you should put 100% of your refund toward debt or save all of it. However, you should be rewarded for good financial choices from time to time, and you should enjoy life. Spending money on fun things like big screen televisions, vacations, and new clothes isn’t always a bad thing.

If you have no debt, you have an 8 month emergency fund in a savings account, and you have a good retirement account set up, don’t feel bad about spending your refund on something fun like a cruise or a bathroom remodel. You earned it. You worked hard to stay out of debt and save enough money to be secure. It is important to spend money on things you enjoy from time to time.

If you have been paying off debt and you only have a little left, or you have a good head start on your emergency fund, you can spend some of your refund on a splurge. For example, if you have 3 months of living expenses saved up that amounts to about $6,000 and you are getting a $3,000 refund, put $2,000 in your savings account to increase your emergency fund to 4 months of living expenses and spend the remaining $1,000 on whatever you please.

If you don’t know how to manage your money, you won’t know how to best spend your tax refund. Learn about financial planning and budgeting to get your finances in order. Once you are on track, you can spend your tax refund more carefully and get the most out of it. Balance financial security with responsible spending on things you enjoy.

What are Key Performance Indicators for Small Businesses?

By Randall Orser | Small Business

Key Performance Indicators diagram TNWhat is the purpose of your business?  What do you need to do absolutely correctly in order for you business to succeed?  What are the activities that you absolutely cannot screw up without losing significant amounts of business?

These questions are answered by examining your Critical Success Factors or CSF’s.  Critical Success Factors are defined as those activities that a business undertakes that allow it to succeed.

It’s more than just the numbers on your financial statements.  Some CSF’s relate to measures of quality, customer satisfaction, and how efficiently you are using your resources.

However, before you can do any analysis on your company’s Critical Success Factors, you need to examine your business strategy.

Ask yourself the following questions: Why is my business better than my competitors’? What do my customers tell me that they like about my business? What don’t they like? What action could I take that would make my customers go elsewhere?

Note that two of the four questions relate to your customers’ perception of your company, not your impressions on what they think.  It’s an important distinction as your customers may have a very different view on you and your business than you think.  How do you know what your customers think?  Ask them!  Set up a procedure where they are asked to fill out a feedback form when they purchase your product or service.  Ask them what they like and don’t like.  Ask why they might choose to shop elsewhere.  Ask what you are doing well and what you could be doing better.  You may be surprised by the results.

The answers to the four questions above give you a list of those activities that you need to make sure your business is doing regularly and consistently.  Review your list.  You will most likely find that the items on it relate more to your customers’ perceived value in your product or service, not just its cost.  Companies that compete only on cost will always suffer in the long run as there will always be someone else that can do it cheaper.

Now that you have defined your Critical Success Factors, you need to be able to make sure you are on track.  But how to measure them, especially when some are non-financial?

The measurements of Critical Success Factors are called Key Performance Indicators or KPI’s.  To recap the jargon, Critical Success Factors are things your company must do to thrive and Key Performance Indicators are the measures of those things.

Here is a typical list of Critical Success Factors:

  1. Personal service- making sure the customer gets to speak with a staff member when the purchase is made.
  2. Product quality- making sure the product does what you say it will do and is durable.
  3. Quick problem resolution- making sure all customer complaints are handled quickly and in a manner that impresses the customer.
  4. Same-day shipping- making sure that your product gets shipped out to your customer the day the order is received.

All four of these CSF’s can be measured, even though some of them are non-financial.

Those are some of the ways that non-financial indicators can be measured and tracked.  Once the measures have been determined, it’s important to set your expectations to measure against.  For example, if your target is to ship 100% of your products same-day, then you would gauge the actual against the standard (100%).

What would happen if your Key Performance Indicators start to slide?

Let’s say you’ve been tracking your key performance indicators for months and this month, several of the indicators seem to show problems.  What do you do?

When this happens (as it inevitably will), you need to discover the source of the problem.  A business could face many problems that would impact its key performance indicators including employee illness, cash flow crunch, breakdown in processes, and inattentiveness to customer needs.  If the problem is short term, such as employee illness, there is no need to take drastic action.  However, you will want to see if there is a way to make your operations less vulnerable to the illness of a single employee.

