Category Archives for "Business Income Taxes"

How to Maximize Tax Deductions for Your Small Business

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

Like most small business owners, you are probably thinking about your tax return for this year and wondering how you can maximize your tax deductions. The most important thing is to have all your business-related receipts, as all your expenses must be backed up with receipts. You also need to keep receipts for six years in case the CRA ever asks for them. 

Remember to ask for a receipt for any business-related transaction throughout the year and make sure that they are legible with the vendor’s name, the date and what the receipt is for. This information will help you when inputting the receipt into your record keeping system and this should be done as soon as possible so that the purchase is fresh in your mind. 

In addition to your purchase receipts here are some more business expenses that you must make sure not to overlook.

  • Annual membership dues for business-related organizations 
  • Interest you have paid on money borrowed for your business, you can also deduct related fees such as one that you might have paid to reduce the interest on your business loan.
  • Insurance premiums that you might have paid on the building or equipment you use in your business
  • All relative maintenance and repair expenses for your business 
  • Office business expenses and supplies 
  • Home business expenses such as a portion of your utilities, home maintenance and property repairs, a cleaning service or cleaning materials, house insurance. You can also deduct a portion of your property taxes and your mortgage interest.  
  • Capital cost allowance – this is an expense for depreciation on business property such as furniture, computers.  
  • Automobile expenses – the cost of fuel, the license and registration fees, insurance, maintenance and repairs, and the interest on your car loan can all be claimed as business expenses.  However, you need to distinguish between business use and pleasure use because you can only claim for the business use of your vehicle.  To help you with this it is important to keep a mileage log.
  • Travel - if your travel was related to earning business income then you can deduct part of the cost of meals, entertainment and the cost of transportation and accommodation.  You can deduct the cost of attending two conventions per year as long as they are directly related to your business.
  • Employing a spouse or child in your business – this would make them an employee and you can deduct their salary as a business expense just as any other employee and you will need to issue them a T4.
  • Advertising – you can only claim for advertising in a Canadian newspaper or on a Canadian tv station or radio station, and only in an E-zine or website that originates in Canada.
  • Accounting and legal fees are all tax deductible, and this includes getting professional advice about maintaining your books and records.

For more information on tax deductible expenses visit https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html

Should you Claim Business Expenses without a Receipt?

By Randall Orser | Business Income Taxes , Small Business

Claiming business expenses on your income tax when you have lost the receipt is not a good idea.  All business expense claims need to be supported by original documents such as receipts.  If you are not able to prove the expense, then the CRA will disallow it and reduce the amount of expenses that you have deducted.   

Nowadays most people file their taxes online and do not send their expense receipts to the CRA, however you still need to be able to produce them if asked.   It is not correct to assume that that a bank or credit card statement is proof of an expense, all a statement proves is that a payment was made.

What is Your Chance of Being Audited?

The CRA audits a certain number of income tax and GST/HST accounts each year to monitor compliance and as a quality check on the tax system. This means that your small business could be selected to be audited just by the luck of the draw.  

Your chances of being audited are higher if you are self-employed or a sole proprietor and if you are running a construction, retail, accommodation or food sector business.  This is because the CRA considers them to be the most likely to be participating in the underground economy, taking cash payments from customers and not reporting the income. 

So as a small business owner your chances of being audited may be quite a bit higher than you think.  Therefore, it is a good idea to have complete and accurate business records which are also a requirement for running a successful small business. 

In General, No Receipts equals No Deduction

For detailed information on claiming meals and vehicle expenses see The Rules for Entertainment and Meal Expenses on Canada Income Tax.

Common Tax Mistakes that Small Businesses Make

By Randall Orser | Business Income Taxes , Small Business

Tax time can be a headache for many small business owners, mainly because they have let their accounting slide over the year.  It is important to set up a system for tracking information and to update it during the year rather than leaving everything to the last minute and worrying about it.  Another solution is to hire a bookkeeping company such as NumberCrunchers® to do the work for you.

Business owners need to go through their books regularly at least monthly or quarterly, so that they understand their yearly earnings position, key revenue and expense trends, and to make sure that they are putting enough away for tax time.

