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Calculating the Home-based Business Tax Deduction

By Randall Orser | Business Income Taxes

If you run a home business, you’ll want to be sure you deduct all the relevant home business expenses on your income tax.

However, although there are income tax deductions that are specific to home businesses, not all home businesses will qualify for these tax deductions. The CRA (Canada Revenue Agency) has stringent conditions that determine whether a home business owner can claim business-use-of-home expenses on line 9945 of the T1 tax form.

Who can claim the home business tax deduction?

You can only claim business-use-of-home expenses if your home is your principal place of business, or you use the work space in your home only to earn your business income and use it regularly to meet with clients, customers or patients. So you can’t claim business-use-of-home expenses if you are conducting business somewhere else as well, or because you sometimes work on business matters at home.

How to claim the home business tax deduction.

If you meet the CRA requirements, you’re ready to calculate your business-use-of-home expenses.

Because you’re doing business where you live, your expenses will be a percentage of your home expenses. It’s easiest to calculate if you have a specific room set aside for business purposes, such as a home office. Then it’s a simple matter to take the area of your work space and divide it by the total area of your house.

For instance, suppose you have a home office that is 10 by 10 feet in a house that’s 1800 square feet. Then your calculation of allowable portion of business-use-of-home expenses would be: 100 divided by 1800 = 5%.

The next step in calculating the home business tax deduction is to apply this percentage to your allowable household expenses. You can deduct a portion of all your house expenses that directly relate to operating your business, such as your utilities, telephone, and cleaning materials. If you own your home, you can claim a portion of your house insurance, property taxes, and mortgage interest (although you can’t claim the mortgage payments themselves.) If you rent your residence, you can claim a portion of the rent you pay.

In the example I’ve just given, let’s say that I own my own home, and all the expenses I’ve just listed total $6800 for the fiscal year. Then 5% (my allowable portion of business-use-of-home expenses) of $6800 (my total home expenses) is $377.78, which is my total business-use-of-home expenses claim on line 9945 of the T1 tax form.

If you operate a part-time business out of your home, you must adjust your business-use-of-home expenses accordingly. For instance, suppose you use part of your home to run a consulting business five days a week. To figure out your business-use-of-home expenses, you would calculate how many hours in the day you use the work space in your home for business purposes, divide that amount by 24 hours, and then multiply the result by the business portion of your total home expenses.

Using the same example used above, and operating the business from 9 a.m. until 5 p.m. five days a week, (7 hours a day), 7/24 hours x 100/1800 square feet x $6800 home expenses = $99.17.

However, in the example, the business is only operated 5 days a week, so I would then reduce the claim accordingly: $99.17 x 5/7 = $70.84.

You can’t deduct an expense from an income you don’t have. In other words, you can’t use the business-use-of-home expenses to create a business loss, so your deduction can’t be more than your net income before you deduct these expenses. If it’s more, you can carry the amount of these expenses forward into the next year.

It may not seem like a lot, but when it comes to income tax, every deduction helps. If you run a home business and meet the CRA’s definition of business-use-of-home, you’ll want to be sure you claim the home business tax deduction on your income tax.

The following are the allowable Home Office Expenses:

Heat (gas)

Electricity (hydro)

Insurance

Maintenance

Mortgage Interest

Property Taxes

Strata Fees

Rent (if not own home)

Internet (if not in the businesses name)

Phone (if you use your home phone to answer business calls or as a fax)

Cable (some industries can get away with this, mostly those in the entertainment areas)

Grow Your Business with Startup Thinking 

By Randall Orser | Small Business

Many entrepreneurs, maybe you, get caught up on small stuff when starting their business. You’ll focus on such things as company name, stationary, incorporation, etc. You end up being mired in the small details, which end up clouding your judgment and stop you from concentrating on the business’s big picture. The running of the business takes control, and you slide right past the bigger possibilities. You need to start thinking like a startup founder, and watch your business grow beyond your wildest dreams. Following are five insights you should endorse to start thinking like a startup founder.

Have an Exit Strategy in Mind

With an exit strategy in mind, this mentality causes you, and your team, to concentrate on the end goal, and how your actions today connect you to your end goal. You need to evaluate every action you take, from marketing efforts to agreements to client interactions, as to whether it moves you towards your goal and a profitable payoff. When building your business, use this exit strategy technique, and embrace a big picture outlook to ensure your business growth push is producing a profitable result.

