All Posts by Randall Orser

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President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.

Should You Pay Yourself Salary or Dividends When You Incorporate Your Business?

By Randall Orser | Business Income Taxes , Personal Income Tax , Small Business

Once you incorporate your business you need to decide which is the best way to pay yourself, a salary, dividends or a mix of both. There are advantages and disadvantages to both salary and dividends for business owners.

Business Salary

Advantages:

  • If you are paid a business salary, then you will be paying into the Canada Pension Plan.  This is an important consideration for the future as the amount of retirement benefits that you will get depend on how much you have paid in and for how long.
  • Your salary or bonus will be a tax deduction for the corporation.
  • As well as paying yourself you can also do some income splitting with your spouse or children.
  • You will also be able to contribute to RRSP’s or TFSA’s for your retirement.

Disadvantages:

  • You will have a personal income which is fully taxable unlike dividends which are taxed at a lower rate so your tax bill may be greater.
  • For the Canada Pension Plan, you will have to pay both portions as you are both an employer and an employee.
  • You will have to do payroll and set up a payroll account with the CRA and file all the related paperwork.
  • If your business profits vary from year to year, paying yourself a salary will mean that you will not be able to carry back a business loss for future years which you could if you are paid by dividends.

Payment by Dividends

Advantages:

  • Dividends are taxed at a lower rate than salaries so you may pay less personal tax.
  • Dividends can be declared at any time which means that you can optimize your tax situation.
  • Not paying into the CPP will save you money.
  • It is easy to pay yourself dividends, you just have to write a cheque to yourself from the company and at the end of the year update the corporation minute book and prepare a director’s resolution for the dividends paid.

Disadvantages:

  • Not paying into CPP will lessen the amount of CPP you are entitled to when you retire.
  • Being paid by dividends does not allow you to contribute to an RRSP as you do not have any income and can mean that you cannot claim other personal expenses. 

Payment by a Mix of Salary and Dividends

Whether payment in a mix of salary and dividends is the best way to go for a business owner is dependent on their personal circumstances including income level, cash flow needs, and the corporation’s predicted income for the next year.  The owner needs to understand if he needs to have room to contribute to his RRSP and if income tax deductions are important.  The decision to pay in a mix of salary and dividends should be made after discussions with an accountant or financial planner.   

Sometimes a mix of salary and dividends is paid out by the company to ensure that it does not earn over $500,000 as this is the limit up to which a privately-owned company pays the lower rate of income tax. If earnings are greater than this, it can be better to pay the owner a salary thereby reducing the corporate income.

Sole Proprietorships or Partnerships

As these types of businesses are not owned by shareholders, they cannot issue dividends and the owners cannot be salaried employees with payroll deductions.  Business income and personal income become the same thing, so you have no choice but to report your earnings on a T1 income tax return.

From an article by Susan Ward

Five Common Mistakes That Small Business Owners Should Avoid

By Randall Orser | Business Income Taxes , Small Business

Small business owners, and those who work freelance or are self-employed must submit an annual tax return to the Canada Revenue Agency.  Most people only focus on their taxes a week or two before they are due, but you should really be thinking about them all year round so that you maximize your deductions and credits thereby reducing the amount of taxes that you have to pay. 

Here are five common mistakes that self-employed people make when filing their annual return.

1.  Failing to Write off Business Expenses

As a self-employed person the CRA allows you to deduct reasonable expenses that you incur while earning business income.  These expenses include start-up costs, business fees, memberships and subscriptions, salaries, wages, employee benefits, accounting legal and other professional service fees, telephones, utilities and office expenses. If you use your vehicle or home for business, you may be able to deduct related expenses for these too.  It is important that you are aware of which expenses you can deduct to have a lower taxable income, but you should also make sure that the expenses you are claiming are reasonable so as not to attract a CRA audit.

2.  Claiming Expenses that are not Deductible

If you claim expenses that are not deductible the CRA sees it as a failure to report income which can mean a reassessment and interest and penalty charges on the unreported income.  Make sure that you are fully aware of the expenses that you can claim when submitting your return.

