Does my business have to follow International Financial Reporting Standards (IFRS)?

By Randall Orser | Small Business

a man hand graphCurrently Canadian business must follow Generally Accepted Accounting Principals or GAAP. You may have been hearing over the past couple of years talk about International Financial Reporting Standards or IFRS, and talk of businesses in Canada converting to this reporting standard. Do you as a small business have to convert out IFRS? That’s what we’ll talk about here.

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.

The IASB is an independent accounting standard-setting body, based in London. It consists of 15 members from nine countries, including the United States. The IASB began operations in 2001 when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, national funding regimes, and other international and professional organizations throughout the world.

A financial statement should reflect a true and fair view of the business affairs of the organization. As statements are used by various constituents of the society / regulators, they need to reflect a true view of the financial position of the organization, and they are very helpful to check the financial position of the business for a specific period.

IFRS authorize three basic accounting models:

I. Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm.

II. Financial Capital Maintenance in Nominal Monetary Units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm.

III. Financial Capital Maintenance in Units of Constant Purchasing Power – CMUCPP – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm.

Sounds complicated, doesn’t it. It is much more involved than GAAP for sure. It will take time for enterprises to convert to IFRS.

Currently, financial statements reflect, historically, a moment in time rather than what may, or may not, happen with the company. IFRS allows for the probable future economic benefit will flow to or from an entity to be recognized in the financial statements.

Do I have to implement IFRS in my business?

In Canada, The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”

So, unless you’re a public company you do not have to follow IFRS. This may change over time. Should I ever convert to IFRS? I would say no, not unless you have to for regulatory reasons or you wish to sometime in the future take your company public. Converting to IFRS can be a costly and time-consuming practice and requires the skills of an accountant who’s worked in the IFRS arena.

Is there a deduction for looking after an adult parent?

By Randall Orser | Personal Income Tax

heart shaped symbol as medical technology,clipping pathWe’re coming into an age when many of us are going to be looking after one, or both, of our parents. This can be a great expense for you, as many people haven’t saved enough for retirement, or made contingencies for when they cannot care for themselves (I have invested in home care insurance so I can be looked after when I’m unable). So, what is available to you when you’re looking after an elderly parent?

Amount for an eligible dependent

This amount applies if you don’t have a spouse, or common-law partner, you supported the dependent during the year, and you maintained a home that the dependent lived in. This has to be someone who you financially supported, so generally someone with little income. Only one person can make the claim for this amount during the year. The dependent can be your parent or grandparent by blood, marriage, common-law partnership, or adoption. They must live with you full time and not just be visiting that year.

Caregiver Amount

You may be able to claim the caregiver amount if, you (either alone or with another person) maintained a dwelling where you and one or more of your or your spouse’s or common-law partner’s parents/grandparents lived. They must dependent on you due to impairment in physical or mental functions. The parent or grandparent has to have been born in 1948 or earlier. This amount is more geared towards someone who is helping his or her parent/grandparent due to them becoming dependent before getting elderly (under 65 during the year).

Family Caregiver Amount

If you can claim the caregiver amount then you may be able to claim the Family Caregiver Amount too. This amount can be claimed when your parent is dependent on you because of impairment in physical or mental functions. You must have a signed statement from a medical practitioner showing when the impairment began and what the duration of the impairment is expected to be. You can claim the FCA for more than one eligible dependent.

Allowable amount of medical expenses for other dependents

You can claim those eligible medical expenses you’ve paid on behalf of a parent who depended upon you for support. Some of those expenses can include: hearing aids, walking aids, wheelchairs, vehicle modifications, and more. You must have paid for these expenses yourself, not your parent.

You still have to use the 3% deduction as you would for medical expenses for yourself, using the parent’s income.

Also, there are certain medical expenses you can claim only with a Disability Tax Credit Certificate. You must make sure that one has been filed on the parent’s behalf prior to claiming the medical expenses.

As most tax returns are electronically filed today, CRA will request to see the receipts when the amount is high. So, ensure you have receipts for the medical expenses you claim. If you do get a request for medical receipts, please make copies of them all just in case they get lost.

