Category Archives for "Business Income Taxes"

Get Your Receipts Together Now for Taxes

By Randall Orser | Business Income Taxes

Many shoppers in Canada quickly decline the offer of a receipt when a store clerk asks them. You won’t ever catch a small business owner doing this. It’s not that they like drowning in thousands of little slips of paper; instead, they just know that without every receipt they can get their hands on, their tax return could get out of hand. What businesses need, then, is a way of cataloging and organizing receipts to present to the Canada Revenue Agency (CRA).

The CRA has very strict rules about businesses providing proof of their expenses. They also offer lenient treatment in these matters sometimes. For instance, CRA may let businesses get away by merely showing detailed accounting and other records as proof that they have spent the money they claim and may only look at certain items. In an audit, the auditor usually has a dollar figure he wants to look at and skips over anything under that amount. Sometimes, the CRA will accept these defenses for a lack of receipts. At other times, they will have none of it. It is safest to keep receipts for everything. Two items where this is never the case is automobile and meals.

There are two parts to providing the CRA with the proof required – getting all the receipts from all the vendors you deal with and then organizing them to present to the CRA as proof. Getting the receipts is easy enough – you only have to resolve to ask for them. Organizing receipts in a manageable and presentable way, though, is the other. These tips below help you keep your records well-sorted.

To organize receipts in proper form, you need to first know what each receipt is for. When you have a load of receipts at the end of the year, it can be hard to know which proves what. Each time you get a receipt, then, you need to make notes on it for what it is for. You may not be able to use the receipt otherwise.

It can be difficult to keep hundreds of little slips of paper organized for years. The CRA can come back long after a tax year is done and ask for additional proof for something. This is what receipt scanners are there for. The CRA accepts scans in place of original receipts. Make sure that you keep a couple of backups of your scans, though. If you don’t, you could be sunk if you lose your hard drive for some reason. Taking pictures on your smartphone camera could be a great alternative, too. There are dozens of apps that help you organize your receipts.

It is hard to overestimate how confusing hundreds of receipts can be when you need to find a specific one for a specific expense. If you have the misfortune to be in a tax audit, you can find that merely having an organized set of receipts is not enough. The CRA auditor may ask for additional corroboration – in the form of a business calendar. If you are deducting travel expenses, for instance, the auditor may want to look at your business calendar to see if you actually have travel plans jotted down in there. Maintaining a detailed Outlook calendar could be a great idea.

Final tips

It is important to keep all your bank and credit card statements. These aren’t good enough to take the place of actual receipts, though. These statements typically use short descriptions for each expense. An expense line may say that you’ve spent $700 at Amazon – it won’t say that you bought business software with that money. As far as the CRA is concerned, you could have bought $700 worth of Silly String cans. You need to keep your receipts as well as your credit card statements.

Finally, whatever happens, always pay with checks or plastic. Cash expenses do come with receipts; they don’t have additional corroboration in the form of bank or credit card statements, though. As far as the CRA is concerned, there is no such thing as too much proof.

You’re much better off trying to ensure you have all your receipts for your business expense, and for those personal expenses you can deduct such as donations and medical expenses, now rather than waiting until April (June for small business); in which case, you may end up filing late.

The CRA is happy to give you thousands of dollars off your tax bill. The only thing they ask in return is solid corroboration for each expense you deduct. Collecting and organizing receipts, though, proves to be a tall order for many small businesses. These tips that follow show you where many businesses make mistakes and what you can do to keep your tax return safe. Or better yet, hire Number Crunchers® and get this headache off your shoulders.

Have You Made Donations Yet This Year? 

By Randall Orser | Business Income Taxes

As we’re nearing the end of 2017, it’s a good time to look at your potential deductions for the tax year. Whether you’re someone who donates throughout the year, or just in one lump sum. It’s a good idea to see how much you’ve donated so far, this year, and should you top it up.  You may also be doing a bit of cleaning out this fall and getting rid of things, so may be a good time to think about donating something in kind to your favourite charity. Now is definitely the time to look at what you can contribute to make the most of your tax deduction.