Focus on Your Team Members’ Core Abilities

To build dynamic teams, you need to figure out your team members’ core abilities, and don’t duplicate skill sets amongst your employees. Following this philosophy of not duplicating skill sets within your staff will allow you to hire new employees based on the skill sets your business is currently lacking. The thought is that with the various skill sets covered there is better cohesion of your team, and, hopefully, less competiveness as they complement rather than compete.

Keep Management Levels to a Minimum

Open the door for high growth by not creating countless levels of management, and instead build on teamwork, and a meaningful appetite to prosper throughout your organization. You’ll keep mid-level management at bay by having this mindset, and not hire them at all. You’re better positioned for faster decisions and rapid growth; keep this top of mind the next time you think about hiring someone.

‘Fail Fast’ Has Become an Essential Component of Startup Culture

Budding, active businesses can’t afford to waste time on products or services doomed for the scrap heap. When looking at launching new products or services, ensure you have all the data to back up your decisions before any launch. You need to be ready to cut your losses early if the signs are pointing to a dying undertaking.

Startups Are Cash-Strapped, So They Bootstrap

You need to look at the return on investment (ROI) on any item you’re about to spend money on, and whether it contributes to the company’s growth. Incorporate the cash-strap/bootstrap attitude into every facet of your business. You need to consider the ROI on anything you’re thinking of buying, and does it financially benefit your business.

Integrating startup thinking into your whole business, you’ll be amazed at just how effortless your business becomes. From product development to human resources, every area of your business will be certain of success. Is this the year you incorporate startup thinking into your business’ growth initiatives?

Refundable vs Non-refundable Tax Credits 

By Randall Orser | Personal Income Tax

Tax credits can greatly decrease the amount of taxes you must pay. If you don’t fully understand them, you could be missing out on large cash opportunities. One aspect that often goes unexplained is the difference between refundable and non-refundable tax credits. What is the difference between the two, and how do they affect the amount of tax you owe to the government?

A tax credit is very different from a tax deduction. A deduction is a reduction in the gross income. For example, if you have a gross income of $50,000 for the year, total itemized deductions of $10,000 would make the adjusted gross income $40,000. You have the option to use the standard deduction or itemize your deductions if your total itemized deductions exceed the standard deduction. By increasing the value of your deductions, you lower your taxable income, therefore lowering the amount of total tax you owe.

Tax credits have a larger advantage. After you have calculated your total taxable income and determined how much you owe in taxes, a tax credit will be deducted from that total amount. For example, if you owe the government $3,000 and you qualify for a $1,000 tax credit, you now only owe $2,000. It is a 100% reduction in taxes owed whereas deductions reduce the taxes owed by a much smaller percentage. Basically, you want to get as many deductions and credits as possible, but credits have a larger impact.

Tax credits have nothing to do with how much money was withheld from your check each month for taxes. Don’t even think about how much money is withheld until the very end. The withheld amount also has nothing to do with whether a tax credit is refundable or not. These are two different aspects; do not confuse them.

Many people don’t know that tax credits can be either refundable or non-refundable. If they aren’t done in the right order, you could be losing money owed to you. Fortunately, the forms are set up so that you will automatically calculate them in the right order. However, understanding the difference between the two is beneficial.

First, calculate non-refundable tax credits. A non-refundable tax credit is a credit that cannot exceed your total tax owed. For example, if you owe $3,000 in taxes and your total non-refundable tax credits equal $4,000, your tax owed is $0. You cannot receive back an extra $1,000. There is no refund to the total tax you owe.

Non-refundable credits include basic personal exemption; education credits; child and dependent care credits, adoption credits, etc. Subtracting non-refundable credits first will minimize your total taxes owed.

Now you will have a new taxes-owed amount. Using the above example, you have $0 owed. Calculate your total refundable credits. These included the earned income tax credit, making work pay credit, first time home buyers credit, etc. Let’s say these come to a total of $2,000. These are refundable credits meaning you will have a result of -$2,000 tax. In other words, the government owes you $2,000.