Attendant care or care in an establishment claimed as medical expenses

You can claim the amounts paid for attendant care expenses as medical expenses, or as a disability supports deduction. However, the total you claim cannot be more than the total amount paid.

You may claim full-time attendant care services if you are eligible for the disability tax credit, or a medical practitioner certifies in writing that these services are necessary and that your impairment is likely to be indefinite. You can claim for part-time attendant care services only if your parent is eligible for the disability tax credit (DTC).

Disability amount transferred from a dependent

You may have a dependent that is able to claim the disability amount, and that person may not need to claim all or part of that amount on his or her income tax and benefit return. Under certain conditions, your dependent may be able to transfer this amount to you. If your dependent is eligible for the disability tax credit (DTC), you may be able to claim all or part of his disability amount on your tax return.

As you can see there are many ways you can claim a dependent parent. It’s best to talk to your parent, their medical practitioner, and your tax professional to ensure that you are getting the best for your parent and yourself.

Why you should take some salary as a business owner.

By Randall Orser | Personal Income Tax

smiling young man counting coin in poggy bankWhile you can’t actually take a salary as a sole-proprietorship or partnership you can take one as an owner of a corporation. However, we can still look at your net income as a salary for the proprietorship or partnership, and you should not just write everything off so you don’t pay tax. You need to show some kind of an income for various purposes, such as loans, mortgages, etc. The taxman also likes to see some income eventually, as they may start to wonder how you support yourself.

Let’s talk about the taxman first.

While there’s no written rule about net income and when Canada Revenue Agency (CRA) will determine you’re not earning enough, you need to look at your net income over the years and see where it is. If you’re having continuous losses, as a proprietorship/partnership, CRA may start to wonder why you’re in business the first place. Plus, they may wonder how you live at all.

You may find yourself in the middle of a net-worth audit, where CRA looks at your income, what you own, what you owe, and how you survive financially. If there is a reason you do not need your business net income, such as other income, pensions, etc. you will have to prove that.

For the corporation owner, while your net income form the business doesn’t matter as much, CRA may look at what you take as income from the corporation. And, again, you could find yourself in a net-worth audit situation, if you aren’t taking any income. However, if you have a large shareholder loan (monies you’ve lent the corporation), and you’re paying this down instead of taking a salary, that will help with CRA.

Everyone Else

Sadly, in the world of finance, not having an income is detrimental to getting any kind of loan. Banks do not understand being self-employed, and only want to see T4 income. That’s what they understand. If you are a proprietorship or partnership, you’ll need to be showing some kind of net income. How much all depends on what you’re going for, mortgage, car loan, etc.

For the corporation owner, you need to be taking some kind of a salary if you have a mortgage or other loans. As I said above the banks seem to only understand T4 income, so it’s best to take some kind of salary. The banks will not look at the monies you take out to repay your shareholder loan, as that’s money you’re owed by the corporation.


Let’s face it, in the end it’s all about us. You’re in business to make money and to earn a living, so your business needs to make money too. You need to be able to support yourself from your business earnings, without dragging the company into debt. This applies whether you’re a sole proprietorship/partnership or a corporation.

For the corporation owner, you can still claim an income even if the company cannot pay you outright. All you have to do is declare an income and pay the appropriate payroll deductions and you are good to go. Once the company has money you can pay this money to yourself. However, you must ensure you have the funds to pay the payroll deductions each month.

While you may want to not have to pay any taxes and take all the deductions you can, in the end, you can hurt yourself by not making money or taking a salary from your business. You need to live and support yourself.

Pooled Registered Pension Plan (PRPP)

By Randall Orser | Personal Income Tax

Digital Piggybank VisualizationA pooled registered pension plan (PRPP) is a new, accessible, straightforward retirement savings option for employed and self-employed individuals who do not have access to a workplace pension plan or where a workplace pension plan does not exist.

A PRPP enables its members to benefit from lower administration costs that result from participating in a large, pooled pension plan. It’s also portable, so it moves with its members from job to job.