Here are Some Expenses that can Cause Problems at Tax Time:

Meals and Entertainment

Many people throw a bunch of receipts into a shoebox or wait until tax time to see what receipts they have, and these can take a long time to find and sort.  Expenses paid for with cash or a personal credit card can be particularly difficult. You should always write the name of the customer and other details on the back of the receipt.  Ideally, business owners should use a separate credit-card account.  Many people mix their personal and business expenses together not realising that in Canada the onus is on the business owner to prove that the transactions are justifiable business expenses.

Business use of Vehicles

To prove the business use of your vehicle for the CRA it is highly recommended that you keep a mileage log, however very few people do so.  Should the CRA ever requests proof of the business use of your vehicle you will be able to provide it. Business owners should also think twice about designating a vehicle as a company car if you use it for personal use as well, sometimes it is better to charge the company for mileage which becomes tax free income for you and an expense for the company.

Home Business Expenses

The Income Tax Act does not give us firm, hard rules and explanations for claiming home business expenses, but there are two overriding principles.  One is, did you incur the cost in order to earn income, and two, is it reasonable under the circumstances? For example, extensive maintenance in your backyard, if it has nothing to do with your home office, may not pass the reasonability test. But maintenance in your front yard, particularly if you have clients regularly coming to your home office, may be seen as being reasonable. Another test for home office is if you actually do see clients at your home office, you want to answer yes whenever this question is asked.

GST and HST

If you are registered for GST, then you need to record the GST on an expense so that it can be separated out from GST applied to company sales. Some GST will be reported for income tax purposes and some will be reported for GST purposes. Many clients especially those who do their own bookkeeping turn up at their accountant’s office with just a list of their deductible expenses where the GST has not been separated out.  This can be challenging and time consuming for the accountant to figure out, and you are going to pay for his time.  So, it is better that you record GST correctly throughout the year to save time and money.

Some business owners and self-employed people can be confused about when to pay their GST. The deadline to file taxes is June 15, but the deadline to pay GST is April 30, so they are sometimes surprised that they are charged interest.

Another big mistake that company owners, especially those first starting out, make is to use GST or payroll tax money to run the business, rather than putting it into a separate bank account or making payment instalments to the CRA.  This can cause them to submit late because they don’t have the money to pay their tax bill.

From an article by Augusta Dwyer Globe and Mail 2017

 

Are you Planning to Give Gifts to Your Employees this Holiday Season? Do You Know What is Taxable?

By Randall Orser | Business Income Taxes , holiday season , Payroll , Personal Income Tax , Small Business

At this time of year many employers give a Christmas or annual bonus – did you know that this is a taxable benefit if paid in cash or a cash equivalent such as gift cards?

You might think about giving your employees gifts instead of cash bonuses so that both of you will benefit on your Canadian income tax.  Employers can use the total cost of the gift as a tax deduction and employees do not need to declare the cost of the gift as part of their taxable income.

Under CRA rules all gifts to employees are considered to be taxable income except for the following exemptions:

1.   It is non-cash and less than $500 in fair market value per year and only given for the following reasons:

  • A Religious or other special event
  • Birth of a child
  • Wedding
  • Birthday

2.   It is a non-cash long standing service award valued at less than $500, this can be given once every five years.

3.   An Award for an employment related accomplishment.  These are allowed when:

  • It has clearly defined criteria
  • A nomination and evaluation process
  • Limited number of recipients

4.   Employer provided parties or social events where the cost is $100 per person or less.

5.   Meals or other hospitality services at work-related functions such as meetings or training sessions.

6.   Valueless items such as tea/coffee, snacks, t-shirts, hats etc.

There is no limit to the number of gifts an employee can receive in a given year as long as the total value is not more than $500.  Small gifts such as mugs or chocolates etc. are not included in the $500 limit.