Once you have calculated your taxes owed after subtracting all qualified credits, calculate your entire refund or taxes owed. If you get $2,000 from the government and $5,000 was withheld from your check, your total refund is $7,000. Notice that the amount withheld from your check is separate from the $2,000 refundable credit. You receive an extra $2,000 in addition to the money returned to you that was withheld for tax purposes throughout the year.

Calculating non-refundable credits before refundable credits maximizes your total credit potential. Non-refundable credits are used first, whether they bring your taxes owed down to zero or just reduce them. Refundable credits are calculated last to ensure that all possible refunds are realized. The above example is exaggerated to make the discussion easier. This amount in tax credits is not typical. It depends on what you qualify for. However, make sure you check out each credit thoroughly to ensure you get your maximum return or minimize your taxes owed as much as possible.

Five Tips To Know If You Have What It Takes To Start A Home Based Business

By Randall Orser | Small Business

You may see, hear, and read a lot of people constantly raving about the numerous wonders of a home-based business but starting and managing one isn’t immediately a bed of roses. In some cases, having a home-based business is easier than having a business in traditional settings, but in some cases, it’s absolutely the other way around.

Tip #1 You Still Need the M’s for a Home-Based Business

The only difference is that there’s no need for you to pay for rent and possibly, you’ll have lower business costs because your business is based at home. But other than that, the process of starting up and the necessary factors of production are still the same.

Money - Its rarely possible, if at all, to start a home-based business without spending even a dollar for investment and pre-operating costs.

Material - If your home-based business is selling products and not services then you’ll still have to ensure that you’ve got the best materials to produce the best products in the market.

Manpower - for a home-based business, you can usually make use of family members ñ even your kids ñ to help and provide the necessary labor for the business.

Machinery - Usually, a home-based business selling services online can function with a computer and Internet access, but if you’re selling products, you’ll naturally need other additional equipment.

Tip #2 You Still Need to Register Your Home-Based Business

The fact that you have a business based or you’re working from home doesn’t exempt you from your obligation to pay taxes. You can, however, apply for tax deductions that you may be eligible for due to your home-based business.

To qualify for tax deductions, you need to prove that one part of your home is indeed used primarily and exclusively for operating your business. Secondly, if ever personal meetings with your clients, suppliers, and affiliates are required, you use that section of your home for such purposes.

Tip #3 Products, Services, or Both?

A home-based business may sell products, services, or both. The success of your home-based business depends on how marketable your products or services are. Consider the following factors:

Quality - How does the quality of your products or services fare compared to those manufactured or provided by your competitors?

Cost - How much are you selling them for? Since you’re operating a home-based business, you should take advantage of your situation and use it to lower the price of whatever you’re selling. Lowering your price is something you can afford to do because you have lower costs, and it will at the same time allow you to compete against bigger retailers on the same ground.

Tip #4 Online, Offline, or Both?

The success of your home-based business will also depend on how you should to advertise about your business. If, for instance, you’re selling home baked cookies, you’ll probably achieve greater profit by focusing mostly on selling to your neighbors and acquaintances in the area then advertising online on the sides. Setting up a home-based web designing business on the other hand would certainly benefit more from online advertising.

Tip #5 Are You Good at Waiting?

A home-based business will also take time to prove its profitability and stability. Thus, make sure that you’re willing to wait for your business to grow. There are any number of hurdles that your home-based business might face in the future but you need to be prepared to face all of them if you wish to succeed.

That Great Employee Benefit is Probably Taxable 

By Randall Orser | Business Income Taxes , Small Business

You’ve decided to reward your employees with a benefits plan, maybe a company car, gift cards, and such. Now, before you go and give your employee something, you need to find out if that benefit is considered income to the employee, and, therefore, taxable. Sadly, any kind of benefit you give an employee is considered a taxable benefit, and the employee must be taxed on it, some even are taxable for Canada Pension Plan and Employment Insurance. We’ll talk about what is a benefit and how is it taxable.

Your employee has received a benefit if you pay for or give something that is personal in nature: directly to your employee; or to a person who does not deal at arm’s length with the employee (such as the employee’s spouse, child, or sibling).

A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employee’s personal expense.

An allowance is a limited amount decided in advance that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having him or her support the expenses. An allowance can be calculated based on distance or time or on some other basis such as motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.