Your donations can consist of monies or gifts to registered charities, and political parties, too. You can look up on Canada Revenue Agency (CRA)’s website to see if the charity you wish to donate to is registered on the Charities Listing page. Ensure the charity is registered here before you give any of your money; this includes charities of foreign countries. Qualified donees are:

  • registered charities;
  • registered Canadian amateur athletic associations;
  • registered national arts service organizations;
  • registered housing corporations resident in Canada set up only to provide low-cost housing for the aged;
  • registered municipalities in Canada;
  • registered municipal or public bodies performing a function of government in Canada;
  • the United Nations and its agencies;
  • registered universities outside Canada that are prescribed to be universities the student body of which ordinarily includes students from Canada;
  • Her Majesty in Right of Canada, a province, or a territory; and
  • before June 23, 2015, registered foreign charitable organizations to which Her Majesty in Right of Canada has made a gift. For gifts made on or after June 23, 2015, registered foreign charities (which now include foreign charitable foundations) to which Her Majesty in Right of Canada has made a gift.

What is the eligible amount of my gift?

In most cases, the eligible amount of your gift is the amount shown on your charitable donation receipt.

However, in more technical terms, the eligible amount of the gift is the amount by which the fair market value of the gifted property exceeds the amount of an advantage, if any, received or receivable for the gift.

The advantage is generally the total value of any property, service, compensation, use or any other benefit that you are entitled to as partial consideration for, or in gratitude for, the gift. The advantage may be contingent or receivable in the future, either to you or a person or partnership not dealing at arm's length with you.

Look at all the donations you have given this year, do they add up to $200 or more? If not, you want to top that up to over $200 as you get a bigger credit for the amounts over $200. Currently, you get 15% tax credit on donations up to $200, and 29% on any amounts over that. For example, you give $750 to charity, you get $30 on the first $200 and $159.50 on the rest for a total of $189.50.

Generally, you can claim on line 340, all or part of these donations, up to a limit of 75% of your net income (line 236). As an exception, gifts of capital property are limited to 100% of your net income. Also, for the year a person dies and the year before, the 75% limit is extended to 100% of the person's net income.

Of course, as always, keep your copies in case CRA asks for them; usually, if you donate quite a bit of your income they’ll check.

First-time donor’s super credit

The First-time donor's super credit (FDSC) supplements the value of the charitable donations tax credit (CDTC) by 25% on donations made after March 20, 2013, by a first-time donor.

For the purpose of the FDSC, you will be considered a first-time donor if neither you nor your spouse or common-law partner (if you have one) have claimed and been allowed a charitable donations tax credit for any year after 2007.

The FDSC applies to a gift of money made after March 20, 2013, up to a maximum of $1,000, in respect of only one taxation year from 2013 to 2017.

If you have a spouse or common-law partner, you can share the claim for the FDSC, but the total combined donations claimed cannot be more than $1,000.

Example

An eligible first-time donor claims $700 of charitable donations in 2016, of which $300 are donations of money. The charitable donations tax credit (CDTC) and the first-time donor's super credit (FDSC) would be calculated as follows:

  • On the first $200 of charitable donations claimed, the CDTC is ($200 x 15%) = $30.
  • On the donations claimed in excess of $200, the CDTC is [($700 − $200) x 29%] = $145.
  • On the donations that are gifts of money, the FDSC is ($300 x 25%) = $75.
  • The total of the CDTC and FDSC is $250.

You do not have to claim all of the donations you made this year on your current year return. It may be more beneficial to carry them forward and claim them on your return for any of the next five years, or over the next ten years for a gift of ecologically sensitive land made after February 10, 2014.

Donating to charity is a worthwhile effort as you are able to help people, feel good about yourself, and get a tax deduction. As with anything in life, it’s a good idea to plan, and track what you’re donating for the year, so as to maximize your tax benefit the most. Check here for some samples of official donation receipts.


Why You Need to Think About CRA’s Online Services? 