If you want to give your employees gifts that are tax deductible for your company, you need to be careful what you give.  Items that can easily be converted into cash such as gift cards or stocks will be considered to be taxable employee benefits as will some performance related awards and bonuses.  Included under this rule are:

  • Gift Cards
  • Rewards that include employer-provided meals or accommodations such as trips
  • Cash or non-cash awards from manufacturers that are given to employers then passed onto employees
  • Points for travel, accommodations or other rewards
  • Gifts given by manufacturers to employees of dealerships

If you want to give Cash Bonuses or near-cash bonuses such as gift cards to your employees, it must be through payroll and must have taxes deducted.

For full list of taxable or non-taxable benefits and allowances visit the link below:
CRA's Benefits and allowances chart


Renting Out Your Mortgage Helper? – The Taxman Cometh

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

Once you start renting out that mortgage helper you will need to include rental income on your tax return, using form T776 Statement of Real Estate Rentals.

You must keep accurate records of your rental income and expenses each year and retain them for six years.  These records help you figure out your net profit for the year. The tax you pay will depend on the net income from the rental; any losses will be deducted from your other income and if you have no other income will be carried forward to the next year. Whether a long-term or short-term rental, most rental receipts are considered income for tax purposes.

If your mortgage helper is for a parent, grandparent, or sibling, they are considered a ‘related person’. You may still have to report the income as rental income, however, if you’re renting below fair market value, you won’t be able to write-off any losses, and will have to report the income differently. 

Airbnb is a big thing now, and you need to realize if you’re doing this regularly, then you need to claim it as rental income. You get the same expenses as if it was a long-term rental, plus you can write off bedding, towels, and soap etc. that you use exclusively for this rental. If you supply meals, then the income may be considered business income and not rental income.

Your mortgage helper can definitely help pay for the mortgage and make your dream home more affordable. With experience, managing the rental side does get easier. Finding a good property manager, lawyer and tax preparer can help you manage the details.

For more information about renting visit https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income-2016.html

What Can I Deduct as a Business Expense?

By Randall Orser | Business Income Taxes , Personal Income Tax

What Can I Deduct as a Business Expense? 

This is a question that we get asked often.  The answer is if this expense was paid in an effort to earn business income then yes, it is deductible.  If it was not used to earn business income, then the answer is no. 

The answer that the Canada Revenue Agency (CRA) has provided is quite simple: a deductible business expense is any reasonable current expense (cost) you paid or will have to pay to earn business income (revenue). Though reasonable is determined by CRA and not you. 

Personal Expenses which are commonly audited. 

Travel Expenses – only trips for business purposes such as a meeting or conference are deductible, and this only includes airfare and accommodations for the duration of the meeting.

Shareholder/Employee Medical Expenses – unless you have set up a formal health insurance plan in your company, health expenses paid for shareholders and employees are not deductible.

Non-business meals – Unless a meal is to try and earn business income, such as taking a client out for lunch or dinner it is not deductible. Taking yourself out for lunch is not deductible!

Expenses Deductible for Business Purposes

Here is a list of the types of expenses that are deductible for business purposes, they are all linked to the CRA information site for further information.

This is a long list and properly accounting for your business expenses can be difficult, but it is our job at Number Crunchers® to figure this out for you.

Is Now a Good Time to Review Your Tax Situation?

By Randall Orser | Business Income Taxes , Personal Income Tax

As summer is upon us, business slows down a bit, and we take time to relax.  It may also be a good time to think about your taxes. Yeah, I know. It’s summer, I don’t want to think about that yet. But, hear me out. The first half of the year is gone, and you have a good idea how it went, so from this you can project what the rest of the year is going to be. With this projection, you can estimate what your tax bill will be. Why? So, you’re not shocked come April of the next year with how much you owe. Instead, you’ll be like, yeah that’s what we thought and you have the funds to pay the bills. 

When we’re talking about taxes, we’re including the Canada Pension Plan (CPP) in these calculations, because as a self-employed person you pay your taxes and CPP at the same time.

Are your books up-to-date?

In order to be able to do any tax projections, you have to have your books up-to-date for the end of June. Are your expenses entered, banks reconciled, credit cards reconciled, and payables entered too? Once you have June completely finished then you are able to look at what your taxes could be. If you’re working with a bookkeeper, let them know what you want to do, and they should get you financials as soon as June is completed. They may even be able to help you with the projections.

