I’ve incorporated my Business Now What?

By Randall Orser | Small Business

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

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

Year End

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

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

Reporting Requirements

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

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

Bank Account

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

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

Government Programs

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

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

Other Matters

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

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

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

Tidbits – What Happens If I Rent My House Out?

By Randall Orser | Personal Income Tax

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

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

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

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

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

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

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

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

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

Don’t File Late, Watch That Date!

By Randall Orser | Personal Income Tax

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

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

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

GST/HST

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

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

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

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

Payroll

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

The penalty for remitting your regular payroll remittance late is:

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

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

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

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

 

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

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

Rental Income, Yeah or Nay?

By Randall Orser | Personal Income Tax

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

Tax Implications

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

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

Some of the expenses you can deduct include:

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

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

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

What Is Considered Barter?

By Randall Orser | Small Business

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

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

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

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

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

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

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

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

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

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

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

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

If I Give a Gift to an Employee, is that Taxable?

By Randall Orser | Employees , Personal Income Tax

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

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

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

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

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

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

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

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

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

Can I Get Penalties/Interest Waived?

By Randall Orser | Personal Income Tax

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

What circumstances warrant relief?

Extraordinary Circumstances

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

These extraordinary circumstances could be:

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

CRA Errors

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

Financial Hardship

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

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

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

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

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

By Randall Orser | Personal Income Tax

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

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

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

SR&ED Investment Tax Credit (ITC)

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

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

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

What work qualifies for SR&ED tax incentives?

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

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

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

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

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

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

But does not include work with respect to

e)     Market research or sales promotion,

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

g)     Research in the social sciences or the humanities,

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

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

j)      Style changes, or

k)    Routine data collection;

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

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

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

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

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

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

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

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’.