3.  Forgetting to Track Your Expenses

Just keeping receipts in a box is not the best way to track your expenses.  You should be keeping records of all your expenses as they occur.  Use accounting software or a smartphone app to record everything immediately.  At tax time you will have a more comprehensive record which will make doing your return so much easier than trying to remember what each receipt was for long after the purchase.

4.  Failing to Report Cash or Trade Payments

If you receive payment for work by cash or trade, you must still report it.  Failure to do so can result in severe penalties from the CRA.  These can include more assessed taxes, interest and penalties, court fines and even jail time.  

5. Insufficient Proof Related to Meal and Entertainment Costs

Self-employed people can claim a partial deduction for meals and entertainment.  This is 50% of expenses incurred to expand your business or for travelling for work.  You may also be able to deduct all of your expenses for holding a holiday party for your employees or for buying food for a charity dinner.  If you are a long-haul truck driver you can claim 80% of your meal expenses and self-employed couriers can claim a flat rate of $17.50 per day.

Just saving receipts for these expenses is not enough for the CRA.  You must be able to prove that they were necessary for your business.  You should record information such as the event, who came, what was discussed and how it relates to your business on each receipt. In addition, credit card receipts showing the amount that you paid must be accompanied by a restaurant or event receipt showing what was purchased.  Truck drivers and couriers should record expenses along with mileage in a log book with information showing where they travelled and where work was done.

For more information see:

CRA Business Expenses

CRA Interest and Penalties

CRA "Will you do the job for cash? It's risky business"

CRA "Line 8523 - Meals and entertainment (allowable part only)" 

From an article by Turbo Tax

The Personal Tax Filing Deadline is April 30th – Some Last Minute Reminders

By Randall Orser | Personal Finances , Personal Income Tax

The deadline for filing your personal taxes April 30th is almost here.  Here are some things to remember before you start the filing process.

1.  Most Canadian residents need to file an income tax return for the previous year to pay the correct amount of income tax owed, pay back overpayment of benefits or to claim benefits.

2.  If you file late and owe money the CRA will charge you interest and penalties on the unpaid amount.  So even if you know that you will have to pay, help yourself by at least filing on time.

3.  Before you tackle your income-tax return be sure that you have all the following information on hand.

  • Information from the CRA including your notice of assessment from the previous year.
  • All your tax information slips such as T4’s from employers, as well as your investment information slips and RRSP contribution receipts from your bank.
  • Information on other income such as self-employment income.
  • Receipts for tax deductions such as medical expenses and donations.

4.  Decide how you are going to file your taxes either a paper copy or online using NETFILE, and make sure that you have the correct tax package for your province. The advantage of using NETFILE is that you get immediate confirmation that your return has been received and if you are owed a refund you will get it much faster, sometimes within two weeks of filing.

5.  If your taxes are complicated for example if you run a small business it is often better to use a tax professional to prepare and file your return, however to save yourself some money you should still spend time sorting your receipts and getting everything ready for your accountant.

6.  There are a few different ways to pay any income tax due; by mailing a cheque to the CRA, using online or telephone banking, using the CRA’s My Payment Service or making a payment at your bank.  If you have to pay your taxes by installments you can set up a payment arrangement with the CRA.

7.  Set up a direct deposit with the CRA so that your tax refund and any benefit payments are deposited directly to your bank account.

Need Help With Your Return? Where to Get Answers to Your Income Tax Questions

By Randall Orser | Investments , Personal Finances , Personal Income Tax

The April 30th deadline is rapidly approaching.  If you are in a panic about your tax return and need answers to some questions, here are some places you can go for help.

1.  If your tax return is complicated it is always best to get a tax professional such as Number Crunchers® to complete it for you. We know all the ins and outs of tax returns and we can answer your questions and make sense of the chaos.

2. If you still want to go it alone, get a Canadian Income Tax Package.  This used to be mailed out but can now be downloaded and printed from the CRA Website.  The package includes line by line instructions to help you to fill out your return.

3. Head to the CRA website at http://www.cra-arc.gc.ca/formspubs/tpcs/menu-eng.html to find forms and publications by topic.