The big question now is, how much do you set aside for taxes? 

Canada Revenue Agency (CRA) may have already done this for you based on a prior tax filing year. If you owed more than $3,000 in a prior tax year, CRA will send you a notice in August that you must make instalment payments in September or December. In February you’ll get a notice for the March and June payments. Usually CRA splits the amount into 4 equal payments. If you’re going to owe at least the same amount last year, then you must make these instalments or you will suffer penalties and interest for not paying them.

You’ve looked at your profit and loss statement (P&L), and realize that you’re doing much better this year compared to last year at the half way mark. You need to decide if you should increase your instalments for September and December, or keep them the same. As long as you paid the amounts in your instalment reminder, you should be okay even if your tax owing is more when you file the next year. Now, if you haven’t made any instalments this year, then now is the time to estimate and pay those in September and December.

The simplest way to estimate taxes owing is to take 25% of your estimate net income (revenue minus expenses) times the 25%. The 25% would be approximately 10% for CPP and 15% for taxes. Now this doesn’t take into account the home office deduction, depreciation, or other deductions, such as RRSPs. This isn’t perfect, however, it does give you something in order to pay instalments. If you’re net income is below $15,000, in many cases you’ll owe CPP, and very little to no tax, depending on your province of residence. In this case, you could use 15% and be pretty accurate.

You can take the net income from your P&L for the end of June, and double that and take the 25% the net income for what your potential tax liability will be for the year. If you don’t think the last half of the year is going to be as good as the first half, then estimate what you think it’ll be, add that to June’s net income and times that figure by the 25%. And, of course, if you think the last half is going to be much better then increase your net income estimate. The simplest way to estimate the last half of the year is to just take a percentage of the first half. What percentage? Well, that depends on what you think you’re sales are going to be in the last half. 

Estimating your taxes can be difficult, however, sometimes you just have to take the easy approach and give it a good ole guess. It’s better to pay too much rather than too little. Plus, remitting instalments relieves that shock come April, and you’re much more relaxed at tax time because you’ve already paid the bill.

 

Surviving A Compliance Review With Canada Revenue Agency

By Randall Orser | Business Income Taxes

The dreaded audit has been somewhat replaced by the ‘compliance review’, which is a nicer way of saying we’re coming in to look at your books but won’t probe you as much. As I write this I have had a couple of clients go through a compliance review, both turned out to be nothing. What they are doing with the compliance review, especially for new businesses, is to ensure you’re doing things correctly, and are filing your remittances correct and on time. Canada Revenue Agency (CRA) is trying to ensure all businesses are compliant with their business remittance requirements before it gets too out of hand. 

The first thing you’ll get from CRA is either a phone call or letter stating what they are reviewing and when. If it is a phone call, get them to fax you what was discussed in the conversation. I always find it’s best to do this step, as there are no mix-ups as to what was required.  

The next thing is to call your bookkeeper or accountant and let them know CRA is doing a review. Follow this up with the letter you receive. I find it best to get the bookkeeper or accountant to deal with CRA in these situations, as they understand what reports CRA will need, and may have better access to the accounting system. Also, the bookkeeper/accountant will only give them what they ask, where you may give them too much information. 

The auditor will examine books and records, documents, and information (collectively referred to as records) such as:

  • Information available to the CRA (such as tax returns previously filed, credit bureau searches, or property database information);
  • Your business records (such as ledgers, journals, invoices, receipts, contracts, and bank statements);
  • Your personal records* (such as bank statements, mortgage documents, and credit card statements);
  • The personal or business records of other individuals or entities not being audited (for example, a spouse, family members, corporations, partnerships, or a trust [settlor, beneficiary, and trustee]); and
  • Adjustments made by your bookkeeper or accountant to arrive at income for tax purposes.        

*Never give personal records unless absolutely asked, and push not to provide them.            CRA will use any monies received in your personal account against you, even if it is a cheque from grandma.