Since the investment options within a PRPP are similar to those for other registered pension plans, its members can benefit from greater flexibility in managing their savings and meeting their retirement objectives.


Starting in 2013 those persons with a valid Canadian Social Insurance Number are able to participate in a PRPP. If you wish to participate you must meet one of the following criteria:

  • Employed or self-employed in the Northwest Territories, Nunavut or Yukon;
  • Work in a federally regulated business or industry for an employer who chooses to participate in a PRPP; or
  • Live in a province that has the required provincial standards legislation in place.


You can enroll in a PRPP by your employer (if the employer so chooses) or a PRPP administrator (bank or insurance company). Your PRPP is created under your SIN, and you choose the amounts to be contributed from your paycheques. You and your employer contributions, including any lump-sum contributions, are pooled together and credited to the your account.

The member must file an income tax and benefit return each year to participate in the PRPP since the amount that can be contributed depends on the income reported on their return. The total amount that a member or employer can contribute without tax implications depends on the member’s RRSP deduction limit. This is also known as your ‘contribution room’.


Any employer PRPP contributions, combined with your contributions to your PRPP, RRSP, and spouse or common-law partner’s RRSP, that are above the RRSP deduction limit may be considered excess contributions. These excess contributions may be subject to a tax of 1% per month for every month they are left in the account, therefore it is important for members to know how much unused contribution room they have available in a given tax year.

Any contributions made to a PRPP that are not deducted on your income tax and benefit return in a given year are referred to as Unused RRSP contributions. If you withdraw the unused contributions from his or her PRPP, an offsetting deduction may be claimed.

You can make voluntary contributions to their PRPP between January 1 in a given year and 60 days into the following year, up until the end of the year in which they turn 71. Your contributions are deductible on your income tax and benefit return, but the deduction must not exceed the difference between their RRSP deduction limit and the employer’s contributions to their PRPP.

Any voluntary contributions made by your employer are not included in the your income, and they are not deductible on the your income tax and benefit return.


To ensure that the funds within a PRPP are available for your retirement purposes as intended, the Pooled Registered Pension Plans Act (PRPPA) limits the distributions (withdrawals) that a member can make. As with limitations in other registered pension plans (RPPs), the funds in a PRPP are generally “locked-in” and cannot be withdrawn until the member retires from employment.

There are certain life events that allow you to withdraw funds from a PRPP. Your death, you have a financially dependent child or grandchild, or the breakdown of your marriage or common-law partnership.

In the case of the your death and you had a spouse or common-law partner, your spouse or common-law partner will become a successor PRPP member of the plan, taking over ownership and future direction of the deceased PRPP account. The successor member is then entitled to receive a lump-sum payment from the PRPP or can choose to transfer the funds directly, on a tax-deferred basis, into another investment plan such as another PRPP, an RRSP, RRIF or RPP.

In the case of a PRPP member who had a financially dependent child or grandchild, the child or grandchild is deemed to be a qualifying survivor, and is also eligible to receive the funds from the deceased’s member’s PRPP account. Since payments made out of the PRPP are taxable, the child or grandchild would include the amount received as income on his or her income tax and benefit return.

Your spouse or common-law partner or former spouse or common-law partner who is entitled to the funds from the your PRPP account as a result of a breakdown of the marriage or common-law partnership, may transfer the lump sum amount to: another registered plan such as another PRPP, an RRSP, RRIF or RPP of the individual; or purchase a qualifying annuity.

When you receive an amount from a PRPP, you must include it on your income tax and benefit return in the year you receive it. Since benefits such as old age security (OAS) or guaranteed income supplements (GIS) are calculated on the your income reported on your income tax and benefit return each year, these benefits may be reduced accordingly.

Investment options

The investment options available for PRPPs are similar to those available for other registered plans, but there are some restrictions. The Income Tax Act does limit the type of investments that can be held in a PRPP to prevent tax avoidance planning. For example, you cannot hold restricted investments in a PRPP such as your mortgage or debts, and shares of companies in which you have a significant interest.