If the problem seems to be in the underlying processes, it’s time to put new procedures in place to make sure the critical success factor is being met.  Have there been changes in the external business environment?  New competitors in the industry?  Quality control problems with the inventory?  These are all situations that need a rethinking and reformulation of your business plan.  If you can see the icebergs, you will have a much better chance of being able to steer around them.

What To Do If You Forgot to File Taxes?

By Randall Orser | Personal Income Tax

Savings And Finance Concept TNEvery year in Canada we must file a personal income tax return by April 30th (June 15th for those who are self-employed). As with anything in our busy, hectic lives, we do forget; however, what if it’s your tax filing that you forgot? That can have serious consequences depending on what you owe, and for what benefit programs you are qualified.

The first thing is Don’t Panic! Okay you will, but calm down. If you’ve realized you haven’t filed your taxes, and it’s not too late in the year, you’ll be okay. Yes, if you owe money, you’ll have a penalty and interest, however, catch it soon enough and it won’t be that much. Of course, if you are getting a refund, then you won’t be charged any penalty. And, getting benefit payments will definitely be delayed, as you haven’t filed, though you will get a catch-up payment.

Canada Revenue Agency (CRA) has now allowed the electronic filing of tax returns until January of the following year, so for the 2013 filing year you can electronically file until January 16th. Eventually, I believe, we’ll be able to file electronically for any tax year any time.

Many people end up not filing for fear that they will owe, or owe way more than they can pay at the moment. It’s much better to file and owe than not file and owe, as CRA tends to get a bit anxious when they realize you owe, but haven’t filed and paid yet. Of course, these same people think they’re going to owe tons of money, and, in the end, don’t owe near as much as they thought, or, hilariously, get a refund. I love the expression on peoples’ faces when I tell them they owe $X, and they were thinking $XXX.

What are the penalties for filing late? If you owe tax for 2013 and do not file your return for 2013 on time, CRA will charge you a late-filing penalty. The penalty is 5% of your 2013 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.

For example, you owe $3,200 and don’t file until November 15th 2014. In this case you owe $583.91 in penalties plus 5% interest compounded daily (approximately $194). That’s a total balance owing of $3,977.91. Your penalties/interest are 24.3% of the original balance owing.

If you failed to report an amount on your return for 2013, and you also failed to report an amount on your return for 2010, 2011, or 2012, you may have to pay a federal and provincial/territorial repeated failure to report income penalty. The federal and provincial/territorial penalties are each 10% of the amount that you failed to report on your return for 2013. Your late-filing penalty for 2013 may be 10% of your 2013 balance owing, plus 2% of your 2013 balance owing for each full month your return is late, to a maximum of 20 months. That can get quite steep depending on how much you owe.

Using our example above of owing $3,200, and this is another year of filing late your penalty would be $764.09 for a total of $3,964.09, and interest would be $203 for a total of $4,167.09 (30.2% of the original amount owing.

From our examples above it is much better to pay upon filing (or pay by installments when you believe you have a big balance owing). If you know you’re going to owe, but don’t have the funds at filing, file anyway and work out some kind of payment arrangement with CRA.

Do you have multiple years to file? Can’t find your slips? If your slips are normally filed with CRA (such as T4s, T5s, etc.) then you can request copies and use those to file your returns. You will have to paper file for 2012 and prior. If you believe you will owe for these prior years, you may also want to look into the Voluntary Disclosures Program.

With the Voluntary Disclosures Program, you may file a disclosure to correct inaccurate or incomplete information, or to provide information you may have omitted in your previous dealings with the CRA. More specifically, this includes information you have previously reported that was not complete, information you have reported incorrectly, or information you did not provide previously to the CRA.

Canada has a high compliance rate (94.5%) of people who file their taxes on time. If you find you’re not one of those, you may need to look into why you’re always late filing. Are you using a tax preparer now? Maybe you should. I hound my clients to get me their stuff, and most appreciate that. Of course, once you’re caught up always ensure you file on time after that so you avoid higher penalties.

How Do You Calculate a Break-Even Analysis for Your Small Business?

By Randall Orser | Small Business

Money raining down on a piggy bank TNYou’re running a small business, or maybe you’re thinking about starting one. You don’t want to lose money, and you don’t want to go out of business. So, how do you find out how much you need to earn to break even? The answer is simple. You do a break-even analysis.

Don’t worry, a break-even analysis sounds more complicated than it really is. It doesn’t require a lot of math skills. It just requires some thought and a basic equation.