A reimbursement is an amount you pay to your employee to repay actual expenses he or she incurred while carrying out the duties of employment. The employee must keep proper records to support the expenses and give them to the employer.

Determine if the benefit is taxable

Your first step is to determine whether the benefit you provide to your employee is taxable and should be included in his or her employment income when the benefit is received or enjoyed. Whether the benefit is taxable depends on its type and the reason an employee or officer receives it. To determine if the benefit is taxable, see Chapters 2 to 4 of Guide T4130, Employers’ Guide Taxable Benefits and Allowances.

The benefit may be paid in cash (such as a meal allowance or reimbursement of personal cellular phone charges), or provided in a manner other than cash, such as a parking space or a gift certificate. The way you pay or provide the benefit to your employee will affect the payroll deductions you should withhold.

Types of benefits and allowances

To find out if benefits and allowances are taxable and how they are declared on T4 or T4A slips, see the Benefits and allowances alphabetical index. There are just too many to go through in this blog post.

Calculate the value of the benefit

Once you determine that the benefit is taxable, you need to calculate the value of the specific benefit. The value of a benefit is generally its fair market value (FMV). This is the price that can be obtained in an open market between two individuals dealing at arm's length. The cost to you for the property, good, or service may be used if it reflects the FMV of the item or service. You must be able to support the value if you are asked.

Goods and services tax/harmonized sales tax (GST/HST) and provincial sales tax (PST)

When you calculate the value of the taxable benefit you provide to an employee, you may have to include:

  • the GST/HST payable by you; and
  • the PST that would have been payable if you were not exempt from paying the tax because of the type of employer you are or the nature of the use of the property or service.

Use the “Benefits chart,” here to find out if you should include GST/HST in the value of the benefit. Some benefits have further information about GST/HST in the topic specific section.

The amount of the GST/HST you include in the value of the taxable benefits is calculated on the gross amount of the benefits, before any other taxes and before you subtract any amounts the employee reimbursed you for those benefits.

You do not have to include the GST/HST for:

  • cash remuneration (such as salary, wages, and allowances); or
  • a taxable benefit that is an exempt supply or a zero‑rated supply as defined in the Excise Tax Act.

Policy for non-cash gifts and awards

You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the fair market value (FMV) of the gifts and awards you give your employee is greater than $500, the amount over $500 must be included in the employee's income. For example, if you give gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650-$500).

you can, once every five years, give your employee a non-cash long-service or anniversary award valued at $500 or less, tax free. The award must be for a minimum of five years' service, and it should be at least five years since you gave the employee the last long-service or anniversary award. Any amount over the $500 is a taxable benefit.

If it has not been at least five years since the employee's last long-service or anniversary award, then the award is a taxable benefit. For example, if the 15-year award was given at 17 years of service, and then the next award is given at 20 years of service, the 20-year award will be a taxable benefit, for five years will not have passed since the previous award.

The $500 exemption for long-service awards does not affect the $500 exemption for other gifts and awards in the year you give them. For example, you can give an employee a non-cash long-service award worth $500 in the same year you give him or her other non-cash gifts and awards worth $500. In this case, there is no taxable benefit for the employee. If the value of the long-service award is less than $500, you cannot add the shortfall to the annual $500 exemption for non-cash gifts and awards.

Items of small or trivial value do not have to be included when calculating the total value of gifts and awards given in the year for the exemption. Examples of items for small or trivial value include: coffee or tea; T-shirts with employer's logos; mugs; plaques or trophies.

Basically, anything you give an employee becomes a taxable benefit. Ensure you chat with your bookkeeping/accountant before deciding on any employee benefits, as more than likely, they are taxable.

Annual Clean-Up and Backup of Your Files

By Randall Orser | Small Business

The end of the year is a good time to put some time and attention into cleaning up and backing up your files. Cleaning up your files lets you clear up physical, digital and psychological space so everyone can get more done. Backing up is essential in case something goes wrong.

Here's how to do your annual file clean-up and backup.

Delete Clutter from Project Management

If you still have old projects open in your project management software, delete them or archive them now. People on your project management software should only be seeing projects that are actually relevant to their work right now.

Archive Physical Files

If you have a lot of physical files lying around that aren't being used anymore, archive them. Small businesses can open a small storage facility to store their archived files. Larger businesses can open an account with a file archive facility.