A PRPP is another way for Canadians to invest for their retirement and with the contributions coming off each cheque it makes it easier to contribute. PRPPs are also similar in many ways to an RRSP. You will want to check your Notice of Assessment from the prior tax year to see how much you can contribute to your PRPP. If you’re already contributing to an RRSP you’ll want to figure out how much is that and contribute to your PRPP accordingly.

I had my first employee last year, what do I have to do now?

By Randall Orser | Personal Income Tax

payroll summaryYou took the plunge last year and hired your first employee. You’ve been diligent in getting his paycheques out and ensuring the monthly payroll remittance was paid on time. Now we’re into a new calendar year, so what’s next? You have to file the T4s for your company based on what you paid the employee last year.

Generally, you need to complete a T4 slip if you are an employer and you paid your employees’ employment income, commissions, taxable allowances and benefits, fishing income, or any other remuneration. If you had someone do some odd jobs for you and it was less than $500 for the year, then you won’t have to file a T4.

Guidelines for completing T4 slips

  • Complete the slips clearly.
  • Report, in dollars and cents, all amounts you paid during the year, except pension adjustment amounts, which are reported in dollars only.
  • Report all amounts in Canadian dollars, even if they were paid in another currency.
  • Do not enter hyphens or dashes between numbers or names.
  • Do not enter the dollar sign ($).
  • Do not show negative dollar amounts on slips; to make changes to previous years, send us amended slips for the years in question.
  • If you do not have to enter an amount in a box, do not enter “nil” – leave the box blank.
  • Do not change the headings of any of the boxes.

Distributing T4s to Employees

You must give employees their T4 slips on or before the last day of February following the calendar year to which the slips apply. If you do not, you may be subject to a penalty. The penalty for failing to distribute T4 slips to recipients is $25 per day for each such failure with a minimum penalty of $100 and a maximum of $2,500.

Give the employee one of the following:

  • Two copies, sent by mail to their last known address;
  • Two copies, delivered in person; or
    • One copy distributed electronically (for example, by email) if you have received the employee’s consent in writing or electronic format.

I suggest that you print the two T4 slips that you have to give to each employee on one sheet. For security purposes, do not print your payroll account number (box 54) on these copies. If T4 slips are returned as undeliverable, I suggest that you retain the slips with the employee’s file.

T4 Summary

You also have to file a T4 Summary, even if it’s only one slip. The Summary states the total employment income, Canada Pension Plan (employee & employer), Employment Insurance (employee & employer) and income tax deducted from the employee during the calendar year.

You also state what you remitted during the year to Canada Revenue Agency. If there is a difference between what you remitted and what the actual deductions were, then you must pay the balance owing when you file the T4 and summary. You will more than likely get a penalty and interest for not filing during the year properly.

How do I file with Canada Revenue Agency?

Canada Revenue Agency does prefer you to file your T4 and summary electronically. If you have over 50 slips then you must file electronically.

Sage 50 and QuickBooks allow you to file via their software; however, you must be on the latest version and subscribed to their payroll updates. This is the best way if you have more 5 employees. Your bookkeeper or accountant can also help with filing your T4s.

If you’re using a payroll service, such as Ceridian or ADP then they’ll file them for you.

If you just have a few slips then you can use CRA’s Web Forms service. I wouldn’t do more than 5 using this feature, as it can be pretty tedious.

Once the year is done you now have to give your employee his/her T4 and then file the same with CRA. It’s always a good idea to get this done as soon as you can after the calendar year ends; though not too soon in case there are adjustments you need to make for taxable benefits and such.

What is a Registered Disability Savings Plan (RDSP)?

By Randall Orser | Personal Income Tax

Happy cartoon smiling blonde girl in magenta wheelchair moving fLately there has been talk about something called a Registered Disability Savings Plan, or RDSP for short. An RDSP is a savings plan to help parents and others save for the long-term financial security of a person who is eligible for the disability tax credit; this person would be the beneficiary of the RDSP.

Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included in income for the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant, the Canada disability savings bond, and investment income earned in the plan are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP. Of course, the idea being that they are in a lower income tax bracket so won’t get taxed as high as the contributor.

Who can become a beneficiary of an RDSP?

You can designate an individual as beneficiary if the individual:

  • Is eligible for the disability amount;
  • Has a valid social insurance number (SIN);
  • Is a resident in Canada when the plan is entered into; and
  • Is under the age of 60. The age limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.

A beneficiary can only have one RDSP at any given time, although this RDSP can have several plan holders throughout its existence, and it can have more than one plan holder at any given time. Anyone can contribute to an RDSP with the written permission of the plan holder.

How do you open an RDSP?

To open an RDSP, a person who qualifies to be a holder of the plan must contact a participating financial institution that offers RDSPs. These financial institutions are known as issuers. The plan holder is the person who opens the RDSP and makes or authorizes contributions on behalf of the beneficiary.

Who can open an RDSP?

If the beneficiary has reached the age of majority and is legally able to enter into a contract, then an RDSP can be established for such a beneficiary by the beneficiary and/or the legal parent who is, at the time the plan is established, a holder of a pre-existing RDSP of the beneficiary.

Another qualified person can open an RDSP for the individual and become a holder. Another qualified person is: a guardian, tutor, or curator of the beneficiary, or an individual who is legally authorized to act for the beneficiary; or a public department, agency, or institution that is legally authorized to act for the beneficiary.

In addition, an individual who is eligible to be a beneficiary of an RDSP, (but for whom a plan has not yet been established) may have reached the age of majority but may not be legally able to enter into a contract.

If, after reasonable inquiry, it is the opinion of a financial institution that offers RDSPs (RDSP issuer), that an individual’s ability to enter into a contract is in doubt because of a mental impairment a “qualifying family member” can become a holder. A qualifying family member includes a spouse, common-law partner, or parent of an individual. The spouse or common-law partner is not eligible for this measure if they are living apart from the beneficiary due to a breakdown in their marriage or partnership.

What types of payments are made from an RDSP?

Only the beneficiary or the beneficiary’s legal representative (on his or her behalf) will be permitted to receive payments from the RDSP.

There are three types of payments that can be made from an RDSP:

  • Payments referred to as disability assistance payments (DAPs);
  • Repayments of grants and bonds to the Government; and
  • Transfers of all property from the beneficiary’s current RDSP to a new RDSP of the beneficiary.

Of these three types of payments, only the DAPs are taxable. Disability assistance payments (DAPs) are any payments made from the plan to the beneficiary or to the beneficiary’s estate.

How are payments from an RDSP reported?

The grants, bonds and investment income earned in the plan are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP. RDSP issuers report the taxable part of the payments from the plan in box 131, located in the “Other information” area of a T4A slip and send two copies of the slip to the beneficiary or the beneficiary’s legal representative. The beneficiary has to include this amount as income on line 125 of his or her tax return for the year in which he or she receives it.

What happens if the beneficiary dies?

The RDSP must be closed and all amounts remaining in the plan must be paid out to the beneficiary’s estate and the plan terminated, by December 31 following the calendar year in which the beneficiary dies. Any funds remaining in the RDSP, after any required repayment of government grants and bonds will be paid to the estate. If a DAP had been made and the beneficiary is deceased, the taxable part of the DAP must be included in the income of the beneficiary’s estate in the tax year in which the payment is made.

Registered Disability Savings Plan (RDSP) is a great way to save for the future of someone who is severely physically or mentally challenged. It allows the holder (parents usually) to be able to save for the future of their child, and knowing that after their passing the funds will be there to look after the child.


What Does an Authorized Representative do?

By Randall Orser | Personal Income Tax

Canada Revenue Agency (CRA) allows you to assign a representative to deal with them in regards to your personal or business accounts. This consent allows the representative to deal with CRA on your behalf for your personal taxes and your business taxes (GST/HST, payroll, corporate and importation). You can add or change your representative via My Account on CRA’s website or by filing either a T1013 – Authorizing or Cancelling a Representative or an RC59 – Business Consent Form.