By Randall Orser | Business Income Taxes , Personal Income Tax

Canada Revenue Agency (CRA) has joined the 21st Century when it comes to giving you access to your tax information online. You can get your notices of assessment, RRSP contribution limit, and more via their My Account and Online Mail, and they even have an app called MyCRA. These allow easy access, and faster access than snail mail, to your tax information that CRA has for you.

Before we get into why you should use these services, let’s give a quick overview.

My Account

My Account allows you to track your refund, view or change your return, check your benefit and credit payments, view your RRSP limit, set up direct deposit, receive online mail, and so much more. My Account is a secure portal. This is for your personal taxes, and not for business accounts, such as GST/HST.

My Business Account

My Business Account is a secure online portal that provides an opportunity to interact electronically with Canada Revenue Agency (CRA) on various business accounts. Business accounts include GST/HST (except for GST/HST accounts administered by Revenu Québec), payroll, corporation income taxes, excise taxes, excise duties, and more.

Online Mail

Online mail is a simple to use service that allows individuals to receive most of their mail, like their notice of assessment or benefit notices, from the Canada Revenue Agency (CRA) directly in My Account.

MyCRA App

MyCRA is a mobile app for individual taxpayers where you can securely view and update key portions of your tax and personal information.

For step-by-step instructions on setting up your CRA user ID and password, go to Registration process to access the CRA login services.

All of the above are:

  • Convenient – It is available 21 hours a day, 7 days a week.
  • Easy to use – After registering, simply log in with your CRA user ID and password.
  • Fast – Information is up-to-the-minute and transactions are processed immediately.
  • Secure – The CRA user ID and password are just part of the security.

It is possible to see information in My Account before you receive the official document from the CRA. For example, if the CRA reassessed your return, you will see details of the reassessment in My Account before you receive your notice of reassessment in the mail. This is because the most up-to-date information is displayed immediately in My Account, while the notice goes through several manual processes before you receive it by mail.

Correspondence that you can receive electronically

Some examples of correspondence currently available through online services include:

  • notices of assessment (NOA)
  • notices of reassessment (NORA)
  • benefit notices and slips
  • T1 adjustment notices
  • instalment reminders and payments made
  • income tax and benefit return status
  • tax-free savings account and registered retirement savings plan contribution limits
  • buy-back amounts for the Home Buyers’ Plan and the Lifelong Learning Plan
  • GST/HST return status
  • Account balances
  • And more…

The above are just some of the services that are currently available, and CRA is looking at adding more all the time. CRA finally wants you to be able to access this information electronically rather than get it in the mail.

Let’s face it mail theft is on the rise and will continue to do so as long as we have those community mailboxes; those mailboxes are not secured in any fashion. Online services allow you to have access to your tax information at any time, and you can authorize others to access it on your behalf, such as your tax preparer. This allows them access to your notices of assessment, T-slips, etc., allowing you to relax as to whether or not you got them. It also allows you to check to see if you didn’t get a T4, or other slip before you do your taxes.

I’m am going to suggest to all my clients this year to sign up for My Account, Online Mail and MyCRA App, it’s just the right thing to do.

Seven Tips to Save on Your Taxes for Authors

By Randall Orser | Business Income Taxes

Way before tax times approaches, you should be gathering up your business-related expenses. What qualifies as a business-related expense? Here’s some great ones for authors.

Home is where the writing is

Where do you write? Most authors write at home, and have a space reserved for that purpose. Whether you rent or own, if you use a part of your home exclusively and regularly for the business of writing then you may be able to write off expenses that relate to the space.

Round up your gas, hydroelectricity, house insurance, maintenance (house cleaning, landscaping, etc.), mortgage interest, property taxes and city utilities, strata fees, rent. It’s best to review these with your tax advisor, and that you get the right percentage of use. Remember you need to measure the square footage of the room, and determine your home’s total square footage.

Pens and Paper Aplenty

All those office store receipts add up after a while, and you may as well use them. Your office equipment and materials that include desks, cabinets, chairs, lighting, computer and software, printers, ink, paper, pens, and other supplies.