4. The CRA has an automated Tax Information Phone Service (TIPS) for personal and general tax information.  To find out more go to http://www.cra-arc.gc.ca/esrvc-srvce/tps/menu-eng.html.  Before calling you need to make sure that you have the following information on hand: your social insurance number, your month and year of birth and the total income that you recorded on line 150 of your 2017 return.

5. Tax information for individuals, businesses, charities and trusts can be found at http://www.cra-arc.gc.ca/ndvdls-fmls/menu-eng.html

6. Phone Inquiries – you can reach a CRA representative by calling 1-800-959-8281 but expect to wait a while to talk to someone, they are extremely busy at this time of year.  They do have extended evening and weekend hours up to April 30th, (9am to 9pm local time during the week and 9am to 5pm Saturdays local time) and they do suggest calling Thursday or Friday when the phones are usually less busy.

7. For help with CRA online services you can go to their E-Service Help Desk at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/menu-eng.html.

8. If you need help with a very basic return that does not include bankruptcy, deceased individuals, capital gains or losses, employment expenses or business or rental income and expenses there are Volunteer Income Tax Preparation Clinics offered by the CRA.  These are only to help people who meet their basic eligibility requirements such as maximum income levels.  For more information about locations go to http://www.cra-arc.gc.ca/tx/ndvdls/vlntr/menu-eng.html

Do You Know Why the CRA Uses a Profit Test for Business?

By Randall Orser | Business Income Taxes , Small Business

The CRA defines a business as “an activity that you conduct for profit or a reasonable expectation of profit”.

The profit test is used by the CRA to determine whether or not a person is actually running a business.  The test asks, “Was the activity conducted with an actual expectation of profit?” and “Was that expectation of profit reasonable?”  Only a person (or legal entity) operating a business can claim business expenses or business tax credits on their income tax or GST return.  If the business does not pass the profit test, then all credits and expenses will be disallowed.

Criteria that the CRA uses to determine whether or not you are running a business:

  • The profit and loss of the business in past years.
  • The amount of gross income if any reported over several years.
  • The length of time in which the business can be reasonably expected to be showing a profit, relevant to the nature of the activity.  
  • The extent of the activity related to businesses of a similar nature and size in the same locality.
  • The amount of time spent on the activity.
  • The qualifications of the business owner, including training, experience and education including eligibility for membership of a professional association.
  • The individual’s intended course of action for the business to make a profit, for example preparing a business plan.
  • That the business has enough capital to make it capable of showing a profit after depreciation, and the individual has the resources available to allow the business to develop and expand.  This includes the ability to secure financing to make the business viable.  
  • That a degree of effort is spent in promoting and marketing the product or services supplied by the individual.  This includes the registration of a trading name and opening and maintaining books and records.
  • The type of expenses claimed and how relevant and reasonable they are to the activity, and if this expenditure will help the business to make a profit.
  • The nature of the goods or services provided is such that a market exists or can be developed and there is potential for profit.

For more information see the CRA's   P-176R – Application of Profit Test to Carrying on a Business

What is Income Splitting and How Can it Reduce Your Tax Bill?

By Randall Orser | Business Income Taxes , Small Business

Income splitting is the transfer of income from a person in a higher tax bracket to a family member in a lower tax bracket.  The more you earn the higher your income tax bracket so “transferring” some of your income to a person whose income is lower than yours will result in having to pay much less tax.

The Family Tax Cut that allowed individuals to split their income with a spouse up to a tax credit of $2000 is no longer available, but businesses can use income splitting strategies still available to them.

There are two ways in which you can split your business income: 

  • By paying some of it in salary or wages to a family member 
  • Transferring some to family members in the form of dividends

Paying salary or wages to a family member means that you actually hire your spouse or children as employees and pay them from your business income thereby reducing your net income.  For example, if you earn $75,000 and pay your spouse $30,000 this reduces your income to $45,000 which is a lower tax bracket, and your spouse will be taxed even less as $30,000 is even lesser tax bracket, resulting in double tax savings for you both.  As great as this sounds there are strict rules on income splitting which involve hiring members of the family as employees.  