First, what is a break-even analysis? Very simply, a break-even analysis is the process of discovering your break-even point. What’s a break-even point? It’s exactly what it sounds like: it’s the point where your expenses are exactly covered by your income. It’s where you “break even”. Every sale above your break-even point is profit in your pocket.

Once you know your break-even point, you know exactly how much you need to earn to break even. You will also see whether or not you can realistically stay in business.

For example, if your break-even analysis shows you need to sell 1000 widgets every year just to cover your expenses, and historically you’ve only sold 200 widgets a year, then you’re going to have to do a lot of planning to get your sales up to 1000. You might need to dramatically lower your expenses or come up with a better marketing plan to break even.

So, how do you calculate your break-even analysis?

The first thing you do is add up all your fixed costs. This means all the expenses you have to pay whether you make any sales or not. Your fixed costs include your rent, utilities, and any salaries. Your business may have other fixed expenses like membership dues or insurance premiums. As an example, if you made widgets from home you might discover your fixed costs are $10,000.

Next, estimate the average price of your product or service. To continue the widget example, if all your widgets are sold for $100 each, then $100 is the average price of products. But what if your widgets have different prices? Then you find the average price. You find the average by adding up the different prices and dividing that by the number of products.

For example, say you offer 2 different widgets: one is $50 and the other is $150. To find the average price of product, add 50 + 150 and divide by 2. Your average price of products would be $100.

Finally, estimate the average cost of your product. In other words, how much does it cost you to produce each widget? Or, if you provide a service, how much does it cost you to provide that service (travel expenses, phone calls, etc.)? To conclude the widget example, let’s say your widgets cost $10 to produce.

Okay, now you know your fixed costs, the average price of product, and the average cost of product. You’re almost finished. All you have to do is plug these numbers into the break-even equation. This equation will tell you the dollar amount you have to make to break even.

The break-even equation is:

Fixed costs/ [1 – (average cost of product/average price of product)]

So, for the widgets example, take the fixed costs of $10,000 and divide that by 1 – (10/100). Remember, $10 is the cost of product and $100 is the price of product.

$10,000/[1 – (10/100)] = $10,000/.9 = $11,111

The equation shows that you must make $11,111 in order to break even.

Want to know how many widgets you’ll have to sell to get there? Easy. Just divide this number by the average price of product. For the widgets, divide $11,111 by $100 and you get 112 (round up to the next whole number).  So, in this example, you must sell 112 widgets every year just to break even.

Calculating a break-even analysis for your small business is the best way to find out how much you need to earn to stay in business. Once you know your break-even point, you can design marketing plans and control your expenses to maximize your earning potential.

Your break-even analysis will tell you exactly at what point you start turning a profit. Every sale above your break-even point will be money in your pocket, so take advantage of the break-even analysis to make better business decisions and increase your profits.

Why are my support payments taxable?

By Randall Orser | Personal Income Tax

Your Money Check Payment in Mailbox TNThere are two kinds of support payments: child and spousal. Child support payments are those payments that you and your spouse have agreed on, or are court ordered, to help cover the cost of raising the children by the one spouse. Spousal support payments are those payments that you and your spouse agreed on, or are court ordered, that cover that spouse’s own maintenance (living expenses). Generally, the agreement or order must stipulate whether the payment is a child or spousal support payment.

Your payment is considered a support payment if the following five conditions are met.

  1. The payment must be made under the terms of a court order or written agreement.
  2. If the recipient is the payer’s current or former spouse or common-law partner, the payer must be living separate and apart from the recipient at the time the payment was made because of a breakdown in the relationship. Otherwise, the payer must be the legal parent of a child of the recipient.
  3. The payment is made for the maintenance of the recipient, child of the recipient, or both, and the recipient has discretion as to the use of the amount.
  4. The allowance must be payable on a periodic basis. The timing of the payments must be set out in the court order or written agreement.
  5. The payments must be made directly to the recipient.

For tax purposes, child support payments are not taxable income to the recipient. However, they must be laid out in the court order or agreement as child support payments. If your order or agreement predates May 1 1997, then the recipient would have to include the payments as income, and the payer gets a deduction.

Spousal support payments are taxable income to the recipient, and a deduction for the payer. As with anything tax wise, there are exceptions. Child support has priority. If your court order or written agreement specifies child support payments and support payments for the recipient, priority is given to the child support.