Ding-a-ling May Be Deductible

Your cell phone or landline may be considered a business expense. You should show that the phone is used normally for business. Canada Revenue Agency seems to allow 100% of cell phone bills to be written off (at least your portion, if it’s a family plan). If your business conducts interviews, you can keep a log of the date, length, ad purpose of such calls. Of course, in today’s smartphone era, you probably use the cell to email clients, take notes, draft story outlines, or do research. Your tax advisor can help you figure out the correct deduction amounts for your phone usage, devices, service and repair charges.

Surfing Could Mean Savings

Every household pretty much has the internet these days, and you’re more than likely using it for your business. You’re probably using it for email, website, video conferencing clients, existing and new ones, doing research and fact-checking. These days it’s social media and promoting your business. Many people get their inspiration from the internet. Ideally, if you want to write off your internet service, it should be in the businesses name; you’ll pay more for it, however, CRA likes to see this.

Subscribe Your Way to Savings

Do you belong to professional organizations? How about magazines and other publications, even websites you subscribe to on a monthly basis? Associations would include ones to power up your writing, or learn more on a certain subject you’re writing about, online access to the AP Stylebook, newspapers, and more.

Fly the Friendly Skies to a Tax Write-off

Travel writers aren’t the only ones who can claim travel as a deduction. Any travel that you do may qualify for a deduction, if it gets you somewhere that’s business related. That professional conference, or event you covered, or client you met would all qualify for the travel deduction; remember parking and tolls. As for a car, if it’s a rental car then you just write off that as a travel expense. If it’s your personal car, then you must keep your mileage and all your receipts; unless you’re a corporation, then you can pay yourself per kilometer.

Your Content Creation and Business Expenses Could be Related

The content you create for clients, could lead to deductions for your business. Are you a movie or theatre reviewer? The cost of those tickets would be a write-off. A graphic designer that creates marketing materials for a beauty brand, anything purchased to better understand the user experience could qualify too. Look at the content you created over the past year, and the products or services you purchased to create that content. Your professional tax advisor should be able to give you great advice on what you can and cannot write-off.

If you want to reduce your taxable income, then look at your home office, cell phone, internet plan, dues and subscriptions, travel and the content you create. For a little bit of record keeping, and advice from a tax advisor, you can keep more money, and give less to the government.

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)

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.

Is This Email from CRA a Scam?

By Randall Orser | Business Income Taxes

Since it’s now tax time, the scammers start to ramp up their efforts, and no doubt you’ll get an email claiming to be from Canada Revenue Agency (CRA). Every year the scammers are out, and every year, they get better at what they do.

As a taxpayer, you should be vigilant when you receive a fraudulent communication that claims to be from the Canada Revenue Agency (CRA) requesting personal information such as a social insurance number, credit card number, bank account number, or passport number.

These scams may insist that this personal information is needed so that you can receive a refund or a benefit payment. Cases of fraudulent communication could also involve threatening or coercive language to scare individuals into paying fictitious debt to the CRA. Other communications urge you to visit a fake CRA website where the taxpayer is then asked to verify their identity by entering personal information. These are scams, and taxpayers should never respond to these fraudulent communications or click on any of the links provided.

If you receive an email saying you owe money to the CRA, you can call them or check My Account to be sure. If you have signed up for online mail (available through My Account, My Business Account, and Represent a Client), the CRA will do the following:

  • send a registration confirmation email to the address you provided for online mail service for an individual or a business; and
  • send an email to the address you provided to notify you when new online mail is available to view in the CRA's secure online services portal.

The CRA will not do the following:

  • send email with a link and ask you to divulge personal or financial information;
  • ask for personal information of any kind by email or text message.
  • request payments by prepaid credit cards.
  • give taxpayer information to another person, unless formal authorization is provided by the taxpayer.
  • leave personal information on an answering machine.

Exception: If you call the CRA to request a form or a link for specific information, a CRA agent will forward the information you are requesting to your email during the telephone call. This is the only circumstance in which the CRA will send an email containing links.