  • They must have duties to carry out the same as any other employee.  As with any other employee you must keep employee records to prove that your family member actually worked in the business.
  • You have to pay your family member the same wage as you would pay anyone else to do the same job.  You cannot overpay them for the job they do, the rate must be the same as other employees earn in the same industry.

Income splitting by Dividends is another way to pay your spouse or children, but you can only do this if your business is incorporated.  This tax strategy is very flexible in that the value of the dividends and those receiving them can vary from year to year.  Your corporation must be set up so that your spouse and children are shareholders then dividends can be distributed between them.  You can also structure your corporation so that there are non-voting share classes for family members so that they can receive dividends but not vote on decisions made relating to the company. 

For the 2018 tax year, the rules on split income received through dividends is changing.  For more information go to Revenue Canada guidance on split income rules for adults.  


Self Employed? Do You Know What Your Tax Obligations Are?

By Randall Orser | Business Income Taxes , Sales Taxes , Small Business

While self-employment comes with some great benefits, such as a flexible work schedule and freedom to select your work projects, you also have big responsibilities, when it comes to tax time. You are totally responsible for reporting your income and filing and paying your taxes.

It’s a good idea to get familiar with the CRA required self-employment tax forms. When you understand what you have to do, you can organize your finances, keep great records, and make tax filing much easier.

Do you need to file self-employment taxes? You are considered by the CRA to be self-employed if your business is one of the following: 

  • A sole proprietorship
  • An unincorporated partnership
  • An unincorporated limited liability partnership
  • An unincorporated general partnership

Your business income is then part of your personal tax return which means that you will pay the personal income tax rate rather than the corporate rate if your business was incorporated.  

Do you need a T4A?  Unlike when you are employed and receive a T4 from your employer, if you are self-employed as an independent contractor then your clients should send you a T4A slip which will include the dollar amount for each job you do for them.  To figure out your income you need to add the amounts from each slip.

However, you will not always get a T4A especially if you are selling goods direct to customers, they will not give you one. You will then be responsible for keeping accurate records of all of your income from receipts, invoices and any other proof of income.  It is a good idea to use a program such as Quickbooks to keep track and you can run a report to find out your total income for the year.

What is a form T2125 for?  This a Statement of Business or Professional activities which helps you to calculate your gross income as well as your business expenses which you deduct from your income to lower your taxable income.  On the T2125 you will have to provide the following information:

  • Information about your business including a description of your products and services.
  • Income from internet activities such as affiliate sales or ad traffic revenue.
  • Business or professional income.
  • The amount of GST you paid 
  • Costs incurred while making and selling your goods
  • Business expenses
  • Expenses paid for while running your business from home
  • Information about your business partners if you are in a partnership

Once you have completed form T2125 you will know your gross and net income for the year which you will enter on your T1 form. If you run a few businesses, then you will need to fill out a T2125 for each of them.

When Do You Need to Pay GST?  If your business makes more than $30,000 per year then you are required to register for a GST number and collect GST from your customers.  You will submit a GST return either monthly, quarterly, or annually.  

Tax Deadlines  If you are self-employed you will have until June 15th to file your tax return instead of the April 30th deadline.  However, you should still pay any taxes you owe by April 30th.  If you are employed in addition to running your own business, then you will have to file your T1 return by April 30th. Your clients have until the last day of February to send you any T4A slips.

 

What is CRA ReFile and How Does it Work?

By Randall Orser | Personal Income Tax

The CRA ReFile service allows you to send online adjustments for income tax and benefits returns using certified Netfile software and Efile software.  You or your tax service provider can send adjustments for 2018, 2017, 2016, and 2015.

Advantages of ReFile:

  • You will know how much you owe or what your refund is much quicker than making adjustments on paper.
  • It saves you money on postage and you use less paper
  • It is good for the environment as you use less paper
  • It is really easy to do

You must use ReFile with the same certified Netfile software that you used to file your income tax and benefit return.  If you filed a paper copy of your return then you will need to mail a paper form             T1-ADJ - T1Adjustment Request to the CRA.