This means that all payments made are first considered to have been made toward child support. Any amount paid over and above the child support amount is considered to be support payments for the recipient. All child support payable to a recipient must be fully paid before any amounts paid as support for the recipient can be claimed as a deduction. Any arrears in the amount of child support is carried forward and added to the next year’s support payable. The priority of child support does not apply when the child support and spouse or common-law partner support are payable under different court orders or written agreements and the recipients are different people.

Payments made after the death of the recipient are not deductible by the payer. Whether the payments are made to the estate or the children, these payments would not meet the conditions of a support payment. Payments made by the estate of a payer to the recipient are neither deductible nor taxable. The amounts do not meet the conditions of a support payment because an estate cannot have a spouse or common-law partner.

If you have to claim support payments you received, then it’s because they are for spousal support. Check your agreement or court order to ensure you are doing this correctly, and keep track of your child support payments as you may not have to claim the support payments if the child support is not paid in full.

I Want To Hire Someone, But They Want Cash

By Randall Orser | Small Business

Broken Piggybank Shows Financial Deposit TNYou may be wondering why I used the word ‘hire’ in the title as to whether I mean an employee or subcontractor. I’m going to be talking about both situations. You basically hire someone whether it’s an employee or subcontractor. Cash is a sticky situation, and while it’s not illegal to pay cash, it’s how you treat the transaction that could make it illegal. In the employee situation, are you legitimately taking off deductions and then paying cash? In the subcontractor situation, are you paying off an invoice and it includes applicable taxes?

For our purposes here, a subcontractor refers to anyone you hire that is not an employee, whether it’s hiring someone to help you with your business work, or to do a website, or just to clean the office.

Employees

There is nothing wrong with paying cash to an employee, as long as you’ve taken off the deductions and are giving them their net pay. That is totally acceptable. You should also give them a paystub, and have a copy that they sign and date as receiving the pay. By having them sign a copy of the paystub, that you keep, you ensure the employee doesn’t come back saying he never was paid.

Now, if it’s a situation where someone wants to do some work for you, and get paid cash without you deducting the appropriate taxes, then you just have to say no. This situation will definitely come back and bite you in the posterior region.

I had a client that was paying employees cash, not doing the proper deductions, and not getting any kind of signed receipt that they actually received funds. By the time the client came to me it was too late, and we had a year-end to complete. Needless to say the client was screwed. All monies paid to these ‘employees’ could not be taken as a deduction for the company, and the client had to claim all these funds as a draw. The client ended up having to claim most of the funds as personal income, and owed thousands to CRA at personal tax time.

Subcontractors

Again, it’s not wrong to pay a subcontractor with cash as long as you get a receipt and pay the applicable sales taxes (unless of course the subcontractor is a small supplier and thus not registered for the GST/HST). Whenever you’re dealing with someone who you’ve hired as a subcontractor, you must get them to invoice you, and charge applicable taxes; whether you’re paying cash or not.

A problem arises when the subcontractor insists on only cash, and then won’t give you an invoice or receipt. If this happens, then don’t do business with that subcontractor, it’ll only come back to haunt you. Canada Revenue Agency always requires you to provide proof of any deductions you claim against revenues, and in this situation you have no proof. With no proof, there’s no way you can claim a deduction.

Let’s go back to the client we discussed in the Employee section above. This client had some dealings with a subcontractor who refused to provide a receipt and would only take cash. By the year-end they had paid this subcontractor tens of thousands of dollars over the course of several jobs. With no proof that the client had paid this subcontractor, all monies paid this subcontractor were considered to be draws taken by the client. These monies were also added to the client’s income.

This scenario involved two people in a corporation; so all monies drawn were divided evenly between the partners. In the end the two partners ended up having to claim tens of thousands of dollars as personal income, and thus ended up owing a lot of money to the government on their personal taxes. Fortunately, the client took these draws as employment income, so the corporation did end up with a deduction.

When you’re in business, or deciding to start a business, it’s imperative that you set a policy when it comes to paying cash. I recommend to clients to never pay cash, and either writes a cheque or some kind of transfer from their bank that can be traced to the recipient. And, remember that subcontractor may not be considered a subcontractor by Canada Revenue Agency, so be careful.

What are child and family benefits?