You need to have this entire information ready for the review, and you may have to meet with your bookkeeper/accountant before the audit and go through everything. Don’t leave anything out that CRA has requested, and, of course, don’t give them any more than they ask.  

Your best bet for surviving this review is to remain calm, deal with the auditor in a professional manner, and if you feel not being present is best then just have your bookkeeper/accountant meet with the auditor. There is no reason to panic, as this is nothing personal, you have been selected for review either as a random pick or that you are a relatively new business.

Have You Not Filed Your Tax Return Yet?

By Randall Orser | Business Income Taxes , Personal Income Tax

Have You Not Filed Your Income Tax Yet?

Every year in Canada we must file a personal income tax return by April 30th(June 15thfor those who are self-employed). As with anything in our busy, hectic lives, we do forget; however, what if it’s your tax filing that you forgot? That can have serious consequences depending on what you owe, and for what benefit programs you are qualified.  

The first thing is Don’t Panic! Okay you will but calm down. If you’ve realized you haven’t filed your taxes, and it’s not too late in the year, you’ll be okay. Yes, if you owe money, you’ll have a penalty and interest, however, catch it soon enough and it won’t be that much. Of course, if you are getting a refund, then you won’t be charged any penalty. And, getting benefit payments will definitely be delayed, as you haven’t filed, though you will get a catch-up payment. 

Canada Revenue Agency (CRA) has now allowed the electronic filing of tax returns until January of the following year, so for the 2017 filing year you can electronically file until January 16th. Eventually, I believe, we’ll be able to file electronically for any tax year any time. 

Many people end up not filing for fear that they will owe or owe way more than they can pay at the moment. It’s much better to file and owe than not file and owe, as CRA tends to get a bit anxious when they realize you owe but haven’t filed and paid yet. Of course, these same people think they’re going to owe tons of money, and, in the end, don’t owe near as much as they thought, or, hilariously, get a refund. I love the expression on peoples’ faces when I tell them they owe $X, and they were thinking $XXX. 

What are the penalties for filing late? If you owe tax for 2017 and do not file your return on time, CRA will charge you a late-filing penalty. The penalty is 5%of your 2017 balance owing, plus 1%of your balance owing for each full month your return is late, to a maximum of 12 months.  

For example, you owe $3,200 and don’t file until November 15th2017. In this case you owe $583.91 in penalties plus 5% interest compounded daily (approximately $194). That’s a total balance owing of $3,977.91. Your penalties/interest are 24.3% of the original balance owing. 

If you failed to report an amount on your return for 2017,andyou also failed to report an amount on your return for 2014, 2015, or 2016, you may have to pay a federal and provincial/territorial repeated failure to report income penalty. The federal and provincial/territorial penalties are each 10%of the amount that you failed to report on your return for 2017. Your late-filing penalty for 2017 may be 10%of your 2017 balance owing, plus 2%of your 2017 balance owing for each full month your return is late, to a maximum of 20 months. That can get quite steep depending on how much you owe. 

Using our example above of owing $3,200, and this is another year of filing late your penalty would be $764.09 for a total of $3,964.09, and interest would be $203 for a total of $4,167.09 (30.2% of the original amount owing). 

From our examples above it is much better to pay upon filing (or pay by installments when you believe you have a big balance owing). If you know you’re going to owe, but don’t have the funds at filing, file anyway and work out some kind of payment arrangement with CRA.  

Do you have multiple years to file? Can’t find your slips? If your slips are normally filed with CRA (such as T4s, T5s, etc.) then you can request copies and use those to file your returns. Your tax preparer can do an auto-fill return for 2015 and 2016, and if you gave them consent, could grab the other years too. CRA no longer worries about returns that are more than 10 years old, unless you ended up owing in those years. You will have to paper file for 2012 and prior. If you believe you will owe for these prior years, you may also want to look into the Voluntary Disclosures Program.  

With the Voluntary Disclosures Program, you may file a disclosure to correct inaccurate or incomplete information, or to provide information you may have omitted in your previous dealings with the CRA. More specifically, this includes information you have previously reported that was not complete, information you have reported incorrectly, or information you did not provide previously to the CRA.