Fraud Scenario – E-mail phishing

At 80 years old, Irene is excited to use her new computer to keep in touch with her family. One afternoon, she receives a message that seems to be from the CRA claiming that she is entitled to a significant tax refund. The email includes a link to a website asking for personal information, including address, date of birth, and banking information, so that the money can be direct-deposited into her bank account.

Irene doesn’t remember giving the CRA her new email address and is surprised that the CRA is contacting her. What’s more, she has never qualified for similar tax refunds in the past. However, Irene is still getting used to her computer, and assumes that since the email is addressed from the CRA it must be real. She follows the link and fills out her personal information.

Does this scenario sound familiar? Every year, Canadians lose millions of dollars to email phishing scams that result in identity and financial theft. Beware of emails claiming to be from the CRA. The CRA never requests personal information of any kind from a taxpayer by e-mail. Delete phishing emails and do not click on any links; they can carry harmful viruses that can infect your computer.

When in doubt, ask yourself:

  • Am I expecting additional money from the CRA?
  • Does this sound too good to be true?
  • How did the requester get my email address?

Remember if it sounds too good to be true, it probably is.

You can download this PDF from CRA

Don’t Get Scammed!

Make Tax Time Less Stressful with These Seven Tips 

By Randall Orser | Business Income Taxes

If you took the time to make a list of all the tasks you need to do to manage your business and then ordered them in terms of how much you liked doing them, where would record management come in? Two hundred and seventy? Or even lower?
But while most of us consider business record management to be scut work and tend to give it a low priority, good record management not only makes our working lives easier, but can give us real stress relief at tax time. Here’s what you can do to make record management easy:

1. Keep your business and personal expenses separate.

Sounds easy, doesn’t it? But this is the part of record management that trips up most people. If you take a potential client out for a round of golf, for instance, is that a personal expense or a business expense? (The answer is personal, because green fees are not a deductible business expense.) Vehicles that you use for both personal and business reasons are another perennial problem.
You need to know what qualifies as legitimate business expenses and what doesn’t, and be sure that your business record management reflects this accurately.

2. Get sufficient documentation for all business expenses.

Many business people make the mistake of thinking that “lists” are good enough for record management purposes. For instance, they have a list of purchases on their credit card statements, and think that that’s good enough in terms of claiming those purchases as business expenses.
Unfortunately, the CRA (Canada Revenue Agency) is more demanding. They do not accept credit card statements or cancelled cheques as sufficient documentation for expenses when an invoice or receipt would normally be issued.
In terms of good business record management, there are two points to bear in mind:
a) Always get a receipt. Get in the habit of asking for a receipt whenever you make a purchase – no matter how small. Little expenses add up, too, and you need the documentation for your business records.
b) Label your receipts, if necessary. There are still businesses around that hand out receipts that don’t have anything on them except the date the item was purchased and how much it cost – which isn’t very helpful when you’re staring at a receipt trying to figure out what the item in question was and which business expense category it fits into.
When you get a receipt, look at it and write the missing/relevant information on it, such as what the receipt is for and the expense category.

3. Get a separate bank account for your business – and use it.

While the fees for business bank accounts are notoriously high compared to personal accounts, a business bank account is absolutely necessary for good business record management. A business bank account helps you keep your business and personal expenses separate. You will deposit all your business revenues into the business account, and withdraw any business-related expenses or payments from the business account only.
What kind of business bank account should you get? A chequing account – preferably one that delivers monthly statements and returns your cancelled cheques to you.
Business cheques help make your record management easy because you can use the memo line on the front of each cheque to document the business purpose of the expense.

4. Have and use a separate credit card for business expenses.

Using your personal credit cards for business purposes will swiftly drop you into a record management quagmire. A business credit card greatly simplifies your business record management by helping keep your personal and business expenses separate. (It also helps make your business look more professional.)

5. Keep a mileage log of your business travel.

If you use any of your vehicles for business purposes, a mileage log will be a big help in record management. Note the mileage (or kilometer) reading on the odometer at the beginning of the year and then enter the mileage by date each time you use the vehicle for a business purpose.
Keeping your mileage log in the glove box of your vehicle will make this easy. If you have more than one vehicle that you use for business purposes, keep a mileage log in each.