By Randall Orser | Personal Income Tax

Piggy Bank Family Shows Planning And Protection TNThe Government of Canada has through our taxation system derived benefits for those taxpayers with spouses and children. These benefits are: Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB), GST/HST Credit, Working Income Tax Benefit (WITB), Children’s Special Allowances (CSAs) [these are payments given to a government agency that protects and cares for children and we won’t cover that here], and various Provincial and Territorial programs.

Information you provide on your income tax and benefit return is used to calculate your child and family benefits payments. Make sure you file your income tax and benefit return on time every year, even if you have not received income in the year. If you have a spouse or common-law partner, they also have to file an income tax and benefit return each year.

Canada child tax benefit (CCTB)

The Canada child tax benefit is a tax-free monthly payment made to eligible families to help them with the cost of raising children under age 18. The CCTB may include the National Child Benefit Supplement and the Child Disability Benefit.

The national child benefit is a joint initiative of the federal, provincial, and territorial governments that will:

  • Help prevent and reduce the depth of child poverty;
  • Promote attachment to the workforce by ensuring that families will always be better off as a result of working; and
  • Reduce overlap and duplication of government programs and services.

In July 1998, the Government of Canada enhanced the Canada child tax benefit (CCTB) by introducing the national child benefit supplement (NCBS). This supplement is the federal government’s contribution to the national child benefit initiative.

The Child Disability Benefit (CDB) is a tax-free benefit for families who care for a child under age 18 who is eligible for the disability amount. A child is eligible for the disability amount when a qualified practitioner certifies, on Form T2201, Disability Tax Credit Certificate, that the child has a severe and prolonged impairment in physical or mental functions, and the CRA approves the form.

Universal Child Care Benefit (UCCB)

The UCCB is designed to help Canadian families, as they try to balance work and family life, by supporting their child care choices through direct financial support. The UCCB is for children under the age of 6 years and is paid in installments of $100 per month per child.

To receive the UCCB, all the following conditions must be met.

a)     You must live with the child, and the child must be under the age of 6

b)    You must be the person who is primarily responsible for the care and upbringing of the child

This means you are responsible for such things as supervising the child’s daily activities and needs, making sure the child’s medical needs are met, and arranging for child care when necessary. If there is a female parent who lives with the child, CRA usually considers her to be this person. However, it could be the father, a grandparent, or a guardian.

c)     You must be a resident of Canada

d)    You or your spouse or common-law partner must be:

o   Canadian Citizen

o   Permanent resident

o   Protected person

o   Temporary Resident

Generally, you should apply for the UCCB as soon as possible after:

  • Your child is born;
  • A child starts to live with you; or
  • You become a resident of Canada.

GST/HST Credit

The GST/HST credit is a tax-free quarterly payment that helps individuals and families with low or modest incomes offset all or part of the GST or HST that they pay.

You are eligible for this credit if, you are a resident of Canada for income tax purposes in the month prior to and at the beginning of the month in which the GST/HST credit is issued and at least one of the following applies:

  • You are 19 years of age or older before the month in which we make a quarterly payment;
  • You have (or previously had) a spouse or common-law partner; or
  • You are (or previously were) a parent and live (or previously lived) with your child.

If you will turn 19 before April 1, 2015, you can apply for this credit on your 2013 tax return.

To receive the GST/HST credit, you have to apply for it, even if you received it last year. To apply, you have to file an income tax and benefit return for 2013, even if you have not received income in the year. On page 1 of your return, check the “Yes” box in the GST/HST credit application area and enter your marital status in the Identification area.

Working Income Tax Benefit (WITB)

The working income tax benefit (WITB) is a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families who are already in the workforce and to encourage other Canadians to enter the workforce. This also includes income earned from being self-employed.

You can claim the WITB on line 453 of your 2014 income tax and benefit return. However, eligible individuals and families may be able to apply for the 2015 advance payments. You can apply for the advanced payments when you file your income tax return.

To qualify, your working income must be over $3,000 for the year, you must be a resident of Canada throughout the year, and over 19 years of age as of December 31st for the year you apply. If you are under 19 years of age, you may still be eligible for the WITB, if you have a spouse or common-law partner or an eligible dependent on December 31st.