Canada has a high compliance rate (94.5%) of people who file their taxes on time. If you find you’re not one of those, you may need to look into why you’re always late filing. Are you using a tax preparer now? Maybe you should. I hound my clients to get me their stuff, and most appreciate that. Of course, once you’re caught up always ensure you file on time after that so you avoid higher penalties.

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How do you calculate your installment payments?

By Randall Orser | Business Income Taxes

Now that you’ve determined you need to make installments to Canada Revenue Agency (CRA), how do you do that? Your installments are based on your net tax owing (what you owed on your tax return), any Canada Pension Plan (CPP) contributions payable on self-employment and other earnings, and any voluntary employment insurance (EI) premiums payable on self-employment and other eligible earnings. Once you know that information you can calculate your installments for the current year.

Calculation options

You have three options to choose from to calculate your instalment payments:

No-calculation option

This option is best for you if your income, deductions, and credits stay about the same from year to year.

CRA will give the no-calculation option amount on the instalment reminders that CRA will send you. CRA determine the amount of your instalment payments based on the information in your latest assessed tax return.

Prior-year option

This option is best for you if your 2018 income, deductions, and credits will be similar to your 2017 amount but significantly different from those in 2016.

You determine the amount of your instalment payments based on the information from your tax return for the 2017 tax year. Use the Calculation chart for instalment payments for 2018 to help you calculate your total instalment amount due.

If you use the prior-year option and make the payments in full by their 2018 due dates, CRA will not charge instalment interest or a penalty unless the total instalment amount due you have calculated is too low. For more information, see Instalment interest and penalty charges.

Current-year option

This option is best for you if your 2018 income, deductions, and credits will be significantly different from those in 2017 and 2016.

You determine the amount of your instalment payments based on your estimated current-year (2018) net tax owing, any CPP contributions payable, and any voluntary EI premiums. Use the Calculation chart for instalment payments for 2018 to help you calculate your total instalment amount due.

If you use the current-year option and make the payments in full by their 2018 due dates, CRA will not charge instalment interest or a penalty unless the amounts you estimated when calculating your total instalment amount due CRA too low. For more information, see Instalment interest and penalty charges.

By choosing the best option for you, you will not overpay your tax during the year or have a large amount of tax to pay when you file your tax return. You do not have to tell CRA which option you choose.

Instalment reminder received in August 2018

If you only received an instalment reminder in August and the reminder does not mention a March or June 2018 instalment payment, follow the instructions that apply to you:

No-calculation option – Pay the amount shown in box 2 of your reminder for September 15 and December 15.

Prior-year option – Calculate your 2017 net tax owing and add any CPP contributions payable, and any voluntary EI premiums payable. Pay 75% of the total on September 15 and 25% on December 15.

Current-year option – Estimate your current-year 2018 net tax owing and add any CPP contributions payable, and any voluntary EI premiums payable. Pay 75% of the total on September 15 and 25% on December 15.

You want to reduce or eliminate the amount of your instalment payments

You can reduce or eliminate the amount of your instalment payments if you reduce your net tax owing. You can do this by having tax withheld, or by increasing the amount of tax withheld, from the following types of income:

Income tax cannot be withheld from certain types of income, such as self-employment, investment, and rental income, and capital gains.

Example:

Hugh, a resident of Alberta, pays his tax by instalments. He decides to have more tax withheld from his income in 2018. His net tax owing has been $3,500 for several years, and he expects it will stay the same in 2018. In January 2018, Hugh gave his pension plan administrator a filled-out Form TD1 that stated he wants an extra $250 withheld each month from his pension income.

Hugh now estimates his net tax owing will be $500 for 2018. Based on his estimate, he does not have to make instalment payments in 2018 because his net tax owing will not be over $3,000 for 2018. Hugh would disregard the instalment reminders he gets for 2018.

It can be easy to calculate installments, as CRA does it for you for the most part. If you feel your income will be much different than the prior year, either up or down, then adjust your installments accordingly. Just remember that if CRA does send you a reminder, then you must make those payments, especially if your tax situation doesn’t change from last year.