6. Keep all your business records for a particular tax year together and in one place.

Having your business records scattered all over the place is a real time-waster when it comes to accounting or preparing your taxes, and organizing your business record management system by fiscal year will make it much easier to find the business records you need when you need them.

7. Keep your business records for the correct length of time.

For some reason, there seems to be a lot of confusion about how long you must keep your business records. For tax purposes, “if you file your return on time, keep your records for a minimum of six years after the end of the taxation year to which they relate” (CRA).
This six-year period starts from the last time you used the business records, not from the time the transaction occurred.
The CRA also has rules about the destruction of business records; see Canada Revenue Agency’s website for details.
These seven things you can do to make your record management easy aren’t difficult. Like a lot of the administrative business related to running a business, they just require establishing good habits and persistence. But if you apply these rules of good record management now and follow through, you’ll see a huge difference next tax time and your accounting will be easier all year long.

Home-Based Business Tax Avoidance Schemes

By Randall Orser | Business Income Taxes

Scam home-based businesses and tax avoidance promotions have gained popularity over the last few years for a variety of reasons, including:
• The desire of individuals to reduce the amount of taxes they pay.
• Unscrupulous promoters, selling tax avoidance and audit assistance packages.
• Taxpayers being advised they can deduct all or most of their home and other personal assets as business expenses.
Most taxpayers with home-based businesses accurately report their income and expenses, while enjoying the benefits that a home-based business can offer. However, some individuals have received advice that they can operate any type of unprofitable “business” out of their home and claim personal expenses as business expenses. Non-deductible personal living expenses cannot be transformed into deductible business expenses regardless of how convincing the information in marketing materials may seem.
The following are a few examples of items that are generally not deductible as business expenses:
• Deducting all or most of the cost and operation of a personal residence. For example, placing a calendar, desk, file cabinet, telephone, or some other business-related item in each room does not increase the amount that can be deducted.
• Paying children, a salary (e.g. for answering telephones, washing cars, etc.).
• Deducting education expenses from salaries paid to children wrongfully claimed as employees.
• Deducting excessive car and truck expenses when the vehicle was used for both personal and business use.
• Deducting personal furniture, home entertainment equipment, children’s toys, etc.
• Deducting personal travel, meals, and entertainment under the guise that everyone is a potential client.
Any investment scheme or promotion that claims to allow a person to deduct what would normally be personal expenses, and not ordinary and necessary business expenses, should be considered highly suspect. As always, a business must truly exist prior to claiming expenses.
In the past few years Canada Revenue Agency (formerly Revenue Canada) has hired 5,000+ new auditors, and one area that they are delving more into is people who work full-time and operate a home-based business (mostly multi-level marketing schemes) that never makes money or has little revenue and high expenses.

Minimize Taxes on Your Small Business 

By Randall Orser | Business Income Taxes

Income from unincorporated businesses is taxed in the hands of the owners. If you earn income from such a business, you must prepare an income statement each year, showing all the income and expenses of the business. The resulting net profit or loss is then transferred to your tax return and is taxed, along with all your income from other sources. The Canada Revenue Agency (CRA) provides standard business statement forms which it encourages you to use in calculating your profit and loss. However, you are not required to use these forms, as the CRA will accept other types of financial statements.

As a small business owner, you are entitled to deduct the ongoing costs of doing business, so long as the expenses are reasonable and have a profit-producing motive. It is important to have a good record-keeping system, however; otherwise it is inevitable that you will forget about certain expenses that you incurred when tax time comes around! Every dollar of expense that you overlook is one more dollar added to your taxable income, so don’t trust your memory. Instead, write it down, and save those receipts! Some of the more common deductible expenses include advertising, promotion, rent, salaries, legal and accounting fees, and auto expenses.