There are two levels of authorization. Level 1 allows CRA to disclose information only, and Level 2 allows CRA to disclose information and accept changes from the representative. An example of Level 1 would be where you have a payroll administrator and that person needs to find out information about the account, such as payments received; in this case you’d do a Level 1, as they only need access to information. An example for Level 2 would be where an adjustment needs to be made on your personal tax return, the representative can get the information needed to make the adjustment as well as file the adjustment on your behalf.

If you are a small businessperson, the representative can represent you in all the different accounts you have with CRA: GST/HST, payroll, corporate tax, contractor payments, and importation. For these accounts you would file the RC59. If you want the representative to also work on your personal taxes you have to file the T1013 as well. Someone can file many of these accounts without being a representative as they are online forms or you may paper file. A representative comes in handy when they are working on these accounts and need access to confirm installment payments or what payments you have made on the account.

The advantage to authorizing a representative online is that this person gets immediate access to your business accounts. The paper forms can take several weeks to process, and, if you’re going through a review or audit this wastes precious time. The same can be done for your personal taxes, if you’ve set up My Account you can authorize a representative there.

What’s really cool now is the “Submit documents” service, which allows your representative to electronically send documents to CRA on behalf of either your individual or business clients. “Submit documents” can be accessed directly through Represent a Client and allows you to submit documents on behalf of multiple clients without leaving the “Submit documents” service. At this time, the service can only be used to submit documents in response to letters from CRA’s Processing Review and Corporate Assessing Review Programs that contain a case/reference number.

NOTE: don’t get an authorized representative confused with a legal representative. A legal representative can be someone with your power of attorney, your guardian, or an executor or administrator of the taxpayer’s estate.

Your representative will not be allowed to do the following:

  • Change your address;
  • Change your marital status;
  • Change your direct deposit information; or
  • Authorize other representatives;
  • View other representatives you have on your file; or
  • Cancel other representatives you have on your file.

Responsibilities of authorized representatives 

  • Act in the interest of your clients, employers, and interested third parties.
  • Not to disclose any taxpayer information the Canada Revenue Agency (CRA) to anyone else without the taxpayer’s prior consent provides that to you.
  • Ensure the security and privacy of all transactions you conduct on behalf of the taxpayer(s).
  • Ensure that all documents are properly disposed of to protect the taxpayer’s confidentiality.
  • Comply with all provisions of applicable legislation (i.e. Income Tax Act (ITA), Excise Tax Act (ETA), etc).
  • EFILE service providers are subject to the terms and conditions of EFILE.

Authorizing a representative is a good idea when you need to have someone access your account or have to make changes to a tax return or business account. Your representative can be an employee, bookkeeper, accountant, lawyer, or family member. It’s always a good idea to know who you have on your accounts, and to cancel any representative that you no longer need.

What do I do with a Bad Debt?

By Randall Orser | Budget , Personal Finances , Retirement , Small Business

bad-debtYou’ve been generous enough to give your customers credit, and now one of those customer’s debt has become uncollectible. You need to determine just how old is the debt, and what are your chances of collecting it. You can definitely write-off any debts that become uncollectible during the year; however, you must take steps to show that you at least tried to collect said debt. For our purposes today, we’re talking about customer invoices, and not loans or other debts.

Bad Debts

Canada Revenue Agency (CRA) considers a debt to be bad when:

(a) The debt was owing to the taxpayer at the end of the taxation year,

(b) The debt became bad during the taxation year, and

(c) The debt was included or is deemed to have been included in the taxpayer’s income for that taxation year or a previous taxation year.

You can’t claim a bad debt where a debt was sold, discounted or assigned absolutely by the taxpayer during the course of the year, even though the taxpayer may remain liable to indemnify the purchaser or assignee if the debt should prove to be uncollectible. If you use a factoring company, where you sell off your accounts receivable (customers who owe you money) then you wouldn’t be able to write off the debt as bad until the factoring company reassigned that debt back to you. This would also apply if you have assigned the debt over to a collection agency. Once the collection agency has determined the debt absolutely uncollectible then you can claim the bad debt as a business expense.