What to Back Up

At least once a year, you should back up:

§ An entire copy of your website. You should have the "front" end of your website, including the CSS and HTML code, as well as the "back" end infrastructure (e.g. server code) all backed up somewhere.

§ Your entire database should be backed up as well.

§ Your email list and newsletter list should be backed up, along with any mailing sequences.

§ Your customer list should also be backed up.

§ Your forums or any other communication channels should be fully backed up. You should be able to restore your community if anything happened.

Basically, anything that could critically cripple your business if it disappeared should be backed up regularly.

At Least Three Backup Sources

You should have at least three backups of all your most important data. Each offers a different level of protection.

§ Online backup - Online backups work well for small files and for files stored on personal computers.

§ On site backups - These can be done as frequently as once a month. Simply take all your digital data and dump them on a hard drive, then store that drive.

§ Off-site backups - On site backups can't protect your data against earthquakes, fires, floods and other disasters that could affect the physical devices your data is stored on. Off-site backups will hold your data for you, so you're protected in case of a disaster.

Just one level of protection isn't enough to protect you against a catastrophe. Higher levels of protection require more work and are generally performed less frequently.

Change Dropbox Passwords

At least once a year, ask all your employees to change their Dropbox, Google Drive and other backup passwords. Passwords now need to be more complex, and best are ones that are 16 or more characters.

If you perform these tasks regularly, you'll be well protected against disasters in all forms.

Taxpayer Bill of Rights

By Randall Orser | Personal Income Tax

The Canada Revenue Agency (CRA) operates on the fundamental belief that you are more likely to comply with the law if you have the information and other services that you need to meet your obligations. These obligations may include paying taxes or providing information.

CRA wants to make sure you receive all your entitlements and that you understand and can exercise your rights. They describe and define these rights in the RC17, Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer.

The Taxpayer Bill of Rights describes and defines 16 rights and builds upon the CRA's corporate values of professionalism, respect, integrity, and cooperation. It describes the treatment you are entitled to when you deal with the CRA. You can expect that the CRA will serve you with high standards of accuracy, professionalism, courteousness, and fairness. The Taxpayer Bill of Rights also sets out the CRA Commitment to Small Business to ensure their interactions with the CRA are conducted as efficiently and effectively as possible.

In addition to the 16 rights that apply to all taxpayers, the Taxpayer Bill of Rights also has a five-part Commitment to Small Business. The five commitments made to small business acknowledge their importance as the engine of growth in the Canadian economy. These commitments also complement the Government's pledge to create a competitive, dynamic, business environment in which Canadian businesses will thrive. They recognize the role the Canada Revenue Agency can play in minimizing the compliance burden, specifically the amount of paperwork involved in complying with the tax system.

The Minister of National Revenue has identified a need for greater awareness among taxpayers (particularly small businesses) about what they can expect when they deal with the CRA. This includes awareness about what their rights are, and what avenues of redress are available to them when they believe they have received inadequate service from the CRA. This was developed through interactions with taxpayers, their representatives, business groups, professional associations, and Members of Parliament, and in consultation with CRA managers and front-line employees.

It’s thought that the Taxpayer Bill of Rights will increase transparency and accountability on the part of the CRA and, as a result, improve the quality of all taxpayers' service experiences with the CRA. The more you know your rights, it’s thought that the more your compliance level will increase, and the less CRA has to check on said compliance.

Here are the 16 rights:

1. You have the right to receive entitlements and to pay no more and no less than what is required by law.

2. You have the right to service in both official languages.

3. You have the right to privacy and confidentiality.

4. You have the right to a formal review and a subsequent appeal.

5. You have the right to be treated professionally, courteously, and fairly

6. You have the right to complete, accurate, clear, and timely information

7. You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review

8. You have the right to have the law applied consistently

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings

10. You have the right to have the costs of compliance taken into account when administering tax legislation

11. You have the right to expect us to be accountable

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances

13. You have the right to expect us to publish our service standards and report annually

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner

15. You have the right to be represented by a person of your choice

16. You have the right to lodge a service complaint or request a formal review without fear of reprisal

Here are the 5 commitments to business:

1. The CRA is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses

2. The CRA is committed to working with all governments to streamline service, minimize cost, and reduce the compliance burden

3. The CRA is committed to providing service offerings that meet the needs of small businesses

4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer

5. The CRA is committed to explaining how we conduct our business with small businesses

Why You Need More Than a Brilliant Idea to Succeed as an Entrepreneur

By Randall Orser | Small Business

Entrepreneurs are more than clever business people who see a need for a new product or service and fulfil it. Successful entrepreneurs not only have brilliant ideas, but also can build relationships, understand customers’ wants, and interpret the constant signals from the market. If you want to succeed as an entrepreneur, you will need vision and the skills to see your plans come to fruition; otherwise, you are just are a dreamer.

Entrepreneurs Need Emotional Intelligence

Emotional intelligence is about having an awareness of your own emotional state of being and not allowing emotions to overrule your decision-making facilities. At the same time, a high level of emotional intelligence enables entrepreneurs to read other people very well and to know when and how to build instantaneous rapport with potential customers or business partners. Some entrepreneurs may use emotional intelligence to manipulate other people or may get another person to tell more than the individual originally intended to say.

Entrepreneurs Need to Build Relationships

Entrepreneurs are extremely good at building relationships, and will often build long term business partnerships with several different businesses. Entrepreneurs excel at marketing, but are not necessarily good salespeople.

A sales person will push to close the deal and to get the sale, while a good entrepreneur will focus on the relationship and may stop short of closing the deal to maintain the good relationship. Often entrepreneurs need to work in conjunction with a sales person who can close the deal, after the entrepreneur has set up the foundations by building a strong relationship with the potential customer or affiliate business.

Entrepreneurs Need to Have a Vision

Small business coaches will often tell individuals who are starting a small business to plan everything and to set up a five year plan. However, entrepreneurs work towards a vision and may not plan every single step along the way. Entrepreneurs will often work with a big picture idea and plan the details to fit in with the overall vision, rather than focus on the details of a plan and forget where the plan leads the business.

Entrepreneurs Need Flexibility to Change the Plan

Entrepreneurs will feel free to change the details of the plan to take advantage of new opportunities. The difference between a small business owner and the entrepreneur is often most visible when a new opportunity knocks. The entrepreneur will be willing to change the plan and to take risks if the opportunity that presents fits into the overall vision, whereas the small business owner will be more likely to ignore the opportunity if it was not in the original business plan.

Entrepreneurs Need Good Timing

An understanding of the cyclical and rhythmic nature of business allows entrepreneurs to know instinctively when the time is right to launch a new business venture, or a new product. Entrepreneurs possess good timing and will know when to hold back on a launch of a new venture until the market reaches the right step in the cycle to ensure the new venture is a success.

Entrepreneurs Need Industry Knowledge

Although entrepreneurs rarely react to what competitors are doing, entrepreneurs do study the competitors and the industry. This industry knowledge enables the well-informed entrepreneur to lead the industry rather than react to it, and to have that impeccable timing to know when to launch the new products.

A brilliant idea will only get you so far in the business world. However, blend the clever business idea with a high emotional intelligence, relationship building skills, vision, flexibility, good timing, and strong industry knowledge, and an entrepreneur has the world at his or her feet.

New Rules for Principal Residence

By Randall Orser | Personal Income Tax

In late 2016, the Liberal government decided to make changes to Canada Revenue Agency’s (CRA) reporting requirements for the sale of your principal residence. Supposedly this will improve compliance and administration of the tax system. Is this the beginning of a new way to tax you, the taxpayer? Well, probably will be though not now. Never underestimate a government to tax its citizens.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, due by April 30th, 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption. If you sell your principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.

The principal residence exemption is an income tax benefit that generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies for each year the property is designated as your principal residence.

For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

The penalty is the lesser of the following amounts:

  1. $8,000; or
  2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections.

The CRA will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year (generally for which the designation would be required to be made in tax filings due by late April 2017) the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.

Your Home is used for a Business or Rental

If only a part of your home is used as your principal residence and you used the other part to earn or produce income, whether your entire home qualifies as a principal residence will depend on the circumstances.

It remains the CRA’s practice to consider that the entire property retains its nature as a principal residence, where all the following conditions are met:

  • the income-producing use is secondary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no capital cost allowance (CCA) is claimed on the property.