Deductions Available to Your Small Business

The cost of advertising is deductible, as is the cost of flyers, brochures and other promotional activities. This includes the cost of entertainment and business lunches, if used to promote your business to existing or prospective clients. However, unlike advertising or promotion, only 50% of the total cost for meals and entertainment is deductible.

Office rent paid to a third party is deductible. However, if you own your business premises, or run your business out of your home, you may not deduct the rental value of these premises. Instead, you may deduct any related expenses, such as mortgage interest, property taxes and insurance. These expenses must be prorated if part of the building is used for personal purposes.

Salaries and wages paid to employees are deductible in full, as are the employer-paid premiums for Canada or Québec Pension Plan contributions, Employment Insurance, Workers’ Compensation, and sickness, accident, disability or income insurance plans. Salaries and wages paid to your spouse or child are deductible if the work done is necessary for earning business income, and the amount paid is reasonable, or equivalent to what you would have paid an unrelated person for the same type of work. Salaries drawn by you, the owner, are not deductible, however, and should not be included on the income statement.

Fees for outside professional advice or services are deductible, including consulting fees, bookkeeping and accounting fees, and tax return preparation fees.

Legal fees and similar professional fees incurred for earning business income are deductible. These include fees paid for legal advice related to on-going business activities, or to a collection agency for the collection of bad debts. However, legal fees incurred to buy capital property are not deductible. Instead, these are added to the capital cost of the property.

Business taxes and annual business licenses are deductible. Fines and penalties for infractions of public laws, however, are generally not deductible.

Automobile expenses related to earning business income are deductible. If the auto is used only partly for business, the expenses must be prorated between business and personal use based on the relative number of kilometres driven. Apart from proration, there are no restrictions on operating expenses, such as gas, oil, repairs, insurance and maintenance. However, items related to the capital cost of the auto, like capital cost allowance, interest on auto loans, or lease payments, are restricted. For automobiles acquired 2001 and later, deductibility of interest payments is limited to $300 per month and lease payments to $800 per month, plus GST and PST, or HST. Capital cost allowance is calculated on a maximum value of $30,000, plus GST and PST, or HST. Special-use vehicles, such as taxis, hearses, vans, pick-up trucks, or other vehicles used mainly to transport goods or passengers during business are not subject to these capital-cost restrictions.

You may not deduct the cost of capital expenditures (expenses relating to the acquisition or improvement of a property used by the business) in the year acquired. Such expenditures normally supply a long-lasting benefit; therefore, tax law requires that their entire costs be claimed slowly, over a period of years. This is accomplished through the mechanism of the capital cost allowance system, which allows a certain percentage of the cost to be claimed each year, on a declining balance basis. The percentage varies with the type of property purchased. Capital cost allowance rules can be quite complex, since they deal with acquisition of new property, the sale of old property, and a variety of other contingencies.

Fiscal Year

Income and expenses from a business are calculated on a fiscal-year basis, which need not coincide with the calendar year. However, it is no longer possible to defer taxes on business income (except in the startup year) by choosing an off-calendar fiscal year. This is because a formula must be applied to estimate the income earned from the end of the fiscal year to the end of the calendar year, and this amount must be added to income and taxed in the current year. The following year, the extra income is subtracted from the actual fiscal period income, and a new amount for the stub period is calculated and included in income. The elimination of income deferral means that, unless you have compelling business reasons for doing so, it is usually no longer worth the bother to have an off-calendar fiscal year.

Back up your claims for business losses with a sound business plan

Sharing is one of the first things we are taught as youngsters. The same can also apply to the Canada Customs and Revenue Agency (CRA). When your business enjoys a profit, you must share part of it with the CRA in the form of income tax. By the same token, when your business shows a loss, the CRA shares in that loss, since you are ordinarily allowed to deduct the loss against other income, thus lowering the taxes you would otherwise pay.

But first you must meet the “reasonable expectation of profit” test. The CRA is only willing to share your losses if there is a reasonable expectation that there will be future profits to share as well. If not, your losses will be disallowed as simple personal losses.