You are not eligible for the WITB if:

  • You do not have an eligible dependent and are enrolled as a full-time student at a designated educational institution for more than 13 weeks in the year;
  • You are confined to a prison or similar institution for a period of 90 days or more in the year; or
  • You do not have to pay tax in Canada because you are an officer or servant of another country, such as a diplomat, or a family member or employee of such person.

If you are eligible for the WITB and the disability amount, you may also be eligible to claim an annual disability supplement. To be eligible for the disability supplement, your working income must be over $1,150 and we must have an approved Form T2201, Disability Tax Credit Certificate on file with CRA.

As you can see the federal government have various credits that can help low-income families with relieve from various financial pressures they incur day-to-day. Always ask your tax preparer whether or not you qualify for these credits, and why you don’t. The CRA will inform you once you’ve filed your taxes whether or not you qualify, too. Below we are talking about the various (and there are many of them) programs to help low-income families.

Provincial and Territorial programs

Alberta family employment 
tax credit (AFETC)

The AFETC is a non-taxable amount paid to families with working income that have children under 18 years of age.

BC family bonus (BCFB)

This program provides non-taxable amounts paid monthly to help low- and modest-income families with the cost of raising children under 18 years of age. The amount is combined with the CCTB into a single monthly payment.

BC low-income climate action tax credit (BCLICATC)

This credit is a non-taxable amount paid to help low‑income individuals and families with the carbon taxes they pay.

New Brunswick child tax benefit (NBCTB)

The NBCTB is a non-taxable amount paid monthly to qualifying families with children under 18 years of age. The New Brunswick working income supplement (NBWIS) is an additional benefit paid to qualifying families with earned income who have children under 18 years of age. Benefits are combined with the CCTB into a single monthly payment.

Newfoundland and Labrador child benefit (and mother baby nutrition supplement)

This benefit is a non-taxable amount paid monthly to help low-income families with the cost of raising children under 18 years of age. The mother baby nutrition supplement (MBNS) is an additional benefit paid to qualifying families who have children under one year of age. Benefits are combined with the CCTB into a single monthly payment.

Newfoundland and Labrador harmonized sales tax credit (NLHSTC)

This credit is a non‑taxable amount paid to help low-income individuals and families who may be affected by the HST. Under this program, individuals or families with adjusted family net incomes of $15,000 or less receive an annual amount of $40 per adult and $60 for each child under 19.

Newfoundland and Labrador seniors’ benefit (NLSB)

This program provides a non‑taxable annual amount of $1,036 for a single senior (65 years of age or older at any time during 2014) or a married or common-law couple with at least one senior whose adjusted family net income is $28,654 or less. Seniors will get part of this payment if their adjusted family net income is between $28,654 and $37,522.

Northwest Territories child benefit (NWTCB)

This benefit is a non-taxable amount paid monthly to qualifying families with children under 18 years of age.

Nova Scotia child benefit (NSCB)

This benefit is a non-taxable amount paid monthly to help low- and modest-income families with the cost of raising children under 18 years of age. These amounts are combined with the CCTB into a single monthly payment.

Nova Scotia affordable living tax credit (NSALTC)

This credit is a non‑taxable amount paid to make life more affordable for Nova Scotian households with low and modest incomes. The credit offsets the increase in the HST and provides additional income for these households.

Nunavut child benefit (NUCB)

This benefit is a non-taxable amount paid monthly to qualifying families with children under 18 years of age.

Ontario trillium benefit (OTB)

The Ontario trillium benefit (OTB) is the combined payment of the Ontario energy and property tax credit, the Northern Ontario energy credit, and the Ontario sales tax credit.

Ontario energy and property tax credit (OEPTC)

The Ontario energy and property tax credit (OEPTC) is designed to help low- to moderate-income Ontario residents with the sales tax on energy and with property taxes.

Northern Ontario energy credit (NOEC) 

The Northern Ontario energy credit (NOEC) is designed to help low- to moderate-income Northern Ontario residents with the higher energy costs they face living in the north.

Prince Edward Island sales tax credit

This credit is a non‑taxable amount paid to help offset the increase in the sales tax for households with low and modest incomes.

Saskatchewan lowincome tax credit (SLITC)

This credit is a non‑taxable amount paid to help Saskatchewan residents with low and modest incomes.

Yukon child benefit (YCB)

This benefit is a non-taxable amount paid monthly to help low‑ and modest‑income families with the cost of raising children under 18 years of age. These amounts are combined with the CCTB into a single monthly payment

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