If your situation does not meet all three of the conditions above, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, if the split is reasonable. Instructions are provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.

If you’ve sold your home, and it’s your principal residence, in 2016, then remember to have the information necessary to report said sale on your income tax return. Now, no gain will be attributed to said sale, however, that may change in the future.

If I Have Foreign Income, What Exchange Rate Do I use?

By Randall Orser | Personal Income Tax

Nowadays many people have income from outside Canada, and when it comes to filing their income taxes must include said income. Many businesses are selling outside of Canada, too, and may receive funds in the country from which they sell. The question then becomes, ‘what exchange rate do you use?’

What is the exchange rate? The exchange rate is the price of one national currency, such as the Canadian dollar, expressed in terms of another currency, for example, the U.S. dollar, or a basket of currencies.

Canada Revenue Agency (CRA) used to recommend what exchange rate to use when filing your personal taxes, and, usually, did an average exchange rate for the year. You weren’t required to use this rate; however, it did make it easier to file your taxes. This save you of having to go to the bother of looking up exchange rates for the date you earned the income; if you even remember the date you received the income.

Now, CRA just recommends you use the Bank of Canada exchange rates. At the BOC website, you can get exchange rates for up to 26 currencies, based on a single rate reflecting the daily average exchange rate per currency pair, which will be published each day. If your foreign income is form outside these 26 countries, you will have to either find an exchange rate elsewhere, or check what the rate was on the day you received the income. There was the average exchange rate for the year, however, I can’t see on the site where this will continue nor does it say it will be discontinued, so we’ll just have to wait and see.

Using the Exchange Rate on Your Personal Taxes

When you go to file your personal taxes, look at what foreign income you have and go to the BOC website. Do you remember when you received that income? If yes, use the exchange rate, or find the amount that was deposited into your bank account, and use that rate. If it’s from multiple deposits, such as the British Pension, then you’ll have to calculate the exchange rate each time, or add up the amounts from each month.

If you just received a slip, and have no idea when the money was deposited or what it’s for, then use the average yearly rate, if it’s still available, or the rate at December 31st for that tax year.

Using the Exchange Rate for Business

For business, it’s a bit easier on when to use the exchange rate.

For sales, when you create the invoice for the customer pick the rate for that day, if available, or the previous day. Fortunately, accounting software now can link to the Bank of Canada website and pick the rate, normally it’s for the previous day and that’s okay. You could also just pick an average rate and go with that for a time, until it changes. For example, say the US dollar, you can pick an exchange rate of 1.35 and go with that until you feel it’s changed too much to keep using it.

For customer payments, use the exchange rate the bank gives you when you deposit, if into your Canadian dollar account. Otherwise, use the rate on the day of the deposit, or the previous day. Are you receiving a lot of foreign currency? You may want to setup a bank account in that currency.

For purchases, you can follow the same advice as for sales. One client I have uses an average, and then adjusts that rate up or down depending on how the Canadian dollar is doing compared to the currencies he makes purchases in. However, when he sends the supplier money, he uses the rate from the currency exchange house.

That’s something else to think about for business, if you do a lot of purchasing in foreign currencies, I suggest using a currency exchange house. They usually give better rates than the banks, and can send bank drafts and wires at much cheaper rates than the banks (many banks are charging $40+ for a wire transfer).

Also, think about purchasing forwards when you have a large volume of transactions in a currency. A forward is a contract to buy so much of a foreign currency at a fixed exchange rate. You’re basically hedging your bets about the currency going up. So, you lock in the exchange rate for a certain period, then much purchase the forward at the rate agreed upon at its creation.

For example, you agree to buy a forward on the US dollar at an exchange rate of 1.35 and it expires in three months. At the expiration, you purchase the agreed amount of dollars at the 1.35 rate, or pay a penalty for not doing so. If the exchange rate goes up to 1.40 then you’ve saved 5 points and depending on the amount quite a bit of money. However, if the rate goes down to 1.30 then you’ve paid 5 points more than you needed to. This is the risk you take doing forwards.

Having foreign income can be a great, especially when the Canadian dollar is low compared to that foreign currency. However, when it comes time to reporting that income on your tax return, or in your business, ensure you are using the correct rate.