As with anything to do with the CRA, you must have proof, and the same goes for bad debts. You can’t just say that the debt is bad and write it off. You need to show a trail of letters, emails, etc. that prove you have tried to collect the debt (of course, you need to have the actual invoice too).

You determine what bad debts you have at the end of your fiscal year. Look through your customer accounts and decide, which accounts you are not going to be able to collect. Have you really tried to collect the debt? Have you kept an audit trail of your attempts to collect the debt? If you’ve done all that and it still appears not to be collectible then by all means write it off.

Allowance for Doubtful Accounts

You may find at the end of your fiscal year there are some accounts, which you think you may not be able to collect; however, as per the rules you can’t just claim a bad debt because you think it may be uncollectible. In this case you can claim a reserve for doubtful accounts. For example, you have $10,322.50 in invoices that you think you won’t be able to collect. In this case you claim a reserve for this amount, or lower, in the current fiscal year. If you do happen to collect them during the next fiscal year, you just reduce this reserve by the amount of that particular debt.

However, any doubtful account reserve claimed in one taxation year, must be included in income in the next fiscal year, even if the debt wasn’t collected. Basically, you’d take the leftover reserve as income and then write-off the debts completely as bad debt to get rid of the reserve. It’s basically a neutral effect on your bottom line.

You must establish that a reserve for doubtful debts is reasonable in amount, it is necessary to identify the debts that are doubtful of collection having regard for such indications as the period of arrears or default, the financial status and prospects of the debtor, the debtor’s past credit record both with the taxpayer and, if available, with other creditors, the value of any security taken and any other factor that is relevant in judging the debtor’s ability or willingness to pay.

Don’t despair that you have uncollectible accounts, as you get to write those debts off eventually. You do have to be careful though as a debt may be thought to be bad by you, however, CRA may have a different idea. You need to do your due diligence when it comes to customer debts, and that you keep a paperwork trail.

I have a customer claiming they’re exempt from GST/HST?

By Randall Orser | Personal Income Tax

Paying TaxThere are many people out there that will refuse to pay GST/HST on your goods/services. They say ‘let’s make a deal’ and pay cash without the taxes. Some people just want a deal and think they’re being savvy by not paying the taxes; however, not realizing that the poor vendor eats the tax as you still have to claim the sale (at least you should be). Some of them are calling themselves “Freemen”. Sadly, these are mistaken individuals who are really deluding themselves that the laws, and the tax laws of Canada, do not apply to them. The Supreme Court of Canada has said otherwise.

The only exempt person is a Status Indian (the legal term used according the Indian Act). Indians, Indian bands, or unincorporated band-empowered entities can buy goods on a reserve without paying the GST/HST if they have the appropriate documentation to show the vendor. Indians, Indian bands, and unincorporated band-empowered entities, as well as incorporated band-empowered entities purchasing for band management activities, may buy goods off the reserve without paying the GST/HST if:

  • They have the appropriate documentation to show the vendor; and
  • The goods are delivered to a reserve by the vendor or the vendor’s agent.

However, if the purchaser uses his or her own vehicle to transport the goods to the reserve, the purchase is subject to the normal GST/HST rules.There are some special rules for the Provinces that are charging the Harmonized Sales Tax (HST). Check CRA’s website for those rules. Also, many Provinces exempt Indians from their Provincial Sales Tax, check with your Province for details.

Goods bought on a reserve by non-Indians will be subject to the normal GST/HST rules.

What do you do?

In a situation like this it’s hard to say ‘no’ as you don’t want to give up a sale. However, you have to be careful in this situation as Canada Revenue Agency has ‘spies’, yes that’s right, and they are hired to find people avoiding taxes. Someone will call you and say they would like to perform your service or buy your product from you. Of course, they’ll approach you with the ‘if I pay cash, can we avoid the taxes’ and you say yes and just get the sale without the taxes and you take the cash. You then don’t bother recording the sale since it was cash and no one will know anyway. The next thing you know you’re getting audited. Now, I don’t have definitive proof, however, there are a couple of stories I’ve heard that this does make sense.