This means that you cannot deduct losses arising from hobbies or similar activities if you do not ultimately expect them to be profitable. It also means that you cannot deduct losses if the size or scope of your business is such that your expectation of profit is simply not reasonable.

Because businesses are rarely profitable immediately, start-up losses are usually routinely allowed. However, if your business does not show a profit in a reasonable length of time, those losses may eventually be disallowed. Remember that the CRA can go back as far as three years (sometimes six years if a loss carryback claim has previously been filed) to disallow any losses previously claimed. If your losses were significant, the back taxes and interest can be substantial.

Since you cannot always know in advance whether your business will succeed or not, it is important to protect yourself in case you are not able to get your business “into the black” within a reasonable time. You can avoid having your bona-fide business losses disallowed by taking certain precautions, the most valuable of which is the five-year business plan. So, take the time, put in some effort and be fair to yourself!

For example, let’s say you love photography and have spent a lot of money on equipment. Your work is very good and occasionally you have sold some pictures. It occurs to you that, with a little effort, you could turn your hobby into a business. After all, it would be nice to write off all that equipment, wouldn’t it? Before you jump in, however, take some time to do your homework.

First, prepare a five-year business plan, showing projected income and expenses over that period. Estimate how much revenue you can realistically bring in each year. Then list all the expenses required to generate that income. Be sure to include all expenses that are deductible for tax purposes, including the cost of any personal items you intend to use in the business (for capital items, include depreciation only). Your business plan should also indicate who your intended customers are and how you intend to reach them. It should explain how and where you will obtain the necessary financing, what management skills and expertise you will contribute to the business, and what you must hire from others.

Now study your business plan. Do you have what it takes to run a small business? What are the projected profit/loss figures for the first five years? If your business plan indicates serious deficiencies, or projects persistent losses, you should either revamp your plan, or else continue your photography simply as a hobby, not a business. In other words, until you have a workable business plan, you should consider the losses to be the personal cost associated with a hobby and forget about trying to write them off on your tax return.

However, if your plan is sound, and the projected profit/loss statement shows an upward trend resulting in profitability after a reasonable length of time, you probably have a viable business, even if there are losses in the first few years. If you decide to proceed, use the business plan as your blueprint for building your business. Remember to save one copy of it for your files: it may come in handy if the CRA decides to look more closely at your business sometime down the road.

At the end of each year, compare your actual income and expenses to the projections in your business plan. If your losses were larger than you had projected, figure out why. Were your expenses higher because your business plan overlooked some regular, recurring expenses, or were there start-up costs you didn’t account for? Was your revenue lower than expected because you over-estimated the market or didn’t advertise enough? It is important to determine the cause of the discrepancy, and whether it is a one-time thing, or an on-going problem. Then make the necessary corrections and revise your business plan accordingly.

An Example

To illustrate the importance of the business plan, let’s assume you started your photography business without one. Let’s further assume that things did not go well at first, and you showed consistent losses of $3,000 in each of the first three years. You still think that it is a good business which will eventually make money, but the CRA, looking at your track record, decides to disallow your losses for all three years – all on the basis that you had no “reasonable expectation of profit.” Without a business plan, it is difficult to challenge that judgement. Thus, you could end up out of pocket, not just for the original $9,000 loss, but for the back taxes and interest on that amount of money as well!

How would a business plan help you? First, it would give you an objective, concrete basis for judging whether your business is likely to make a profit. After all, maybe the CRA is right; maybe you were just engaged in “wishful thinking.” A business plan would have indicated this to you much sooner and allowed you to cut your losses before they became too large.

On the other hand, maybe the CRA is wrong. Maybe your expectation of profit is entirely realistic. Maybe the losses were due to unusual circumstances, which have since been rectified, or were a necessary part of getting started in a cut-throat business. A sound business plan, adjusted yearly, will help you prove your case. It will enable you to counter the CRA’s perfect “hindsight” with facts and figures instead of unsubstantiated hopes and dreams.

Thus, instead of paying taxes on disallowed losses, you could invest that money in the business. Or better yet, spend it on something fun, like a well-earned vacation.