You Cannot Use ReFile when:

  • You are amending an election, or you want to make an election for example on the Disposition of Property by a Taxpayer to a Taxable Canadian Corporation, (transferring eligible property to the corporation for consideration such as shares of any class in that corporation).
  • You are applying for child and family benefits.
  • You are allocating a refund to other CRA accounts.
  • You are applying for the disability tax credit.
  • You have a reassessment in progress.
  • You have a first return that has not been assessed – check on your MyAccount or have a notice of assessment paper copy to show that your return has been assessed.
  • You have to pay taxes in other provinces or territories.
  • Your first return was filed by the CRA as a 152(7) assessment.

You cannot use ReFile to make changes to personal information you need to use MyAccount to make the following changes:

  • Marital status
  • Address
  • Direct deposit details
  • Email address

The ReFile system only allows you to make nine adjustments per year.  If you go over that then you will get an automated response saying the limit has been reached and you will then have to file a paper request.

 

How Can You Claim Expenses on a Business Loss?

By Randall Orser | Business Income Taxes , Small Business

If you are a sole proprietor or partner and file your income taxes on a T1 you need to fill out a Statement of Business or Professional activities on a T2125.  Should your business expenses exceed your business income then you will record a business loss on this form.

"Using" this business loss depends on whether or not you have other income.  If you do you can use the income from your business to offset your other income. This is an advantage for people who work full time and have a side business as you can write off business losses against your regular income.  If you don’t have other income your business loss will not be a tax advantage for you.

Using Your Business Loss in a Different Tax Year  If you have personal income you can offset your business loss up to three years back or seven years forward from the year of your business loss, therefore it can make sense to use your business loss to offset a larger tax bill in the future or the past.

Beware! you Cannot Write off Business Losses Forever  According to the CRA your business should have a “reasonable expectation of making a profit” and will eventually generate more income, reduce losses and become more profitable.  If you continue to write off business expenses for a number of years, then the CRA will decide that you decide that your business does not meet this expectation and will deny your claim for business losses in the current year and will assess your losses in previous years.  See Canada Revenue Agency Profit Test.

Your Business Must be Legitimate  Your business must be seen to be “clearly commercial in nature”.  If you have a full-time job and start a side business, you must have customers and revenue. Otherwise your business expense claims may be denied by the CRA if they decide that your business is not a sufficiently commercial operation.

Incorporation  If your business is incorporated you cannot use business losses from the corporation to offset your other income, except in some cases where investment losses result may from share dispositions or debt. 

Claim Reasonable Expenses  To avoid raising red flags which may result in a CRA audit you should always be reasonable with your expense claims.

From an article by Susan Ward

What are Input Tax Credits?

By Randall Orser | Business Income Taxes , Personal Income Tax , Small Business

Input Tax Credits are the amount that your business paid, or the allowable portion of the GST you paid.  They allow you to recover GST you paid out on business purchases or expenses.  You must be registered for the GST to use Input Tax Credits.  Once you have done this you need to start keeping track of the GST you have paid and enter it into your bookkeeping system.  As with all expenses you need to keep all your receipts to support your claims.

What qualifies as Input Tax Credit?

Some of the expenses that you can claim as Input Tax Credits include:

  • Rent
  • Equipment Rentals
  • Advertising expenses such as business cards, ads and flyers
  • Accounting, legal and other professional fees
  • Home office and motor vehicle expenses
  • Office expenses including postage, computers, pens etc.
  • Travel including hotels, airfare, car rentals

These capital expenses also qualify:

  • Capital property
  • Machinery and vehicles
  • Furniture and appliances
  • Improvements to capital property

You can only claim Input Tax Credits for anything related to your business not for personal expenses.  The purchase or expense must also be what the CRA deems reasonable in nature as well as cost.  You cannot claim Input Tax Credits on:

  • Taxable goods and services bought or imported to provide exempt goods and services
  • Some capital property
  • Memberships or dues to any club whose main purpose is for recreation – this includes fitness clubs, golf clubs and hunting and fishing clubs unless the membership is bought to resell in 

For more information a full list is available on the CRA website