The best thing to do is either don’t take cash, or if you do, just say, sorry I have to charge GST/HST whether it’s cash or not. If you lose the sale, then so be it, they weren’t worth dealing with in the first place. Let’s face it, if someone is willing to cheat on the taxes, then more than likely they’ll end up cheating you.

Some of my clients have been including the taxes in their quotes. For example, if the amount before GST/HST is $300 (and they need to charge 5% GST/HST) then they say it’s $315. If the client asks about taxes then he says that includes the taxes. One client I know adds 20% to his quotes initially, and then if the client balks, he lowers it by 10% and still gets most of the taxes. If you’re finding you’re getting a lot of these types of people, you really need to find new clients.

The ones I love are those people who write you a cheque but forget to include the taxes; ensure you look at the cheque before you leave, as it is very hard later on to get another cheque for the taxes. Some clients have found they need to invoice with the taxes included as many people just look at the subtotal and not the invoice total.

Running a business has all sorts of issues, and you don’t want to get into a situation where you’re not collecting the taxes on your gross sale amount and then eating the taxes. The main issue this tax situation raises is the types of clients you’re attracting. Attract the right clients and the taxes shouldn’t be an issue.

Tidbits – Can I donate property?

By Randall Orser | Personal Income Tax

Haus in handFor our purposes here, when we say property we’re talking about land and buildings. Of course you can donate property, however, that may not get you out of the capital gain you may acquire due to the transfer of that property. Once property is transferred it triggers a capital gain. If it’s been your principal residence, then you can designate it as such for tax purposes. If it’s other property then it needs to be ecologically sensitive land (including a covenant, an easement, or in the case of land in Quebec, a real servitude), or it has a heritage value. Any other land would trigger a capital gain on the donation.

Ecologically Sensitive Land

For ecologically sensitive land you would have a zero rate of inclusion, which means you would have no capital gain per se. However, you must still report the capital gain on your income taxes. You can claim a tax credit based on the eligible amount of a gift of ecologically sensitive land you made to Canada, or one of its provinces, territories, or municipalities, or a registered charity approved by the Minister of the Environment. Under proposed changes, gifts of ecologically sensitive land made to a municipal or public body performing a function of government in Canada, will also qualify for a tax credit.

The Minister of the Environment, or a person designated by that minister, has to certify that the land is important to the preservation of Canada’s environmental heritage. The Minister will also determine the fair market value (FMV) of the gift. For a gift of a covenant or an easement, or a real servitude (in Quebec), the FMV of the gift will be the greater of:

  • The FMV of the gift otherwise determined; and
  • The amount of the reduction of the land’s FMV that resulted from the gift.

Your claim for a gift of ecologically sensitive land is not limited to a percentage of your net income.

Other Property

You will have to include a capital gain, or loss, on your income taxes. You would calculate this loss based on the adjusted cost base and the fair market value of the property at the time of the donation. You must have the property appraised by someone familiar with the property you are donating, which in the case of land and buildings would probably be a realtor. Many times the charity will hire the appraiser. If the fair market value of the land is greater than the adjusted cost base then you have a capital gain, and if it’s less then you have a capital loss.

If you donate cash or other property to a registered charity or other qualified donee in the year, your total donations limit will generally be 75% of your net income for the year. However, you can increase your total donations limit if you donate capital property in the year. If you received an advantage in respect of the donation of the property, include, in your calculations, only the portion of taxable capital gains and recapture of depreciation that related to the gift portion of your donation.

Your receipt from the charity must include the usual suspects plus:

  • Eligible amount of the gift for tax purposes (fair market value of the property)
  • Description of property
received by charity
  • Appraised by
  • Address of appraiser

Donating a property can be a great way to help the charity of your choice, however, there can be tax consequences for doing so. It’s always best to talk to a tax professional before you do any property donating.